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Shaftesbury PLC  -  SHB   

Shaftesbury 2016 Full Year Results

Released 07:00 29-Nov-2016

RNS Number : 3539Q
Shaftesbury PLC
29 November 2016
 

SHAFTESBURY 2016 FULL YEAR RESULTS

Relentless focus on sustainable rental growth continues to deliver resilient growth in earnings, dividend and NAV

 

 

Shaftesbury PLC ("Shaftesbury") today announces its results for the year ended 30 September 2016.

 

Highlights

 

 

§  Footfall and trading in the West End and our locations buoyant. Broad-based occupier demand throughout the year, together with extensive asset management activity, have driven good growth in income and EPRA earnings.
 

§  Underlying portfolio capital value growth1,2 of 4.9% reflects continuing rental growth and conversion of reversionary potential into contracted cash flow. After SDLT increase, capital value growth 4.0%. Yields largely unchanged.
 

§  Refurbishment schemes across 202,000 sq. ft. under way at 30 September 2016, represent £14.2 million (11%) of total ERV3. Includes our three major schemes in Seven Dials, Chinatown and Carnaby, which will add an estimated £7.4 million to contracted income, once let.
 

§  Issue of £285 million of 15-year bonds has added significant financial capacity for further earnings-accretive investment in our portfolio.
 

§  Termination of interest rate swaps in October 2016 reduces future finance costs by £1.9 million per annum.

 

 

Growth in income, dividends and NAV

§ Net property income3 up £5.3 million (6.7%) to £84.1 million (2015: £78.8 million).
 

§ EPRA earnings increased by 8.0% to £39.0 million (2015: £36.1 million). EPRA earnings per share increased by 7.7% to 14.0p (2015: 13.0p).
 

§ IFRS earnings: £99.1 million (2015: £467.3 million). IFRS earnings per share: 35.6 p (2015: 168.0 p), the decrease largely due to a lower revaluation surplus in 2016, compared with 2015.          
 

§ Total dividend for the year 14.7p (2015: 13.75p), an increase of 6.9%. Final dividend per share of 7.55p (2015: 6.925p).    
 

§ Increase in reported IFRS NAV of 2.6% to £8.54 per share (2015: £8.32 per share).      
 

§ EPRA NAV: £8.88 per share, an increase of 19p (2.2%). Portfolio capital value growth added 43p (4.9%) before a reduction of 24p as a result of early termination of debenture debt and interest rate swaps.  
 

§ Net asset value return before dividends: 3.8% (2015: 23.8%).

Continued growth in contracted rents, ERVs and portfolio value2

 

§ Portfolio valuation: £3.35 billion. Underlying like-for-like capital value return over the year: +4.9% but reduced to 4.0% as a result of the increase in SDLT announced in the March 2016 Budget.  
 

§ ERV, based on current, established rental tones, increased by £10.0 million to £138.7 million (2015: £127.8 million). Like-for-like ERV growth: 5.7%. CAGR over 10 years: 4.6%.  
 

§ Portfolio reversionary potential has grown by £3.9 million to £29.1 million, 26.6% above current annualised income, of which £14.2 million relates to refurbishment schemes in progress at 30 September 2016.       
 

§ Equivalent yields largely unchanged. Wholly-owned portfolio: 3.57% (2015: 3.61%); Longmartin joint venture: 3.79% (2015: 3.75%).

Strong occupier demand across all locations and for all uses

§ EPRA vacancy3 at 30 September 2016: 1.6% of ERV, of which 1.1% was under offer.   
 

§ Commercial lettings, lease renewals and rent reviews1 (rental value: £21.6 million) concluded at an average 7.7% above 30 September 2015 ERV.         
 

Further investment in our portfolio

§ Redevelopment and refurbishment schemes across 249,000 sq. ft. (14% of floor space3). Capital expenditure1: £32.6 million (2015: £24.7 million).           
 

§ Major schemes: Thomas Neal's Warehouse completed after year end and marketing now underway. Encouraging initial interest. Charing Cross Road/Chinatown and 57 Broadwick Street progressing well.
 

§ We continue to identify opportunities to carry out further asset management initiatives to increase rental potential and unlock value.         
 

§ Acquisitions totalling £62.7 million in Covent Garden, Soho and Charlotte Street.

Important financing initiatives    

§ Completed the refinancing of our 8.5% Debenture Stock 2024 with issue of £285m 2.487% Mortgage Bonds maturing in 2031.         
 

§ In October 2016 cancelled interest rate swaps with notional principal of £55 million. Legacy swaps totalling £235 million terminated since 2013.        
 

§ Conservative gearing. Loan-to-value ratio2,4: 25.8% (2015: 22.5%).       
 

§ Weighted average maturity of debt2,4: 10.8 years (2015: 10.2 years).
 

§ Weighted average cost of debt2,4: 3.9% (2015: 4.9%).
 

§ Committed unutilised facilities2,4: £214.6 million. Marginal cost of drawing on these facilities: 1.2%.

 

Brian Bickell, Chief Executive, commented: 

 

"We are pleased to report another year of excellent performance. Against a background of growing caution in property markets, which is beginning to affect some property values, our exceptional portfolio has delivered underlying capital value growth of 4.9%.

Whilst London and, at its heart, the West End, cannot be completely immune from the influences of the macro environment, its global city status, exceptionally dynamic and broad-based economy and enduring appeal for domestic and international businesses and visitors, will continue to support its long-term prospects for sustained growth and prosperity. This positive outlook underpins the potential in our portfolio.

The exceptional qualities and resilience of our business have delivered long-term sector out-performance. Despite present uncertainties, we are confident our impossible-to-replicate portfolio and the innovative, long-term management we bring to it, will continue this record of delivering sustained growth in total returns for shareholders."

 

29 November 2016

 

For further information:

Shaftesbury PLC 020 7333 8118

Capital Access Group 020 3763 3400

Brian Bickell, Chief Executive

Chris Ward, Finance Director

Scott Fulton

Simon Courtenay

 

 

1.      Like-for-like.

2.      Includes 50% of the Longmartin joint venture.

3.      Wholly-owned portfolio.

4.      Pro-forma for refinancing of our Debenture Stock on 7 October 2016 and cancellation of interest rate swaps on notional principal of £55m, in October 2016.

 

This announcement includes inside information

There will be a presentation to equity analysts at 9.30 am on Tuesday 29 November 2016, at The London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. There will be a conference call for bondholders at 3:30 pm on Friday 2 December 2016. If you would like to participate, please contact Gill Smith on 020 7333 8118.

There is a live audio webcast of the analyst presentation which you can access via the following link: https://goo.gl/u2KeFW or from our website. A playback facility of this presentation will be available on the Group's website www.shaftesbury.co.uk by the end of the day. The presentation document is available on the Group's website www.shaftesbury.co.uk

 

About Shaftesbury

 

Shaftesbury PLC is a Real Estate Investment Trust, which owns a unique real estate portfolio extending to over 14 acres in the heart of London's West End - a highly popular, sought-after and prosperous destination for visitors and businesses. Our holdings are concentrated in Carnaby, Covent Garden, Chinatown, Soho and Charlotte Street.

 

Our objective is to deliver long-term growth in rental income, capital values and shareholder returns.

 

We focus on retail, restaurants and leisure in the liveliest parts of the West End.  Our portfolio now comprises 584 shops, restaurants, cafés and pubs, extending to over 1 million sq. ft., and accounting for 70% of our current income.  In our locations these uses have a long record of occupier demand exceeding their availability. The portfolio also includes 406,000 sq. ft. of offices and 559 apartments for rent, which provide 16% and 14%, respectively, of our current income.

 

In addition, we have a 50% interest in the Longmartin joint venture with The Mercers' Company, which has a long leasehold interest in St Martin's Courtyard in Covent Garden. Extending to 1.9 acres, it includes 21 shops, ten restaurants and cafés, 102,000 sq. ft. of offices and 75 apartments.

 

Our proven management strategy is to create and foster distinctive, attractive and prosperous locations. Its implementation is supported by an experienced management team with an innovative approach to long-term, sustainable income and value creation, and a focus on shareholder returns.  We have a strong balance sheet with modest leverage.

 

Forward-looking statements

 

This document may contain certain 'forward-looking' statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.

 

Any forward-looking statements made by, or on behalf of, Shaftesbury PLC speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Shaftesbury PLC does not undertake to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

 

Information contained in this document relating to Shaftesbury PLC or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

 

Ends.

 

Highlights

 

 

 

 

Change

 

 

2016

2015

%

Net property income

£m

84.1

78.8

+6.7%

Property valuation

 

 

 

 

-     Wholly-owned

£m

3,123.6

2,919.5

+3.9%1

-     Total including 50% share of the Longmartin joint venture

£m

3,348.0

3,132.0

+4.0%1

Loan-to-value2,3

%

25.8

22.5%

 

EPRA results4

 

 

 

 

Earnings

£m

39.0

36.1

+8.0%

Earnings per share

Pence

14.0

13.0

+7.7%

Net assets

£m

2,481.7

2,427.6

+2.2%

Net asset value per share

£

8.88

8.69

+2.2%

Dividends

 

 

 

 

Interim dividend per share

Pence

7.15

6.825

+4.8%

Final dividend per share

Pence

7.55

6.925

+9.0%

Total dividend per share

Pence

14.70

13.75

+6.9%

Total distribution declared in respect of the financial period

£m

41.0

38.5

+6.5%

Reported results

 

 

 

 

Profit after tax

£m

99.1

467.3

-78.8%

Basic earnings per share

Pence

35.6

168.0

-78.8%

Net assets

£m

2,387.1

2,325.4

+2.6%

Diluted net asset value per share

£

8.54

8.32

+2.6%

KPIs

 

 

 

 

Portfolio ERV growth1,2

%

5.7%

7.0%

 

Average time to let5

Months

1.2

1.0

 

EPRA vacancy5

%

1.6%

1.6%

 

Performance6

 

 

 

 

Total shareholder return

%

+8.0%

+36.7%

 

Capital value return1

%

+4.0%

+18.0%

 

Net asset value return

%

+3.8%

+23.8%

 


                                                        

1.      Like-for-like

2.      Including 50% share of the Longmartin joint venture.

3.      Pro-forma for refinancing of our Debenture Stock on 7 October 2016 and cancellation of interest rate swaps on notional principal of £55m, in October 2016.

4.      Adjusted in accordance with EPRA Best Practice Recommendations.

5.      Wholly-owned portfolio.

6.      Shaftesbury Group data (other than total shareholder return) derived from financial results.

 

See Glossary of terms below.

 

Chief Executive's Statement

 

+2.2%

+8.0%

+6.9%

£8.88

£39.0m

14.7p

EPRA NAV per share

EPRA earnings

Dividends per share

 

We are pleased to report another year of excellent performance. Against a background of growing caution in property markets, which is beginning to affect some property values, our exceptional portfolio has delivered underlying capital value growth1 of 4.9%. 

Progression in current and potential future rental income has been resilient and investment yields attributed by our valuers have remained firm. After adjusting for the increase in SDLT announced in the March 2016 Budget, which has affected the valuation of all UK property assets, capital value growth over the year reduces to 4.0%.

 

The increase in our net property income of 6.7% to £84.1 million reflects sustained occupier demand and high levels of occupancy across our portfolio and has delivered an 8.0% increase in our EPRA earnings to £39.0 million. This translates into a 7.7% increase in EPRA earnings per share, and supports a 6.9% increase in dividends paid and proposed in respect of the year to 14.7 pence per share.

 

The growth in the value of our portfolio added 43 pence to the net asset value of £8.69 we reported last year, an increase of 4.9%. This has been offset by the costs of refinancing our debenture stock and terminating certain interest rate swaps, which amounted to 24 pence per share, resulting in a net asset value per share of £8.88, an overall increase of 2.2%. This well-timed refinancing has provided us with new, low-coupon, long-term funding, which increased our financial resources and will improve earnings in the years ahead.

 

Our focus on London's West End

Over our 30-year history, we have patiently assembled an exceptional portfolio of over 14 acres in the heart of London's West End, a location which is underpinned by an unrivalled variety of attractions for local, domestic and international visitors. Our investment strategy is focused on restaurants, cafés, leisure and retail, where our ownerships extend to over 1 million sq. ft. and provide 70% of our annualised rental income. Our long-term management strategy is aimed at creating lively destinations, which attract both footfall and spending by offering a distinctive variety of retail and leisure choices. As space in the West End for these core uses is constrained by planning policies, the structural imbalance in demand and availability brings great resilience in occupancy and rental levels.

 

In addition, with over 400,000 sq. ft. of office accommodation, we are the largest single provider of accommodation for SME businesses in Soho and Covent Garden. We have also built up an ownership of 559 apartments which we rent and which appeal to younger people who are studying or working in central London.

 

The unique features of the West End attract a wide variety of national and international businesses, and provide a large local working population, particularly from the creative, media and tech sectors, whose activity and spending throughout the working week make an important contribution to its economy and character. We benefit from the substantial investment being made by others in improving and extending the stock of office accommodation around our locations and across the West End.

 

The West End economy

The buoyant conditions we reported last year in our local market have continued throughout the current year. Although there have been growing concerns of an economic slowdown nationally since the beginning of 2016, the West End continues to prosper, with steadily rising domestic and international visitor numbers and spending and demand from a broad-spectrum of businesses seeking space across all uses.

 

These conditions, and the special appeal of our high-profile and carefully-curated areas, have underwritten the low level of vacancy in our portfolio, and good growth in both current rental income and rental tones, throughout the year. We concluded £27.8 million of leasing transactions, achieving rents for commercial space 7.7% above ERV at the previous year end. This activity converts our portfolio's reversionary potential into contracted income, whilst at the same time providing valuable rental evidence for growing income, over time, from our adjacent and nearby holdings.

 

Although the outcome of the EU referendum has created uncertainty for business nationally, we have not, so far, seen any adverse impact on occupier demand, footfall or trading in our areas. The recent depreciation in sterling has already added to the spending power of international visitors and, if sustained, may lead to increased visitor numbers above their long-term growth trend. Domestic inflationary pressures, which are expected to increase next year, may impact UK consumer confidence but will be less important for visitors who benefit from a strong local currency. Until future trading and other arrangements with the EU become clearer, there is a risk that business decisions may be deferred, slowing the UK economy, but we expect the West End's wide appeal and economy will maintain its history of resilience.

 

The recently announced revaluation of business rates across England will increase the levy on business premises in London from next April. Across our portfolio, we anticipate increases in the range 30% to 45%, depending on location. Broadly, we estimate that this will increase tenants' occupancy costs by c. 2-3% of turnover. The average increases across our streets will be less marked than for some nearby locations and other Central London destinations, increasing the competitive advantage of the more-modestly priced accommodation we offer. Whilst the transitional arrangements for larger premises are not as generous as they have been in the past, we estimate that half of our 584 restaurants, cafés and shops, and three quarters of our offices will qualify for the transition to the new levels to be effected over four years.

 

We support Westminster City Council's initiative to seek to retain more of the £1.8 billion of business rates they collect on behalf of the Treasury. An increase from the 4% they currently keep would support their ambition to further invest in the borough's infrastructure, in partnership with property owners and other stakeholders.

 

Improving access to the West End

We expect our portfolio will, in the coming years, benefit from a number of transport infrastructure improvements. The opening of the Elizabeth Line in late 2018, improved rail and tube capacity, and initiatives such as weekend night time running on the Underground, are expected to bring more footfall and spending to the West End. Whilst the increased rates burden on tenants, coupled with wider economic uncertainties, are not welcome, these improvements will enhance the West End's connectivity and should, over time, enable restaurant, leisure and retail businesses to absorb increased costs through turnover growth.

 

Investing in our portfolio

Our strategy is to refurbish, reconfigure and adapt, rather than redevelop, our buildings. Despite our extensive management activity, our focus on uses which limit the exposure to obsolescence in our portfolio continues to result in a relatively low level of capital expenditure, which this year totalled £32.6 million, less than 1% of the valuation of our portfolio.

 

We are making good progress with our major projects in Seven Dials, Chinatown and Carnaby. Each of these schemes is located on streets which are expected to benefit from greater forecast footfall from the completion of the new Tottenham Court Road transport hub and associated public realm improvements. Our selection of occupiers, and the creativity they bring with their trading formats, will be of particular importance. Inevitably with retail and restaurant accommodation of the sizes we are offering, where occupiers will be investing heavily in their fit-outs, letting periods are likely to be longer than for the smaller space we traditionally have to offer. In total, these three schemes will, on completion and letting, add an estimated £7.4 million to our contracted income. We expect each will bring significant benefits to our neighbouring ownerships as well as producing long-term rental growth.

 

We continue to identify and negotiate early vacant possession of under-utilised space to implement improvement schemes, introducing new, more valuable uses, where possible. These projects unlock value and enhance the rental potential of our holdings, often producing compound benefits across our extensive adjacent ownerships.

 

Adding to our ownerships

Over the year, additions to our portfolio totalled £62.7 million.

 

In our locations, the availability of properties to acquire, which meet our strict investment criteria, continues to be limited. Existing owners, who are mainly private, rather than institutional, are reluctant to sell, recognising the long-term security and growth prospects their ownerships offer. This situation, which has existed for many years, is unlikely to change, even as a result of current economic uncertainties, so assembling a portfolio of 14 acres, like ours, in the heart of the West End, would be impossible.

 

However, as in the past, our patient approach and forensic knowledge of our local market will lead to a steady flow of purchases which extend and complement our ownership clusters, and provide further opportunities to add value through our intensive management strategies.

 

Important refinancing initiatives

With a scarcity of the type of properties we seek to acquire, we need to act swiftly when opportunities arise and, therefore access to stable long-term funding and committed financial resources is critical.  In October 2016 we completed the early redemption of our historical debenture stock and issued £285 million of 15 year bonds, providing additional net resources of £189.4 million, enabling us to continue to fund additions to, as well as investment in, our already-extensive portfolio. This new debt was secured at an exceptionally low fixed coupon of 2.487%. Coupled with the termination of £55 million of interest rate swaps in October 2016, these transactions have usefully reduced the cost of our debt, benefiting future earnings and dividends.

 

Looking ahead

2016 will be remembered as a year of unprecedented political turbulence, not just in the UK but in many parts of the world. The impact of the events we have seen this year have not yet become clear, and their longer term ramifications may not become apparent for some considerable time. This will inevitably bring uncertainty to the general business climate, with risks to consumer confidence and economic growth.

 

Whilst London and, at its heart, the West End, cannot be completely immune from the influences of the macro environment, its global city status, exceptionally dynamic and broad-based economy and enduring appeal for domestic and international businesses and visitors, will continue to support its long-term prospects for sustained growth and prosperity. This positive outlook underpins the potential in our portfolio.

 

Our management strategy, executed by an experienced and enthusiastic team, with a forensic knowledge of the local market, has a long record of delivering sustained rental growth, which is key to the long-term growth in the value of our portfolio and shareholder returns. Our strategy is deliberately long-term in outlook and is not influenced by short-term market or economic conditions. Its implementation constantly evolves to ensure that our buildings and locations adapt and respond to the challenges of technological developments and environmental sustainability, as well as expectations of both occupiers and the vast, and ever-growing, numbers who visit every day, throughout the year.

 

The exceptional qualities and resilience of our business have delivered long-term sector out-performance. Despite present uncertainties, we are confident our impossible-to-replicate portfolio and the innovative, long-term management we bring to it, will continue this record of delivering sustained growth in total returns for shareholders.

 

Brian Bickell
Chief Executive

29 November 2016

 

1.   Like-for-like, before the impact of increased SDLT
 

Portfolio valuation

 

Across our portfolio, strong demand and extensive asset management activity is delivering continued growth in current rents and ERVs, driving capital value growth.

 

£3.35bn
Portfolio valuation1

4.9%
Underlying growth1,2
before SDLT increase

4.0%
Capital value growth1,2

5.7%
ERV growth1,2

 

 

 

 

 

The valuation of our portfolio, including our 50% share of the Longmartin joint venture, increased by £216 million to £3.35 billion over the year. The ungeared, like-for-like valuation growth was 4.0%, after a reduction of 0.9% as a result of an increase in SDLT on commercial property of 1%, imposed in the March 2016 Budget.

 

 

Fair value

£m

% of

portfolio

Annualised current

income

£m

ERV

£m

Topped-up initial

yield

%

Equivalent yield

%

Wholly-owned portfolio

 

 

 

 

 

 

Carnaby

1,161.0

35%

39.6

48.8

3.22%

3.65%

Covent Garden

875.0

26%

27.5

35.9

2.89%

3.57%

Chinatown

725.9

22%

22.3

29.2

3.09%

3.40%

Soho

244.0

7%

8.0

10.0

3.30%

3.63%

Charlotte Street

117.7

3%

3.6

4.8

2.79%

3.52%

 

3,123.6

93%

101.0

128.7

3.08%

3.57%

Longmartin joint venture3

224.4

7%

8.6

10.0

3.38%

3.79%

Total portfolio

3,348.0

100%

109.6

138.7

 

 

 

Village

2016 Capital growth2

3 year CAGR2

Carnaby

4.9%

16.9%

Covent Garden

3.2%

12.2%

Chinatown

2.7%

12.4%

Soho

5.3%

12.1%

Charlotte Street

4.0%

13.2%

Longmartin joint venture3

5.1%

15.2%

 

4.0%

14.1%

 

1.      Including our 50% share of the Longmartin joint venture

2.      Like-for-like

3.      Our 50% share

 

Valuation increase driven by strong rental growth

Sustained demand for space across our portfolio, together with extensive asset management activity, continue to deliver growth in current income and rental values. Our management strategies have a relentless focus on, and a long record of, converting the potential reversion in our portfolio into cash flow, whilst further increasing rental values.

 

Rental growth

Annualised current income1

£m

 

ERV1

£m

Reversionary

potential1

£m

At 30 September 2015

102.6

127.8

25.2

Contribution from acquisitions

1.4

2.6

1.2

Impact of major schemes2

(0.6)

1.3

1.9

Underlying growth

6.2

7.0

0.8

At 30 September 2016

109.6

138.7

29.1

Like-for-like growth3

6.2%

5.7%

 

 

1.      Including our 50% share of the Longmartin joint venture.

2.      Charing Cross Road/Chinatown, Thomas Neal's Warehouse, Seven Dials, 57 Broadwick Street, Carnaby and Foubert's Place/Kingly Street, Carnaby.

3.      Excluding acquisitions and the impact of major schemes.

 

Annualised current income increased on a like-for-like basis by 6.2%, Importantly, the ERV of our portfolio, which is based on currently established rental tones, increased on a like-for-like basis by 5.7% and currently stands at £138.7m, 26.6% above current income.

 

Components of the reversionary potential

 

£m

Expected term to  realisation

How it will be realised

Contracted income

2.7

Near term

On expiry of rent-free periods

EPRA vacancy

2.3

Near term

Upon letting of available space at 30 September 2016

Space vacancy

14.2

Near to medium term

On completion of and letting of schemes at 30 September 2016

Under-rented leases

9.9

Near to medium term

Through the normal cycle of rent reviews, lease renewals and lettings. This is typically converted to income over a 3 - 5 year period.

 

29.1

 

 

 

64% of the uncontracted, under-rented reversion is accounted for by shops, restaurants, cafés and pubs. In our locations, these uses have a long history of sustained, non-cyclical demand, which, together with a restricted supply of space, underpins their growth prospects. We remain confident that, with our proven long-term management strategy, we shall not only continue to convert this rental potential into cash flow, but also deliver further long-term growth in rental values.

 

Investment security, growing returns and low obsolescence

Investor interest remains strong for properties like ours, which provide investment security, low vacancy, growing returns and limited exposure to obsolescence. This is further fuelled by the current availability of finance at historically low levels. Against this backdrop of strong demand, availability of properties to purchase remains limited.

 

Equivalent yields, attributed by our external valuers, have remained broadly unchanged over the year with the wholly-owned portfolio at 3.57% (2015: 3.61%), and the Longmartin joint venture at 3.79% (2015: 3.75%).

 

The valuation of our larger schemes does not include expected development profits which will be recognised once they are completed and let.

 

Potential greater value for some, or all, parts of the portfolio

DTZ, independent valuer of our wholly-owned portfolio, has continued to note that:

§ our portfolio is unusual in its substantial number of predominantly restaurant and retail properties in adjacent, or adjoining, locations in London's West End; and

§ there is a long record of strong occupier demand for these uses in this location and, consequently, high occupancy levels throughout the portfolio.

 

Consequently, they have reiterated to the Board that some prospective purchasers may recognise the rare and compelling opportunity to acquire, in a single transaction, substantial parts of the portfolio, or the portfolio in its entirety. Such parties may consider a combination of some, or all, parts of the portfolio to have a greater value than currently reflected in the valuation included in these financial statements, which has been prepared in accordance with RICS guidelines.

 

Investing in our portfolio

 

Extensive asset management and refurbishment activity delivering increasing income and unlocking value.

 

249,000 sq. ft.
Space under refurbishment
during the year

 

£32.6 million
Capital expenditure

£62.7 million
Acquisitions

 

Extensive activity

Schemes during the year extended to 249,000 sq. ft. (circa 14% of wholly-owned floor space), at a cost, during the year, of £32.6 million. Where possible, we seek to negotiate early vacant possession of under-rented space to implement further asset management initiatives to accelerate the capture of, and growth in, our portfolio's reversionary potential. During the year we secured 71 planning consents, a vital part of maintaining a pipeline of projects.

 

Vacant space held for, or undergoing, refurbishment at 30 September 20161

 

 

 

 

 

% of total ERV

 

Restaurants, cafés
and leisure

Shops

Offices

Residential

Total

30.9.16

30.9.15

 

£m

£m

£m

£m

£m

%

%

 

 

 

 

 

 

 

 

Major schemes2

1.4

4.2

1.7

0.1

7.4

5.7%

1.4%

Other schemes

1.4

1.5

1.9

2.0

6.8

5.3%

2.9%

Total

2.8

5.7

3.6

2.1

14.2

11.0%

4.3%

 

 

 

 

 

 

 

 

Area ('000 sq. ft.)

35

80

51

36

202

 

82

                       

 

1.      Wholly-owned portfolio

2.      Charing Cross Road/Chinatown, Thomas Neal's Warehouse, Seven Dials, 57 Broadwick Street, Carnaby

 

Good progress with major schemes

At 30 September 2016, space held for, or under, refurbishment extended to 202,000 sq. ft., and represented 11% of ERV, an increase of 6.7% during the year. This included our three major schemes: Thomas Neal's Warehouse, Seven Dials, Charing Cross Road/Chinatown and 57 Broadwick Street, Carnaby, which totalled 101,200 sq. ft. and represented 5.7% of ERV.

 

Each of these major schemes is well-positioned to benefit from expected changes in footfall following the opening of the Elizabeth Line in 2018 and will bring significant long-term benefits to our neighbouring ownerships. Our selection of tenants, and how they intend to use this exciting new space, will be particularly important to their success. Inevitably, with space of this size, where occupiers will be investing heavily in their fit-outs, letting periods are likely to be longer than the smaller space we traditionally have to offer.

 

Once let, these schemes will add £7.4 million to our annual income. Importantly, since the restaurant and retail space on the lower floors, extending to 79,200 sq. ft., will be provided in shell form only, further rental growth will come with little, or no further, capital expenditure.

 

Thomas Neal's Warehouse, Seven Dials

We completed the reconfiguration of Thomas Neal's Warehouse, Seven Dials, in October 2016.

 

The scheme provides 22,700 sq. ft. of retail space, including up to 3,000 sq. ft. for restaurant use. Marketing is now underway and the level of initial interest is encouraging.

 

Located close to the new Tottenham Court Road transport hub, this flagship accommodation, together with major public realm improvements in 2017, will further strengthen Seven Dials as a popular and distinctive retail and leisure destination.

 

Earlham Street, which is part of an important pedestrian route from Soho towards Thomas Neal's Warehouse, is set to undergo a major upgrade, commencing in spring 2017. Rental tones in this important gateway into Seven Dials from Cambridge Circus have lagged behind nearby streets for some time. However, with an expectation of increased footfall from Tottenham Court Road and the benefit of improvements to Cambridge Circus to relieve pedestrian congestion, planned for early 2017, this should bring material long-term benefits to this street, as well as our other holdings in Seven Dials.

 

Charing Cross Road/Chinatown

Having commenced this scheme in January 2016, we have now passed the half-way point and are on track to complete our works in spring 2017. Located next to Leicester Square Underground station, and within a short walk of Tottenham Court Road station, it will bring major improvements to this important block on Chinatown's eastern boundary, which we expect to provide material benefits to our other holdings in Chinatown.

 

The scheme will provide:

§ 35,000 sq. ft. of retail along a 330-foot frontage on Charing Cross Road, a street with high footfall, which is expected to grow materially once the Elizabeth Line opens.

§ 13,500 sq. ft. of restaurant space, fronting Newport Place and Newport Court.

§ a much-improved gateway into Chinatown.

 

We are creating space with exceptional floor-to-ceiling heights, providing an opportunity to increase floor space by adding mezzanine floors in a number of locations within our scheme, if required by tenants.

 

Formal marketing will commence in early 2017, once works are sufficiently progressed to show the accommodation to prospective occupiers. The expected cost is £14.5 million, of which £8.4 million had been incurred by 30 September 2016.

 

We continue to support Westminster City Council's plans to create a part-pedestrianised public square in Newport Place, at the eastern end of Gerrard Street. This will provide the opportunity, subject to licensing and planning consents, for al fresco dining for our newly-created restaurants, and significantly improve the public realm in Chinatown. Currently we expect works to begin in late spring 2017.

 

57 Broadwick Street, Carnaby

Having completed strip-out works, in September construction commenced at our major mixed-use project at 57 Broadwick Street, Carnaby. Situated within a few minutes' walk of Tottenham Court Road's new western ticket hall on Dean Street, this 30,000 sq. ft. scheme at this eastern gateway to Carnaby will provide:

§ flagship retail space and a restaurant, together extending to 8,000 sq. ft., over the lower floors;

§ 20,000 sq. ft. of refurbished and extended grade A office accommodation across the upper floors; and

§ two apartments totalling 2,000 sq. ft.

The project will complete in phases from late 2017, at an estimated cost of £14.5 million, of which £3.1 million had been incurred by 30 September 2016.

 

With an expectation of increased footfall along Broadwick Street, Westminster City Council have designated this improving thoroughfare as a priority pedestrian route and have now begun a programme to improve the streetscape.

 

Other schemes

At 30 September 2016, we were progressing other projects, extending to 100,800 sq. ft. and representing 5.3% of ERV. These included the reconfiguration and improvement of 19,000 sq. ft. of restaurants and cafés, 16,800 sq. ft. of retail, 31,000 sq. ft. of office space, and 56 apartments either being created or upgraded. We expect these to complete and become income-producing in the coming year.

 

Acquisitions with the potential for rental and capital growth

Acquisitions during the year totalled £62.7 million. These additions to our portfolio in Covent Garden, Soho and Charlotte Street comprised nine shops, five restaurants and cafés, 2,850 sq. ft. of office space and four apartments.

 

On acquisition, they produced an average net initial yield of 2.4%. As we integrate them with our existing ownerships, they offer the potential for good rental and capital growth through short and medium-term asset management initiatives, some of which have already commenced.

 

We continue to seek out new acquisitions, but remain disciplined, concentrating on buildings:

§ in, and around, our villages;

§ which have a predominance of, or potential for, restaurant, leisure and retail uses; and

§ which offer the potential for future rental growth, either individually or through combination with our existing ownerships.

 

As ever, the availability of buildings which fit these strict investment criteria remains limited, with existing owners reluctant to sell assets which they will find hard to replace in this exceptionally prosperous and resilient area.

Leasing and occupancy

 

Demand continues to be strong for all uses and across each location. Space continues to let quickly and vacancy levels remain low.

 

Leasing

During the year, we concluded lettings, lease renewals and rent reviews in the wholly-owned portfolio with a rental value of £27.8 million (2015: £27.3 million), representing 21.6% of total ERV. Of this, commercial transactions totalled £21.6 million (2015: £21.6 million) and residential lettings and renewals amounted to £6.2 million (2015: £5.7 million). Rents achieved for commercial uses were, on average, 7.7% above ERV at 30 September 2015.

 

 

£m

 

Commercial

 

 

Lettings and renewals

11.4

+9.2% vs 30 September 2015 ERV

Rent reviews

10.2

+29.2% vs previous rent (equivalent to 5.3% CAGR over five years)

 

21.6

+7.7% vs 30 September 2015 ERV

Residential

 

 

Lettings and renewals

6.2

+2.5% vs prior rent

Total

27.8

 

 

Our share of leasing activity in the Longmartin joint venture was £2.7 million. Commercial rents achieved were, on average, 6.2% above ERV at 30 September 2015.

 

Vacancy

EPRA vacancy at 30 September 20161

 

 

 

 

 

 

% of total ERV

 

Restaurants, cafés
and leisure

Shops

Offices

Residential

Total

30.9.16

30.9.15

 

£m

£m

£m

£m

£m

%

%

 

 

 

 

 

 

 

 

Under offer

0.3

-

0.8

0.3

1.4

1.1%

0.3%

Available-to-let

0.1

0.3

0.2

-

0.6

0.5%

1.3%

EPRA vacancy

0.4

0.3

1.0

0.3

2.0

1.6%

1.6%

 

 

 

 

 

 

 

 

Area ('000 sq. ft.)

6

4

14

7

31

 

28

 

1.      Wholly-owned portfolio.

With sustained tenant demand for space, EPRA vacancy has been, on average, 1.9% of total ERV over the year. At 30 September 2016, it stood at 1.6%, of which 1.1% was under offer.

 

Available-to-let vacancy comprised: one restaurant, five small shops, 3,000 sq. ft. of office space and one apartment. Space under offer at 30 September 2016 included four cafés, 11,000 sq. ft. of office accommodation and ten apartments.

 

In the Longmartin joint venture, two shops, 4,000 sq. ft. of office space and two apartments were available-to-let or under offer. The ERV of our 50% share of EPRA vacancy was £0.3 million.

 

Portfolio review

 

Lower floors - 70% of current income1

 

 

Wholly-owned

Longmartin2

Restaurants, cafés and leisure - 35% of current income1

 

 

Number

275

10

Area (sq. ft.)

590,000

45,000

 

 

 

Retail - 35% of current income1

 

 

Number

309

21

Area (sq. ft.)

471,000

67,000

 

 

 

 

1.      Wholly-owned portfolio

2.      Shaftesbury has a 50% interest

 

Restaurants, cafés and leisure

Important driver of footfall

We are the largest single provider of dining and leisure space in the West End, owning nearly one in five of the licenced premises. Restaurants, cafés and leisure choices are important to the mix of uses in our villages. Most of our restaurants provide a casual dining experience, often with an all-day offer. The broad variety of concepts and cuisines is a major driver of footfall and social media interest.

 

High demand, restricted availability of space

The availability of restaurant and leisure space in the West End is constrained by restrictive planning policies, which seek to preserve the balance of commercial uses and amenity of local residents. The barriers to entry are high with existing operators reluctant to relinquish their valuable sites, other than for significant premiums. As a consequence, tenants ensure they preserve their valuable occupation rights and our bad debt history is negligible.

 

Demand for space in our busy areas is strong, particularly from independent operators, established street-food concepts and start-ups seeking their first site. Usually we receive numerous offers for available units and vacancy levels are minimal.

 

Longer leases, but terms improving

Tenants invest considerable sums fitting out their space, sometimes spending the equivalent of 3-5 years' rent and, therefore, we grant longer leases than those for shops, to provide an extended period over which to amortise this cost.

 

Until recently, leases were granted over whole buildings and provided tenants with renewal rights on expiry. We find that upper floors are often now underutilised and, where opportunities arise, we seek to negotiate the surrender of these leases to secure vacant possession. This allows us to improve the configuration of space on the lower floors, attract new operators on more beneficial terms, and often release valuable upper floors for other uses.

 

Reflecting the strength of demand for our restaurant space, in recent years we have reduced the term of leases we grant and introduced more flexibility at expiry. Also, we include turnover-related rental top-ups, giving us the higher of market rent and a percentage of turnover.

 

During the year, we completed leasing transactions with a rental value of £8.2 million, equivalent to 19.4% of restaurant, café and leisure ERV. This included nineteen lettings and renewals, and 29 rent reviews. Our share of leasing transactions in the Longmartin joint venture was £0.2 million.

 

Retail

Our retail areas in Carnaby and Seven Dials make an important contribution to the West End's reputation as a global shopping destination.

 

Competitive rental levels compared with nearby streets 

An important element of the character and mix in our villages is the wide range of shop sizes and rental levels across our streets, from small starter units to larger shops for more-established retailers. This enables us to provide a wide diversity of retail formats and offers great flexibility for retailers to grow, or open new concepts, within our areas.

 

Importantly, in our high-footfall and spending locations, rental levels are competitive relative to nearby streets.

 

Sustained demand

The majority of our space is let to fashion and lifestyle retailers. Quality and variety are becoming ever-more important as shoppers' behaviour changes, with a bias towards innovation, experience, fulfilment and the ability to find something different from that commonly offered by high streets and shopping centres. To attract visitors, we seek out new, interesting concepts from across the world, to maintain a fresh retail mix.

 

With the huge potential customer base offered by the West End, demand for space in our iconic retail destinations remains good, with interest both from domestic and international retailers, often opening new concept stores or flagships.

 

During the year, we completed letting transactions with a combined rental value of £10.3 million, equivalent to 22.5% of retail ERV. This included 25 new shop lettings, 26 lease renewals and 21 rent reviews. Our share of lettings and rent reviews in the Longmartin joint venture was £1.4 million.

Upper floors - 30% of current income1

 

 

Wholly-owned

Longmartin2

Offices - 16% of current income1

 

 

Area (sq. ft.)

406,000

102,000

 

 

 

Residential - 14% of current income1

 

 

Number

559

75

Area (sq. ft.)

332,000

55,000

 

 

 

 

1.      Wholly-owned portfolio

2.      Shaftesbury has a 50% interest

 

Offices

Large provider of small office space in the core West End

We are an important provider of small, affordable office space in the core West End, with 406,000 sq. ft. of accommodation in the wholly-owned portfolio, let to 246 tenants, of which 87% occupy less than 2,500 sq. ft.

 

Our average letting is 1,440 sq. ft., often over more than one floor, at £51 per sq. ft. (2015: £46 per sq. ft.). The average ERV is £61 per sq. ft. (2015: £56 per sq. ft.).

 

Strong demand, with low availability of space

Demand for our smaller office accommodation is good, particularly from the SME media, creative, fashion and tech sectors, which traditionally have been based in Soho and Covent Garden.

 

Over recent years, office-to-residential conversions and redevelopment of multi-let office buildings, to higher specification, larger floor plate space, has reduced the availability of smaller office accommodation across our locations.

 

With occupier demand outstripping availability of space, rental levels have grown and vacancy levels remain extremely low.

 

During the year, we completed lettings and lease renewals with a rental value of £3.1 million, equivalent to 12.8% of office ERV. Our share of lettings in the Longmartin joint venture was £0.6 million. 

 

Residential

Popular area to live

The West End is a popular place to live and we continue to see sustained demand to rent our mid-market apartments. Our flats are mainly studios and one or two-bedroom apartments, many of which have been created from the conversion of small office accommodation back to its original residential use. We have a number of further residential conversion planning consents which we could implement in the future.

 

Reliable and growing cash flow

Occupancy levels in our apartments are high and, with strong demand, they produce a growing and reliable income stream.

 

During the year, we completed lettings and renewals totalling £6.2 million, equivalent to 37.6% of residential ERV. Our share of residential letting activity in the Longmartin joint venture was £0.5 million.

 

Generally, we do not sell our apartments

Most of the value of our buildings is in the commercial uses on the lower floors. We prefer to retain control over whole buildings to avoid compromising the management flexibility needed to realise the long-term potential in those valuable lower floors. Therefore, generally, we choose not to sell our apartments.

 

Financial results

 

This has been another good year for Shaftesbury with further growth in income, earnings, dividends and NAV.

 

Reported results

+2.6%

+6.7%

-78.8%

+6.9%

£8.54

£84.1m

35.6p

14.7p

Diluted NAV

Net property income

Basic EPS

Dividends per share

EPRA results

 

 

 

+2.2%

 

+8.0%

+7.7%

£8.88

+3.8%

£39.0m

14.0p

EPRA NAV

NAV return

EPRA earnings

EPRA EPS

Income statement

Reported earnings

Profit after tax for the year was £99.1 million (2015: £467.3 million) and basic earnings per share was 35.6 pence, compared with 168.0 pence in 2015. The decrease was largely due to a lower revaluation surplus from our portfolio, which contributed 43 pence (2015: 167 pence), and the recognition of the fair value of our 8.5% Debenture Stock, which reduced basic earnings per share by 10 pence.

 

EPRA earnings

As is usual practice in our sector, we produce an alternative measure for certain indicators, including earnings, making adjustments set out by EPRA in its Best Practice and Policy Recommendations. EPRA earnings are a measure of the level of underlying operating results and an indication of the extent to which current dividend payments are supported by recurring earnings. In our case, EPRA earnings excludes valuation movements in respect of our properties and interest rate swaps and ignores deferred tax arising in our Longmartin joint venture. The one-off charge from recognising the fair value of our Debenture Stock in the current year has also been excluded, as set out in the reconciliation below.

 

 

EPRA earnings
2016
£m
2015
£m
IFRS profit after tax
99.1
467.3
Adjusted for:
 
 
-     Change in value of investment properties
(108.3)
(432.0)
-     Change in fair value of financial instruments
34.9
28.5
-     Recognition of fair value of Debenture Stock
29.2
-
Adjustments in respect of the Longmartin joint venture:
 
 
-     Change in value of investment properties
(11.3)
(34.6)
-     Deferred tax
(4.6)
6.9
EPRA earnings
39.0
36.1
EPRA EPS        
14.0p
13.0p

 

 

EPRA earnings increased by 8.0% to £39.0 million (2015: £36.1 million). EPRA EPS was 14.0 pence, 7.7% above last year (2015: 13.0 pence). The increase in earnings was driven principally by increased net property income, partly offset by higher finance costs.

 

Net property income

Rents receivable increased by 7.2% to £98.4 million (2015: £91.8 million) as we continue to convert our portfolio's reversionary potential into contracted cash flow.

 

Acquisitions accounted for £1.0 million of this increase. Our scheme at Foubert's Place/Kingly Street, Carnaby, which became income-producing in the second half of last year, contributed £1.6 million. This was offset by vacancy at major schemes which commenced this year, reducing rents receivable by £2.4 million compared with 2015. Like-for-like growth in rental income, excluding the impact of acquisitions and major refurbishment schemes, was 7.3%.

 

Irrecoverable property charges were £14.3 million (2015: £13.0 million), representing 14.5% of rents receivable (2015: 14.2%). The increase compared with last year is, in part, due to a higher level of asset management activity. Also, it reflects increased marketing and promotion of our villages, a key aspect of our long-term strategy.

Net property income was £84.1 million, an increase of 6.7% on last year (2015: £78.8 million).

 

Administrative expenses

Administrative expenses, excluding the charge for equity-settled remuneration, totalled £11.6 million (2015: £11.0 million). This includes a charge for annual bonuses of £3.0 million (2015: £2.2 million).

 

The charge for equity-settled remuneration was £2.5 million (2015: £3.0 million). This included a non-cash accounting provision of £1.9 million (2015: £2.3 million) and a charge for employer's National Insurance of £0.6 million (2015: £0.7 million).

 

Revaluation surplus

The revaluation surplus from our wholly-owned portfolio was £108.3 million (2015: £432.0 million). This surplus represented a like-for-like increase of 3.9%, principally driven by like-for-like growth in contracted income and ERV of 6.0% and 5.5% respectively. The increase in SDLT for commercial properties reduced values by 0.9%.

 

Finance costs

With higher net debt as a result of acquisitions and further investment in our portfolio, net finance costs (excluding the change in fair value of our interest rate swaps and the one-off charge from recognising the fair value of our Debenture Stock) increased by £2.9 million to £33.6 million (2015: £30.7 million).

 

Having modified the terms of our 8.5% Debenture Stock 2024 in September 2016, in anticipation of a new bond issue, we recognised the fair value of the Stock, to reflect the expected net present value of the future cash flows, including an early redemption penalty. This resulted in a one-off, non-cash charge to finance costs of £29.2 million. This deficit was crystallised in October 2016.

 

The fair value deficit on our interest rate swaps increased by £34.9 million to £114.1 million, following a fall in long-dated interest rates, particularly after the EU referendum in June 2016. The Board regularly reviews the Group's interest hedging strategy and the impact these derivatives have on the long-term financing of the business. In October 2016, we terminated swaps with a notional principal of £55 million, at a cost of £34.1 million. We have now cancelled around 65% of our legacy interest rate swaps over the past three years.

 

Longmartin results

Our share of post-tax profit from the Longmartin joint venture decreased by £11.2 million to £18.5 million (2015: £29.7 million). This decrease was largely due to a lower revaluation surplus of £11.3 million (2015: £34.6 million), which was partly offset by a deferred tax credit.

 

Our share of EPRA earnings from the joint venture increased by £0.6 million to £2.6 million (2015: £2.0 million), principally due to an increase in net property income of 14.4% to £6.7 million (2015: £5.9 million), following a number of rent reviews over the past twelve months.

 

Tax

As a REIT, the Group's activities are largely exempt from corporation tax and, as a result, there is no tax charge in the year (2015: £Nil).

 

Despite our REIT status, we do collect and pay other taxes eg payroll taxes, VAT, Stamp Duty Land Tax and Business Rates. During the year, the total tax paid in respect of these taxes amounted to £21.0 million. In addition, £1.2 million of tax was withheld from Property Income Distributions and paid to HMRC. In addition, our share of corporation tax incurred by the Longmartin joint venture was £0.6 million.

 

The group's tax strategy is to account for tax on an accurate and timely basis. Our appetite for tax risk is low and we only structure our affairs based on sound commercial principles. We do not engage in aggressive tax planning. Rather, we maintain an open dialogue with HMRC with a view to identifying and solving issues promptly. HMRC have designated us as a 'low risk' taxpayer, a status we aim to maintain. Our detailed tax strategy is available on our website. 

 

Dividend

The Board has recommended a final dividend of 7.55 pence per share, an increase of 9.0% on last year's final dividend (6.925 pence). This brings the total dividend for the year to 14.7 pence per share, an increase of 6.9% on 2015 (13.75 pence).

 

The dividend for the year ended 30 September 2016 is covered by EPRA earnings, after adding back the non-cash accounting charge in the year for equity-settled remuneration of £1.9 million. If approved at the 2017 AGM, the final dividend will be paid on 17 February 2017. It will comprise 5.2 pence as a PID and 2.35 pence as an ordinary dividend.

 

The Board monitors the Group's ability to pay dividends out of available resources and distributable reserves. Prospective dividend payments are estimated in our forecasts, which also consider future liquidity requirements.

As a REIT, we are required to distribute a minimum of 90% of net rental income, calculated by reference to tax rather than accounting rules, as a PID. Notwithstanding this, our dividend policy is to maintain steady growth in dividends, reflecting the long-term trend in our income and EPRA earnings, adjusted to add back the non-cash accounting charge for equity-settled remuneration. To the extent that dividends exceed the amount available to distribute as a PID, we pay the balance as ordinary dividends. We have substantial distributable reserves.

 

The exceptional charges associated with the recent refinancing of our debenture stock and termination of interest rate swaps will be charged against our qualifying REIT income and, consequently, it is likely that any dividend in relation to the year ending 30 September 2017 will be paid as an ordinary dividend, with PID distributions resuming in the following year.

 

Net asset value

Reported diluted net asset value per share increased by 22.0 pence to £8.54 per share, largely due to diluted earnings per share of 35.5 pence less dividends paid totalling 14.075 pence.

 

EPRA NAV makes adjustments to reported NAV, to provide a measure of the fair value of net assets on a long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances are excluded. In our case, the calculation excludes the fair value of interest rate swaps, other than those which we expect to terminate, and deferred tax related to property valuation surpluses in the Longmartin joint venture.

 

EPRA NAV

 

2016

£M

2015

£M

IFRS net assets

 

2,387.1

2,325.4

Effect of exercise of options

 

0.5

0.4

Diluted net assets

 

2,387.6

2,325.8

Adjusted for:

 

 

 

-    Fair value of financial instruments

 

76.1

79.2

Adjustments in respect of the Longmartin joint venture:

 

 

 

-    Deferred tax

 

18.0

22.6

EPRA NAV

 

2,481.7

2,427.6

EPRA NAV per share

 

£8.88

£8.69

 

EPRA NAV per share increased by 19 pence (2.2%) to £8.88 (2015: £8.69). EPRA earnings of 14 pence per share were offset by dividends paid in the year (14.075 pence per share). The revaluation surpluses from the wholly-owned portfolio and the Longmartin joint venture added 43 pence.

 

The exceptional charges from refinancing activity reduced EPRA NAV by 24 pence, of which 10 pence arose from recognising the fair value of our Debenture Stock and 14 pence was charged in respect of interest rate swaps, with a notional principal of £55 million and fair value deficit of £38.0 million, which we intended to cancel. These swaps were cancelled in October 2016, at a cost of £34.1 million. The saving, compared with the deficit at 30 September 2016, will increase NAV by 1.4 pence per share in the coming year.

 

Cash flows and net debt

Net debt increased by £114.3 million to £752.1 million over the year (2015: £637.8 million), and now includes £92.2 million in respect of the 8.5% Debenture Stock (2015: £61.0 million) following the recognition of its fair value.

 

The major cash flows were:

§ Operating cash inflow totalling £44.3 million

§ Dividends paid amounting to £38.2 million

§ Acquisitions and capital expenditure of £91.2 million

 

Finance review

 

Important refinancing of historical debt increased financial resources, extended average debt maturity and reduced blended cost.

 

£214.6m
Available facilities1

25.8%
Loan-to-value1

10.8 years
Weighted average debt maturity1

 

Debenture Stock refinancing

In September 2016, we amended our 8.5% First Mortgage Debenture Stock 2024, to set the terms under which we could refinance this Stock, in exchange for a new issue of Guaranteed First Mortgage Bonds. In October 2016, taking advantage of extremely low gilt yields, we issued £285 million of bonds with a coupon of 2.487% and maturity in September 2031.

 

Part of the proceeds of the issue were used to:

§ redeem our existing £61 million 8.5% First Mortgage Debenture Stock due 2024, including a prepayment cost of £31.1 million.

§ cancel interest rate swaps with a notional principal of £55 million, at a cost of £34.1 million. 

 

The balance of the proceeds was used to reduce drawings under our revolving credit facilities, which are available to be re-drawn.

 

Increase in financial resources

The issue significantly increased our financial resources for further investment in our portfolio, whilst extending our weighted average debt maturity and reducing our blended cost of debt.

 

The table below sets out a summary of our debt, both at 30 September 2016, and on a pro-forma basis for these transactions.

 

Debt summary

 

 

Reported

2016

£M

Pro-forma1

2016

£M

 

2015

£M

Debt excluding Longmartin JV

 

 

 

-    Fixed/hedged debt3

657.0

794.8

628.8

-    Drawn unhedged bank debt

110.7

10.4

19.7

 

767.7

805.2

645.5

Longmartin non-recourse debt (50% share)

60.0

60.0

60.0

Total debt

827.7

865.2

705.5

 

 

 

 

Undrawn floating rate facilities

59.3

214.6

150.3

Loan-to-value2,3

24.7%

25.8%

22.5%

Gearing2,3,4

33.4%

34.9%

29.1%

Interest cover2

2.1x

2.3x

2.1x

% debt fixed2

87%

99%

97%

Blended cost of debt5

4.5%

3.9%

4.9%

Marginal cost of undrawn floating rate facilities

1.3%

1.2%

1.5%

Weighted average debt maturity2

9.2 years

10.8 years

10.2 years

 

1.      Pro-forma for the issue of 2.487% Mortgage Bonds 2031 and redemption of 8.5% Debenture Stock 2024, and for the cancellation of interest rate swaps with a notional principal of £55m in October 2016.

2.      Including our 50% share of the Longmartin joint venture

3.      Based on nominal value of debt.

4.      Based on EPRA net assets.

5.      Including non-utilisation fees on undrawn bank facilities.

 

On a pro-forma basis, at 30 September 2016, our loan-to-value ratio was 25.8% (2015: 22.5%) and we had committed undrawn facilities totalling £214.6 million (2015: £150.3 million). Of our drawn debt, 98.8% was fixed or hedged (2015: 97.2%).

 

The blended cost of debt was 3.9%, 1.0% lower than at 30 September 2015. The marginal cost of our undrawn committed facilities is around 1.2% (2015: 1.5%) and, so, as additional drawings are made, our cost of debt will fall further. If our facilities were fully drawn, the blended cost of debt would be 3.4%.

 

Debt maturity profile

 

Year of maturity

Facility type

Total facility

£m

2018

Bank facility

150

2020

Bank facility

125

2021

Bank facility

75

2026

Term loan (Longmartin joint venture)

601

2029

Term loan

135

2030

Term loan

130

2031

Mortgage bonds

285

2035

Term loan

120

 

1.      Shaftesbury Group's 50% share. This loan is without recourse to Shaftesbury.

 

Portfolio analysis

At 30 September 2016

Note

Carnaby

Covent

Garden

Chinatown

Soho

Charlotte

Street

Wholly

owned

portfolio

Longmartin

Total

portfolio

Portfolio

Fair value

1

£1,161.0m

£875.0m

£725.9m

£244.0m

£117.7m

£3,123.6m

£224.4m1

£3,348.0m

% of total fair value

 

35%

26%

22%

7%

3%

93%

7%

100%

Current income

2

£39.6m

£27.5m

£22.3m

£8.0m

£3.6m

£101.0m

£8.6m1

£109.6m

ERV

3

£48.8m

£35.9m

£29.2m

£10.0m

£4.8m

£128.7m

£10.0m1

£138.7m

Shops

Number

 

101

94

66

39

9

309

21

 

Area - sq. ft.

 

181,000

138,000

95,000

43,000

14,000

471,000

67,000

 

% of current income

4

50%

30%

22%

27%

18%

35%

37%

 

% of ERV

4

47%

32%

28%

27%

14%

36%

39%

 

Average unexpired lease length - years

5

4

4

5

4

5

4

4

 

Restaurants, cafés and leisure

Number

 

53

92

77

30

23

275

10

 

Area - sq. ft.

 

103,000

176,000

206,000

58,000

47,000

590,000

45,000

 

% of current income

4

16%

37%

61%

37%

58%

35%

16%

 

% of ERV

4

15%

33%

56%

38%

51%

33%

14%

 

Average unexpired lease length - years

5

11

10

12

10

9

11

13

 

Offices

Area - sq. ft.

 

247,000

84,000

29,000

36,000

10,000

406,000

102,000

 

% of current income

4

28%

11%

4%

15%

8%

16%

32%

 

% of ERV

4

32%

15%

4%

17%

9%

19%

34%

 

Average unexpired lease length - years

5

4

4

3

3

4

4

5

 

Residential

Number

 

94

221

124

69

51

559

75

 

Area - sq. ft.

 

56,000

137,000

78,000

38,000

23,000

332,000

55,000

 

% of current passing rent

4

6%

22%

13%

21%

16%

14%

15%

 

% of ERV

4

6%

20%

12%

18%

26%

12%

13%

 

 

1.      Shaftesbury Group's 50% share

 

Basis of valuation 

At 30 September 2016

Note

Carnaby

Covent

Garden

Chinatown

Soho

Charlotte

Street

Wholly

owned

portfolio

Longmartin

Overall initial yield

7

3.18%

2.81%

3.04%

2.91%

2.65%

3.00%

3.26%

Topped-up initial yield

8

3.22%

2.89%

3.09%

3.30%

2.79%

3.08%

3.38%

Overall equivalent yield

9

3.65%

3.57%

3.40%

3.63%

3.52%

3.57%

3.79%

Tone of retail equivalent yields

10

3.35-4.25%

3.60-4.50%

3.50-4.50%

3.75-4.50%

3.50-4.75%

 

3.4%-4.15%

Tone of retail ERVs - ITZA £ per sq. ft.

10

£125-£515

£75-£490

£140-£350

£140-£275

£92.50-£215

 

£77.50-£700

Tone of restaurant equivalent yields

10

3.65-5.00%

3.50-4.25%

3.50-3.75%

3.75-4.10%

3.60-4.15%

 

3.75-4.00%

Tone of restaurant ERVs - £ per sq. ft.

10

£105-£135

£90-£179

£260-£400 ITZA

£85-£124

(£275 ITZA)

£77.50-£100

 

£90-£137.50

Tone of office equivalent yields

10

4.00%-4.50%

4.00-4.25%

4.25-4.50%

4.50-4.60%

4.50-4.75%

 

4.25%-4.50%

Tone of office ERVs - £ per sq. ft.

10

£58-£80

£50-£75

£43-£53

£50-£65

£45-£55

 

£50-£77.50

Average residential ERVs - £ per sq. ft. per annum

10

£51

£51

£44

£48

£56

 

£49

 

Notes

1.         The fair values at 30 September 2016 (the "valuation date") shown in respect of the individual villages are, in each case, the aggregate of the fair values of several different property interests located within close proximity which, for the purpose of this analysis, are combined to create each village. The different interests within each village were not valued as a single lot.

2.         Current income includes total annualised actual and 'estimated income' reserved by leases. No rent is attributed to leases which were subject to rent-free periods at the valuation date. Current income does not reflect any ground rents, head rents nor rent charges and estimated irrecoverable outgoings at the valuation date. 'Estimated income' refers to gross estimated rental values in respect of rent reviews outstanding at the valuation date and, where appropriate, ERV in respect of lease renewals outstanding at the valuation date where the fair value reflects terms for a renewed lease.

3.         ERV is the respective valuers' opinion of the rental value of the properties, or parts thereof, reflecting the terms of the relevant leases or, if appropriate, reflecting the fact that certain of the properties, or parts thereof, have been valued on the basis of vacant possession and the assumed grant of a new lease. Where appropriate, ERV assumes completion of developments which are reflected in the valuations. ERV does not reflect any ground rents, head rents nor rent charges and estimated irrecoverable outgoings.

4.         The percentage of current income and the percentage of ERV in each of the use sectors are expressed as a percentage of total income and total ERV for each village.

5.         Average unexpired lease length has been calculated by weighting the leases in terms of current rent reserved under the relevant leases and, where relevant, by reference to tenants' options to determine leases in advance of expiry through effluxion of time.

6.         Where mixed uses occur within single leases, for the purpose of this analysis, the majority use by rental value has been adopted.

7.         The initial yield is the net initial income at the valuation date expressed as a percentage of the gross valuation. Yields reflect net income after deduction of any ground rents, head rents and rent charges and estimated irrecoverable outgoings at the valuation date.

8.         The topped-up initial yield, ignoring contractual rent free periods, has been calculated as if the contracted rent is payable from the valuation date and as if any future stepped rental uplifts under leases had occurred.

9.         Equivalent yield is the internal rate of return, being the discount rate which needs to be applied to the expected flow of income so that the total amount of income so discounted at this rate equals the capital outlay at values current as of the valuation date. The equivalent yield shown for each village has been calculated by merging together the cash flows and fair values of each of the different interests within each village and represents the average equivalent yield attributable to each village from this approach.

10.       The tone of rental values and yields is the range of rental values or yields attributed to the majority of the properties.

11.       All commercial floor areas are net lettable. All residential floor areas are gross internal.

12.       For presentation purposes some percentages have been rounded to the nearest integer.

13.       The analysis includes accommodation which is awaiting, or undergoing, refurbishment or development and is not available for occupation at the date of valuation.

 

Group Statement of Comprehensive Income

 

For the year ended 30 September 2016

 

 

Notes

2016

£m

2015

£m

Revenue

2

106.2

98.7

Property charges

3

(22.1)

(19.9)

Net property income

 

84.1

78.8

Administrative expenses

 

(8.6)

(8.8)

Charge for annual bonuses

 

(3.0)

(2.2)

Charge in respect of equity-settled remuneration

4

(2.5)

(3.0)

Total administrative expenses

 

(14.1)

(14.0)

Operating profit before investment property valuation movements

 

70.0

64.8

Net surplus on revaluation of investment properties

9

108.3

432.0

Operating profit

 

178.3

496.8

Finance income

 

0.1

0.1

Finance costs

5

(33.7)

(30.8)

Recognition of fair value of Debenture Stock

15

(29.2)

-

Change in fair value of derivative financial instruments

16

(34.9)

(28.5)

Net finance costs

 

(97.7)

(59.2)

Share of post-tax profit from joint venture

11

18.5

29.7

Profit before tax

 

99.1

467.3

Tax charge for the year

6

-

-

Profit and total comprehensive income for the year

 

99.1

467.3

 

 

 

 

Earnings per share:

7

 

 

Basic

 

35.6p

168.0p

Diluted

 

35.5p

167.4p

EPRA

 

14.0p

13.0p

 

Please see below for an explanation of the EPRA measures used in these financial statements.

 

Group Balance Sheet

 

As at 30 September 2016

 

 

Notes

2016

£M

2015

£M

Non-current assets

 

 

 

Investment properties

9

3,111.6

2,908.0

Accrued income

10

9.8

9.5

Investment in joint venture

11

146.4

129.6

Property, plant and equipment

 

1.4

1.5

Other receivables

13

3.7

3.7

 

 

3,272.9

3,052.3

Current assets

 

 

 

Trade and other receivables

12

19.3

21.7

Cash and cash equivalents

13

15.6

7.7

Total assets

 

3,307.8

3,081.7

 

 

 

 

Current liabilities

 

 

 

Trade and other payables

14

45.3

36.8

Borrowings

15

92.2

-

Non-current liabilities

 

 

 

Borrowings

15

669.1

640.3

Derivative financial instruments

16

114.1

79.2

Total liabilities

 

920.7

756.3

 

 

 

 

Net assets

 

2,387.1

2,325.4

 

 

 

 

Equity

 

 

 

Share capital

17

69.7

69.6

Share premium

 

124.8

124.7

Share-based payments reserve

 

3.6

4.0

Retained earnings

 

2,189.0

2,127.1

Total equity

 

2,387.1

2,325.4

 

 

 

 

Net asset value per share:

18

 

 

Basic

 

£8.57

£8.36

Diluted

 

£8.54

£8.32

EPRA

 

£8.88

£8.69

 

On behalf of the Board who approved and authorised for issue the financial statements on 29 November 2016.

 

Brian Bickell                Chris Ward
Chief Executive              Finance Director

 

Group Cash Flow Statement

 

For the year ended 30 September 2016

 

 

Notes

2016

£M

As restated

2015

£M

Cash flows from operating activities

 

 

 

Cash generated from operating activities

19

76.9

67.4

Interest received

 

0.1

0.1

Interest paid

 

(32.7)

(30.1)

Net cash generated from operating activities

 

44.3

37.4

Cash flows from investing activities

 

 

 

Investment property acquisitions

 

(62.0)

(25.8)

Capital expenditure on investment properties

 

(29.2)

(25.1)

Purchase of property, plant and equipment

 

(0.3)

(0.3)

Dividends received from joint venture

 

1.7

1.6

Decrease in loans to joint venture

 

0.5

0.5

Net cash used in investing activities

 

(89.3)

(49.1)

Cash flows from financing activities

 

 

 

Proceeds from exercise of share options

 

0.1

0.1

Proceeds from borrowings

 

114.5

69.6

Repayment of borrowings

 

(23.5)

(230.5)

Proceeds from secured term loans

 

-

250.0

Increase in cash held in restricted accounts and deposits

 

-

(2.2)

Facility arrangement costs

 

-

(3.4)

Termination of derivative financial instruments

 

-

(28.1)

Equity dividends paid

8

(38.2)

(39.5)

Net cash from financing activities

 

52.9

16.0

Net change in cash and cash equivalents

 

7.9

4.3

Cash and cash equivalents at 1 October

13

7.7

3.4

Cash and cash equivalents at 30 September

13

15.6

7.7

 

Movements in loans to the joint venture of £0.5 million (2015: £0.5 million) have been reclassified from financing to investing activities to better reflect the nature of the transactions. Proceeds and repayment of borrowings have been restated to present these movements on a gross basis. These changes have no impact on the net change in cash and cash equivalents, net assets, or reported results in either of the years presented.

 

Statement of Changes in Equity

 

For the year ended 30 September 2016

 

 

Notes

Share
capital

£M

Share

premium

£M

Share-based

payments

reserve

£M

Retained

earnings

£M

Total
equity

£M

At 1 October 2014

 

69.5

124.6

4.0

1,695.1

1,893.2

Profit and total comprehensive income for the year

 

-

-

-

467.3

467.3

Transactions with owners:

 

 

 

 

 

 

Dividends paid

8

-

-

-

(37.5)

(37.5)

Exercise of share options

17

0.1

0.1

-

-

0.2

Fair value of share-based payments

4

-

-

2.2

-

2.2

Release on exercise of share options

 

-

-

(2.2)

2.2

-

At 30 September 2015

 

69.6

124.7

4.0

2,127.1

2,325.4

Profit and total comprehensive income for the year

 

-

-

-

99.1

99.1

Transactions with owners:

 

 

 

 

 

 

Dividends paid

8

-

-

-

(39.4)

(39.4)

Exercise of share options

17

0.1

0.1

-

(0.1)

0.1

Fair value of share-based payments

4

-

-

1.9

-

1.9

Release on exercise of share options

 

-

-

(2.3)

2.3

-

At 30 September 2016

 

69.7

124.8

3.6

2,189.0

2,387.1

 

Notes to the financial statements

 

For the year ended 30 September 2016

1.  Accounting policies

Basis of preparation

The preliminary announcement does not constitute full financial statements.

 

The results for the year ended 30 September 2016 included in this preliminary announcement are extracted from the audited financial statements for the year ended 30 September 2016 which were approved by the directors on 29 November 2016. The auditor's report on those financial statements was unqualified and did not include a statement under Section 498(2) or 498(3) of the 2006 Companies Act.

 

The 2016 Annual Report is expected to be posted to shareholders in December 2016 and will be considered at the Annual General Meeting to be held on 10 February 2017. The financial statements for the year ended 30 September 2016 have not yet been delivered to the Registrar of Companies.

The auditor's report on the financial statements for the year ended 30 September 2015 was unqualified and did not include a statement under Section 498(2) or 498(3) of the 2006 Companies Act. The financial statements for the year ended 30 September 2015 have been delivered to the Registrar of Companies.

Going concern

The Group's business activities, together with the factors affecting performance, financial position and future development are set out above. The financial position of the Group including cash flow, liquidity, borrowings, undrawn facilities and debt maturity analysis is set out above. The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, they continue to adopt the going concern basis in preparing the financial statements.

Critical judgements, assumptions and estimates

The preparation of these financial statements requires the Board to make judgements, assumptions and estimates that affect amounts reported in the Statement of Comprehensive Income and Balance Sheet. Such decisions are made at the time the financial statements are prepared and adopted based on the best information available. Actual outcomes may be different from initial estimates and are reflected in the financial statements as soon as they become apparent.

 

The directors consider the valuation of investment property to be critical because of the level of complexity, judgement or estimation involved and its impact on the financial statements. The Group's wholly-owned portfolio is valued by its external valuers, DTZ Debenham Tie Leung Limited. Knight Frank LLP value the investment properties owned by the Longmartin joint venture. The valuations are used as the basis for the fair value of the investment properties.

 

The valuation of the Group's property portfolio is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental income. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate, particularly in periods of volatility or low transaction flow in the commercial property market. DTZ Debenham Tie Leung Limited and Knight Frank LLP make a number of assumptions in forming their opinion on the valuation of our investment properties, which are detailed in the basis of valuation above. These assumptions are in accordance with the RICS Valuation Standards. However, if any assumptions made by the external valuers prove to be incorrect, this may mean that the value of the Group's properties differs from their valuation reported in the financial statements, which could have a material effect on the Group's financial position.

 

New accounting standards and interpretations

a)  The following amendments to Standards and Interpretations were mandatory for the first time for the financial year ended 30 September 2016:

Standard or Interpretation

Effective from

Annual Improvements 2011-2013

1 January 2015

Amendment to IAS 19 Employee benefits on defined benefit plans

1 February 2015

Annual Improvements 2010-2012

1 February 2015

 

No material changes to accounting policies arose as a result of these amendments.

 

b)  The following amendments to Standards and Interpretations are relevant to the Group and are not yet effective in the year ended 30 September 2016 and are not expected to have a significant impact on the Group's financial statements:

Standard or Interpretation

Effective from

Annual Improvements 2012-2014

1 January 2016

Amendment to IFRS 11 Joint arrangements on acquisition of an interest in a joint operation

1 January 2016

Amendments to IAS 16 and IAS 38 on depreciation and amortisation

1 January 2016

Amendments to IAS 27 Separate financial statements on equity accounting

1 January 2016

Amendments to IAS 1 Presentation of financial statements disclosure initiative

1 January 2016

Amendments to IFRS 10, 12 and IAS 28 on consolidation for investment entities

1 January 2016

IFRS 15 Revenue from contracts with customers

1 January 2018

 

c)   There are no other Standards or Interpretations that are not yet effective that would be expected to have a material impact on the Group.

Segmental information

The Group's properties, which are all located in London's West End, are managed as a single portfolio. Its properties, which are of a similar type, are combined into villages. All of the villages are geographically close to each other and have similar economic features and risks. In view of the similar characteristics and the reporting of all investment, income and expenditure to the Board at an overall Group level, the aggregation criteria set out in IFRS 8 have been applied to give one reportable segment.

 

The Board assesses the performance of the reportable segment based on net property income and investment property valuation. Financial information provided to the Board is prepared on a basis consistent with these financial statements.

2.  Revenue

 

2016

£m

2015

£m

Rents receivable

98.4

91.8

Recoverable property expenses

7.8

6.9

 

106.2

98.7

 

Rents receivable includes lease incentives recognised of £0.5 million (2015: £2.4 million).

3.  Property charges

 

2016

£m

2015

£m

Property operating costs

6.5

6.1

Fees payable to managing agents

2.3

2.1

Letting, rent review, and lease renewal costs

3.3

3.0

Village promotion costs

2.2

1.8

Property outgoings

14.3

13.0

Recoverable property expenses

7.8

6.9

 

22.1

19.9

4.  Charge in respect of equity-settled remuneration

 

2016

£m

2015

£m

Charge for share-based remuneration

1.9

2.3

Employer's national insurance in respect of share awards

0.6

0.7

 

2.5

3.0

5.  Finance costs

 

2016

£m

2015

£m

Debenture stock interest and amortisation

5.0

5.0

Bank and other interest

20.0

15.6

Facility arrangement cost amortisation

1.0

0.8

Facility arrangement costs written-off on refinancing

-

0.2

Amounts payable under derivative financial instruments

7.7

9.2

 

33.7

30.8

6.  Tax charge for the year

The Group's wholly-owned business is subject to taxation as a REIT. Under the REIT regime, income from its rental business (calculated by reference to tax rather than accounting rules) and chargeable gains from the sale of its investment properties are exempt from corporation tax.

7.  Earnings per share

Basic and diluted earnings per share

 

2016

2015

 

Profit

after

tax

£M

Number of

shares

Million

Earnings

per share

Pence

Profit

after

tax

£M

 

Number of

shares

Million

Earnings

per share

Pence

Basic

99.1

278.4

35.6

467.3

278.1

168.0

Dilutive effect of share options

-

1.0

(0.1)

-

1.1

(0.6)

Diluted

99.1

279.4

35.5

467.3

279.2

167.4

               

EPRA earnings per share

The calculations below are in accordance with the EPRA Best Practice Recommendations.

 

2016

2015

 

Profit

after

tax

£M

 

Number of

shares

Million

Earnings

per share

Pence

Profit

after

tax

£M

 

Number of

shares

Million

Earnings

per share

Pence

Basic

99.1

278.4

35.6

467.3

278.1

168.0

EPRA adjustments:

 

 

 

 

 

 

Investment property valuation surplus (note 9)

(108.3)

 

(38.9)

(432.0)

 

(155.3)

Movement in fair value of derivatives (note 16)

34.9

 

12.5

28.5

 

10.2

Recognition of fair value of Debenture Stock (note 15)

29.2

 

10.5

-

 

-

Adjustments in respect of the joint venture:

 

 

 

 

 

 

Investment property valuation surplus

(11.3)

 

(4.1)

(34.6)

 

(12.4)

Deferred tax

(4.6)

 

(1.6)

6.9

 

2.5

EPRA earnings

39.0

278.4

14.0

36.1

278.1

13.0

                 

8.  Dividends paid

 

2016

£m

2015

£m

Final dividend for:

 

 

Year ended 30 September 2015 at 6.925p per share

19.5

-

Year ended 30 September 2014 at 6.60p per share

-

18.5

Interim dividend for:

 

 

Year ended 30 September 2016 at 7.15p per share

19.9

-

Year ended 30 September 2015 at 6.825p per share

-

19.0

Dividends for the year

39.4

37.5

Timing difference on payment of withholding tax

(1.2)

2.0

Dividends cash paid

38.2

39.5

 

A final dividend of 7.55p per share was recommended by the Board on 29 November 2016. Subject to approval by shareholders at the 2017 AGM, the final dividend will be paid on 17 February 2017 to shareholders on the register at 20 January 2017. 5.2p of the dividend will be paid as a PID under the UK REIT regime and 2.35p will be paid as an ordinary dividend. The dividend totalling £21.0 million will be accounted for as an appropriation of revenue reserves in the year ending 30 September 2017. See above for commentary on dividends.

9.  Investment properties

 

2016

£m

2015

£m

At 1 October

2,908.0

2,425.5

Acquisitions

62.7

25.8

Refurbishment and other capital expenditure

32.6

24.7

Net surplus on revaluation of investment properties

108.3

432.0

Book value at 30 September

3,111.6

2,908.0

 

Fair value at 30 September:

 

 

Properties valued by DTZ Debenham Tie Leung Limited

3,123.6

2,919.5

Less: unamortised lease incentives (note 10)

(12.0)

(11.5)

Book value at 30 September

3,111.6

2,908.0

 

The investment properties valuation comprises:

 

2016

£m

2015

£m

Freehold properties

2,864.8

2,691.4

Leasehold properties

258.8

228.1

 

3,123.6

2,919.5

 

Investment properties were subject to external valuation as at 30 September 2016 by qualified professional valuers, being members of the Royal Institution of Chartered Surveyors, working for DTZ Debenham Tie Leung Limited, Chartered Surveyors, acting in the capacity of external valuers.

All properties were valued on the basis of fair value and highest and best use in accordance with the RICS Valuation Standards - Professional Standards 2014 and IFRS 13. When considering the highest and best use a valuer considers its actual and potential uses which are physically, legally and financially viable. Where the highest and best use differs from the existing use, the valuer considers the use a market participant would have in mind when formulating the price it would bid and reflects the cost and likelihood of achieving that use.

 

The external valuers use information provided by the Group, such as tenancy information and capital expenditure expectations. The valuers, in forming their opinion make a series of assumptions. The assumptions are typically market related, such as yields and rental values, and are based on the valuers' professional judgement and market observations. The major inputs to the external valuation are reviewed by the senior management team. In addition, the valuers meet with external auditors and members of the Audit Committee.

 

The fair value of the Group's investment properties has primarily been determined using a Market Approach, which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available. There are a number of assumptions that are made in deriving the fair value, including equivalent yields and ERVs. Equivalent yields are based on current market prices, depending on, inter alia, the location and use of the property. ERVs are calculated using a number of factors which include current rental income, market comparatives and occupancy. Whilst there is market evidence for these inputs, and recent transaction prices for similar properties, there is still a significant element of estimation and judgement. As a result of adjustments made to market observable data, these significant inputs are deemed unobservable.

 

The Group considers all of its investment properties to fall within Level 3 of the hierarchy in IFRS 13, as set out below. The Group's policy is to recognise transfers between fair value hierarchy levels as at the date of the event or change in circumstances that caused the transfer. There have been no transfers during the year.

 

Hierarchy

Description

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2

Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 3

Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). Discounted cash flows are used to determine fair values of these instruments.

 

The key assumptions made by the valuers are set out in the basis of valuation. The Group's acquisition and capital expenditure activity is discussed above.

 

Sensitivity analysis

As noted in the critical judgements, assumptions and estimates section, the valuation of the Group's property portfolio is inherently subjective. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate, particularly in periods of volatility or low transaction flow in the commercial property market.

The Group's properties are all located in London's West End and are virtually all multi-use buildings, usually configured with commercial uses on the lower floors and office and/or residential uses on the upper floors. DTZ Debenham Tie Leung Limited value properties in their entirety and not by use, consequently the sensitivity analysis below has been performed on the Group's portfolio as a whole.

 

 

Change in ERV

Change in equivalent yields

 

+5.0%

£m

-5.0%

£m

+0.25%

£m

-0.25%

£m

Increase/(decrease) in the fair value of investment properties

135.7

(136.2)

(210.3)

238.3

           

 

These key unobservable inputs are inter-dependent. All other factors being equal, a higher equivalent yield would lead to a decrease in the valuation of a property, and an increase in the ERV would increase the capital value, and vice versa.

 

At 30 September 2016, the Group had capital commitments of £31.3 million (2015: £16.4 million). 

10. Accrued income

 

2016

£m

2015

£m

Accrued income in respect of lease incentives

12.0

            11.5

Less: included in trade and other receivables (note 12)

(2.2)

(2.0)

 

9.8

9.5

 

Lease incentives are allocated between amounts to be charged against rental income within one year of the Balance Sheet date and amounts which will be charged against rental income in subsequent years.

11. Investment in joint venture

 

2016

£m

2015

£m

Group

 

 

At 1 October

129.6

101.5

Share of profits

18.5

29.7

Dividends received

(1.7)

(1.6)

Book value 30 September

146.4

129.6

 

 

The summarised Statement of Comprehensive Income and Balance Sheet used for consolidation purposes are presented below:

 

 

2016

£m

2015

£m

Statement of Comprehensive Income

 

 

Rents receivable

15.1

13.4

Recoverable property expenses

1.4

1.6

Revenue from properties

16.5

15.0

Property outgoings

(1.6)

(1.6)

Recoverable property expenses

(1.4)

(1.6)

Property charges

(3.0)

(3.2)

Net property income

13.5

11.8

Administrative expenses

(0.4)

(0.6)

Operating profit before investment property valuation movements

13.1

11.2

Net surplus on revaluation of investment properties

22.5

69.2

Operating profit

35.6

80.4

Net finance costs

(6.6)

(6.6)

Profit before tax

29.0

73.8

Current tax

(1.2)

(0.6)

Deferred tax

9.1

(13.8)

Tax credit/(charge) for the year

7.9

(14.4)

Profit and total comprehensive income for the year

36.9

59.4

 

 

 

Profit attributable to the Group

18.5

29.7

 

 

 

2016

£m

As restated

2015

£m

Balance Sheet

 

 

Non-current assets

 

 

Investment properties at book value

455.0

430.0

Accrued income

4.0

4.4

Other receivables

1.3

1.3

 

460.3

435.7

 

 

 

Cash and cash equivalents

4.1

4.6

Current assets

4.0

3.5

Total assets

468.4

443.8

 

 

 

Current liabilities

9.4

9.8

Non-current liabilities

 

 

Secured term loan

120.0

120.0

Other non-current liabilities

46.3

54.8

Total liabilities

175.7

184.6

Net assets

292.7

259.2

 

 

 

Net assets attributable to the Group

146.4

129.6

 

Amounts totalling £1.3 million, in respect of cash held on deposit, which have certain conditions restricting their use, have been reclassified from cash and cash equivalents to other receivables at 30 September 2015. This presentational change does not impact earnings or net assets.

12. Trade and other receivables

 

2016

£m

2015

£m

Amounts due from tenants

10.5

11.3

Provision for doubtful debts

(0.5)

(0.6)

 

10.0

10.7

Accrued income in respect of lease incentives (note 10)

2.2

2.0

Amounts due from joint venture

0.9

1.4

Prepayments

4.4

7.2

Other receivables

1.8

0.4

 

19.3

21.7

 

Amounts due from tenants at each year end included amounts contractually due and invoiced on 29 September in respect of rents and service charge contributions in advance for the period 29 September to 24 December. As of 30 September 2016, amounts due from tenants which were more than 90 days overdue, relating to accommodation and services provided up to 28 September 2016, totalled £1.5 million (2015: £1.9 million) and are considered to be past due. Provisions against these overdue amounts totalled £0.4 million (2015: £0.5 million). The remaining balance is not considered to be impaired.

 

At 30 September 2016, cash deposits totalling £18.0 million (2015: £17.4 million) were held against tenants' rent payment obligations. The deposits are held in bank accounts administered by the Group's managing agents.

13. Cash and cash equivalents

Cash and cash equivalents at 30 September 2016 were £15.6 million (2015: £7.7 million).

 

Other receivables include £3.7 million at 30 September 2016 (2015: £3.7 million) which relate to cash held on deposit as security for certain secured term loans, and where there are certain conditions restricting its use. Holding cash in restricted accounts does not prevent the Group from earning returns by placing these monies in interest-bearing accounts or on deposit.

14. Trade and other payables

 

2016

£m

2015

£m

Rents and service charges invoiced in advance

21.3

20.7

Amounts due in respect of property acquisitions

0.7

-

Trade payables and accruals in respect of capital expenditure

5.2

1.9

Other taxation and social security

6.1

4.9

Other payables and accruals

12.0

9.3

 

45.3

36.8

15. Borrowings

 

2016

2015

 

Nominal

value

£M

Unamortised

premium and issue costs

£M

Book

value

£M

Nominal

value

£M

Unamortised

premium and issue costs

£M

Book

value

£M

Current borrowings

 

 

 

 

 

 

Debenture Stock

92.2

-

92.2

-

-

-

 

 

 

 

 

 

 

Non-current borrowings

 

 

 

 

 

 

Debenture Stock

-

-

-

61.0

2.2

63.2

Secured bank loans

290.7

(1.7)

289.0

199.7

(2.3)

197.4

Secured term loans

384.8

(4.7)

380.1

384.8

(5.1)

379.7

Total non-current borrowings

675.5

(6.4)

669.1

645.5

(5.2)

640.3

Total borrowings

767.7

(6.4)

761.3

645.5

(5.2)

640.3

 

Net debt

 

2016

£M

2015

£M

Nominal borrowings - gross

767.7

652.8

Cash balances set-off against certain borrowings

-

(7.3)

 

767.7

645.5

Cash and cash equivalents (note 13)

(15.6)

(7.7)

 

752.1

637.8

 

The 8.5% First Mortgage Debenture Stock due 2024 (the Stock) and bank loans are secured by fixed charges over certain investment properties held by subsidiaries, with a carrying value of £1,320.4 million (2015: £1,412.7 million), and by floating charges over the assets of the Company and certain subsidiaries. Two of the Company's subsidiaries each have secured term loans. Both entities have granted fixed charges over certain of their investment properties, with a carrying value of £1,116.5 million (2015: £1,060.7 million), and cash balances, and floating charges over their assets as security for their respective loans. Additionally, the two shareholders of these subsidiaries have granted a charge over the shares in these companies.

 

Following an EGM of holders of the £61.0 million Debenture Stock in September 2016, the terms and conditions of the Stock were amended to grant Shaftesbury an option to redeem the Stock in full at an agreed amount, conditional upon an issue of newly created longer-dated Guaranteed First Mortgage Bonds or an equivalent cash alternative.

As a result of the substantial modification to the expected future cash flows of the Debenture Stock, the Company de-recognised the book value of the Stock, which was previously held in the Balance Sheet at amortised cost. It then recognised the fair value of the Stock, being the total consideration to be paid to the holders of the Stock. This resulted in an increase in the recognised liability of £29.2 million, compared with the previous book value. This increase comprised the redemption premium of £31.1 million, less the unamortised premium in respect of the original Stock of £1.9 million. This was charged to the Statement of Comprehensive Income in the year ended 30 September 2016. The fair value of the Stock, which represents the new basis for amortised cost, is included in the Balance Sheet within current liabilities, as the directors considered the condition of the issue of newly created Guaranteed First Mortgage Bonds was highly likely to be met within one year of the Balance Sheet date.

 

On 7 October 2016, Shaftesbury Carnaby PLC, a subsidiary of Shaftesbury PLC, issued £285 million of Guaranteed First Mortgage Bonds (the Bonds) with a coupon of 2.487% and maturity in September 2031. The Bonds are secured by fixed charges over the properties held by Shaftesbury Carnaby PLC and a floating charge over Shaftesbury Carnaby PLC's assets. They also benefit from an unsecured guarantee from Shaftesbury PLC.

 

On the same day, the Company's existing £61.0 million Debenture Stock was redeemed in full, being satisfied by existing holders of the Stock exchanging their Stock for new Bonds, or taking cash. Of the £285 million proceeds raised by the issue of the new Bonds, £92.2 million was used to redeem the existing Stock. This was satisfied by £10.4 million of cash and £81.8 million of new Bonds. The fixed and floating charges relating to the Stock were released.

Availability and maturity of borrowings

 

2016 Facilities

2015 Facilities

 

Committed

£M

Drawn

£M

Undrawn

£M

Committed

£M

Drawn

£M

Undrawn

£M

Repayable within 1 year

92.2

92.2

-

-

-

-

Repayable between 2 and 5 years

350.0

290.7

59.3

275.0

124.7

150.3

Repayable between 5 and 10 years

-

-

-

136.0

136.0

-

Repayable between 10 and 15 years

384.8

384.8

-

384.8

384.8

-

 

827.0

767.7

59.3

795.8

645.5

150.3

                 

Interest rate profile of interest bearing borrowings

 

2016

2015

 

Debt

£M

Interest

rate

Debt

£M

Interest

rate

Floating rate borrowings

 

 

 

 

LIBOR-linked loans (including margin)

110.7

1.75%

19.7

1.75%

Hedged borrowings

 

 

 

 

Interest rate swaps (including margin)

180.0

6.17%

180.0

6.01%

Total bank borrowings

290.7

4.49%

199.7

5.59%

Fixed rate borrowings

 

 

 

 

Secured term loans

384.8

3.85%

384.8

3.85%

8.5% First Mortgage Debenture Stock - book value

92.2

7.93%

63.2

7.93%

Weighted average cost of drawn borrowings

 

4.45%

 

4.78%

 

The interest rate for the 8.5% First Mortgage Debenture Stock in 2016 represents the effective interest rate on the book value of the Debenture Stock prior to the modification of its terms in September 2016.

The Group also incurs non-utilisation fees on undrawn facilities. At 30 September 2016, the weighted average charge on the undrawn facilities of £59.3 million (2015: £150.3 million) was 0.70% (2015: 0.70%).

 

At 30 September 2016, the weighted average credit margin on the Group's current bank facilities was:

 

 

2016

2015

Drawn facilities

1.33%

1.16%

If facilities were fully drawn

1.37%

1.35%

 

The Group has in place interest rate swaps to hedge £180.0 million of floating rate bank debt, at fixed rates in the range 4.64% to 5.16%, with a weighted average rate at 30 September 2016 of 4.85%. The swaps, which are settled against three month LIBOR, expire between August 2028 and November 2038. If mutual break or counterparty early termination options are exercised the weighted average term is 3.1 years (2015: 4.1 years).

 

In October 2016, the Group terminated interest rate swap contracts with a notional principal of £55.0 million. These swaps, with an average rate of 4.76%, had expiry dates between August 2028 and November 2038, and included counterparty early termination options in November 2018. The cost of terminating these swaps was £34.1 million. They were included in the Balance Sheet at 30 September 2016 at a fair value of £38.0 million.

 

Details of the Group's current financial position are discussed above.

16. Financial instruments

Fair value of financial instruments

 

2016

£m

2015

£m

Interest rate swaps

 

 

At 1 October - deficit

(79.2)

(78.8)

Swap contracts terminated

-

28.1

Fair value deficit charged to the Statement of Comprehensive Income

(34.9)

(28.5)

At 30 September - deficit

(114.1)

(79.2)

 

Changes in the fair value of the Group's interest rate swaps, which are not held for speculative purposes, are reflected in the Statement of Comprehensive Income as the Group has chosen not to adopt hedge accounting under the provisions of IAS 39 'Financial Instruments: Recognition and Measurement'.

 

The extent to which the fair value deficit will crystallise will depend on the course of interest rates over the life of the swaps. The weighted average maturity of the swaps at the Balance Sheet date is set out in note 15.

 

The fair value of the interest rate swaps has been estimated using the mid-point of the relevant yield curve prevailing at the reporting date, and represents the net present value of the differences between the contractual rate and the valuation rate through to the contracted expiry date of the swap contract. The valuation technique falls within Level 2 of the fair value hierarchy (see note 9 for definition). The swaps are valued by J.C Rathbone Associates Limited.

 

Interest rate swaps are the only financial instruments which are held at fair value. There have been no transfers between hierarchy levels during the year (2015: none).

 

The 8.5% Mortgage Debenture Stock is held at amortised cost. This was remeasured in September 2016, following modifications to the terms of the Stock (see note 15).

 

The Group's secured term loans are held at amortised cost in the Balance Sheet. The fair value of liability in excess of book value which is not recognised in the reported results for the year is £52.5 million (2015: £39.1 million). The fair values have been calculated based on a discounted cash flow model using the relevant reference gilt and appropriate market spread. The valuation technique falls within Level 2 of the fair value hierarchy (see note 9 for definition).

 

The Group has no obligation to repay its secured term loans in advance of their maturities on 2 May 2029, 19 March 2030, and 31 July 2035.

 

Other financial instruments

The fair values of the Group's cash and cash equivalents, and those financial instruments included within trade and other receivables, interest bearing borrowings, (including the 8.5% Mortgage Debenture Stock but excluding the secured term loans), and trade and other payables are not materially different from the values at which they are carried in the financial statements.

17. Share capital

 

2016

Number

Million

2015

Number

Million

2016

£m

2015

£m

Alloted and fully paid (ordinary 25p shares)

 

 

 

 

At 1 October

278.2

277.9

69.6

69.5

Exercise of share options

0.4

0.3

0.1

0.1

At 30 September

278.6

278.2

69.7

69.6

 

During the year, 362,163 ordinary 25p shares were issued in connection with the exercise of nil cost options granted under the 2006 LTIP and 16,537 shares were issued in connection with the exercise of Sharesave scheme options with an exercise price of £4.29.

18. Net asset value per share

The calculations below are in accordance with the EPRA Best Practice Recommendations.

 

2016

As restated
2015

 

Net

assets

£m

Number

of ordinary

shares

Million

Net

asset

value per

share

£

Net

assets

£M

Number

of ordinary

shares

Million

Net

asset

value per

share

£

Basic

2,387.1

278.6

8.57

2,325.4

278.2

8.36

Dilutive effect of share options

0.5

1.0

 

0.4

1.2

 

Diluted

2,387.6

279.6

8.54

2,325.8

279.4

8.32

Fair value of derivatives

76.1

 

0.27

79.2

 

0.29

Deferred tax*

18.0

 

0.07

22.6

 

0.08

EPRA NAV

2,481.7

279.6

8.88

2,427.6

279.4

8.69

Fair value of derivatives

(76.1)

 

(0.27)

(79.2)

 

(0.29)

Deferred tax*

(18.0)

 

(0.07)

(22.6)

 

(0.08)

Fair value of secured term loans*

(64.9)

 

(0.23)

(47.3)

 

(0.17)

EPRA NNNAV

2,322.7

279.6

8.31

2,278.5

279.4

8.15

* Includes our 50% share of deferred tax and fair value of secured term loans in the Longmartin joint venture.

The calculations of diluted net asset value per share show the potentially dilutive effect of share options outstanding at the Balance Sheet date and include the increase in shareholders' equity which would arise on the exercise of those options.

 

In accordance with EPRA recommendations, the adjustment for the fair value of derivatives excludes those interest rate swaps which were cancelled in October 2016 (see note 15).

 

The comparative figure for the fair value of secured term loans has been restated by £8.2 million to include the fair value in excess of book value for the debt in the joint venture. This has decreased EPRA NNNAV net assets by £8.2 million and EPRA NNNAV net asset value per share by £0.03.

19.  Cash flows from operating activities

Operating activities

2016

£m

2015

£m

Profit before tax

99.1

467.3

Adjusted for:

 

 

Lease incentives recognised (note 2)

(0.5)

(2.4)

Charge for share-based remuneration (note 4)

1.9

2.3

Depreciation

0.4

0.4

Investment property valuation movements (note 9)

(108.3)

(432.0)

Net finance costs

97.7

59.2

Share of profit from joint venture (note 11)

(18.5)

(29.7)

Cash flows from operations before changes in working capital

71.8

65.1

Changes in working capital:

 

 

Change in trade and other receivables

2.1

(0.5)

Change in trade and other payables

3.0

2.8

Cash generated from operating activities

76.9

67.4

 

20. Movement in borrowings     

 

1.10.2015

£m

Cash

flows

£m

Non-cash

items

£m

30.9.2016

£m

Group

 

 

 

 

8.5% First Mortgage Debenture Stock 2024

(63.2)

-

(29.0)

(92.2)

Secured bank loans

(199.7)

(91.0)

-

(290.7)

Secured term loans

(384.8)

-

-

(384.8)

Facility arrangement costs

7.4

-

(1.0)

6.4

 

(640.3)

(91.0)

(30.0)

(761.3)

Year ended 30 September 2015

(553.7)

(85.7)

(0.9)

(640.3)

 

21.  Related party transactions

Transactions between Shaftesbury PLC (the "Company") and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

 

Transactions and balances between the Company and its joint venture, which have not been eliminated on consolidation are summarised below:

 

2016

£m

2015

£m

Transactions with joint venture:

 

 

Administrative fees receivable

0.2

0.4

Dividends receivable

1.7

1.6

Interest receivable

0.1

0.1

 

 

 

Amount due from joint venture

0.9

1.4

 

22.  Events occurring after the Balance Sheet date

In October 2016 the Group issued £285 million of 2.487% Guaranteed First Mortgage Bonds due 2031. At the same time, it redeemed its £61.0 million 8.5% First Mortgage Debenture Stock due 2024. It also cancelled interest rate swaps with a notional principal of £55.0 million, at a cost of £34.1 million. Further details are set out in note 15.

 

23. Annual General Meeting

The 2017 Annual General Meeting will be held at The Ham Yard Hotel, 1 Ham Yard, London W1D 7DT on 10 February 2017 at 11.00 am.

 

Risk management

 

The Board's attitude to risk management is consistent with its low overall appetite for risk.

 

Overview

The Board structures the Group's operations to minimise exposure to investment, operational and financial risks, and to ensure that there is a rigorous, regular review of risks and mitigation across its activities.

 

Important factors in the relative low risk of our business include:

§ The Group invests only in London's West End, where there is a long history of resilience, stability and sustained occupier demand for our principal uses of restaurants, leisure and retail

§ With a diverse tenant base, there is limited exposure to any single tenant

§ The nature of our portfolio does not expose us to risks inherent in material speculative development schemes

§ We have an established and experienced management team, based in one location, close to all our holdings

§ We manage our balance sheet on a conservative basis with moderate leverage, long-term finance, a spread of loan maturities, good interest cover and with the majority of interest costs fixed.

 

Management structure

As a foundation to effective day-to-day risk management, we encourage an open and honest culture within which staff can operate. Our team, based in one office, within fifteen minutes' walk of all our holdings, comprises four executive directors and 23 staff. The senior management team, with an average tenure of 16 years, has an in-depth knowledge of our business and the West End property market.

 

The Board's attitude to risk is embedded in the business, with executive directors having close involvement in all aspects of operations and significant decisions. Non-executive directors approve capital and non-routine transactions over a specified level.

 

Senior management, below Board level, is incentivised in the same way as executive directors to achieve the Group's strategic goals of delivering long-term growth in rental income, capital values and shareholder returns. Decisions are made for long-term benefit, rather than short-term gain. Succession planning across the management team is monitored by the Board.

Responsibilities

Board

Overall responsibility for risk management. Reviews principal risks and uncertainties regularly, along with actions taken, where possible, to mitigate them.

Audit Committee

Assurance of the internal controls and risk management process.

Executive management

Day-to-day management of risk. Design and implementation of the necessary systems of internal control.

 

Risk management and internal control

The Board reviews the nature and extent of the Group's principal risks and uncertainties, and monitors the risk management framework and internal control systems. Such systems are designed to manage, rather than eliminate, the risks faced by the business and can provide only reasonable, not absolute, assurance against material misstatement or loss. Their adequacy and effectiveness are monitored through the risk management and audit processes which include financial and property management audits.

 

The Group has established processes and procedures to identify, assess, and manage, the principal risks and uncertainties it faces. These processes and procedures were in place throughout the year and remained in place up to the date of the approval of the Annual Report and accord with the Financial Reporting Council's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (2014).

 

The key elements of the Group's procedures and internal financial control framework are:

§ Close involvement of the executive directors in all aspects of day-to-day operations, including regular meetings with employees to review risks and controls

§ Clearly defined responsibilities and limits of authority

§ Defined schedule of matters for decision by the Board including significant acquisitions, disposals, major contracts, material refurbishment/development proposals and any other transaction outside the normal course of business

§ A comprehensive system of financial reporting and forecasting, which is updated on a quarterly basis and includes forecast liquidity requirements and loan covenant compliance

§ The day-to-day management of the Group's portfolio is outsourced to three managing agents. The Group monitors the performance of each managing agent and has established extensive financial and operational controls to ensure that each maintains an acceptable level of service and provides reliable financial and operational information. The managing agents share with the Group their internal control assessments. The Group periodically uses the services of an external consultant to review the managing agents' operational processes and controls.

 

Risk assessment

Operational and financial risks facing the Group are monitored through a process of regular assessment by the executive team. The aim of this assessment is to:

§ Provide reasonable assurance that material risks are identified

§ Ensure appropriate mitigation action is taken at an early stage

 

Risks are considered in terms of their impact and likelihood from operational, financial and reputational perspectives. Risks, and the controls in place to mitigate them, are formally reported, discussed and challenged, at meetings of the Audit Committee and Board. To the extent that significant risks, failings or control weaknesses arise during the year, these are reported to the Board and appropriate action is taken to rectify the issue and implement controls to mitigate further occurrences.

 

The Audit Committee has monitored the Group's risk management and internal control system, and having reviewed the effectiveness of material controls, has not identified any significant failings or weaknesses in the Group's controls during the year.

 

Principal risks and uncertainties

The Board has carried out a robust assessment of the principal risks and uncertainties which might prevent the Group achieving its goal of long-term growth in rental income, capital values and shareholder returns. These risks and uncertainties are largely consistent with those reported in 2015. We no longer consider meeting the requirements of legislation to improve environmental performance of buildings to be a principal risk or uncertainty. This is because the legislation has become more clear and, through our rolling refurbishment activities, we are able to meet its requirements without significant cost.

 

To date we have seen no adverse impact on occupier demand, footfall or trading as a result of political and economic uncertainties following the EU referendum. Until the UK's future exit arrangements are negotiated, we are unable to draw any firm conclusions as to the longer-term impact on our business. However, with London's status and broad-based economy, we believe it will be less adversely affected than the wider UK.

 

Geographic concentration risk

 

Risk of a sustained fall in visitor numbers and/or spending

Risk

Potential impact

Mitigation

Commentary

·  Reduced visitor numbers, spending and occupier demand

·  Reduced rental income and/or capital values

·  Potential increased vacancy and declining profitability

·  Damage to property

·  Inherent risk given the geographic concentration of our investments in a high profile location

·  Insurance cover maintained for terrorism and loss-of-rent

·  Close liaison with statutory authorities to maximise safety of visitors

·  Detailed emergency response plans

London has a growing population, is the most visited city in the western world, and current forecasts are for further growth in tourism

Across the West End, visitor numbers, spending and occupier demand continue to be buoyant

The UK's terrorism threat level remains severe

Competing destinations lead to long-term decline in footfall in our villages

·  Reduced visitor numbers and occupier demand

·  Reduced rental income and/or capital values

·  Potential increased vacancy and declining profitability

·  Ensure our villages maintain a distinct identity

·  Management strategies to create prosperous destinations within which tenants can operate

·  Seek out new concepts, brands and ideas to keep our villages vibrant and appealing

·  Consistent strategy on tenant mix, which evolves over time

·  Marketing and promotion of our villages

·  KPI to deliver sustainable rental growth

·  Regular board monitoring of performance and prospect

Footfall and occupier demand across our villages remains strong. We continue to see sustained rental growth and low vacancy

 

Regulatory risk

Risk

Potential impact

Mitigation

Commentary

All our properties are in the boroughs of Westminster and Camden.

Changes to national or local policies, particularly planning and licensing, could have a significant impact on our ability to maximise the long-term potential of its assets

 

·  Limit our ability to optimise revenues

·  Reduced profitability

·  Reduced capital values

·  Ensure our properties are operated in compliance with local regulations

·  Make representations on proposed policy changes, to ensure our views and experience are considered

·  Mix of uses in our portfolio means we are not reliant on income from one particular use

There are no current indications that the evolution of the planning and licensing framework, either as a result of national or local legislation, will have a material impact on the Group's business for the foreseeable future

 

Economic risk

Risk

Potential impact

Mitigation

Commentary

·  Pressure on rents

·  Declining profitability

·  Reduced capital values

·  Focus on assets, locations and uses which have historically proved to be economically resilient and have demonstrated much lower valuation volatility than the wider market

·  Diverse tenant base with limited exposure to any one tenant

·  Tenant deposits held against unpaid rent obligations at 30 September 2016: £18.0m

Restaurant, leisure and retail tenants provide 70% of our annualised current income

Trading, footfall and spending has been resilient since the EU referendum and we continue to benefit from strong demand, footfall and rental growth. However, uncertainty will remain until the UK's future arrangements with the EU are negotiated

Decline in the UK real estate market due to macro-economic factors e.g. global political landscape, currency expectations, bond yields, interest rate expectations, availability and cost of finance, relative attractiveness of property compared with other asset classes

·  Reduced capital values

·  Decrease in NAV, amplified by gearing

·  Loan covenant defaults

 

·  Focus on assets, locations and uses which have historically proved to be economically resilient and have demonstrated much lower valuation volatility than the wider market

·  Regular review of investment market conditions including bi-annual external valuations

·  Maintain conservative levels of leverage

·  Quarterly forecasts including covenant headroom review

·  Substantial pool of uncharged assets available to top up security held by lenders

Interest rates have continued at historically low levels

Present market sentiment is that increases will be moderate and gradual, although the current political and economic backdrop increases uncertainty

 

 

Shareholder Information

 

Registrar

 

Equiniti Limited maintains the Group's Register or Members. They may be contacted at:

 

Equiniti Limited

Aspect House

Spencer Road

Lancing

West Sussex, BN99 6DA

 

Telephone 0871 384 2294 (International +44 121 415 7047). Calls to this number are charged at 8p per minute from a BT landline plus network extras.  Lines open 8.30am to 5.30pm, Monday to Friday.

 

Shareholder accounts may be accessed online through www.shareview.co.uk.  This gives secure access to account information instructions. There is also a Shareview dealing service which is a simple and convenient way to buy or sell shares in the Group.

 

Effect of REIT status on payment of dividends

 

As a REIT, we do not pay UK corporation tax in respect of rental profits and chargeable gains relating to our property rental business. However, we are required to distribute at least 90% of the qualifying income (broadly calculated using the UK tax rules) as a PID.

 

Certain categories of shareholder may be able to receive the PID element of their dividends gross, without deduction of withholding tax. Categories which may claim this exemption include: UK companies, charities, local authorities, UK pension schemes and managers of PEPs, ISAs and Child Trust Funds.

 

Further information and the forms for completion to apply for PIDs to be paid gross are available on the Group's website or from the registrar. The deadline for completed forms to be with the registrar for payment of the 2016 final dividend is 20 January 2017.

 

Where the Group pays an ordinary dividend, in addition to the PID, this will be treated in the same way as dividends from non-REIT companies.

 

Corporate Timetable

 

Financial Calendar

 

Annual General Meeting                                                 10 February 2017

AGM statement                                                             10 February 2017

 

Dividends and Mortgage Bond interest

 

Proposed 2016 final dividend:

 

Ex-dividend                                                                    19 January 2017

Record date                                                                   20 January 2017

Payment date                                                                17 February 2017

 

2017 interim dividend to be paid                                       July 2017

 

Mortgage Bond interest                                                   31 March 2017 and 30 September 2017             

 

Glossary of terms

Capital value return

The valuation movement and realised surpluses or deficits arising from the Group's investment portfolio expressed as a percentage return on the valuation at the beginning of the period adjusted for acquisitions and capital expenditure.

 

Compound Annual Growth Rate (CAGR)

The year-on-year growth rate of an investment over a specified period of time.

 

EPRA adjustments

Standard adjustments to calculate EPS and NAV as set out by EPRA in its Best Practice and Policy Recommendations.

 

EPRA EPS

EPRA EPS is the level of recurring income arising from core operational activities. It excludes all items which are not relevant to the underlying and recurring portfolio performance.

 

EPRA NAV

EPRA NAV aims to provide a consistent long-term performance measure, by adjusting reported net assets for items that are not expected to crystallise in normal circumstances, such as the fair value of derivative financial instruments and deferred tax on property valuation surpluses. EPRA NAV includes the potentially dilutive effect of outstanding options granted over ordinary shares.

 

EPRA net assets

Net assets used in the EPRA NAV calculation, including additional equity if all vested share options were exercised.

 

EPRA NNNAV

EPRA NAV incorporating the fair value of debt which is not included in the reported net assets.

 

EPRA vacancy

The rental value of vacant property available expressed as a percentage of ERV of the total portfolio.

 

Equivalent yield

Equivalent yield is the internal rate of return from an investment property, based on the gross outlays for the purchase of a property (including purchase costs), reflecting reversions to current market rent, and such items as voids and non-recoverable expenditure but disregarding potential changes in market rents.

 

European Public Real Estate Association (EPRA)

EPRA develops policies for standards of reporting disclosure, ethics and industry practices.

 

Estimated rental value (ERV)

ERV is the market rental value of properties owned by the Group, estimated by the Group's valuers.

 

Fair value

The amount at which an asset or liability could be exchanged between two knowledgeable, willing and unconnected parties in an arm's length transaction at the valuation date.

 

Gearing

Nominal value of Group borrowings expressed as a percentage of EPRA net assets.

 

Initial yield

The initial yield is the net initial income at the date of valuation expressed as a percentage of the gross valuation. Yields reflect net income after deduction of any ground rents, head rents, rent charges and estimated irrecoverable outgoings.

 

Interest cover

The interest cover is a measure of the number of times the Group can make interest payments with its operating profit before investment property disposals and valuation movements.

Loan-to-value

Nominal value of borrowings expressed as a percentage of the fair value of property assets.

 

Long Term Incentive Plan (LTIP)

An arrangement under which an employee is awarded options in the Company at nil cost, subject to a period of continued employment and the attainment of NAV and TSR targets over a three-year vesting period.

 

Net asset value (NAV)

Equity shareholders' funds divided by the number of ordinary shares at the balance sheet date.

 

Net asset value return

The change in EPRA NAV per ordinary share plus dividends paid per ordinary share expressed as a percentage of the EPRA NAV per share at the beginning of the period.

 

Property Income Distribution (PID)

A PID is a distribution by a REIT to its shareholders paid out of qualifying profits. A REIT is required to distribute at least 90% of its qualifying profits as a PID to its shareholders.

 

Real Estate Investment Trust (REIT)

A REIT is a tax designation for an entity or group investing in real estate that reduces or eliminates corporation tax on rental profits and chargeable gains relating to the rental business, providing certain criteria obligations set out in tax legislation are met.

 

Topped-up initial yield

An adjusted initial yield which assumes rent free periods or other unexpired lease incentives, such as discounted rent periods and step ups, have expired.

 

Total property return

Net property income and the valuation movement and realised surpluses or deficits arising from the portfolio for the year expressed as a percentage return on the valuation at the beginning of the period adjusted for acquisitions and capital expenditure.

 

Total Shareholder Return (TSR)

The change in the market price of an ordinary share plus dividends reinvested expressed as a percentage of the share price at the beginning of the period.

 

 

 

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Shaftesbury 2016 Full Year Results - RNS