Daejan Holdings PLC
Annual Report 2021

Plain-text annual report

174753 Daejan Holdings R&A 2021 COVER 5mm_174753 Daejan Holdings R&A 2021 COVER 5mm 02/09/2021 11:00 Page 1 174753 Daejan Holdings R&A 2021 COVER 5mm_174753 Daejan Holdings R&A 2021 COVER 5mm 02/09/2021 11:00 Page 2 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:06 Page 1 (formerly Daejan Holdings PLC) CONTENTS Chairman’s Introduction 2 Financial Highlights 3 Strategic Report 5 Directors’ Report 34 Corporate Governance Report 38 Directors’ Remuneration Report 41 Directors’ Responsibilities Statement 45 Independent Auditor’s Report to the Members of Daejan Holdings Limited 47 Consolidated Income Statement 50 Consolidated Statement of Comprehensive Income 51 Consolidated Statement of Changes in Equity 51 Consolidated Balance Sheet 52 Consolidated Statement of Cash Flows 53 Notes to the Consolidated Financial Statements 54 Company Balance Sheet 83 Company Statement of Changes in Equity 84 Notes to the Company Financial Statements 85 Group Five-Year Record 88 Directors and Advisers 89 PAGE 1 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:06 Page 2 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CHAIRMAN’S INTRODUCTION I am pleased to report on the year in which our transition to private company status was successfully accomplished. The shares were delisted in May 2020, the administrative burden of maintaining the listing had grown progressively in recent years and was out of all proportion to any benefit being derived therefrom. All aspects of the operations and results for the year have been impacted by the Covid-19 pandemic and the measures taken by government in response. The net profit before tax for the year was £72.0 million (2020 – £33.2 million loss). Shareholders’ funds increased by 0.3% to £1,901.2 million (2020 – 2.3% decrease to £1,896.0 million). Although our gross rental income is down somewhat I am pleased to report that our rent collections have held up well with 95% of billed rents collected in the UK and 97% in the USA. In the UK the overall value of our portfolio has remained flat with falling values in commercial, retail and office property offset by an uplift in residential and a significant uplift on a hotel property resulting from marriage value following a merger of interests and expected improved commercial terms as an old lease approaches its end. In the USA we have seen an overall uplift in values of 4.1% arising principally on our properties in Florida. There continued to be some small downward movements on our Manhattan properties following the rent controls introduced last year. Although the circumstances of the year have limited the scope for the identification and completion of value enhancing developments within our portfolio or elsewhere we remain alert to new opportunities. In March this year we completed the acquisition for $87.6 million of Newport Colony, a 476 unit garden apartment complex in Casselberry, Florida. In June 2020 a new £225 million facility was obtained from Barclays and NatWest banks as part of the financing for the new group structure. Outlook Both the immediate and the long term future hold considerable uncertainty. It is less than clear that the UK Government is succeeding in bringing the Covid-19 pandemic under some form of control so that the economy can grow back to pre-pandemic levels and beyond. Although the formalities of the UK’s exit from the EEC have been completed, much work remains to be done in establishing new and efficient trading relationships. In particular this is having an adverse effect on the price and supply of building materials. In the USA the significant Government stimulus is having a positive impact on the economy but Covid-19 infections are on an upward trajectory once again. It will take some time to establish the extent to which habits acquired during lockdown will continue into the future. In particular a reluctance to visit retail, leisure and hospitality venues and a movement to working from home will all feed through to the future demand for property. We will continue to follow our tried and trusted approach which has served us well over good times and bad by focussing on achieving long term, low risk growth in asset value and rental income. As ever my thanks must go to the staff who have dealt so well with the extra challenges which have arisen this year. B S E Freshwater Chairman Cover and inside front cover: Oakwood Court, Holland Park, London W14. Contents page, above and opposite page: the recently completed Piano Apartments, St John’s Hill, London SW11. PAGE 2 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:06 Page 3 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 FINANCIAL HIGHLIGHTS NET VALUATION GAIN £33.8 million 2020: loss of £90.5 million £72.0 million2020: loss of £33.2 million PROFIT BEFORE TAX EARNINGS PER SHARE £3.35 2020: loss of £2.92 SHAREHOLDERS’ FUNDS £1,901.2 million 2020: £1,896.0 million SHAREHOLDERS’ FUNDS PER SHARE £116.67* 2020: £116.35* *Definitions of these alternative performance measures are included on pages 81 and 82. GEARING 24.3%* 2020: 17.8%* PAGE 3 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:07 Page 4 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:07 Page 5 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT Objectives For many years we have focussed on the pursuit of the Group’s objective of achieving long term, low risk growth in net asset value and rental income, and in prudently growing our dividends. Net asset value per share (£) Gross rental income 125 120 115 110 105 100 95 90 Strategy s n o i l l i m £ 180 160 140 120 100 80 60 40 20 0 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 The strategy for achieving our objectives has three principal elements: ■ Management of our property portfolio to maximise net rental income and thereby enhance capital values ■ Identification and completion of value enhancing development opportunities within our portfolio ■ Identification and completion of new property acquisitions which have the potential, through development or otherwise, for long term enhancement to net asset value In pursuing this strategy we take the view that property is a long term business which does not always fit conveniently into the annual reporting cycle. Development opportunities, in particular, can take many years from first idea to first letting and will often involve substantial investment over a period of years before any gain is achieved. We carefully monitor our exposure to ensure that the impact on our resources remains manageable. Business model The main activity of the Group, as carried on through its subsidiary companies, is investment in commercial, industrial and residential property in the UK and also on the eastern seaboard of the USA. The Group generally holds its properties for the long term in order to generate rental income and capital appreciation although in the right circumstances any property could be available for sale. The Group operates a substantially outsourced business model. Day-to-day management of the Group’s properties in the UK is carried out by Highdorn Co. Limited and Freshwater Property Management Limited. These companies also provide the staff who carry out all of the UK functions of the Group. Further details of the relationship with these companies are set out in Note 18 to the financial statements. Similar arrangements with local managing agents operate in the USA. Managing risk Whilst retaining an entrepreneurial culture, the Group has a low appetite for risk. This underpins our approach to all aspects of the business and is appropriate to our strategic objective of delivering long term, low risk growth in net asset value per share. The Board has undertaken a robust assessment of the principal and emerging risks facing the Group, by reviewing detailed risk reports, including those risks threatening its business model, future performance, solvency and liquidity. In relation to financial instrument risk, the Group operates a cautious financial policy on a non- speculative and long term basis in order to enable the Group to carry on its business in confidence and with strength. The Group aims to ensure that the cost of capital is kept to a minimum through the maintenance of its many long standing relationships with leading banks and other financial institutions. The Group seeks to minimise the risk of sudden or unexpected rises in finance costs by way of fixed rate debt and financial derivative instruments whilst retaining some flexibility in relation Opposite page and above: the recently completed Piano Apartments, St John’s Hill, London SW11. PAGE 5 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:07 Page 6 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued to short term interest rates. As explained in Note 1(g) to the financial statements, the Group does not hedge account. Note 17 to the financial statements details the Group’s exposure to the various financial instrument risks. Managing risk has been central to the success of the Group over many years and in particular gearing has been kept at a relatively low level for the property industry; currently gearing is 24.3% (2020 – 17.8%). The Board recognises that, in common with all companies, it can only have limited control over many of the external risks which it faces. The largest of such “uncontrollable” factors is the economic cycle which has a major impact on the demand for and price of property and the ability of the Group to achieve its strategic objectives. The principal risks facing the Group are described in the following paragraphs together with the steps which are taken to mitigate and manage them. External risks Economic outlook The economic outlook is dominated by the Covid-19 pandemic. The UK Government has recently started to dismantle various restrictions which had been put in place to prevent the spread of the disease and which had resulted in a dramatic slowdown in economic activity. It is too soon to tell if and when these steps will return the economy to pre-pandemic levels. Within the general downturn there have been particularly sharp impacts on retail, leisure and travel sectors. It remains to be seen whether the current reluctance of people to visit shops and leisure premises is a temporary or a longer term trend. Many organisations have successfully introduced systems of home working with little or no loss of efficiency. If “working from home” becomes an established feature of business life, demand for office accommodation may reduce. The UK is now fully detached from the European Economic Union (EEU) although trade relations have yet to get onto an even keel which creates an ongoing layer of uncertainty for UK business. The Covid-19 pandemic in the USA had seemed largely to be under control with the economy benefiting from the substantial stimulus programme introduced following the election of President Biden. However infection rates are now rising once again. This is the background which provides the risks and opportunities for our residential tenants and for the businesses of our commercial tenants and their demand for space. This page and opposite page: The Strand Palace Hotel, The Strand, London WC2. PAGE 6 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:08 Page 7 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:08 Page 8 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:08 Page 9 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued We seek to mitigate and manage such risk by: ■ Continuous monitoring of the economic outlook ■ Continued maintenance of low gearing and the conservation of cash and bank facilities ■ Rigorous tenant covenant checks including independent assessments for major lettings; in the case of smaller properties we undertake such checking as is appropriate ■ Enhanced rent collection effort to minimise the possibility of bad debts Availability of finance on acceptable terms In order to undertake significant acquisitions or projects of development and value enhancement within our portfolio, the Group relies in part on funding from the UK and USA property finance market. At present our experience shows that suitable finance can be obtained on acceptable terms. Nevertheless any reduction in the availability of finance for property at an acceptable cost and for an appropriate period would adversely affect the Group’s ability to undertake acquisitions and major schemes of redevelopment and refurbishment. We seek to mitigate and manage this risk by: ■ Monitoring funding trends and the development of banking regulations ■ Sustaining relationships with our principal financing partners, both banks and other lending institutions ■ Securing term finance facilities to meet our foreseeable requirements ■ Ensuring that the maturities of major loan arrangements are spread over a period of years Movements in currency rates of exchange With 28% by value of the Group’s property portfolio located in the USA, any significant movement in the US dollar/sterling rate of exchange will impact our reported results. This page and opposite page: Africa House, Kingsway, London WC2. PAGE 9 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:08 Page 10 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued The rise in the value of sterling relative to the US dollar in the financial year was 10% (2020 – 5% fall). This has had the effect of reducing the reported value of our USA net assets. The average exchange rate for the year rose by 3% (2020 – 3% fall) and its impact on the reported USA results is not material. We mitigate and manage this risk by: ■ Funding US assets by US dollar borrowings and local retained earnings. This means that the impact of movements in the exchange rate is limited to accounting adjustments in the Group’s consolidated accounts. An accounting loss of £31.7 million (2020 – gain of £20.6 million) arises in reserves mainly on the re-translation of the opening net book value of assets in the USA ■ Incurring all costs used to generate US dollar rental income in US dollars Regulation As commented in previous years, regulations aimed at the control of residential rental levels or shorthold tenancy arrangements could have an adverse impact on the Group. If regulations introduced in the UK during the year as temporary measures which restrict the ability of landlords to recover unpaid rent by legal process remain in place then bad debt expense is likely to increase. Similarly, increased regulation on building or environmental standards, health and safety or planning matters could impose additional costs. We seek to mitigate and manage this risk by: ■ Careful monitoring of developments in legislation with the help of our professional advisers Catastrophic events The operations of the Group have been affected by the impact of the Covid-19 pandemic and could in future be adversely affected by the impact of a significant catastrophe such as extreme weather, fire, cyber-attack, civil disturbance or terrorism which could result in the loss of any of our principal buildings or offices and the records stored in them. We seek to mitigate and manage this risk by: ■ Developing a system of home working to ensure that the Group can continue to function despite the need for office closures This page and opposite page: Africa House, Kingsway, London WC2. PAGE 10 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:08 Page 11 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:09 Page 12 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:09 Page 13 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued ■ Insuring buildings with third parties ■ Physical building security ■ Fireproof storage of leases and other documents of title ■ Dispersal of business critical IT systems and enhanced data security measures Tenant default Tenant default constitutes a risk to income and, ultimately, to capital value. Notwithstanding well publicised reports in the media of tenants defaulting on rental arrangements or unilaterally seeking material rent reductions, we continue to receive the substantial majority of rentals due under contractual arrangements. The multi-tenanted nature of the portfolio, with rental income derived from numerous properties, provides a natural measure of protection against the risk of individual default. In addition, we seek to mitigate and manage this risk by: ■ Seeking tenants with strong covenants ■ Credit checks on new tenants including independent assessments for major lettings ■ Careful monitoring of tenants showing signs of financial stress ■ Actively using recovery mechanisms for overdue debts Retail Sector In recent times we have seen the contraction or collapse of many high profile retail chains. The change in shopping patterns and in particular the move to on-line shopping which has accelerated during the Covid-19 pandemic means that the downward pressure on UK high street rental and capital values will continue. Parades of shops, an important part of our portfolio, have not suffered to the same extent. Our portfolio is not significantly exposed to the risk of any single retail tenant. We seek to mitigate and manage this risk by: ■ Close monitoring of developments in the retail sector ■ Careful monitoring of tenants showing signs of financial stress ■ Avoiding concentration on any one tenant or retail sector This page and opposite page: the recently completed Starlite Lodge, Greenford, Middlesex. PAGE 13 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:09 Page 14 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued Analysis by property type PROPERTY UK Residential £861.4m Commercial £995.0m PROPERTY USA Residential £629.4m Commercial £96.8m COMMERCIAL PROPERTY UK COMMERCIAL PROPERTY USA Land & Development £1.4m Industrial £54.7m Offices £337.4m Retail £2.4m Offices £94.4m Leisure & Services £239.1m Retail £362.4m Analysis by location UK VALUATIONS USA VALUATIONS Wales & West £50.4m North & Scotland £48.6m Midlands & East Anglia £93.8m South East £138.9m Pennsylvania £49.5m Baltimore £25.1m New York £240.9m Greater London £1,524.7m New Jersey £48.5m Boston £90.0m Florida £272.2m PAGE 14 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:09 Page 15 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 Internal risks Regional concentration in UK and US portfolios Within the UK, the majority of our properties are situated in and around the London area. In past years the increase in value of our UK portfolio has been almost entirely derived from the London area which has enjoyed a period of well publicised growth. A slowdown in the London market such as has occurred more recently will significantly reduce the net annual revaluation uplifts in the UK portfolio. In the USA, a substantial part of our portfolio is situated in New York which has in the past produced significant growth in capital values; last year the impact of additional rent controls and restrictions reversed this pattern. Changes in aggregate property value have a direct impact on the net worth of the Group. We seek to mitigate and manage this risk by: ■ Continuing to invest in the USA, principally in Florida and other locations outside New York ■ Regular monitoring of the property market for opportunities, not just in London but throughout the UK ■ Regular professional revaluations by our independent surveyors in the UK and USA Acquisitions The Group seeks well priced acquisitions which will meet the strategic objective of adding long term, low risk growth in net asset value. The Group’s oft stated aversion to undue risk means that in a period of economic and political uncertainty, such as we presently face, opportunities for acquisition will be approached with extreme caution. There is nevertheless a risk that an inappropriate or ill-judged acquisition could destroy value. We seek to mitigate and manage this risk by: ■ Rigorous pre-acquisition screening of all buying opportunities and appropriate due diligence This page and opposite page: Park West, London W2. PAGE 15 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:10 Page 16 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued Development The Group continues to seek development opportunities, principally from within the portfolio but also elsewhere. Development provides an opportunity to enhance income and net asset values but carries risk as to planning, construction timing, costs and letting. We seek to mitigate and manage these risks by: ■ Rigorous screening of all development opportunities including external professional advice and, where appropriate, market research to ensure continued tenant demand ■ Seeking fixed price contracts with building contractors ■ Focusing on a limited number of developments at any one time ■ Close monitoring, together with our external advisers, of active developments People The Group relies heavily on the involvement of key executive directors in both strategic and day-to- day affairs. Loss of this involvement would be disruptive to business. We have sought to mitigate and manage this risk by: ■ The establishment of a strong Group management team to support the executive directors ■ The appointment of new directors from the next generation of the Freshwater family Investment properties A professional valuation of all of the Group’s properties was carried out at 31 March 2021. The UK properties were valued by Colliers International Property Advisers UK LLP, Chartered Surveyors. In the USA, all properties were valued by Metropolitan Valuation Services, Inc., Certified General Real Estate Appraisers. Properties in Manhattan, New York, USA. Above: 515-535 East 89th Street, right: The Franconia, 20 West 72nd Street, far right: 677 West End Avenue, opposite page: 611 West 158th Street. PAGE 16 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:10 Page 17 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:10 Page 18 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:11 Page 19 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued The table below shows a summary of the valuation of our investment property at 31 March 2021: Valuation Valuation March 2021 March 2020 £m £m Commercial property UK 995.0 1,011.1 USA 96.8 107.8 Residential property UK 861.4 832.7 USA 629.4 593.9 Less lease incentives (18.2) (21.2) Total 2,564.4 2,524.3 A more detailed analysis of the investment property portfolio is set out in Note 9 to the consolidated financial statements. The changes shown above are attributable to the net gain arising on revaluation and movements resulting from purchases, capital expenditure, disposals and changes in currency rates of exchange. This is shown in the analysis below: 2021 2020 £m £m Opening valuation 2,524.3 2,532.5 Gross up of head lease liability – 8.4 Opening valuation (restated) 2,524.3 2,540.9 New acquisitions 68.1 29.8 Additions to existing properties 10.0 18.1 Disposals (1.3) (4.7) 2,601.1 2,584.1 Revaluation gain/(loss) 33.8 (90.5) Foreign exchange (loss)/gain (70.5) 39.1 Transfer to properties held for sale – (8.5) Closing valuation 2,564.4 2,524.3 The overall valuation of our UK portfolio has remained flat with losses arising on retail and office property offset by a significant uplift on a property arising from expected improved commercial terms as an old lease approaches its end. Residential properties have shown a modest increase in values. We continue to obtain significant uplifts in value upon the completion of successful developments and rent reviews. The overall increase in valuation of USA properties is 4.1% (2020 – 11.9% reduction). The increase mainly arises on our Florida properties offset by some small downward adjustments on our Manhattan properties following the rent controls introduced last year. Acquisitions and Developments In the UK the impact of the Covid-19 pandemic has restricted our ability to undertake development work. Our largest potential development project at Oxford Street, London W1 has been put on hold at the preparatory stage until the outlook clears. The Piano Apartments, London SW11 were completed which created 35 flats. Work was commenced to create a new 24 flat block on the site of Baillie and Strathcona House which is due to complete in late 2021. Opposite page and above: 30 Kensington Church Street, London W8. PAGE 19 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:11 Page 20 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:11 Page 21 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued Refurbishment work was completed on an office building in Great Marlborough Street, London and on the offices in Salusbury Road, London NW6 which were acquired last year. In March 2021 we acquired an apartment complex in Casselberry, Florida for $87.6 comprising 476 units spread over 41 garden acres. In the USA we undertook the refurbishment of our office property on St Paul’s Street, Baltimore. Results for the year The Group recorded a profit before taxation for the year ended 31 March 2021 of £72.0 million (2020 – loss of £33.2 million). The result includes a net valuation gain of £33.8 million arising on investment properties (2020 – loss of £90.5 million). The table below shows the performance of the Group before and after valuation movements: 2021 2020 £m £m Total rental and related income from investment property 162.5 166.1 Property operating expenses (91.7) (91.1) Net rental and related income from investment property 70.8 75.0 Profit on disposals of investment property 3.2 15.8 Administrative expenses: Recurring (14.9) (14.3) Non-recurring arising from scheme of arrangement (3.3) – Net operating profit before net valuation movements 55.8 76.5 Net valuation gains/(losses) on investment property 33.8 (90.5) Net financing expense (17.6) (19.2) Profit/(loss) before taxation 72.0 (33.2) More properties in the USA. Left: 77 North Washington, Boston, Massachusetts, above and opposite page: 11, East Chase Street, Baltimore, Maryland. PAGE 21 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:12 Page 22 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued Overall this year has seen a reduction of £2.9 million in rental income equivalent to 1.9% (2020 – 6.5% increase). In the UK rental income has shown a small net decrease with income from new developments and tenants offset by lost tenants and income reductions. In the USA the reduction in rental income mainly arose from our Washington Street, Baltimore property where a tenant gave up three floors. Service charge income has decreased reflecting a reduced level of activity on major works in the year. There was no significant change in the overall level of property operating expenses with reduced expenditure on letting commissions and repairs offset by an increase in the provision for bad debts. Administrative expenses include costs of £3.3 million relating to the Scheme of Arrangement which will not recur in future years. Profit on disposals largely derive from the sale of lease extensions in the UK. When long leaseholders extend the length of their lease a premium is paid; the Group has no control over when these extensions may occur. In 2020 profit on disposals also included the surplus on the sale of part of our Middlesex Street site in Aldgate. The new bank borrowings in the UK have had the effect of increasing both interest paid and received by equivalent amounts with no impact on net finance costs. The increase in net finance costs results from the reduction in interest on cash balances due to deposit interest rates falling to near zero. This year’s fair value movement on financial instruments was a gain of £1.4 million (2020 – £1.4 million loss). As shown in Note 6 to the financial statements, the Group tax charge of £17.5 million (2020 – £13.4 million) represents an effective tax rate of 24% which is consistent with the weighted average standard tax rate of both countries. The announced increase to the UK corporate tax rate from 1 April 2023 had not been enacted by the 31 March 2021 but will affect current and deferred tax charges in the future. This page and opposite page: Travelodge, Middlesex Street, Aldgate, London E1. PAGE 22 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:12 Page 23 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:13 Page 24 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued Earnings per share The Group recorded earnings per share of £3.35 (2020 – loss of £2.92) an increase of £6.40 (2020 – £10.28 decrease). £ 14 12 10 8 6 4 2 0 -2 -4 2017 2018 2019 2020 2021 Underlying profit before tax The profit reported in the financial statements has for some years included property revaluation movements and fair value adjustments to financial instruments. In addition to this measure of performance we also focus on “underlying profit before tax” which does not include these valuation items. Underlying profit before tax for the last two years is set out below: 2021 2020 £m £m Profit/(loss) before tax per the income statement 72.0 (33.2) Property valuation (surplus)/deficit (33.8) 90.5 Financial instruments fair value adjustments (1.5) 1.4 Adjustment to measurement of disposal profits 1.1 59.9 Underlying profit before tax 37.8 118.6 This year’s underlying profit before tax of £37.8 million is a reduction of £80.8 million on the previous year (2020 – £118.6 million). The prior year benefitted from the one-off realised gain arising on the sale of the southern part of the Middlesex Street site. Underlying profit before tax represents that element of our reported results which has actually been realised and is not dependent on valuation judgements. It represents the performance of our core rental business together with disposal profits which tend to fluctuate from year to year. This page and opposite page: Grove Hall Court, London NW8. PAGE 24 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:13 Page 25 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:14 Page 26 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:14 Page 27 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued It is our underlying profit before tax which generates the cash we use to re-invest in the business and to pay dividends and taxes. Gearing Gearing, the ratio between our loans and borrowings and the value of our total assets, is 24.3% (2020 – 17.8%) for the Group as a whole. In the UK the ratio is 16.9% (2020 – 7.8%) whilst in the USA, where each property is financed separately on a ring-fenced basis, it is 43.8% (2020 – 42.0%). Shareholders’ funds At 31 March 2021 shareholders’ funds amounted to £1,901.2 million, an increase of 0.3% on last year’s figure of £1,896.0 million (2020 decrease of 2.3%). Shareholders’ funds in recent years have been as follows: n o i l l i m £ 2,000 1,950 1,900 1,850 1,800 1,750 1,700 1,650 1,600 1,550 1,500 2017 2018 2019 2020 2021 Outlook The Chairman’s Introduction on page 2 describes the economic and political factors which will affect the Group in the coming year. This page and opposite page: Central Park, Brighton, East Sussex. PAGE 27 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:14 Page 28 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:15 Page 29 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued In the UK we have seen the economy rebound after emerging from the winter lockdown with some economists projecting that GDP will return to pre-pandemic levels by the end of 2021. However the recovery is fragile and heavily dependent on the successful management of Covid-19 infections. It is by no means clear that the behaviour of the public, so far as concerns the use of retail, leisure and office premises, will fully return to previous patterns. This may impact on the future demand for and valuation of such properties. The USA is currently enjoying significant growth in GDP although it is also experiencing an increase in Covid-19 infections which may threaten the recovery. Inflationary pressure has re-emerged in both the UK and the USA with current rates running ahead of target although monetary authorities in both territories regard this as a transitory phenomenon. Until these issues have become clearer we will carefully conserve our financial resources so that we are well placed to take advantage of opportunities as they arise. It is the nature of programmes of development and enhancement that they tend to span more than one accounting period and may take some time to bring to fruition; we are comfortable taking a long term, low risk approach to growing net asset value. We will continue to explore development opportunities within our existing portfolio; the timing and speed with which these are pursued will be influenced by general economic and market conditions. In the USA we continue to seek acquisition opportunities in favourable locations, mainly outside New York and, whenever possible, to refinance existing properties at more advantageous rates. There is strong competition for worthwhile opportunities but we stick to our rigorous selection criteria and are prepared to wait for the right transaction. In the immediate future we are unlikely to experience the rate of growth in net asset value that we have enjoyed in recent years although a return to growth is anticipated in the longer term. Employees The day-to-day activities are outsourced to management companies which are responsible for the provision of the services of the staff on whom we rely to run the business. As part of the arrangements with the management companies in the UK, those individuals engaged on the Group’s affairs hold joint employment contracts but the management companies retain sole responsibility for setting recruitment, employment, training, health and safety, diversity and human rights policies for their staff. Whilst the Group supports and encourages good practice in all of these areas, detailed responsibility for the establishment and execution of such policies lies with the management companies. As a result, this report does not contain the kind of information mentioned in the Companies Act 2006 s414C (7)(b)(ii) and (iii). So far as health and safety is concerned, the Board recognises the importance of ensuring that our properties provide a safe and healthy environment for all users. With this in mind the Board has requested that the management companies ensure that: ■ All their employees receive appropriate training in the identification and management of health and safety risks. Every employee is required to be familiar with health and safety policies and has responsibility for ensuring that they are followed in their area of work. ■ Covid-19 secure workplaces and practices are established for all employees. This has involved enabling working from home where appropriate as well as deep cleaning of offices and the provision of sanitising materials. Working practices have been modified to maintain social distancing wherever possible and Covid-19 risk assessments have been completed. Opposite page and above: 90 Hills Road, Cambridge. PAGE 29 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:15 Page 30 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:16 Page 31 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued ■ Regular cyclical risk assessments are undertaken by external consultants on all properties for which the Group has responsibility. A dedicated team is tasked with resolving issues raised by such assessments and with monitoring policy compliance. To ensure that an awareness of the importance of this issue continues at the highest level within the Group, health and safety reviews are periodically presented at Board level. All Directors of the Company are male and no new recruitment to the Board is presently planned which would cause this to change. When the need for recruitment does arise equal consideration will be given to all candidates, regardless of gender, religion or ethnicity. Community The Group has long recognised the importance of supporting the communities in which we operate. Many companies encourage and facilitate their employees to donate their time and efforts to community projects; because our staffing is outsourced this route is not available to us. Our support therefore takes the following forms: ■ Donations, largely to educational charities, which this year amounted to £183,335 (2020 – £115,500). ■ Dividends on donated shares following the donation some years ago to charities of shares representing 6.3% of the capital of the Company with dividend payments in the year of £1,113,786 (2020 – £1,083,131) being passed to charitable companies. Environment As mentioned above, all the staff engaged in the business and who control our buildings are provided by management companies. We do not have responsibility for the greenhouse gas emissions related to the employment of those people. The greenhouse gas emissions arising from our let properties are the responsibility of our tenants. In consequence, we have no disclosures to make in relation to greenhouse gas emissions and therefore this report does not contain information of the kind mentioned in Part 7 of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. The scope for enhancing the environmental standards across the majority of our properties is limited. In the main they were constructed before the advent of modern standards and it would be neither practically nor economically feasible to undertake a complete upgrade to meet modern requirements. However, we do take the opportunities which arise each year as part of programmes of repair and refurbishment to improve the energy efficiency of our buildings and the plant therein. When we undertake new developments or major schemes of refurbishment we strive to achieve the highest environmental and sustainability standards consistent with the nature of the building and the scheme being undertaken. Section 172(1) statement The Directors have acted in the way that they considered, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole and in doing so had regard to the matters set out in Section 172 (1) (a) to (f) of the Companies Act 2006. The Board considers the Group’s key stakeholders to be the Group’s: lenders, shareholders, staff provided by management companies, suppliers and tenants. The Board impress the need for an open, fair, honest and respectful workplace culture on senior management who ensure that all who work for the Group are aligned to these values. This enables the Group to forge strong and mutually beneficial long term relationships with its key stakeholders, which is critical to the success of the business and its stated objective of the pursuit of long term, low risk growth in net asset value and rental income as explained on page 5. The executive directors aim to meet with most of the Group’s Opposite page and above: 49 & 50 Great Marlborough Street W1. PAGE 31 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:16 Page 32 174753 Daejan Holdings R&A 2021 Pt1_174753 Daejan Holdings R&A 2021 Pt1 02/09/2021 12:17 Page 33 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 STRATEGIC REPORT continued key stakeholders each year and it is an important part of the role of senior management to meet with and foster business relationships with lenders, suppliers, tenants and other stakeholders. High standards of business conduct are demanded from all those who represent the Group whether they are members of the Board, staff provided by management companies or third party advisers, agents or other representatives. Viability review The Directors have appointed a team led by senior management to assist the Board in undertaking a viability assessment. A thorough review has been undertaken of the Group’s current financial, strategic and operational position, the Board’s future plans for the business and the principal risks faced by the Group, described on pages 6 to 16 of the Strategic Report. The Directors consider that five years remains an appropriate time horizon for assessing the longer- term viability of the business and this is consistent with the period which has been used for strategic planning. ■ The Group has a low risk, balanced portfolio of properties, with many commercial properties occupied by tenants with long leases. Based on current trends and notwithstanding the impact of the Covid–19 pandemic, the Directors continue to believe that the Group will be able to grant short term leases on residential properties and new leases on commercial properties at comparable rents for at least five years. ■ The Group utilises external funding and has available and committed facilities which are spread over a period of years. Most bank finance is available for an initial term of five years and all of the Group’s current facilities mature during or beyond 2024. Discussions regarding the renewal or replacement of facilities occur in advance of their maturity. Current discussions with incumbent lenders give the Board confidence that the Group will be able to renew or replace existing facilities on comparable or improved terms. Assessment of the Group’s viability over the next five years included stress testing key business metrics with what is considered the plausible worst-case potential impact of the principal risks. Whilst carrying out this assessment, the strength and effectiveness of the controls in place to mitigate risks were considered. In determining what should be regarded as the plausible worst-case impact, the Board and senior management team have considered in detail and sought advice on the potential impact to UK property prices, demand for UK property and the associated impact on rents and yields, and the willingness of financial institutions to lend to UK property companies.Testing included assuming the proportion of UK rent and service charges collected for the following four quarters is the same as had been collected by 10 August 2021 for rent due in the quarter ended 31 July 2021. This amounts to approximately 15% not being collected, which itself is around ten percentage points lower than the actual collection of UK rental income that the Group has achieved to date for the year ended 31 March 2021. Notwithstanding the reduction in cash collected, administration and operating costs were assumed to remain the same in real terms. Headroom on loan covenants has been stress-tested, the maturities of loan agreements reviewed and a five-year cash flow forecast produced. The Directors confirm that, based on the analysis, they have a reasonable expectation that the Group can continue to operate and meet its liabilities as they fall due over the five-year period of their assessment. By order of the Board J S Southgate Company Secretary 1 September 2021 Opposite page and above: 25 Worship Street, London EC2. PAGE 33 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 34 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ REPORT Change of company name and status An offer, to be implemented by a scheme of arrangement, by Dock Newco Limited, a company controlled by the Freshwater family, was announced on 21 February 2020 for the Company’s shares not already held by the Freshwater family. At a Court meeting in April 2020, over 99% of the shares that voted accepted the offer. The scheme was sanctioned by the Court on 5 May 2020 and became effective on 7 May 2020. The Company changed its name from Daejan Holdings plc to Daejan Holdings Limited on 28 May 2020 and approved modifications to its constitutional documents changing the company from a public limited company to a private limited company. Strategic Report The Company’s Strategic Report for the year ended 31 March 2021 is set out on pages 5 to 33 and contains the following information: ■ ■ ■ ■ ■ The principal activities of the Group The business review of the Group An indication of the future developments of the Group The principal risks and uncertainties facing the business, including those relating to financial instruments Employee and environmental disclosures including those related to greenhouse gas emissions Results and Dividend The profit for the year amounted to £54.5 million (2020 – loss of £46.6 million). A first interim dividend of 74p per share was paid on 22 December 2020 and a second interim dividend of 35p per share was paid on 19 March 2021. The Directors do not recommend the payment of a final dividend and expect to continue the current practice of paying two interim dividends each year. Directors The Directors who served throughout the year and up to the date of this report, except as noted, were: Mr B S E Freshwater Mr S I Freshwater Mr S B Benaim (resigned 31 May 2020) Mr D Davis Mr A M Freshwater Mr C B Freshwater Mr R E Freshwater Mr S Srulowitz (resigned 30 June 2020) Brief biographies of the Directors are as follows: Mr B S E Freshwater. Aged 73 – Joined the Board in December 1971 with primary responsibility for the Group’s finances. In July 1976 he was appointed Managing Director and, additionally, became Chairman in July 1980. Mr S I Freshwater. Aged 71 – Directs the Group’s operations in the USA and also has responsibility for the Group’s UK sales division. He has been a Director of the Company since January 1986. PAGE 34 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 35 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 Mr D Davis. Aged 86 – Previously a partner in Cohen Arnold, the Group’s consulting accountants. He relinquished his partnership in 1971 in order to devote more time to his numerous business and other interests. He has been a non-executive Director of the Company since December 1971. Mr A M Freshwater. Aged 50 – He is resident in the UK and sits as an Arbitrator in complex commercial disputes. He is an actual and potential beneficiary of trusts and a trustee of certain other trusts with substantial holdings of the Company’s equity. He was appointed to the Board as a non- executive director in July 2010. Mr C B Freshwater. Aged 49 – Was appointed to the Board as a non-executive Director in July 2017. He currently lectures at a London college. He is an actual and a potential beneficiary of trusts and a trustee of certain other trusts with substantial holdings of the Company’s equity. Mr R E Freshwater. Aged 51 – He is currently pursuing an academic career and lectures to graduate students. He is an actual and a potential beneficiary of trusts and a trustee of certain other trusts with substantial holdings of the Company’s equity. He was appointed to the Board as a non-executive director in July 2010. The powers of Directors of the Company are as set out in the Company’s articles of association. During the year, the Company did not purchase any shares. Directors’ Interests in Transactions Day-to-day management of the Group’s properties and its operations in the UK is mainly carried out by Highdorn Co. Limited and by Freshwater Property Management Limited. Mr B S E Freshwater and Mr S I Freshwater are Directors of both companies. They have no direct beneficial interest in the share capital of Highdorn Co. Limited. Mr B S E Freshwater, Mr S I Freshwater and Mr D Davis are also Directors of the parent company of Freshwater Property Management Limited but have no beneficial interest in either company. Mr C B Freshwater and Mr R E Freshwater have a beneficial interest in a trust holding interests in shares in Highdorn Co. Limited. Details of the amounts paid for the provision of these services are set out in Note 18 to the financial statements. Share Capital and Substantial Directors’ and other Shareholdings The structure of the Company’s share capital, including the rights and obligations attaching to the shares, is given in Note 14 to the financial statements. The Company has 16,295,357 shares in issue and, with the exception of the 763 shares beneficially owned by Mr D Davis, all shares are controlled by or held in trusts on behalf of members of the Freshwater family. Directors’ interests in the share capital of the Company are as follows: B S E Freshwater S I Freshwater D Davis A M Freshwater C B Freshwater R E Freshwater Beneficial interest Non-beneficial interest 31 March 2021 457,683 206,920 763 2,591,294 2,591,294 2,591,294 31 March 2020 31 March 2021 457,683 12,245,617 206,920 8,332,941 763 – 2,591,294 962,323 2,591,294 – 2,591,294 1,034,566 31 March 2020 8,898,253 4,985,577 – 962,323 – 1,034,566 PAGE 35 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 36 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ REPORT continued Notes: 1 2 3 Beneficial interests of B S E Freshwater and S I Freshwater includes shares held by: (i) a company owned 50% by B S E Freshwater and 50% by S I Freshwater; and (ii) B S E Freshwater and S I Freshwater joint pension scheme. Beneficial interests of A M Freshwater, C B Freshwater and R E Freshwater include shares held by trusts in which they are each one of a large class of beneficiaries. Non-beneficial interests relate to shares held by trusts, charities and bodies corporate owned by family trusts where the director is a trustee or director. Included in the directors’ holdings shown in the table on the previous page are the following holdings at 31 March 2021, each amounting to 3% or more of the Company’s issued share capital: Dock Newco Limited Henry Davies (Holborn) Limited Trustees of the S I Freshwater Settlement Distinctive Investments Limited Quoted Securities Limited Centremanor Limited Valand Investments Limited Silda 2 Limited Mayfair Charities Limited Tabard Property Investment Company Limited Shares 3,347,364 1,934,090 1,560,000 1,464,550 1,305,631 1,000,000 1,000,000 705,000 565,000 500,000 % 20.5 11.9 9.6 9.0 8.0 6.1 6.1 4.3 3.5 3.1 There have been no changes to any of the above interests from 31 March 2021 up to the date of signing this report. Corporate Governance This report combines by reference the Corporate Governance Report on pages 38 to 40. Change of Control Part 6 of Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 requires the Company to identify those significant agreements to which the Company is party that take effect, alter or terminate upon a change of control of the Company following a takeover bid and the effects of any such agreements. The Group has seven bank loan and mortgage facilities which contain change-of-control clauses. Five of these facilities in certain circumstances require the prior written consent of the lender to a change of control over the parent company, without which such change of control would constitute an event of default. A change of control under the other two facilities would similarly constitute an event of default but no provision is made for the prior written consent of the lender. At 31 March 2021, these facilities represented £109.1 million (2020 – £110.2 million) of the loans and borrowings in the financial statements and undrawn facilities of £30.0 million (2020 – £30.0 million). Going Concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 5 to 33, which also refers to the financial position of the Group, its cash flows, liquidity position and borrowing facilities. In addition, Note 17 to the financial statements includes the Group’s objectives, policies and processes for managing its financial risks, together with details of its financial instruments, hedging activities and exposures to credit, liquidity and market risks. PAGE 36 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 37 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 The Group generated cash from operating activities of £66.9 million during the year (2020 – £58.4 million). Gearing, on the basis of gross debt to total assets, was 24.3% (2020 – 17.8%) and net debt (total loans and borrowings less cash and cash equivalents) increased to £599.1 million (2020 – £344.7 million) as the Group entered into a new £225 million loan following the scheme of arrangement and new mortgages including one to part fund the acquisition of a large property in the USA. The Group had undrawn committed facilities of £55.0 million at the balance sheet date (2020 – £55.0 million). The Group has undertaken a detailed and robust assessment of its projected future financial position including assessing what the Board considers a plausible worst-case downside scenario which incorporates the expected potential impact on the Group of the consequences of the Covid-19 pandemic. The Board considered the potential impact to UK property prices, demand for UK property and the associated impact on rents and yields. The plausible worst-case downside scenario included assuming the proportion of UK rent and service charges collected for the following four quarters is the same as had been collected by 10 August 2021 for rent due in the quarter ended 31 July 2021. This amounts to approximately 15% not being collected, which itself is around ten percentage points lower than the actual collection of UK rental income that the Group has achieved to date for the year ended 31 March 2021. Notwithstanding the reduction in cash collected, administration and operating costs were assumed to remain the same in real terms. Development costs and dividends were included at the current expected level, although as discretionary costs the Board have the scope to delay or cancel these if necessary. The Board is satisfied that even in the plausible worst-case scenario, the Group will have sufficient resources to be able to continue to operate and there are no breaches of any of its loan covenants. Consequently, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approving this Annual Report & Accounts. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Auditor The Company’s auditor, KPMG LLP, has expressed its willingness to continue in office and pursuant to Section 487 of the Companies Act 2006, the auditor will be deemed to be reappointed as the Company’s auditor. Statement of Disclosure of Information to the Auditor The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they each are aware there is no relevant audit information of which the Company’s auditor is unaware, and each Director has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. By order of the Board J S Southgate Secretary 1 September 2021 PAGE 37 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 38 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CORPORATE GOVERNANCE REPORT Overview The Board has long recognised the benefits of strong corporate governance and its link to enhanced business performance. Strong corporate governance supports high levels of accountability and robust, informed and transparent decision-making which benefits the Group’s major stakeholders. It also gives confidence and reassurance to our stakeholders that we operate with honesty, integrity and in a socially responsible way. Each year, the Board reviews the Group’s approach to corporate governance and considers any changes which might be necessary in light of developments in best practice and in the context of the needs of the Group’s business. The Board’s assessment of the Group’s governance framework included consideration of the Wates Corporate Governance Principles for Large Private Companies issued in December 2018 and endorsed by the Financial Reporting Council. As it is now privately- owned, the Group is not required to apply the 2018 UK Corporate Governance Code, but has considered the principles included in this Code. The Board The Group is controlled through the Company’s Board of Directors. The Board’s main roles are to create value for shareholders, to provide entrepreneurial leadership of the Group, to approve the Group’s strategic objectives and to ensure that the necessary financial and other resources are made available to enable those objectives to be met. The Board meets regularly throughout the year on both a formal and an informal basis. Comprehensive management information covering all aspects of the Group’s business is supplied to the Board in a timely manner and in a form and quality which enables it to discharge its duties. The Board’s principal focus, in accordance with the formal schedule of matters referred to it for decision, is on the formation of strategy and the monitoring and control of operations and financial performance. The performance of the Board, its committees and individual directors is kept under constant review by the Chairman and therefore it is not considered necessary to undertake a more formal process of evaluation, either internally or externally. All directors have access to the Company Secretaries who are responsible for ensuring compliance with the Board procedures. The Board has agreed a procedure for directors in the furtherance of their duties to take independent professional advice, if necessary, at the Company’s expense. All directors are briefed by the Chairman of the views, and any changes to them, of the major shareholders. Directors and Directors’ Independence During the year the Board comprised the Chairman, who acts in an executive capacity, one further executive Director and non-executive directors. Four non-executive directors served throughout the year and two other non-executives resigned during the year following completion of the scheme of arrangement, having represented the interests of the independent shareholders during the offer process. The names of the Directors together with their biographical details are set out on pages 34 and 35. The directors are all members of the Freshwater family with the exception of Mr D Davis who, due to his length of service, is not considered to be independent. Given the Freshwater family are the shareholders of the Company, the Board reflects this. PAGE 38 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 39 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 Financial Reporting The Board has ultimate responsibility for all aspects of the Group’s financial reporting obligations. The key aspects of these obligations are as follows: Accounting and significant areas of judgement It is essential to the standard of the Group’s financial reporting that appropriate accounting policies are adopted and applied on a consistent basis. The Board is updated by management of the impact of new and emerging accounting standards and keeps under careful review those areas of its accounting policies requiring subjective or complex judgements or estimates. These areas, particularly in relation to fair value measurements of investment property are set out in Note 1(u) to the financial statements. As part of their review of the accounts, the Board also considers the valuation reports and discusses these with its valuers. External auditor KPMG LLP and its predecessor entities have been the Group’s statutory auditor since the Group in its current form was created by reverse takeover in 1959. The Board keep under careful review the independence of the auditor and the quality of its services to the Group and is satisfied that KPMG LLP and Richard Kelly who has been the Senior Statutory Auditor since 2015 provide a high quality, objective and cost effective service, from the sound base of their understanding of the Group’s business. Whilst there are no legal restrictions on the length of time an auditor can continue as the auditor of a private company, in line with good corporate governance the Board are considering tender options for the Group’s audit. The Board has a policy of using KPMG LLP to provide non-audit services to the Group only in relation to matters closely associated with the audit and maintains close scrutiny of its non-audit services and fees in order to safeguard objectivity and independence. Internal Controls The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Directors review the effectiveness of the Group’s system of internal controls, covering financial, operational and compliance controls and risk management. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant business risks faced by the Group and the internal control systems, and that this process has been in place for the year under review and up to the date of approval of the Annual Report & Accounts. This process was considered by the Board at regular intervals. The Board has considered the benefits likely to arise from the appointment of an internal audit function and has concluded that this is not currently necessary having regard to other controls which operate within the Group. Key elements of the Group’s system of internal controls These are as follows: Control environment: The Group is committed to the highest standards of business conduct and seeks to maintain these standards across all its operations. The Group has a clear organisational structure for planning, executing and monitoring business operations in order to achieve the Group’s objectives. Lines of responsibility and delegation of authority are well defined. PAGE 39 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 40 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CORPORATE GOVERNANCE REPORT continued Risk identification and evaluation: Management is responsible for the identification and evaluation of key risks applicable to the areas of the property market which impact its objectives. These risks are assessed on a continual basis, are subject to a robust annual assessment and may be associated with a variety of internal and external sources. The Board considers the risk implications of business decisions including those affecting all major transactions. Information and communication: Periodic strategic reviews are carried out which include the consideration of long term financial projections. Financial performance is actively monitored at Board level. Through these mechanisms group performance is monitored, risks identified in a timely manner, their implications assessed, control procedures re-evaluated and corrective actions agreed and implemented. Control procedures: The Group has implemented control procedures designed to ensure complete and accurate accounting for financial transactions and to limit the potential exposure to loss of assets or fraud. Measures include physical controls, segregation of duties, use of external experts and advisers where beneficial, reviews by management and reviews by the Company’s external auditor to the extent necessary to arrive at their audit opinion. Monitoring and corrective action: The Board met regularly, formally and informally, throughout the year to review the internal controls. This process includes a detailed annual review of the significant business risks and formal consideration of the scope and effectiveness of the Group’s system of internal control. In addition, the executive Directors and senior management have a close involvement in the day-to-day operations of the Group and as such, the controls are subject to ongoing monitoring. The Board is satisfied with the scope and effectiveness of the internal controls. PAGE 40 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 41 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ REMUNERATION REPOR T Directors’ Remuneration Policy Included in this report is the remuneration strategy and policy together with other relevant information about the terms and conditions applicable to executive directors of the Group: Overview The remuneration strategy is designed to be simple and transparent. In setting levels of remuneration it is important to: ■ ■ ■ ■ ■ Reflect the interests and expectations of shareholders and other stakeholders Take account of pay and employment conditions of employees in the Group Reward the sustained growth and profitability of the business Encourage management to adopt a level of risk which is in line with the risk profile of the business as approved by the Board Ensure there is no reward for failure by having a contractual entitlement to compensation for loss of office Executive directors’ potential remuneration Executive directors receive basic pay only. There are no bonus or incentive schemes in operation or any form of share option scheme or long term incentive plan. The executive directors are incentivised by virtue of all shares in issue, with the exception of the 763 shares beneficially owned by Mr D Davis, being held by or on behalf of themselves, other members of their families and their charitable interests. Strategy Purpose The salary is set to be competitive, relative to other companies operating in the same sector. Annual review A review of executive directors’ salaries is carried out each year once the results for the year are known and with reference to a comprehensive peer group of similar companies. The annual review takes into consideration: ■ ■ ■ ■ ■ Individual responsibilities, experience and performance Salary levels for similar positions in comparable businesses The level of pay increases awarded to staff whose services are provided by management companies Economic and market conditions Overall performance of the business There is no overall limit to maximum increases save as to comply with the strategy outlined above. Benefits There are no additional benefits granted to any director over and above basic pay. PAGE 41 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 42 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ REMUNERATION REPOR T continued Pension The Group does not operate a pension scheme for the directors and therefore they do not receive either pension contributions or entitlement to pension benefits as part of their remuneration by the Group. Recruitment of executive directors No new appointments of executive directors have been made for many years but if an appointment were made, salary would take into account market data for the relevant role, the individual’s experience and the responsibilities expected of them. Service contracts No director has a service contract. Company policy is to employ executive directors at will, with no contractual entitlement to compensation for loss of office. Mr B S E Freshwater has served as a director since 1971 and Mr S I Freshwater has served as a director since 1986. The non-executive directors are not appointed for a fixed term but are subject to periodic reviews. Mr D Davis was appointed in 1971, Mr A M Freshwater and Mr R E Freshwater were appointed in 2010. Mr S B Benaim and Mr S Srulowitz were appointed in 2017 and resigned on 31 May 2020 and 30 June 2020 respectively. Mr C B Freshwater was also appointed in 2017. They are all remunerated by a fixed director’s fee. Mr S B Benaim received an additional fee as Chairman of the Audit Committee. Annual Report on Remuneration This section describes all payments to directors in connection with the year under review. Total directors’ remuneration Details of each individual director’s remuneration are set out below on an accruals basis: 2021 Mr B S E Freshwater Mr S I Freshwater Mr S B Benaim* Mr D Davis Mr A M Freshwater Mr C B Freshwater Mr R E Freshwater Mr S Srulowitz* Base Salary £ Additional fee £ Compensation for loss of office £ 1,350,000 1,350,000 5,833 20,000 20,000 20,000 20,000 5,000 2,790,833 – – 50,000 – – – – 40,000 90,000 – – 50,000 – – – – – 50,000 Total £ 1,350,000 1,350,000 105,833 20,000 20,000 20,000 20,000 45,000 2,930,833 * Mr S B Benaim resigned on 31 May 2020 and Mr S Srulowitz resigned on 30 June 2020. PAGE 42 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 43 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 2020 Mr B S E Freshwater Mr S I Freshwater Mr S B Benaim Mr D Davis Mr A M Freshwater Mr C B Freshwater Mr R E Freshwater Mr S Srulowitz Base Salary £ Additional fee £ Compensation for loss of office £ 1,300,000 1,300,000 35,000 20,000 20,000 20,000 20,000 20,000 2,735,000 – – – – – – – – – – – – – – – – – – Total £ 1,300,000 1,300,000 35,000 20,000 20,000 20,000 20,000 20,000 2,735,000 Changes in the year Mr D Davis is the senior non-executive Director and has responsibility for recommending executive directors’ remuneration which is subsequently approved by the full Board. Mr B S E Freshwater and Mr S I Freshwater each received an increase in basic salary of £50,000 per annum during the year (2020 – £50,000), equivalent to 3.8% (2020 – 4.0%). The increases were agreed by the Board, following a recommendation from Mr D Davis. The total staff costs borne by the Group under its arrangements with its management companies and the salary costs of directors of subsidiaries in the UK increased by 5.1% (2020 – decrease of 0.3%) reflecting the cost of annual salary increases, appointment of additional directors to subsidiary companies and additional funding of the deficit in a pension scheme. Since such staff are employed under these arrangements, no consultations regarding directors’ remuneration policy or implementation have been held. It is intended that the current practice of annual reviews and the method in which they are carried out will continue to be adopted in the future. Non-executive directors’ remuneration Non-executive directors each receive a base fee of £20,000 per annum which is reviewed periodically, pro-rated for his or her period of service in any one year. This entitlement has not changed in recent years. During the current year, Mr S B Benaim and Mr S Srulowitz received one-off payments amounting to £50,000 and £40,000 respectively, in recognition of the additional time commitments in connection with the scheme of arrangement. The amounts were determined with reference to arms-length hourly fee rates for their professions. Mr Benaim received a further £50,000 as compensation for loss of office. PAGE 43 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 44 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ REMUNERATION REPORT continued Relative importance of spend on pay The table below demonstrates the relative amounts expended by the Group on staff costs, Directors’ remuneration and dividends to shareholders. The Company did not buy back any shares during the year. Staff costs £000 7,900 7,516 % of total 27.6 27.3 Directors’ remuneration Dividends to shareholders £000 2,931 2,735 % of total £000 % of total 10.3 9.9 17,762 17,273 62.1 62.8 2021 2020 Statement of directors’ shareholdings and share interests There is no minimum shareholding requirement for executive or non-executive directors. The directors’ share interests are complex and are set out in the Directors’ Report on pages 35 and 36. The basic pay of the Chairman and Managing Director who is also the highest paid director over the past ten years is shown as a single figure in the table below: Mr B S E Freshwater 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 £ 770,000 820,000 870,000 1,000,000 1,100,000 1,150,000 1,200,000 1,250,000 1,300,000 1,350,000 PAGE 44 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 45 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ RESPONSIBILITIES STATEMENT The directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent Company financial statements for each financial year. Under that law they have elected to prepare the Group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and applicable law and have elected to prepare the parent Company financial statements in accordance with the UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and applicable law. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the directors are required to: ■ ■ ■ ■ ■ ■ select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable, relevant and reliable; for the Group financial statements state whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; for the parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. PAGE 45 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 46 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS’ RESPONSIBILITIES STATEMENT continued Responsibility statement of the directors in respect of the annual financial report We confirm that to the best of our knowledge: ■ ■ the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. B S E Freshwater Chairman 1 September 2021 PAGE 46 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 47 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 INDEPENDENT AUDITOR’S REPORT To the members of Daejan Holdings Ltd Opinion We have audited the financial statements of Daejan Holdings Ltd (“the company”) for the year ended 31 March 2021 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, Company Statement of Changes in Equity, Consolidated Balance Sheet, Company Balance Sheet, Consolidated Statement of Cash Flows, and the related notes, including the accounting policies in note 1. In our opinion: ■ ■ ■ ■ the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 March 2021 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; the parent company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the group in accordance with, UK ethical requirements including the FRC Ethical Standard. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Going concern The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the group or the company or to cease their operations, and as they have concluded that the group and the company’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). In our evaluation of the directors’ conclusions, we considered the inherent risks to the group’s business model and analysed how those risks might affect the group and company’s financial resources or ability to continue operations over the going concern period. Our conclusions based on this work: ■ ■ we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the group or the company’s ability to continue as a going concern for the going concern period. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the group or the company will continue in operation. Fraud and breaches of laws and regulations – ability to detect Identifying and responding to risks of material misstatement due to fraud To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included: ■ ■ Enquiring of the directors of whether they are aware of fraud and of the company’s high-level policies and procedures to prevent and detect fraud; and Reading minutes of the meetings of the board of directors; PAGE 47 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 48 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 INDEPENDENT AUDITOR’S REPORT continued We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit. As required by auditing standards, we perform procedures to address the risk of management override of controls, in particular the risk that management may be in a position to make inappropriate accounting entries and the risk of bias in accounting estimates and judgements such as investment property valuations. We did not identify any additional fraud risks. On this audit we do not believe there is a fraud risk related to revenue recognition because the company’s income primarily arises from operating lease contracts with fixed, or highly predictable, periodic payments. In determining the audit procedures, we took into account the results of our evaluation and testing of the operating effectiveness of the company fraud risk management controls. We also performed procedures including: ■ ■ identifying journal entries to test based on a risk criteria and comparing the identified entries to supporting documentation. These included those containing certain key words, and those posted with unexpected account combinations,. evaluating the business purpose of significant unusual transactions. Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors (as required by auditing standards) and discussed with the directors the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non- compliance throughout the audit. The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the company is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies’ legislation), distributable profits and taxation legislation. We assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. Secondly, the company is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: landlord and tenant legislation, property laws and building legislation, recognising the nature of the company’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore, if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non- compliance with all laws or regulation. PAGE 48 174753 Daejan Holdings R&A 2021 Pt2_174753 Daejan Holdings R&A 2021 Pt2 02/09/2021 11:51 Page 49 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 Other information The directors are responsible for the other information, which comprises the strategic report, the directors’ report, the corporate governance report and the directors’ remuneration report. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work: ■ ■ ■ we have not identified material misstatements in the other information; in our opinion the information given in the strategic report and the directors’ report for the financial year is consistent with the financial statements; and in our opinion those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: ■ ■ ■ ■ adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. Directors’ responsibilities As explained more fully in their statement set out on page 45, the directors are responsible for: the preparation of the financial statements and for being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Richard Kelly (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London 1 September 2021 PAGE 49 174753 Daejan Holdings R&A 2021 Pt3_174753 Daejan Holdings R&A 2021 Pt3 02/09/2021 11:54 Page 50 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CONSOLIDATED INCOME STATEMENT for the year ended 31 March 2021 Notes Gross rental income Service charge income Total rental and related income from investment property Property operating expenses Net rental and related income from investment property Profit on disposal of investment property Net valuation gains/(losses) on investment property Administrative expenses: Recurring Non-recurring arising from scheme of arrangement Total Administrative expenses Net operating profit/(loss) before net financing costs Fair value gains/(losses) on derivative financial instruments Fair value losses on current investments Other finance income Finance expenses Net financing costs Profit before taxation Income tax charge Year ended 31 March 2021 £000 Year ended 31 March 2020 £000 148,703 13,754 151,641 14,502 2 3 9 4 5 5 162,457 (91,659) 166,143 (91,094) 70,798 3,248 33,817 75,049 15,775 (90,494) (14,984) (3,259) (14,254) – (18,243) (14,254) 89,620 (13,924) 1,434 – 4,971 (1,335) (21) 1,929 (24,051) (19,800) (17,646) (19,227) 71,974 6 (17,518) (33,151) (13,441) Profit/(loss) for the year 54,456 (46,592) Attributable to: Equity holders of the parent Non-controlling interest Profit/(loss) for the year 54,598 (142) (47,626) 1,034 54,456 (46,592) Basic and diluted earnings/(loss) per share 7 £3.35 £(2.92) The accompanying notes form an integral part of the financial statements. PAGE 50 174753 Daejan Holdings R&A 2021 Pt3_174753 Daejan Holdings R&A 2021 Pt3 02/09/2021 11:54 Page 51 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 March 2021 Profit/(loss) for the year Foreign exchange translation differences Year ended 31 March 2021 £000 Year ended 31 March 2020 £000 54,456 (31,732) (46,592) 20,568 Total comprehensive income/(loss) for the year 22,724 (26,024) Attributable to: Equity holders of the parent Non-controlling interest 22,975 (251) (27,118) 1,094 Total comprehensive income/(loss) for the year 22,724 (26,024) All comprehensive income may be reclassified as profit and loss when realised in the future. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2021 Balance at 1 April 2019 (Loss)/profit for the year Foreign exchange translation differences Distributions to non-controlling interest Dividends to equity shareholders Issued share capital £000 4,074 – – – – £000 555 – – – – Profit/(loss) for the period Foreign exchange translation differences Distributions to minority interest Dividends to equity shareholders – – – – – – – – Share Equity Non- premium Translation Retained shareholders’ controlling account reserve earnings £000 £000 funds £000 interest £000 Total equity £000 55,727 1,879,998 1,940,354 167 1,940,521 – (47,626) (47,626) 1,034 (46,592) 20,508 60 20,568 (17,273) (17,273) (56) – (56) (17,273) 20,508 – – (31,623) – – – – – – – – (31,623) (109) (31,732) (17,762) (17,762) (28) – (28) (17,762) Balance at 1 April 2020 4,074 555 76,235 1,815,099 1,895,963 1,205 1,897,168 – 54.598 54,598 (142) 54,456 Balance at 31 March 2021 4,074 555 44,612 1,851,935 1,901,176 926 1,902,102 The accompanying notes form an integral part of the financial statements. PAGE 51 174753 Daejan Holdings R&A 2021 Pt3_174753 Daejan Holdings R&A 2021 Pt3 02/09/2021 11:54 Page 52 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CONSOLIDATED BALANCE SHEET as at 31 March 2021 Assets Investment property Deferred tax assets Loan to a related party Total non-current assets Trade and other receivables Current investments Cash and cash equivalents Properties held for sale Total current assets Total assets Equity Share capital Share premium Translation reserve Retained earnings Total equity attributable to equity holders of the parent Non-controlling interest Total equity Liabilities Loans and borrowings Deferred tax liabilities Lease obligations payable Total non-current liabilities Loans and borrowings Trade and other payables Taxation Total current liabilities Total liabilities Total equity and liabilities Notes 31 March 2021 £000 31 March 2020 £000 9 10 11 11 12 13 14 16 10 16 15 2,564,445 234 222,693 2,524,260 506 – 2,787,372 2,524,766 83,143 131 132,120 8,450 76,976 130 146,275 8,450 223,844 231,831 3,011,216 2,756,597 4,074 555 44,612 1,851,935 4,074 555 76,235 1,815,099 1,901,176 926 1,895,963 1,205 1,902,102 1,897,168 725,793 300,717 8,267 469,188 297,642 8,328 1,034,777 775,158 5,384 67,326 1,627 21,739 61,332 1,200 74,337 84,271 1,109,114 859,429 3,011,216 2,756,597 The financial statements on pages 50 to 82 were approved by the Board of Directors on 1 September 2021 and were signed on its behalf by: B S E Freshwater Director The accompanying notes form an integral part of the financial statements. PAGE 52 174753 Daejan Holdings R&A 2021 Pt3_174753 Daejan Holdings R&A 2021 Pt3 02/09/2021 11:54 Page 53 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 March 2021 Cash flows from operating activities Cash generated from operations (Note 21) Interest received Interest paid Tax paid Net cash generated from/(used in) operating activities Cash flows from investing activities Acquisition and development of Year ended 31 March 2020 £000 Year ended 31 March 2021 £000 £000 59,195 1,941 (26,646) (5,304) £000 58,435 1,929 (26,024) (58,563) 29,186 (24,223) investment property (79,038) (47,636) Proceeds from sale of investment property Net cash (absorbed by)/generated from investing activities 3,102 91,899 (75,936) 44,263 Cash flows from financing activities Loan to related party Repayment of loan to related party received Repayment of bank loans New bank loans Repayment of mortgages New mortgages Dividends paid to equity holders of the parent Payments to non-controlling interest (225,000) 2,307 (1,505) 225,000 (40,024) 92,816 (11,876) (28) – – (2,135) 30,000 (36,150) 52,469 (17,273) (56) Net cash generated from financing activities 41,690 26,855 Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents brought forward Effect of exchange rate fluctuations on cash held (5,060) 146,275 (9,095) 46,895 95,895 3,485 Cash and cash equivalents (Note 12) 132,120 146,275 The accompanying notes form an integral part of the financial statements. PAGE 53 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 54 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Daejan Holdings Limited (formerly Daejan Holdings PLC) is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 March 2021 comprise the Company and its subsidiaries (together referred to as “the Group”). The consolidated financial statements were authorised for issuance on 1 September 2021. (a) Statement of compliance The consolidated Financial Statements have been prepared in accordance with international accounting standards (“IFRS”) in conformity with the requirements of the Companies Act 2006. The Company has elected to prepare its parent company financial statements in accordance with Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and these are presented on pages 83 to 87. (b) Basis of preparation The consolidated financial statements are presented in sterling, the Company’s functional currency and the Group’s presentational currency, rounded to the nearest thousand. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: investment property, derivative financial instruments, current asset investments and properties held for sale. The Group has undertaken a detailed and robust assessment of its projected future financial position including assessing what the Board considers a plausible worst-case downside scenario which incorporates the expected potential impact on the Group of the consequences of the Covid-19 pandemic. The Board considered the potential impact to UK property prices, demand for UK property and the associated impact on rents and yields. The plausible worst-case downside scenario included assuming the proportion of UK rent and service charges collected for the following four quarters is the same as had been collected by 10 August 2021 for rent due in the quarter ended 31 July 2021. This amounts to approximately 15% not being collected, which itself is around ten percentage points lower than the actual collection of UK rental income that the Group has achieved to date for the year ended 31 March 2021. Notwithstanding the reduction in cash collected, administration and operating costs were assumed to remain the same in real terms. Development costs and dividends were included at the current expected level, although as discretionary costs the Board have the scope to delay or cancel these if necessary. The Board is satisfied that even in the plausible worst-case scenario, the Group will have sufficient resources to be able to continue to operate and there are no breaches of any of its loan covenants. Consequently, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approving this Annual Report & Accounts. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Although these estimates are based on management’s best knowledge of the events or amounts involved, actual results ultimately may differ from those estimates. The areas involving a higher degree of complexity, judgement or estimation are set out in Note 1(u) on page 59. PAGE 54 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 55 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 The accounting policies set out in this Note 1 have been applied consistently throughout the Group to all periods presented in the consolidated financial statements, except as described below. Accounting standard changes The Group has applied the following new accounting standards and interpretations during the year: (cid:129) (cid:129) (cid:129) Definition of Material – Amendments to IAS 1 and IAS 8 Definition of a Business – Amendments to IFRS 3 Amendments to the Conceptual Framework for Financial Reporting The adoption of these new accounting standards and interpretations has not had an impact on the consolidated financial statements. The following amendments to standards and interpretations relevant to the Group have been issued but are not yet effective. None of these have been early-adopted by the Group and, based on the Group’s ongoing assessment of each of them, none are expected to have a material impact on the Group’s financial statements: (cid:129) (cid:129) (cid:129) Annual improvements to IFRS Standards 2018-2020 Classification of liabilities as current or non-current – Amendments to IAS 1 Disclosure of accounting policies – Amendments to IAS 1 (c) Subsidiaries Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to direct relevant activities of an entity and an exposure to variable returns so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. (d) Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. (e) Income available for distribution Under the articles of association of certain Group investment undertakings, realised capital surpluses are not available for distribution as dividends. (f) Foreign currency translation The assets and liabilities of foreign operations are translated to sterling at the foreign exchange rate ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on re-translation are recognised directly in a separate component of equity. The cumulative translation difference for all foreign operations was deemed to be zero as at the date of transition to IFRS. The year end and average rates used for these purposes were as follows: US Dollar Year end Average 2021 1.37 2020 1.24 2021 1.31 2020 1.27 PAGE 55 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 56 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued (g) Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to interest rate risk arising from operational and financing activities. As these derivatives do not qualify for hedge accounting, they are accounted for as trading instruments. Derivative financial instruments are initially recognised, and subsequently recorded, at fair value. The fair value of interest rate swaps and caps is the estimated amount that the Group would recover or pay to terminate the swap or cap at the balance sheet date, taking into account current interest rates and the credit worthiness of the swap or cap counterparties. The gain or loss on re-measurement to fair value is recognised immediately in the income statement. (h) Investment property and properties held for sale IFRS defines investment properties as those which are held either to earn rental income or for capital appreciation or both. All of the Group’s property falls within this definition apart from one property which is classified as a current asset held for sale. Investment property is initially recognised at cost and subsequently recorded at fair value. Properties held for sale are recorded at fair value. External, independent valuation firms having appropriate recognised professional qualifications and recent relevant experience in the location and category of property being valued, value the portfolio annually at the Company’s year end. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations are prepared either by considering the aggregate of the net annual operating income from the properties using a market yield/capitalisation rate which reflects the risks inherent in the net cash flow which is then applied to the net annual operating income, or on a sales comparison basis. Any gains or losses arising from a change in fair value are recognised in the income statement. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property continues to be treated as an investment property, and is measured based on the fair value model. Interest is capitalised on such developments to the extent that such interest is directly attributable to the cost of redevelopment. The Group’s interest in some of its investment properties are in the form of a long lease as opposed to freehold ownership. Following the adoption of IFRS 16 Leases, the Group recognises as liabilities amounts payable under head leases and a corresponding right of use asset, which is included in investment property. These leased investment properties are initially recorded at the present value of the remaining lease payments and are then subsequently carried at fair value. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. Leases held at the date of transition were discounted using the Group’s incremental borrowing cost at that date. Properties are classified as being held for sale when it is considered highly probable that a sale will be completed within one year of the classification date. Acquisitions and disposals are recognised on the date that the significant risks and rewards of ownership have been transferred. Any resulting gain or loss based on the difference between sale proceeds and valuation is included in the income statement and taxation applicable thereto is shown as part of the taxation charge. (i) Current investments Investments comprise equity securities and other investments held for trading and classified as current assets stated at fair value, with any resultant gain or loss recognised in the income statement. PAGE 56 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 57 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 (j) Trade and other receivables Trade and other receivables are initially stated at fair value and subsequently carried at cost less an allowance for impairment. These assets are not discounted as the effect is deemed immaterial. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and short term deposits. These short term deposits are highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts are repayable on demand and form an integral part of the Group’s cash management. Bank overdrafts when utilised are therefore included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (l) Dividends Dividends are recognised as a liability in the period in which they are approved. (m) Trade and other payables Trade and other payables are initially stated at fair value and subsequently carried at amortised cost. (n) Net rental income Net rental income comprises rent, service charges and other property related income receivable less applicable provisions and costs associated with the properties. Rental income from investment property leased out under operating leases is recognised in the income statement on a straight-line basis over the certain term of the lease. Lease incentives granted are recognised as an integral part of the total rental income. If a rent review is due but not yet agreed with the tenant any expected rent increase is only recognised when receipt is highly probable. Service charge income is recognised as the services are provided. Net rental income is stated net of recoverable VAT. The cost of repairs is written off to the income statement in the year in which the expenditure was incurred. Lease payments under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (o) Dividend income Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established which, in the case of quoted securities, is the ex-dividend date. (p) Taxation Income tax on the profit or loss for the year comprises current and deferred tax. The tax charge for the year is recognised in the income statement, the statement of comprehensive income or directly in equity, depending on the accounting treatment of the related transaction. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities (which, in the case of investment property, is assumed to be through sale), using tax rates enacted or substantively enacted at the balance sheet date. PAGE 57 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 58 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. (q) Segmental reporting The Company has identified its operating segments on the basis of those components of the Group which engage in business activities from which they may earn revenues and incur expenses and for which discrete financial information is available and regularly reviewed by the Chief Operating Decision Maker in order to allocate resources and assess performance. The Group has determined the Chief Operating Decision Maker to be the Board of Directors. (r) Impairment The carrying amounts of the Group’s assets, other than investment property and properties held for sale (see Note 1(h)) and deferred tax assets (see Note 1(p)), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists the asset’s recoverable amount is estimated and an impairment loss recognised whenever the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell and its value-in- use. The value-in-use is determined as the net present value of the future cash flows expected to be derived from the asset, discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The Group makes a provision for impairment for the expected credit losses associated with its trade and other receivables reflecting historic credit loss experience, informed credit assessments and forward looking information. The Group makes provisions of an amount equal to lifetime expected credit loss (“ECL”), except for debt securities and bank balances for which credit risk has not increased significantly since initial recognition which are measured as 12-month ECL. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECL, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument. Credit losses are measured as the present value of all cash shortfalls and are discounted at the effective interest rate of the financial asset. (s) Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (t) Loans and borrowings Floating rate and fixed rate loans and borrowings are initially recognised at fair value and are subsequently recorded at amortised cost. Transaction costs are deducted from the fair value at recognition and any differences between the amount initially recognised and the redemption value is recognised in the income statement over the period of the borrowings on an effective interest rate basis. When mortgages are refinanced, any redemption costs are immediately recognised in the income statement. PAGE 58 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 59 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 (u) Significant judgements, key assumptions and estimates The Group’s significant accounting policies are set out in 1(a) to 1(t) on pages 54 to 58. Not all of these policies require management to make subjective or complex judgements or estimates. The following is intended to provide further detail relating to the accounting policy that management considers particularly significant because of the level of complexity and estimation involved in its application and its impact on the consolidated financial statements. Property valuations The valuation of the Group’s property portfolio is inherently subjective, depending on many factors, including the individual nature of each property, its location and expected future net rental values, market yields and comparable market transactions (as set out in Note 9). Therefore the valuations 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 difficult market or economic conditions. As noted in Note 1(h), all the Group’s properties are valued by external valuers with appropriate qualifications and experience. PAGE 59 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 60 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 2. Segmental Analysis The Group is managed through two discrete geographical divisions and has only one product or service, being investment in property for the generation of rental income and/or capital appreciation. This is reflected in the Group’s structure and in the segment information reviewed by the Board. for the year ended 31 March 2021 Rental and related income Property operating expenses Profit/(loss) on disposal of property Net valuation movements on property Administrative expenses Recurring Non-recurring arising from scheme of arrangement Total administrative expenses Profit before finance costs Fair value gains Other financial income Financial expenses Profit before taxation Income tax charge Profit for the year Capital expenditure Investment property Other assets Total segment assets Total segment liabilities USA Eliminations £000 £000 UK £000 101,796 (56,853) 4,327 8,210 60,661 (34,806) (1,079) 25,607 (13,898) (1,086) (3,259) (17,157) 40,323 1,434 4,409 (9,893) 36,273 (6,477) 29,796 6,786 – (1,086) 49,297 – 746 (14,342) 35,701 (11,041) 24,660 71,322 Total £000 162,457 (91,659) 3,248 33,817 (14,984) (3,259) (18,243) 89,620 1,434 4,971 (24,051) 71,974 (17,518) 54,456 78,108 – – – – – – – – – (184) 184 – – – – 1,841,368 346,878 2,188,246 (630,798) 723,077 111,443 834,520 (489,866) – (11,550) (11,550) 11,550 2,564,445 446,771 3,011,216 (1,109,114) Capital employed 1,557,448 344,654 – 1,902,102 PAGE 60 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 61 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 for the year ended 31 March 2020 Rental and related income Property operating expenses Profit/(loss) on disposal of property Net valuation movements on property Administrative expenses Profit/(loss) before finance costs Fair value losses Other financial income Financial expenses Profit/(loss) before taxation Income tax (charge)/credit Profit/(loss) for the year Capital expenditure Investment property Other assets Total segment assets Total segment liabilities UK £000 103,013 (55,871) 16,253 3,005 (12,631) 53,769 (1,356) 699 (6,295) 46,817 (27,054) 19,763 41,586 USA Eliminations £000 £000 63,130 (35,223) (478) (93,499) (1,623) (67,693) – 1,419 (13,694) (79,968) 13,613 (66,355) 6,303 – – – – – – – (189) 189 – – – – Total £000 166,143 (91,094) 15,775 (90,494) (14,254) (13,924) (1,356) 1,929 (19,800) (33,151) (13,441) (46,592) 47,889 1,826,641 121,192 1,947,833 (403,569) 697,619 123,722 821,341 (468,437) – (12,577) (12,577) 12,577 2,524,260 232,337 2,756,597 (859,429) Capital employed 1,544,264 352,904 – 1,897,168 No single lessee accounted for more than 5% of the Group’s rental and related income in either year. 3. Property Operating Expenses Porterage, cleaning and repairs Insurance Building services Other management costs 2021 £000 39,570 6,503 23,972 21,614 2020 £000 41,552 5,909 25,057 18,576 91,659 91,094 Of the property operating expenses shown above, an amount of £940,000 (2020 – £1,256,000) related to properties which generated no income during the year. 4. Administrative Expenses Staff costs Directors’ remuneration Audit and accountancy Legal and other administrative expenses 2021 £000 7,900 2,931 985 3,168 2020 £000 7,516 2,735 950 3,053 Total administrative expenses from recurring activities Non-recurring administrative expenses arising from scheme of arrangement 14,984 3,259 14,254 – 18,243 14,254 PAGE 61 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 62 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Non-recurring administrative expenses: During the year the company incurred expenses of £3,259,000 (2020 – £Nil) relating to the scheme of arrangement, the majority of these expenses were professional fees for advice received. More details of the scheme of arrangement are provided on page 34. Auditor’s remuneration: For the year, the fees payable to KPMG LLP were £50,000 (2020 – £31,000) for the audit of the Company and £800,000 (2020 – £499,000) for the audit of the Group’s subsidiaries, together with £Nil (2020 – £Nil) for audit related assurance services and £Nil (2020 – £Nil) for other services. The increase in the cost of the audit for the Group’s subsidiary companies is mainly due to certain subsidiaries of the Company that were audited by a component auditor in previous years now being audited by KPMG LLP. In the UK, the average number of staff provided by the property and administrative management companies who performed roles for the Group totalled 183 (2020 – 203). The average number of full time equivalents whose staff costs were borne by the Group during the year was 129 (2020 – 146). The aggregate staff cost of these persons is shown above and can be analysed as follows: Salaries NI contributions Pensions 2021 £000 6,011 645 1,244 2020 £000 6,066 650 800 7,900 7,516 In addition the property and administrative management companies provide, under agency arrangements, staff to perform various caretaking roles. Those costs totalling £976,000 (2020 – £1,063,000) are included within property operating expenses (Note 3) under porterage, cleaning and repairs. Details of Directors’ remuneration are set out in the Directors’ Remuneration Report. 5. Finance Income and Expenses Finance income: Bank interest receivable Other finance income Finance expenses: Interest payable on bank loans Interest payable on mortgages Interest on overdue tax Interest on lease obligation payable Other interest payable 2021 £000 2020 £000 56 4,915 59 1,870 4,971 1,929 7,484 15,572 – 502 493 3,744 15,483 563 – 10 24,051 19,800 PAGE 62 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 63 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 6. Taxation Taxation based on the profit for the year of the Company and its subsidiaries: UK corporation tax UK prior year items Overseas taxation Total current tax Deferred tax Deferred tax – (reduction)/increase in future tax rate Total deferred tax Total tax charge Reconciliation of tax expense Profit before taxation Corporation tax at the standard UK rate of 19% (2020 – 19%) (Reduction)/increase in future tax rate Prior year items Impact of different tax rates Indexation and non-taxable items Non-allowable expenses Other Total tax charge 2021 £000 2020 £000 2,923 (1,029) 14,821 (243) 1,894 14,578 1,303 1,316 3,197 15,894 14,774 (453) (30,095) 27,642 14,321 (2,453) 17,518 13,441 71,974 (33,151) 13,675 (493) (229) 3,578 (793) 1,579 201 (6,299) 27,642 (243) (6,926) (1,716) 681 302 17,518 13,441 Current and deferred tax in the UK have been calculated at 19%, the enacted UK corporation tax rate at 31 March 2021 and 2020. The announced increase to 25% was not enacted into UK law until the summer of 2021 but will affect future charges. In the USA changes to certain USA state taxes meant that the rate of tax our USA results are subject to decreased slightly to 27.6% (2020 – 27.7%) leading to a small overall reduction in our tax charge of £493,000. The Group’s effective tax rate for the current year was 24% (2020 – 41%) a rate consistent with the UK and USA statutory rates. In the prior year as shown above, the recalculation of the deferred tax liabilities due to tax rate changes increased the tax charge by £27,642,000. Removing this amount and prior year tax credits of £243,000 our prior year effective tax rate in the UK was 15% and in the USA was 26%, consistent with the statutory rates in each country. 7. Earnings per Share Earnings per share is calculated on the profit, after taxation and non-controlling interests, of £54,598,000 (2020 loss of – £47,626,000) and the weighted average shares in issue during the year of 16,295,357 (2020 – 16,295,357). PAGE 63 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 64 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 8. Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 March 2019, paid 1 November 2019 @ 71p per share Interim dividend for the year ended 31 March 2020, paid 6 March 2020 @ 35p per share First interim dividend for the year ended 31 March 2021, approved 22 December 2020 @ 74p per share Second interim dividend for the year ended 31 March 2021, approved 19 March 2021 @ 35p per share 9. Investment Property Long Short Freehold leasehold leasehold £000 £000 £000 2021 £000 2020 £000 – – 11,570 5,703 12,059 5,703 – – 17,762 17,273 Total 2021 £000 Total 2020 £000 Balance at 1 April Gross up of head lease liability 2,081,315 – 416,239 – 26,706 2,524,260 2,532,518 8,401 – – Adjusted opening balance Disposals New acquisitions Additions to existing properties Revaluation (recognised in profit) Transfer to properties held for sale Foreign exchange movements (recognised in other comprehensive income) 2,081,315 (269) 68,061 8,139 416,239 (980) – 1,908 26,706 2,524,260 2,540,919 (4,677) (1,249) 29,818 68,061 18,071 10,047 – – – (2,900) – 35,465 – 1,252 – 33,817 – (90,494) (8,450) (61,289) (9,202) – (70,491) 39,073 Balance at 31 March 2,093,057 443,430 27,958 2,564,445 2,524,260 External, independent professional valuations of all the Group’s UK investment properties were carried out by Colliers International Property Advisers UK LLP, RICS Registered Valuers at 31 March 2021.The aggregate amount of £1,848.3 million (2020 – £1,843.8 million) is based on open market values, assessed in accordance with the RICS Valuation – Current Global Standards (incorporating the International Valuation Standards). The Group’s USA investment properties were independently professionally valued at 31 March 2021 by Metropolitan Valuation Services, Inc., USA Certified General Real Estate Appraisers. The aggregate amount of £726.0 million (2020 – £701.6 million) is based on open market values, assessed in accordance with the Standards of Professional Appraisal Practice of the Appraisal Institute. Both valuers have recent experience in the location and category of the property being valued. The aggregate professional valuations included in the above table have been reduced by an amount of £18.2 million (2020 – £21.2 million), relating to lease incentives included in Trade and other receivables and increased by an amount of £8.3 million (2020 – £8.4 million) relating to lease obligations. PAGE 64 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 65 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 As explained in Note1(u), property valuations are inherently subjective, depending on many factors, including the individual nature of each property, its location and expected future net rental values, market yields and comparable market transactions. These fair value measurements are unrealised and classified as Level 3 as defined by IFRS 13 Fair Value Measurement. There have been no transfers between the levels of fair value hierarchy during the year. Valuation techniques and key inputs We set out the valuation techniques used below and the key inputs used in these valuation techniques are set out in the tables over the page. UK commercial property was valued using the income capitalisation method, requiring the application of the appropriate market based yield to net operating income. Adjustments are made to allow for voids when less than five years are left under the current tenancy and to reflect market rent at the point of lease expiry or rent review. Estimated fair value is sensitive to and would increase if either net operating income increased or estimated yield decreased. UK residential property was valued using a sales valuation approach, derived from recent comparable transactions in the market, adjusted by applying discounts to reflect the status of occupation and condition. The largest discounts for the status of occupation were applied to those properties subject to registered tenancies, reflecting the relative difference in security of tenure, whilst the smallest discounts were applied to those properties subject to assured shorthold tenancies. The base discount for condition was maintained at 10% in 2021 reflecting current estimates of costs being incurred. It is estimated that an increase of one percentage point in this discount would result in a decrease of £9.1 million (2020 – £8.8 million) in the value of investment property. Estimated fair value is sensitive to and would increase if the sales values increased. USA commercial and residential properties (excluding co-operative apartments) have been valued using the application of a capitalisation rate, based on recent arm’s length transactions, to an assessment of stabilised net income, and for residential properties the values are cross-checked to recent comparative sales evidence. USA commercial and residential estimated fair value is sensitive to and would increase if either capitalisation rates decreased or estimated rental values increased. USA co-operative residential apartments have been valued using the application of a discount rate, based on recent arm’s length transactions, to an assessment of net income over the period to full reversion, cross-checked to recent comparative sales evidence. USA unsold co-operative residential apartments estimated fair value is sensitive to and would increase if either discount rates decreased, estimated rental values increased or estimated sales values increased. PAGE 65 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 66 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 2021 Fair Value Rental value £ per sq ft Equivalent Yield % £000 Low Average High Low Average High UK Commercial Office Units Greater London UK – South UK – North Retail Units Greater London UK – South UK – North Industrial Units All UK 293,536 35,386 8,454 231,773 111,756 18,851 7.8 2.0 3.4 6.4 0.2 2.6 56.9 13.7 11.0 25,3 14.1 9.5 76.7 47.2 17.0 66.0 37.2 26.0 5.0% 12.9% 3.8% 2.6% 7.7% 19.9% 7.3% 11.1% 14.0% 6.8% 35.6% 1.0% 2.2% 8.4% 20.7% 7.5% 11.6% 15.7% 54,735 2.0 10.0 33.1 4.3% 7.5% 27.3% Leisure and Service Units All UK 239,082 4.4 19.2 46.2 5.3% 6.7% 14.9% Land and Development All UK 1,401 – – – – – – Total UK Commercial 994,974 UK Residential Greater London UK – South UK – North Total UK Residential Total UK USA Commercial Massachusetts, Philadelphia 768,903 88,538 3,979 861,420 1,856,394 Sales value £ per sq ft 1,499 794 311 541 331 133 246 187 112 Rental value £ per sq ft Capitalisation rate % and New Jersey 96,793 9.4 27.8 32.1 5.0% 5.3% 7.5% Total USA Commercial 96,793 USA Residential Apartments New York City Florida Other States 154,300 272,213 116,254 Rental value £ per sq ft 25.0 10.7 8.3 11.8 10.1 7.8 13.5 11.4 10.6 Capitalisation rate % 5.5% 6.3% 5.5% 5.2% 5.6% 5.3% 4.0% 4.3% 4.8% New York City – unsold co-operative Total USA Residential Total USA Total Group Less lease incentives 86,644 3.1 13.1 78.7 8.0% Discount rate % 9.5% 12.0% 629,411 726,204 2,582,598 (18,153) 2,564,445 PAGE 66 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 67 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 2020 Fair Value Rental value £ per sq ft Equivalent Yield % £000 Low Average High Low Average High UK Commercial Office Units Greater London UK – South UK – North Retail Units Greater London UK – South UK – North Industrial Units All UK 297,195 36,556 9,797 254,988 129,197 20,728 7.8 2.0 3.2 6.4 0.2 2.1 59.2 13.6 11.2 26.2 20.0 9.5 81.2 47.2 17.0 75.1 60.1 26.0 4.8% 12.4% 3.3% 2.6% 8.6% 48.1% 7.5% 11.7% 18.1% 6.8% 15.4% 1.0% 2.2% 8.2% 21.4% 6.0% 11.0% 16.2% 47,513 2.0 9.3 29.5 5.3% 10.9% 27.3% Leisure and Service Units All UK 213,560 4.4 20.2 42.4 4.8% 6.2% 14.5% Land and Development All UK 1,563 – – – – – – Total UK Commercial 1,011,097 UK Residential Greater London UK – South UK – North Total UK Residential Total UK USA Commercial Massachusetts, Philadelphia 741,498 87,343 3,847 832,688 1,843,785 Sales value £ per sq ft 1,543 831 316 505 315 133 241 182 105 Rental value £ per sq ft Capitalisation rate % and New Jersey 107,768 9.0 29.6 34.1 5.0% 5.2% 6.5% Total USA Commercial 107,768 USA Residential Apartments New York City Florida Other States 165,202 212,390 120,029 Rental value £ per sq ft 28.6 11.9 8.8 13.2 10.6 7.7 15.3 12.3 10.7 Capitalisation rate % 5.5% 6.0% 5.5% 5.2% 5.5% 5.3% 3.8% 5.3% 4.8% New York City – unsold co-operative Total USA Residential Total USA Total Group Less lease incentives 96,249 3.5 13.9 63.5 8.0% Discount rate % 9.5% 12.0% 593,870 701,638 2,545,423 (21,163) 2,524,260 There are inter-relationships between the groups of inputs as they are determined by market conditions. Movements in more than one input having the effect of increasing fair value could give rise to a magnifying effect on the valuation. Due to the number of properties included in the Group’s valuations, it is impracticable to disclose the extent of the possible effects of each assumption and it is possible that outcomes that are different from the current assumptions could result in a material adjustment to the valuation. PAGE 67 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 68 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued The present value of future minimum lease payments in relation to leasehold investment properties is £8.3 million at 31 March 2021 (2020 – £8.4 million). In determining the present value, the Group used the estimated incremental borrowing cost at the date of transition as the discount rate. In accordance with the accounting policy described in Note 1(h) following the introduction of IFRS 16 Leases, a right of use asset has been recognised in the property valuation. Reconciliation between the total of future minimum lease payments and their present capital values 2021 Present Minimum Interest lease on lease value Minimum lease of lease 2020 Interest Present value on lease of lease payments payments liabilities £000 £000 £000 payments payments £000 £000 liabilities £000 Due within one year 537 Due within two to five years 2,147 Due after more than five years 42,646 (498) (1,969) (34,557) 39 178 8,089 539 2,157 43,205 (501) (1,983) (35,051) 38 174 8,154 45,330 (37,024) 8,306 45,901 (37,535) 8,366 Capital commitments, arising from contractual obligations not yet invoiced or paid, for the purchase, construction, development or enhancement of investment properties, amounted to £9.8 million at 31 March 2021 (2020 – £7.9 million). 10. Deferred Tax Assets and Liabilities 2021 2020 Assets Liabilities £000 £000 Net £000 Assets Liabilities £000 £000 Net £000 Investment property Accelerated tax depreciation Financial instruments – – 234 (267,638) (267,638) (33,079) (33,079) 234 – – (265,918) (265,918) (31,724) – 506 506 (31,724) – 234 (300,717) (300,483) 506 (297,642) (297,136) The movement in deferred tax is as follows: Accelerated tax Financial Investment depreci- instru- property £000 ation £000 ments £000 Total 2021 £000 Total 2020 £000 Balance at 1 April Recognised in income Foreign exchange movements (265,918) (31,724) (3,821) 2,466 (10,228) 8,508 506 (297,136) (272) (14,321) 10,974 – (293,205) 2,453 (6,384) Balance at 31 March (267,638) (33,079) 234 (300,483) (297,136) PAGE 68 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 69 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 11. Trade and Other Receivables Non-current assets Loan to a rental party Further detail is provided in Note 18. Current assets Rent and service charges debtor Rent and service charges accrued Other debtors and prepayments Mortgages granted repayable within one year Corporation tax recoverable The ageing of rent and service charge receivables was as follows: Not past due Past due by less than one month Past due by one to three months Past due by three to six months Past due by more than six months Impairment Net 2021 £000 2020 £000 222,693 – 2021 £000 2020 £000 40,149 2,961 34,407 622 5,004 42,592 3,915 27,836 468 2,165 83,143 76,976 2021 £000 26,171 7,877 2,221 4,355 14,663 2020 £000 31,679 9,059 2,362 3,720 7,531 55,287 (12,177) 54,351 (7,844) 43,110 46,507 The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows: Balance at 1 April Amounts written back/(loss) Movement in allowance for impairment Balance at 31 March 2021 £000 7,844 621 3,712 2020 £000 7,672 (1,319) 1,491 12,177 7,844 PAGE 69 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 70 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 12. Cash and Cash Equivalents Bank balances Short term deposits 2021 £000 2020 £000 131,901 219 146,056 219 Cash and cash equivalents in the balance sheet and cash flow statement 132,120 146,275 Included within bank balances are tenants’ deposits of £4,184,000 (2020 – £4,489,000) in the UK and £2,754,000 (2020 – £3,109,000) in the USA, which cannot be used in the ordinary course of business. 13. Properties held for sale Properties held for sale are recorded at their fair value of £8.45 million (2020 – £8.45 million). The fair value is a Level 3 valuation as defined by IFRS 13 and is based on offers received discounted for risks of completion. Subsequent to the year end, the Group completed the sale of the properties concerned and has received the consideration. 14. Share Capital Allotted, called up and fully paid: Ordinary shares of 25 pence per share Number 2021 £000 2020 £000 16,295,357 4,074 4,074 The Company has one class of share, which carries no special rights or rights to fixed income. There are no restrictions on the transfer of these shares or restrictions on voting rights. 15. Trade and Other Payables Rent and service charges charged in advance Other creditors and accruals Derivative financial instruments Lease obligations payable 2021 £000 25,394 40,664 1,229 39 2020 £000 26,080 32,551 2,663 38 67,326 61,332 PAGE 70 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 71 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 16. Loans and Borrowings Non-current liabilities Mortgages Bank loans Current liabilities Mortgages Bank loans Total loans and borrowings Mortgages Bank loans 2021 £000 2020 £000 385,196 340,597 349,635 119,553 725,793 469,188 4,786 598 20,312 1,427 5,384 21,739 389,982 341,195 369,947 120,980 731,177 490,927 All mortgages and bank loans are secured on specific investment properties owned by subsidiary undertakings. The maturity profile of the Group’s loans and borrowings was as follows: Due within one year Due within one to two years Due within two to five years Due after more than five years 2021 Bank loans £000 Mortgages £000 598 598 339,999 – 4,786 5,516 50,791 328,889 Total £000 5,384 6,114 390,790 328,889 2020 Total £000 21,739 13,066 137,268 318,854 341,195 389,982 731,177 490,927 The risk profile of the Group’s loans and borrowings, after taking account of interest rate swaps, was as follows: 2021 Fixed Floating £000 £000 Total £000 Fixed £000 2020 Floating £000 Total £000 Sterling US Dollar 59,154 311,195 370,349 – 360,828 360,828 60,245 339,702 90,980 – 151,225 339,702 419,982 311,195 731,177 399,947 90,980 490,927 PAGE 71 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 72 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Floating rate bank loans bear rates based on LIBOR. The Group’s interest rate swaps are set out in Note 17 on page 75. The interest rate profile of the Group’s fixed rate mortgages was as follows: Per cent. 2.5-3.0 3.0-3.5 3.5-4.0 4.0-4.5 4.5-5.0 5.0-5.5 5.5-6.0 6.0-6.5 2021 £000 2020 £000 43,776 92,093 139,667 42,659 42,632 13,132 6,925 9,098 – 129,924 111,859 50,794 47,125 13,403 7,042 9,800 389,982 369,947 The weighted average rate and the weighted average term of the Group’s fixed rate loans and borrowings (after taking account of interest rate swaps) were as follows: Sterling US Dollar 2021 % 3.65 3.70 2020 % 3.69 3.83 2021 Years 9.1 8.3 2020 Years 10.1 8.4 17. Financial Assets and Liabilities The Group’s financial instruments are analysed into categories as follows: 2021 2020 Carrying amount £000 131 131 (1,229) (1,229) 305,836 132,120 437,956 (66,058) (8,306) (341,195) (389,982) Financing income/ (expense) £000 – – 1,434 1,434 4,915 56 4,971 (493) (502) (7,484) (15,572) Carrying amount £000 130 130 (2,663) (2,663) 76,976 146,275 223,251 (58,669) (8,328) (120,980) (369,947) Financing income/ (expense) £000 (21) (21) (1,335) (1,335) 1,870 59 1,929 (10) (21) (3,744) (15,462) Current asset investments Current assets at fair value through profit or loss Derivative financial instruments Current liabilities at fair value Trade and other receivables Cash and cash equivalents Current assets at amortised cost Trade and other payables Lease obligations payable Floating rate loans and borrowings Fixed rate loans and borrowings Current and non-current liabilities at amortised cost (805,541) (24,051) (557,924) (19,237) Total financial instruments (368,683) (17,646) (337,206) (18,664) PAGE 72 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 73 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 The finance income of £1,434,000 (2020 – finance expense £1,335,000) relating to derivative financial instruments is stated net of £70,000 expense (2020 – £66,000 income) relating to credit risk movements. Fair values of financial instruments With the exception of fixed rate loans and borrowings, the Group’s financial instruments are shown in the table above at fair value. Fixed rate loans and borrowings are stated at amortised cost as shown in the table above and as explained in Note 1(t). The fair value of fixed rate loans and borrowings was £429,286,000 (2020 – £425,101,000). At both the current and preceding year end there were no non-recurring fair value measurements. The Group does not hedge account and all its interest rate swaps and caps are initially recognised, and subsequently recorded, at fair value, with any movement being recorded in the consolidated income statement. The fair values of all interest rate swaps, caps and fixed rate loans and borrowings are determined by reference to observable inputs that are classified as Level 2 in the fair value hierarchy set out in IFRS 13 Fair Value Measurement. Fair values have been determined by discounting expected future cash flows using market interest rates and yield curves over the remaining term of the instrument, as adjusted to reflect the credit risk attributable to the Group and, where relevant, its counterparty. Financial instrument risk management In common with all businesses, the Group is exposed to the following types of risk which arise from its use of financial instruments: Credit risk Liquidity risk Market risk This note presents information about the nature of the Group’s exposure to such risks, its objectives, policies and processes for measuring and managing risk and the Group’s management of capital. Reference to disclosures given elsewhere in the financial statements is included as appropriate. The Board has overall responsibility for determining the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, has delegated to the finance function the authority for designing and operating processes that ensure the effective implementation of those objectives. The overall objectives of the Board are to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Credit risk The Group’s exposure to credit risk arises from the potential financial loss if a tenant or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s trade receivables from tenants and from a loan made during the year to a connected company. Trade receivables The majority of the Group’s rental income is demanded quarterly in advance and demands are sent out prior to the due date, although the Group did agree to some temporary variations to this for a small number of commercial tenants during the height of the Covid-19 pandemic. Management monitors arrears continually and prompt action is taken to address potential defaults as appropriate. The credit worthiness of each tenant is assessed prior to the agreement of the lease. Where appropriate, collateral is required by the Group to support lease obligations. In many cases this takes the form of a tenant security deposit but also includes parent company guarantees, bank or other guarantees where appropriate. Provision is made based upon an expected credit loss model, with full provision for impairment usually being made where a tenant is in arrears for more than a year. Details of the Group’s trade receivables and the extent of impairment provisions against them are set out in Note 11. PAGE 73 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 74 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Due to the large number of tenants across various sectors and geographical locations, the Board does not consider there to be a significant concentration of credit risk. Other receivables Included in other debtors and prepayments in Note 11 is a material loan made to a connected company which is wholly controlled by the Freshwater family. The risk of default is considered remote. Cash and derivative financial instruments The credit rating of counterparties to financial instruments is kept under review. The Group’s interest rate swaps are currently out-of-the-money; consequently, counterparty risk on swaps does not represent a major risk at the current time. The counterparty risk on cash and short-term deposits is managed by limiting the aggregate exposure to any institution by reference to their credit rating. Such balances are generally placed with major financial institutions where credit risk is not considered significant. Maximum exposure The aggregate carrying amounts of the Group’s financial assets, which are stated net of impairment provisions, represents the Group’s maximum exposure to credit risk, before taking into account the value of the tenant security deposits held and other collateral. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due and arises from the Group’s management of its working capital and the finance charges and amortisation of its loans and borrowings. The Group’s policy is to seek to maintain cash balances to meet all short and medium term requirements. The Group has a low level of gearing relative to the property investment sector as a whole and has long standing relationships with many leading banks and financial institutions from which the Board expect to be able to raise further funds if required. At 31 March 2021, gearing was 24.3% (2020 – 17.8%) (see note 23). Cash and short-term deposits at 31 March 2021 were £132.1 million (2020 – £146.3 million) and £5.4 million of loans and borrowings were repayable within one year (2020 – £21.7 million). In addition, at the same date, the Group had undrawn committed facilities of £55.0 million (2020 – £55.0 million), which expire in 2024. The maturity analysis of the undiscounted cash flows arising from the Group’s financial liabilities at 31 March 2021 was as follows: Bank loans Mortgages Interest Interest rate swaps Lease obligations payable Trade and other payables Carrying amount £000 341,195 389,982 – 1,815 8,306 66,058 2021 Aggregate undiscounted Due within Due within cash flows one year 1-2 years 2-5 years £000 £000 598 339,999 £000 341,195 389,982 142,825 3,387 45,330 66,058 £000 598 4,786 22,148 466 537 66,058 5,516 21,598 466 537 – Due Due after within more than 5 years £000 – 50,791 328,889 46,162 52,917 1,093 1,362 42,646 1,610 – – 807,356 988,777 94,593 28,715 446,679 418,790 PAGE 74 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 75 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 Aggregate undiscounted cash flows £000 120,980 369,947 125,756 2,254 45,901 58,669 2020 Due within one year £000 1,427 20,312 17,687 268 539 58,669 Due within 1-2 years £000 1,629 11,437 16,827 268 539 – Due Due after within more than 5 years £000 – 318,854 48,155 915 43,205 – 2-5 years £000 117,924 19,344 43,087 803 1,618 – 723,507 98,902 30,700 182,776 411,129 Carrying amount £000 120,980 369,947 – 2,663 8,328 58,669 560,587 Bank loans Mortgages Interest Interest rate swaps Lease obligations payable Trade and other payables Market risk Market risk arises mainly from the impact that changes in interest rates might have on the cost of Group borrowing and the impact that changes in the US dollar/sterling rate of exchange might have on the Group’s recognition of its USA net assets. Interest rates The Group seeks to reduce the interest rate risk by fixing rates on a majority of its loans and borrowings, whilst maintaining some loans at floating rates in order to retain flexibility in relation to short term interest rates. Interest rates are fixed either through the use of fixed rate mortgage finance or through interest rate swaps. On the new £225 million borrowing, the Group capped its exposure to interest rate movements by entering into £225 million of 0.5% interest caps. The Group does not speculate in treasury products but uses these only to limit exposure to potential interest rate fluctuations. The interest rate profile of the Group’s loans and borrowings is set out in Note 16. It is estimated that a general increase of one percentage point in interest rates would decrease the Group’s profit before taxation by approximately £3.1 million per annum, on the basis of the floating rate debt outstanding at 31 March 2021, after taking account of the interest swaps and caps in place. There also exists a risk to the income statement arising from the recognition and re-measurement of interest rate swaps at fair value. It is estimated that a general increase of one percentage point in interest rates would give rise to a reduction in fair value of interest rate swaps outstanding at 31 March 2021 of £2.2 million, together with a corresponding increase in the Group’s profit before taxation. Derivative financial instruments The derivative financial instruments held by the Group at the year end were as follows: Class Maturing within 2 – 5 years Cap Maturing after 5 years Swap 2021 % 0.5 1.6 Contracted rate Notional principal 2021 2020 2020 £000 % £000 – – 225,000 30,000 30,000 1.6 Fair value 2021 £000 (586) 1,815 2020 £000 – 2,663 255,000 30,000 1,229 2,663 Foreign exchange rates The Group seeks to reduce its exposure to foreign currency risk in relation to its USA net assets by funding its USA investment property with US dollar denominated loans and borrowings. As the Group’s investment in USA assets are held for the long term and funds are not usually returned to the UK, the Group’s policy is not to hedge its residual exposure. Management monitors exchange rates on a regular basis and elects to transfer funds only when the rate is favourable to do so. PAGE 75 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 76 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued It is estimated that a ten percentage point decrease in the value of the US dollar against sterling would result in a decrease in the sterling value of the Group’s USA net assets of £47.4 million. Capital management The capital structure of the Group consists of equity attributable to equity holders of the parent together with net debt. This is kept under constant review to ensure the Group has sufficient capital to fund its operations and that the Group’s strategy of low gearing is maintained. The Group seeks to maintain a balance between longer-term finance appropriate to fund its long-term investment property holding strategy and medium-term finance which provides a more cost effective source of finance. Equity comprises issued share capital, reserves and retained earnings as set out in the consolidated statement of changes in equity. Net debt comprises a mix of fixed rate mortgages and shorter-term bank loans as set out in Note 16 and cash and short term deposits as set out in Note 12. All loans and borrowings are secured against investment property and the bank loans are drawn against committed facilities. 18. Related Party Transactions Day-to-day management of the Group’s properties and its operations in the UK is mainly carried out by Highdorn Co. Limited (“Highdorn”) and by Freshwater Property Management Limited (“FPM”). Mr B S E Freshwater and Mr S I Freshwater are Directors of both companies. They have no beneficial interest in the share capital of Highdorn. Mr B S E Freshwater, Mr S I Freshwater and Mr D Davis are Directors of the parent company of FPM but have no beneficial interest in either company. Mr C B Freshwater and Mr R E Freshwater have a beneficial interest in a trust holding interests in shares in Highdorn. In their capacity as property managing agents, Highdorn and FPM collect rents and incur direct property expenses on behalf of the Group. At 31 March 2021, the aggregate net amounts due to the Group from Highdorn and FPM was £5.4 million (2020 – £4.0 million due to the Group from Highdorn and FPM). These amounts are not secured and are payable on demand. No guarantees have been given or received and the amounts are settled in cash. Included in the balance above are amounts paid and payable by the Group for the provision of property and other management services to Highdorn and FPM, which were as follows: Balance due to related party managing agents at 1 April Charged during the year Paid during the year Balance due to related party managing agents at 31 March 2021 £000 2020 £000 2,510 4,424 (4,805) 2,285 4,537 (4,312) 2,129 2,510 Mr B S E Freshwater, Mr S I Freshwater and Mr D Davis are trustees of two charities that own 6.3% of the share capital of the Company. These charities have received dividend payments in the year of £1,113,786 (2020 – £1,083,131). The Directors’ interests in the Company and the principal shareholders are described on pages 35 and 36. The Board considers that the Directors are the key management personnel of the Group and their remuneration is disclosed on page 42. In June 2020 the Group lent £225,000,000 to Dock Newco Limited at a commercial arms’ length interest rate of LIBOR plus 1.85%. The loan is due for repayment on 21 February 2025. Mr B S E Freshwater and Mr S I Freshwater are directors of Dock Newco Limited but have no beneficial interest in the share capital of the company or of its ultimate holding company. Mr C B Freshwater and Mr R E Freshwater are included within a wide class of potential beneficiaries PAGE 76 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 77 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 of trusts that hold shares in the ultimate parent of Dock Newco Limited. Dock Newco Limited owns 20.5% of the share capital of Daejan Holdings Limited. During the year the Group charged Dock Newco Limited £4,473,000 in interest and associated fees (included in other finance income, note 5) and as at the end of the year Dock Newco Limited owed the Group £222,693,000 (included in other debtors, note 11). Certain of the first and second declared interim dividends remain outstanding at year end amounting to £5,886,000 (included in other creditors, note 15) and are due to a number of shareholding companies that are related parties as Mr B S E Freshwater and Mr S I Freshwater are directors of these companies. The ultimate controlling shareholders of these companies are trusts that Mr A M Freshwater, Mr C B Freshwater and Mr R E Freshwater have beneficial interests in. 19. Contingent Liabilities The Group is from time to time party to legal actions arising in the ordinary course of business. The Directors are not aware of any current actions which could have a material adverse effect on the financial position of the Group. 20. Operating Lease Agreements The Group earns rental income by leasing its investment properties to tenants under operating leases which vary in terms and provisions between type of property and type of tenure. Leases providing for contingent rents are rare within the Group’s property portfolio and no amounts for contingent rents are included in rental income for the year (2020 – £Nil). At the balance sheet date, future minimum lease payments receivable by the Group under operating leases were as follows: Due within one year Due within one to two years Due within two to five years Due after more than five years 2021 £000 2020 £000 89,411 60,223 133,406 359,763 66,682 57,186 145,741 377,516 642,803 647,125 Many of the Group’s residential properties are let under assured shorthold tenancies which typically are for initial terms of 12 months or less, whereafter they are cancellable at short notice. The Group’s experience is that a significant proportion of such tenancies are held over after the expiry of their initial term. PAGE 77 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 78 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 21. Notes to the Consolidated Statement of Cash Flows Cash generated from operations Net operating profit/(loss) before net financing costs Adjusted for: Net valuation (gain)/loss on investment property (Note 9) Net gain on sale of investment property 2021 £000 2020 £000 89,620 (13,924) (33,817) (3,248) 90,494 (15,775) Cash flows from operations before changes in working capital 52,555 60,795 Changes in working capital: Change in trade and other receivables Change in trade and other payables Working capital movement Cash generated from continuing operations Change in liabilities during the year relating to financing activities Total loans and borrowings at 1 April (Note 16) Repayment of bank loans New bank loans in year Repayment of mortgages New mortgages Foreign exchange impact Total loans and borrowings at 31 March (Note 16) 3,476 3,164 (8,907) 6,547 6,640 (2,360) 59,195 58,435 2021 £000 2020 £000 490,927 (1,505) 221,720 (40,024) 92,816 (32,757) 430,754 (2,135) 30,000 (36,150) 52,469 15,989 731,177 490,927 PAGE 78 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 79 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 22. Subsidiary Undertakings At 31 March 2021, except where indicated, the following were indirect subsidiaries of the Company, where the Company’s direct and indirect interest is in ordinary shares. All were wholly owned, except as indicated and are included in the consolidated financial statements. Incorporated in Great Britain and registered in England and Wales Registered office: Freshwater House, 158 – 162 Shaftesbury Avenue, London WC2H 8HR Agecroft Estates Limited Alsam Limited Astral Estates (London) Limited Bagnight Limited* Bampton (B&B) Limited Bampton (Redbridge) Limited Bampton Holdings Limited Bampton Homes Limited Bampton Management Limited Bampton Property Group Limited (The) Brickfield Properties Limited Chilon Investment Co. Limited City and Country (Londonderry House) Limited City and Country Properties (Birmingham) Limited City and Country Properties (Camberley) Limited City and Country Properties (Estates) Limited City and Country Properties (Gillingham) Limited City and Country Properties (Leeds) Limited City and Country Properties (Midlands) Limited City and Country Properties Limited Coindragon Limited* Coineagle Limited* Coinface Limited Coinmad Limited* Coinmoat Limited* Coinorbit Limited* Coinpilot Limited* Coinreach Limited* Coinsmart Limited* Coinspear Limited* Coinsun Limited Consbrix Developments Limited Cromlech Property Co. Limited (The) Crozera Limited Daejan (Brentford) Limited* Daejan (Brighton) Limited Daejan (Cambridge) Limited Daejan (Cardiff) Limited Daejan (Care Homes) Limited* * Directly owned Daejan (Dartford) Limited Daejan (Design & Build) Limited* Daejan (Durham) Limited Daejan (FH 1998) Limited Daejan (FHNV 1998) Limited Daejan (Hanger Hill) Limited* Daejan (High Wycombe) Limited Daejan (Kingston) Limited Daejan (Lauderdale) Limited Daejan (Norwich) Limited Daejan (NUNV) Limited Daejan (NUV) Limited Daejan (PF) Limited Daejan (Reading) Limited Daejan (Taunton) Limited Daejan (UK) Limited* Daejan (US) Limited* Daejan (Warwick) Limited Daejan (Watford) Limited Daejan (Wimbledon) Limited* Daejan (Worcester) Limited Daejan Commercial Properties Limited Daejan Developments Limited Daejan Enterprises Limited Daejan Estates Limited Daejan Investments (Grove Hall) Limited Daejan Investments (Harrow) Limited Daejan Investments (Park) Limited Daejan Investments Limited Daejan Metropolitan Investments Limited* Daejan Properties Limited Daejan Retail Properties Limited Daejan Securities Limited* Daejan Services Limited* Daejan Traders Limited* Daneryn Limited* Derlingrange Limited* Ealux Limited Endell Developments Limited* Endell Properties Limited* Endell Real Estate Limited* Esslock Limited PAGE 79 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 80 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Fifth Charles Investments Limited* First Charles Investments Limited* Foredale Limited* Gertsbrix Developments Limited Grapeseal Limited* Halliard Property Co. Limited (The) Hampstead Way Investments Limited Inputstock Limited Inputstripe Limited Insworth Investments Limited* Johnsbrix Developments Limited Kingforge Limited* Kintsilk Investments Limited Lawnstamp Limited Lesbrix Developments Limited Limebridge Co. Limited Lookstate Limited * Directly owned Lyme & Farrar Limited Marfred Limited Mineral and General Investments Limited Modboon Limited* Mont Investments Limited Offerworld Limited Pegasus Investment Company Limited Ronend Properties Limited* Rosebel Holdings Limited Seaglen Investments Limited Semlark Limited* Simlock Limited St. Leonards Properties Limited Strand Palace Hotel Limited* Summerseas Investment Co. Limited Wisebourne Limited* Workvideo Limited * Incorporated in Guernsey Registered office: Bordage House, Le Bordage, St Peter Port, Guernsey GY1 1BU Daejan Financing Limited Three Dials Limited Four Dials Limited Eight Dials Limited Nine Dials Limited Ten Dials Limited Incorporated in the Isle of Man Registered office: 8 St George’s Street Douglas IM1 1AH Temple Investments Limited Incorporated in Curaçao Registered office: Schottegatweg Oost 44, Curaçao Daejan Holdings N.V. Incorporated in the USA Registered office, except as noted in (i) to (vii) below: 1651 Coney Island Avenue, Brooklyn, NY 11230 22-04 Collier Avenue LLC 77NW LLC 200 Portland LLC 260 Realty Associates** 427 West 51st Street Owners Corp. 611 West 158th Street Corp. 670 River Realty Corp. 730 GC Realty Corp. 1750 GC LLC 3380 Nostrand LLC Ace 2160 Wallace LLC Ace 2180 Wallace LLC Ace 2181 Barnes LLC Ace 2181 Wallace LLC CM Bucks Landing 120 LLC Daejan 1010 Regency LLC(i) Daejan 11 E Chase LLC(i) Daejan 77 Inc.(vii) Daejan 3120 Court LLC(i) Daejan Astoria LLC Daejan Baltimore Inc. Daejan Chesterfield LLC(ii) Daejan Crossroads LLC Daejan Enterprises Inc. PAGE 80 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 81 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 Daejan Fisherman’s Landing LLC(iii) Daejan Greenwich Commons LLC(iv) Daejan Hidden Palms LLC(iii) Daejan Holdings (U.S.) Inc.*(vi) Daejan Inverrary LLC Daejan Lauderhill Inc. Daejan Lycoming LLC, Inc. Daejan N.Y. Ltd. Daejan Oak Manor, Inc.(v) Daejan Portland, Inc. DJN Crossroad, Inc. DJN Greenwich Inc. DJN Raritan LLC Ivory 1150 Concourse Corp. Ivory 1166 G.C. Realty Corp. Ivory 3045 Grand Concourse Corp. Ivory 3591 Bainbridge Corp. Ivory 3780 Bronx Blvd. Corp. Ivory 3908 Bronx Realty Corp. Ivory 780 Grand Corp. Ivory 790 G.C. Corp. Madison Oaks Apartment Homes LLC(ii) New Franconia Associates*** Newport Colony Apartment Homes LLC(ii) Sevens G.C. Realty Corp. Tampa Sunscape Inc. Waterford Park Apartment Homes LLC(ii) Registered offices: (i) 6800 Liberty Road, Baltimore, MD 21207; (ii) 4200 Inverrary Blvd, Lauderhill, FL 33319; (iii) 14555 Bruce D. Downs Blvd, Tampa, FL 33613; (iv) 14608 43rd Street, Tampa, FL 33813; (v) 5105 Mission Hills Ave, Tampa, FL 33617; (vi) 1105 North Market Street, Wilmington, NY 19899; (vii) 65 Franklin Street, Suite 401, Boston, MA 02110. * Directly owned ** 75% owned *** 70% owned 23. Alternative Performance Measures The directors use a number of alternative performance measures within this Annual Report to provide more relevant explanations of the Group’s financial position and performance. Provided below are explanations for each such measure and reconciliations to relevant IFRS balances. Underlying profit before tax The directors consider “underlying profit before tax” which excludes unrealised changes in the valuation of property and certain financial instruments to be a useful measure as it represents the element of our results that has actually been realised. It represents the performance of our core rental business together with disposal profits which tend to fluctuate from year to year. It is our underlying profit before tax which generates the cash we use to re-invest in the business and to pay dividends and taxes. Profit/(loss) before tax per the income statement (Deduct)/add back property valuation losses/(gains) (Deduct)/add back financial instruments fair value (gains)/losses Add back realised valuation gains on property disposals Underlying profit before tax 2021 £000 2020 £000 71,974 (33,817) (1,434) 1,118 (33,151) 90,494 1,356 59,901 37,841 118,600 Shareholders’ funds per share The directors consider that shareholders’ funds per share is a useful measure as it reflects the fair value of the investment property we hold and is a common measure used across the property industry. It is calculated by dividing the total equity attributable to equity holders of the parent by the weighted average number of shares in issue during the period. Total equity attributable to equity holders of the parent (£000) Weighted average number of shares in issue during the year 1,901,176 1,895,963 16,295,357 16,295,357 Shareholders funds per share (£) 116.67 116.35 2021 2020 PAGE 81 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 82 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Gearing The Group considers gearing to be the ratio of our loans and borrowings to the value of our total assets. As the majority of our loans and borrowings are secured on our investment property assets, our gearing ratio is useful as it indicates our capacity to borrow further to invest in our business and also shows the level of headroom we have in case of adverse property valuation movements. 2021 UK £000 2021 USA £000 2021 Total £000 2020 UK £000 2020 USA £000 2020 Total £000 Loans and borrowing (Note 16) Total assets Gearing 370,349 2,188,246 151,225 360,828 731,177 822,970 3,011,216 1,947,833 339,702 490,927 808,764 2,756,597 16.9% 43.8% 24.3% 7.8% 42.0% 17.8% Valuation of investment properties Valuation gains or losses on investment properties is a key metric for property companies and is presented on the face of the income statement. To assist a reader’s understanding, we also express the net revaluation gains or losses recognised during the year as a percentage of the value of investment property at the start of the year. Where a property’s value is not denominated in sterling, such as those in the USA, the opening value is first adjusted for the impact of movements in exchange rates during the year. 2021 UK £000 2021 USA £000 2021 Total £000 2020 UK £000 2020 USA £000 2020 Total £000 Carrying value at 1 April (Note 9) Gross up of head lease liability Foreign exchange movements 1,826,641 – – 697,619 2,524,260 1,785,746 8,159 – – (70,491) – (70,491) 746,772 2,532,518 8,401 39,073 242 39,073 Value at 1 April at year end exchange rate Acquisitions Additions to existing properties Disposals Revaluation Transfer to properties held 1,826,641 581 6,205 (269) 8,210 627,128 2,453,769 1,793,905 68,061 29,818 10,047 11,768 (1,249) (3,405) 33,817 3,005 67,480 3,842 (980) 25,607 786,087 2,579,992 29,818 18,071 (4,677) (90,494) – 6,303 (1,272) (93,499) for sale – – – (8,450) – (8,450) Carrying value at 31 March (Note 9) 1,841,368 723,077 2,564,445 1,826,641 697,619 2,524,260 Valuation gain percentage 0.4% 4.1% 1.4% 0.2% (11.9)% (3.5)% 24. Ultimate controlling party The Freshwater Family are considered to be the ultimate controlling party by virtue of all shares in issue, with the exception of the 763 shares beneficially owned by Mr D Davis, being held by or on behalf of themselves, other members of their families and their charitable interests. 25. Events after the reporting period On 30 June 2021, the Group completed the sale of a property included in Properties held for sale with a carrying value of £8.45 million. There were no other significant events occurring after the reporting period, but before the financial statements were authorised for issue. PAGE 82 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 83 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 COMPANY BALANCE SHEET as at 31 March 2021 Fixed assets Investment in subsidiary undertakings Deferred tax assets Loan to a related party Current assets Debtors Cash at bank Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Other reserves Profit and loss account Equity shareholders’ funds Notes £000 2021 £000 £000 2020 £000 4 1,198,266 345 222,693 1,421,304 1,243,319 506 – 1,243,825 10,912 40,107 51,019 19,283 29,167 48,450 5 (229,658) (317,896) (178,639) (269,446) 6 7 1,242,665 (62,585) 1,180,080 4,074 555 893 1,174,558 1,180,080 974,379 (62,826) 911,553 4,074 555 893 906,031 911,553 The financial statements of Daejan Holdings Limited (Company number 305105) on pages 83 to 87 were approved by the Board of Directors on 1 September 2021 and were signed on its behalf by: B S E Freshwater Director PAGE 83 174753 Daejan Holdings R&A 2021 Pt4_174753 Daejan Holdings R&A 2021 Pt4 02/09/2021 12:02 Page 84 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2021 Balance at 1 April 2019 Loss for the year Dividends to equity shareholders Balance at 1 April 2020 Profit for the year Dividends to equity shareholders Issued share capital £000 4,074 – – 4,074 – – Balance at 31 March 2021 4,074 Share premium account £000 555 – – 555 – – 555 Equity Other Retained shareholders’ reserves £000 earnings £000 funds £000 893 931,701 937,223 – – 893 – – (8,397) (8,397) (17,273) (17,273) 906,031 286,289 911,553 286,289 (17,762) (17,762) 893 1,174,558 1,180,080 PAGE 84 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 85 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE COMPANY FINANCIAL STATEMENTS 1. Accounting Policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements. (a) Basis of preparation The Company financial statements have been prepared in accordance with Financial Reporting Standard 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). The Company has adopted the following disclosure exemptions permitted by FRS 102 1.12 (b), (c) and (e): The requirement to present a statement of cash flows; the requirement to disclose the terms and conditions of long term debt; and the requirement to disclose key management personnel compensation in total. As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account dealing with the results of the Company has not been presented. The Company’s profit for the year after taxation was £286,289,000 (2020 – loss of £8,397,000). (b) Investments in subsidiary undertakings Investments in subsidiary undertakings comprise shares in, and loans to, those undertakings and are stated at cost less any provision for impairment. (c) Financial instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all financial liabilities. Basic financial instruments (i) Trade and other debtors and trade and other creditors Trade and other debtors are recognised initially at transaction price plus attributable transaction costs. Trade and other creditors are recognised initially at transaction price less attributable transaction costs. Subsequent to initial recognition they are measured at amortised cost using the effective interest method less any impairment losses in the case of trade and other debtors. If the arrangement constitutes a financing transaction, for example if payment is deferred beyond normal business terms, then it is measured at the present value of future payments discounted at a market rate for a similar debt instrument. (ii) Loans and borrowings Loans and borrowings are initially recognised at fair value and are subsequently recorded at amortised cost. Transaction costs are deducted from the fair value at recognition and any differences between the amount initially recognised and the redemption value is recognised in the income statement over the period of the borrowings on an effective interest rate basis. Derivative financial instruments The Company uses derivative financial instruments to hedge its exposure to interest rate risk arising from operational and financing activities. As these derivatives do not qualify for hedge accounting, they are accounted for as trading instruments. Derivative financial instruments are initially recognised, and subsequently recorded, at fair value. The fair value of interest rate swaps is the estimated amount that the Company would recover or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the credit worthiness of the swap counterparties. The gain or loss on re-measurement to fair value is recognised immediately in the income statement. PAGE 85 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 86 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES TO THE COMPANY FINANCIAL STATEMENTS continued (d) Deferred tax Deferred tax is provided on timing differences which arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred tax is not recognised on permanent differences arising because certain types of income or expenses are non-taxable or are disallowable for tax or because certain tax charges or allowances are greater or smaller than the corresponding income or expense. Deferred tax is measured at the tax rate that is expected to apply to the reversal of the related difference, using tax rates enacted or substantively enacted at the balance sheet date. Unrelieved tax losses and other deferred tax assets are recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. (e) Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction and gains and losses on translation are included in the profit and loss account. Debtors and creditors are retranslated using the rate of exchange at the balance sheet date. 2. Profit on Ordinary Activities before Taxation The Company has no staff other than its Directors and their remuneration is set out on page 42 of the Group accounts. The parent company audit fee is disclosed on page 62 of the Group accounts. 3. Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 March 2019, paid 1 November 2019 @ 71p per share Interim dividend for the year ended 31 March 2020, paid 6 March 2020 @ 35p per share First interim dividend for the year ended 31 March 2021, paid 22 December 2020 @ 74p per share Second interim dividend for the year ended 31 March 2021, paid 19 March 2021 @ 35p per share 4. Investments in Subsidiary Undertakings 2021 £000 2020 £000 – – 11,570 5,703 12,059 5,703 – – 17,762 17,273 At 1 April 2020 Additions Loans At 31 March 2021 PAGE 86 Shares at cost £000 992,205 – – Loans £000 251,114 – (45,053) Total £000 1,243,319 – (45,053) 992,205 206,061 1,198,266 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 87 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 5. Creditors: Amounts falling due within one year Bank loans and overdrafts Amounts owed to subsidiary undertakings Other creditors and accruals Derivative financial instruments 2021 £000 162 220,574 7,107 1,815 2020 £000 148 314,238 847 2,663 229,658 317,896 6. Creditors: Amounts falling due after more than one year Secured bank loans 7. Share Capital Allotted, called up and fully paid: Ordinary shares of 25 pence per share 8. Profit and Loss Reserve 2021 £000 2020 £000 62,585 62,826 Number 2021 £000 2020 £000 16,295,357 4,074 4,074 Some years ago, the Company sold its shareholdings in certain subsidiary undertakings to intermediate holding companies. As a result of that transaction, the parent company transferred £645.1 million of revaluation gains relating to these investments to the profit and loss reserve. As the transfer of these revaluation gains arose as a result of a sale of assets within the Group, it is unlikely that the Company will seek to treat the profit and loss reserve thus arising as distributable. Under the articles of association of certain Group investment undertakings, realised capital surpluses are not available for distribution as dividends. PAGE 87 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 88 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 GROUP FIVE-YEAR RECORD (UNAUDITED) Total rental and related income Property operating expenses Net rental and related income Profit on disposal of investment properties Net valuation gains/(losses) on investment 2017 £000 140,738 (75,938) 2018 £000 142,885 (76,407) 2019 £000 156,161 (79,580) 2020 £000 166,143 (91,094) 2021 £000 162,457 (91,659) 64,800 14,594 66,478 11,893 76,581 12,203 75,049 15,775 70,798 3,248 properties 144,508 146,438 83,928 (90,494) 33,817 Administrative expenses Recurring Non-recurring arising from Scheme of Arrangement (12,559) (13,263) (13,904) (14,254) (14,984) – – – – (3,259) Total administrative expenses (12,559) (13,263) (13,904) (14,254) (18,243) Net operating profit/(loss) before net financing costs Net financing expense Profit/(loss) before taxation Income tax 211,343 (12,947) 211,546 (10,284) 158,808 (20,976) (13,924) (19,227) 89,620 (17,646) 198,396 (36,266) 201,262 1,696 137,832 (17,853) (33,151) (13,441) 71,974 (17,518) Profit/(loss) for the year 162,130 202,958 119,979 (46,592) 54,456 £9.93 £7.36 £12.45 £3.35 2,406,831 2,535,005 2,766,503 2,756,597 3,011,216 1,655,955 1,812,993 1,940,521 1,897,168 1,902,102 £119.07 £116.67 £116.35 £111.25 £101.61 £(2.92) Earnings/(loss) per share Total assets Equity shareholders’ funds Equity shareholders’ funds per share PAGE 88 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 89 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 DIRECTORS AND ADVISERS Directors B S E Freshwater Auditor KPMG LLP (Chairman and Managing Director) 15 Canada Square, S I Freshwater D Davis (non-executive) London E14 5GL A M Freshwater (non-executive) Consulting Accountants C B Freshwater (non-executive) Cohen Arnold R E Freshwater (non-executive) New Burlington House, Secretaries M D E Bale J S Southgate 1075 Finchley Road, London NW11 0PJ Principal Bankers Barclays Bank PLC Registered & Head Office Lloyds Banking Group PLC Freshwater House, NatWest Group PLC 158-162 Shaftesbury Avenue, London WC2H 8HR Registered in England Co. No. 305105 PAGE 89 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 90 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES PAGE 90 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 91 DAEJAN HOLDINGS LTD Annual Report & Accounts 2021 NOTES PAGE 91 174753 Daejan Holdings R&A 2021 Pt5_174753 Daejan Holdings R&A 2021 Pt5 02/09/2021 11:56 Page 92 Opposite page: The St Paul Court, 3120 St Paul Street, Baltimore, Maryland, USA. sterling 174753 Design, art direction and photography by Roger Watt. 174753 Daejan Holdings R&A 2021 COVER 5mm_174753 Daejan Holdings R&A 2021 COVER 5mm 02/09/2021 11:00 Page 2 174753 Daejan Holdings R&A 2021 COVER 5mm_174753 Daejan Holdings R&A 2021 COVER 5mm 02/09/2021 11:00 Page 1 

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