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Report & Accounts 2018
CONTENTS
STRATEGIC REPORT
GOVERNANCE
2018 summary ......................................................................................... 04
Chairman’s statement ............................................................................07
Chief Executive’s statement .................................................................. 08
CEO succession ........................................................................................11
London: Open for business .....................................................................12
Central London office market ................................................................14
A well-placed portfolio ............................................................................16
Our stakeholders ......................................................................................18
Our business model ................................................................................20
Our strategy ............................................................................................. 30
Measuring our performance .................................................................40
Viability statement .................................................................................44
Our principal risks ...................................................................................46
Property review ....................................................................................... 58
Valuation ............................................................................................... 59
Asset management & investment activity .....................................62
Development & refurbishment ......................................................... 65
Finance review .........................................................................................68
Responsibility ...........................................................................................74
Introduction from the Chairman ...........................................................84
Governance at a glance ..........................................................................86
Board of Directors ...................................................................................88
Senior management ............................................................................... 90
Corporate governance statement ........................................................ 92
Nominations Committee report ......................................................... 100
Audit Committee report ....................................................................... 104
Risk Committee report ..........................................................................110
Remuneration Committee report ........................................................116
Annual statement ..............................................................................116
Remuneration at a glance ................................................................118
Annual report on remuneration .......................................................119
Schedules to the Annual report on remuneration ........................129
Directors’ report .................................................................................... 132
01
DERWENT
LONDON
Who we are
We are the largest London-focused real estate
investment trust (REIT), owning a 5.4 million sq ft
portfolio of mainly commercial real estate in
13 ‘villages’ across central London.
Our purpose
Our purpose is to help improve and upgrade the stock of
office space in central London, providing above average
long-term returns to our shareholders while bringing
social and economic benefits to all our stakeholders.
By setting an open and progressive corporate culture
and promoting values that include building lasting
relationships, our design-led ethos has created a
brand of well-designed, flexible and efficient buildings
at affordable rents. These not only help our occupiers
attract talent but also revitalise neighbourhoods and
benefit local communities. Our approach contributes
to workforce well-being and will help to maintain
London’s place as a leading global business hub.
What we do
The majority of our portfolio is income producing.
We aim for a balance between properties with potential
to add further value through regeneration and those
which have already been improved but where our asset
management skills can continue to grow value and
income. Underlying the business is a strong balance
sheet with modest leverage and uncomplicated and
flexible financing.
Our culture
• Hard-working and adaptable
• A passion to improve London’s office spaces
• Progressive and pragmatic
• ‘Open door’ and inclusive
• Collaborative and supportive
Our values
• Reputation, integrity and good governance
• Building long-term relationships and trust
• Focus on creative design and embracing change
• Openness and transparency
• Sustainability and responsibility
Cover image: Brunel Building W2
FINANCIAL STATEMENTS
Statement of Directors’ responsibilities ........................................... 138
Independent Auditor’s report .............................................................. 139
Group income statement ..................................................................... 145
Group statement of comprehensive income .................................... 146
Balance sheets .......................................................................................147
Statements of changes in equity ........................................................ 148
Cash flow statements .......................................................................... 149
Notes to the financial statements ...................................................... 150
Other information
Ten-year summary ................................................................................200
EPRA summary ..................................................................................... 201
Principal properties ..............................................................................203
List of definitions................................................................................... 205
Communication with our shareholders .............................................208
Awards & recognition ............................................................................IBC
02
Derwent London plc Report & Accounts 2018
STEPHEN STREET W1Since acquisition in 2010 we have refurbished 57% of the office space and completely reconfigured the retail element of this substantial 265,000 sq ft building. During 2018 we extended leases on 83,400 sq ft and took back and re-let 32,000 sq ft of office space including one floor which was let to Odeon Cinemas. 03
Strategic report
strategic
report
2018 summary ........................................................................04
Chairman’s statement ...........................................................07
Chief Executive’s statement .................................................08
CEO succession ......................................................................11
London: Open for business ...................................................12
Central London office market ...............................................14
A well-placed portfolio ..........................................................16
Our stakeholders ....................................................................18
Our business model ...............................................................20
Our strategy .............................................................................30
Measuring our performance .................................................40
Viability statement .................................................................44
Our principal risks ..................................................................46
Property review .......................................................................58
Valuation ..............................................................................59
Asset management & investment activity ......................62
Development & refurbishment .........................................65
Finance review ........................................................................68
Responsibility .........................................................................74
04
Derwent London plc Report & Accounts 2018
2018 summary
Derwent London has continued to make good
operational progress, enhanced its stakeholder
and responsibility agendas and announced its
future leadership team.
OPERATING HIGHLIGHTS
• New lettings of £26.8m, 4.1% above ERV
• Brunel Building W2 64% pre-let at year end,
77% at 26 February 2019 with balance under offer
• 623,000 sq ft development programme, 75% pre-let
at 26 February 2019
• Progressed Soho Place W1 and signed the
construction contract in February 2019
• Site of The Featherstone Building EC1 vacated
ready for demolition
• Asset managers involved in lease events on
833,000 sq ft raising existing rent 20.4% to £38.3m
• Assigned a corporate credit rating of A- by Fitch
• Arranged a £250m US private placement
Right: CGI of Brunel Building W2
STAKEHOLDERS AND RESPONSIBILITY
• Established Responsible Business Committee
to be chaired by Cilla Snowball
• Like-for-like managed portfolio carbon intensity
down 20%
• Our Community Fund celebrated its fifth anniversary
with a further extension to 2021
• Supported staff through ‘Fit for the Future’ and
well-being initiatives
LEADERSHIP
• Robert Rayne to retire as Non-Executive Chairman
• John Burns to become Non-Executive Chairman
• Paul Williams to become Chief Executive
• To become effective 17 May 2019
Strategic report
FINANCIAL AND NON-FINANCIAL HIGHLIGHTS
05
Net property income
£185.9m
2017: £164.8m
+12.8%
EPRA earnings per share
113.1p
2017: 94.2p
+20.0%
Underlying earnings per share1
99.1p
2017: 94.2p
+5.1%
Total return
5.3%
2017: 7.7%
-31.2%
Dividend per share2
65.9p
2017: 59.7p
+10.2%
EPRA NAV per share
3,776p
2017: 3,716p
+1.6%
1 Derived by excluding 14p per share of one-off rights of access income in 2018 from EPRA earnings per share
2 Excludes 75p special dividend declared in 2017
Net interest cover ratio
Loan-to-value
491
454
362
370
280
286
261
263
279
286
215
%
500
400
300
200
100
0
2008
2009
2010 2011
2012
2013
2014
2015
2016
2017
2018
%
40
30
20
10
0
39.7
36.4
35.7
32.0
30.0
28.0
24.0
17.8
17.7
17.2
13.2
2008
2009
2010 2011
2012
2013
2014
2015
2016
2017
2018
EPRA vacancy rate
True equivalent yield
%
6
5
4
3
2
1
0
5.9
3.8
3.6
4.1
1.6
1.3
1.0
2.6
1.3
1.3
1.8
2008
2009
2010 2011
2012
2013
2014
2015
2016
2017
2018
%
8
7
6
5
4
3
2
1
0
7.1
6.4
5.8
5.6
5.6
5.3
4.7
4.5
4.8
4.7
4.7
2008
2009
2010 2011
2012
2013
2014
2015
2016
2017
2018
06
Derwent London plc Report & Accounts 2018
PERFORMANCE IN 2018
Total property return
Measures the income and
capital return on our portfolio
+6.0%
Exceeding our benchmark, the MSCI IPD
Central London Offices Index, of +5.3%
Total shareholder return
Measures our share price
and dividend performance
+0.9%
Outperforming the FTSE 350
Real Estate index return of -9.2%
BREEAM ratings
Measures environmental impact
of commercial buildings
‘Excellent’
Both Brunel Building and 80 Charlotte Street
are on track to meet this target
Strategic report
CHAIRMAN’S
STATEMENT
Derwent London continued to make
good progress in 2018 despite prolonged
political and economic uncertainty.
Against the background of protracted Brexit negotiations, we have
achieved £26.8m of new lettings, a 5.1% increase in underlying
earnings to 99.1p per share and a 20.0% increase in EPRA EPS
to 113.1p per share. The EPRA NAV rose 1.6% to 3,776p per share
after paying out dividends of 136.5p. Our financial strength was
recognised when we were assigned a corporate credit rating of
A- by Fitch, and we have subsequently arranged a £250m US private
placement, which was drawn down in January 2019. We adopted the
UN Sustainable Development Goals as part of our reporting process,
launched an internal management and leadership programme and
completed our succession plans.
We propose raising the final dividend 10.3% to 46.75p per share,
taking the full year’s dividend to 65.85p per share, an increase of
10.2%. Looking forward, we expect to raise the 2019 dividend at
a similar rate. For the past decade, our average ordinary dividend
growth has been 10.4% per annum and, in addition, we have paid
special dividends totalling 127p per share in the last two years.
This month is the twelfth anniversary of the merger between
Derwent Valley and London Merchant Securities. I was one of
the architects of this transaction and subsequently became the
enlarged Group’s Chairman. I believe that we have more than
delivered on our aspirations, outperforming both the relevant
property and equity indices by a substantial margin. As well as
growing the business, we have enhanced our brand, designing
and creating innovative office space with the flexibility required
by today’s occupiers, located in improving areas and at middle
market rents.
The Group’s sustained performance over many years reflects our
culture and that can only be nurtured through strong leadership.
Derwent London benefits from a talented team, which has been led
from the beginning by its exceptional Chief Executive, John Burns.
It has been my privilege to have worked with him. However, any
achievement can only be measured through its continuing legacy
and, with this objective in mind, the Board has focused on succession
planning with the aim of ensuring a smooth management handover.
07
In November 2018, it was announced that I will retire at the next AGM
on 17 May 2019 to be succeeded by John Burns as Non-Executive
Chairman. The Board agreed that Paul Williams should succeed
John as Chief Executive. Paul has been a Board member since 1998,
having joined Derwent Valley in 1987. He has been an integral part
of the Group’s success story. We are pleased by the support this
announcement has received from our shareholders, and it provides
us with the ongoing leadership to take the Group forward.
After nine years as a Non-Executive Director, Stephen Young will
also be retiring at our next AGM and I would like to thank him for
his considerable contribution to the business. We already have an
excellent replacement in Lucinda Bell, previously Chief Financial
Officer of British Land, who was appointed in January 2019.
She will follow Stephen as chair of the Audit Committee.
Increasingly, we are focusing on the broader impact of our business
on a wider range of stakeholders and we have established a
Responsible Business Committee chaired by Non-Executive Director,
Cilla Snowball. While we believe that we already have some of the
best ESG1 standards in our industry, we remain committed to
improving them and 2018 saw us raise the bar again. White Collar
Factory EC1 won numerous awards, including RIBA2 National and
BCO3 National Innovation awards and 25 Savile Row W1 won a SKA4
Gold rating. We have now committed to extending our Community
Fund out to 2021, having completed its first five years in 2018, and
we saw good progress towards achieving our 2027 science-based
carbon targets.
Derwent London has a well located office portfolio and a tried and
tested strategy that is constantly being flexed in response to the
market. We remain dedicated to creating the space that allows
businesses to thrive, as well as benefits both for our investors and
for the communities in which we operate. The long-term success of
this model is dependent on the skills of our people and the Group’s
relationships with its many stakeholders.
Finally, I would like to thank all those who have been involved
with Derwent London over many years and to wish the Group
continuing prosperity. I know that there are plenty of opportunities
in the portfolio, and I am very confident that the leadership team
will be able to capitalise on them as well as adding fresh initiatives
of its own.
Robert Rayne
Chairman
1 Environmental, social and governance
2 Royal Institute of British Architects
3 British Council for Offices
4 RICS rating
08
Derwent London plc Report & Accounts 2018
Chief Executive’s
statement
The London office market has remained
resilient following the result of the EU
referendum over two and a half years ago.
Occupational and investment demand is holding up and London’s
economy and workforce continue to grow, although at a slower rate.
Businesses continue to look beyond the short-term uncertainty,
which has created an unusually stable period of rents and values for
the second year in succession. Derwent London has again been able
to outperform the central London office market, benefitting from
its successful development activities, which justifies the positive
decision taken in 2016 to progress with our regeneration programme.
Despite average rents and values remaining stable, the underlying
market is witnessing a number of dynamic trends as occupiers are
increasingly focused on the impact of their workspace in attracting
and retaining their employees. These trends include the strength
of demand for new space compared to secondhand space, and
occupiers’ increasing emphasis on lease flexibility, well-being and
technology. Demand is no longer purely focused just on location and
price. This has seen the proportion of London office space occupied
by flexible office providers increase from 3% to 5% in recent years.
Meanwhile, in the investment market, the strongest demand remains
for properties on longer leases.
Our development at Brunel Building W2 has seen excellent demand
with the majority of its space let for a minimum of 12 years before
breaks. Some of our smaller spaces in Clerkenwell have been let as
fully fitted flexible units on simplified shorter leases. White Collar
Factory EC1, as well as winning numerous architectural awards,
has also won the NLA well-being award. Additionally, the asset
management team has had a busy 2018, extending a number of
existing leases on our portfolio, notably creating a new 20-year
lease for Burberry at Horseferry House SW1.
We are well positioned to respond to market conditions, reflecting the
multiple skills of our team as well as the Group’s portfolio and financial
structure. Our properties are predominantly income-producing, let off
middle market rents, with plenty of opportunities to add value through
both management initiatives and regeneration. Our business is
underpinned by prudent financing, giving us the freedom to pursue
our strategies at our own timing. We vary development exposure by
accelerating or slowing the pipeline depending on the letting success
of our current projects and our market view. The overall portfolio
balance is maintained by disposing of assets where we have maximised
the growth and re-investing the proceeds into new opportunities.
From the outset, Derwent London has been passionate about the
buildings it creates. We listen to our occupiers which means that,
for many years, we have tried to create the most flexible internal space
possible and offered communal break-out space and amenities in our
multi-let buildings to help create a positive experience. The Group likes
to remain innovative and uses a range of materials to provide the most
practical, sustainable and aesthetic buildings. Our designs consider a
building’s impact on the environment and the local community, not just
during construction but for the long-term. We do not do this alone but
collaborate with specialists who we believe are the best in their field.
No Derwent London refurbishment or redevelopment is the same, but
all aim to be of the highest quality with a long-lasting positive impact.
The portfolio retains considerable reversionary potential, totalling
£114.9m. Nearly half of this growth is already contracted and largely
accounted for in the Group’s earnings per share, which leaves £59.6m,
subject to rental incentives, still to benefit our earnings. This will
require another £133m of capital expenditure. We are enhancing this
potential income growth in 2019 with our next major developments:
Soho Place W1 and The Featherstone Building EC1. These two
well-located projects will be major beneficiaries from the opening
of the Elizabeth line (now expected in 2020) and have a combined
ERV of £30m. They are expected to require an additional £359m of
capital expenditure, including the deferred land purchase payable
to Crossrail on completion of Soho Place. These projects will extend
our development programme out to 2022.
While we have made no significant acquisitions recently, 29% of
our existing portfolio, in addition to our current projects, holds
substantial potential for major regeneration. This includes two
West End schemes, which already have ‘resolutions to grant’
planning permission, totalling 443,000 sq ft. Both could start by
2022 thereby extending our development programme out to 2025.
After thirty-five years as Chief Executive, I will be stepping down at this
year’s AGM to become Non-Executive Chairman. It has been a privilege
to lead and watch the business grow from total assets of only £1.1m in
1984 to the sizeable operation it is today. From the start, I have been
able to work with outstanding colleagues. In particular, Simon Silver’s
design flair and attention to detail has been so important to the Group’s
reputation for providing special buildings which has become part of our
DNA. I am delighted that he is continuing to play his valuable role within
the Group.
The merger with London Merchant Securities in 2007 proved a pivotal
moment, doubling the size of the Group and providing a rich seam of
opportunities which are still delivering for us today. During my tenure,
I have benefitted from the advice of two exemplary Chairmen: first,
John Ivey and, subsequent to the merger, Robbie Rayne. Robbie will
retire at this year’s AGM. I am most grateful for his considered advice
and wish him well with his other business and charitable interests.
Derwent London has an excellent team with a broad range of
expertise and experience and we have continued to invest in the
talent pool through our ‘Fit for the Future’ programme. Our business
is supported by strong relationships with our occupiers, advisers
and other stakeholders. Together, we have established a brand
recognised for its cutting-edge design, providing the spaces and
services needed by today’s businesses. I would like to thank all who
have been involved in Derwent London’s remarkable journey so far,
especially my colleagues and family for their support.
Outlook
Making any short-term prediction today is difficult with so many major
political decisions unresolved. Longer term, we remain confident about
London’s prospects and its status as a global city. This belief, shared
with many other businesses, continues to support occupier demand.
Assuming demand is maintained, we expect the London office market
will follow a similar pattern to last year so, for 2019, we estimate our
ERV growth at +1% to -2%, with stable investment yields. Our strong
financial position means that, were London offices to suffer an
unexpected downturn, we would be poised to take advantage
of any opportunities that might occur.
With its unique portfolio offering a very strong pipeline of potential
projects, I am confident that Derwent London will continue to
prosper under the future leadership of Paul Williams. Enhanced
by its regeneration skills and the financial strength to invest when
opportunities present themselves, this will ensure that the Group
continues to deliver great buildings backed up by equally strong returns.
John Burns
Chief Executive
Strategic report
09
PERFORMANCE IN 2018
Tenant retention/re-lets
Measures our ability to
retain or re-let space
following lease expiry
90%
Tenant retention alone was 76%, above
our target range of 50-75% (see page 125)
Development potential
We monitor the proportion of our
portfolio with the potential for
refurbishment or redevelopment
Reversionary percentage
Measures the growth in passing rents,
assuming the rent increases to ERV
and all current developments are
completed and let
41%
Within our target range
of 37-47% (see page 125)
72%
Up from 69%, reflecting rise
in contractual uplifts
10
Derwent London plc Report & Accounts 2018
OUR PRIORITIES IN 2019
De-risk the pipeline
Derwent London had 623,000 sq ft under
development in December 2018, and has
started an additional 410,000 sq ft in 2019.
We will be seeking additional pre-lets during
the year.
Capital recycling
We always look to take advantage of
opportunities to either acquire or dispose of
assets in the portfolio. At the same time we
seek to maintain the balance between core
income and future development properties,
as well as to ensure that we can meet our
various financial targets.
Promote responsible business
The Group has recently established the
Responsible Business Committee to focus
on social and environmental matters and,
as part of its remit, we will be continuing to
promote diversity, inclusion and well-being
amongst our staff.
Strategic report
CEo SUCCESSION
Questions and answers with Paul
Williams, who will succeed John Burns
as Chief Executive immediately after
our AGM on 17 May 2019. Paul joined
Derwent London in 1987, becoming
a main Board Director in 1998.
Q How do you think Derwent has changed over the years?
A In some ways very little, as our passion for buildings, creativity,
focus on central London offices striving to attract the best tenants
and the desire to do the ‘right thing’ was there from the start. We still
focus on buying buildings with ‘good bones’ that we can regenerate
in improving locations. However, one obvious difference is our size,
which means that we have taken on larger schemes and increased
the depth of our pipeline. It has also meant that we have needed to
become increasingly tech ‘savvy’ as a business.
Q During that time, has there been any specific transaction
that you would highlight?
A Over the years there have been many deals which were seen as
exceptional at the time, but then we go on to make a further one.
Derwent London’s approach is very team-orientated and my area
of focus has been in leasing, development and seeing potential in
sites. Our recent leasing activity has been strong, notably with the
pre-letting of most of the commercial space at our largest ever
development, 80 Charlotte Street W1, and the success we have
had at Brunel Building W2. We continue to work hard to know our
occupiers and their needs and that drives us in everything we do.
Q Do you propose to do anything differently to your
predecessor?
A Given my predecessor’s outstanding track record, there is no
need to make any immediate changes, but I will have my own
individual style and the Group will continue to evolve. Internally,
my appointment will give opportunities to others as I take on new
roles and relinquish most of my old ones. Derwent London has a
strong set of Executive Directors and an experienced team eager
to take on new responsibilities. Externally, we will continue
to pursue opportunities to benefit all our stakeholders.
11
Q You have been the Director responsible for sustainability
for over six years now; how do you think this will impact your
role as CEO?
A Derwent London has always felt that it is good business to take
a long-term view of the environmental and social impact of our
buildings on our neighbours and the wider community. We also look
to promote well-being initiatives at our larger multi-let buildings.
The Group takes its sustainability disclosures seriously,
demonstrated through the publication of our first Annual
Sustainability Report in 2009 and the appointment of a Head
of Sustainability in 2013. We are continually looking at ways of
improving our sustainability performance and adopted the TCFD*
reporting framework in 2018. The Group launched a Community
Fund in 2013, which has supported 76 projects since inception.
In a further move to ensure we are considering our impact on all
our stakeholders and to manage our environmental, social and
governance risks and opportunities, we set up the Responsible
Business Committee in 2018. This will be chaired by Cilla Snowball,
a Non-Executive Director, and I will be a Committee member.
Q What are the biggest challenges that you face?
A I believe it is important that any listed business can demonstrate
to its investors that it has good growth potential. We have little
control over the office cycle or the challenges of Brexit, but we can
generate our own momentum through asset management and
development. It is important that our ambition matches our size,
and that this in turn is balanced through preserving a suitable risk
profile and maintaining strong capital discipline.
Over many years, Derwent London has built a brand through the
creation of its buildings. We believe that, in part, this reflects our
desire to be the best that we can be in all aspects of our business.
One is to ensure that, as far as possible, our buildings are having
beneficial impacts on their occupiers and neighbourhoods and
that longer term we are minimising any negative impacts they have
on the environment. Dealing with potential climate change presents
challenges to all businesses, and it is one other area where Derwent
London will continue to strive to be among the best in class.
The Group has always aspired to be a market leader in the provision
of office space. This means that we cannot afford to stand still.
We need to keep investing in our people and investing in new
designs and technologies. We must continue to be bold and offer
new solutions for each property. Only then can we ensure that we
will continue to offer our occupiers the spaces fit for not just today
but tomorrow too.
* Task Force on Climate-related Financial Disclosures
12
London:
open for
business
Key to Derwent London buildings
1. The White Chapel Building
2. Tea Building
3. White Collar Factory
4. The Featherstone Building
5. Morelands
6. Turnmill
7. Johnson Building
8. Angel Building
9. 90 Whitfield Street
10. Network Building
11. 80 Charlotte Street
12. 1-2 Stephen Street
13. Soho Place
14. Holden House
15. 19-35 Baker Street
16. Brunel Building
17. Greencoat House
18. Horseferry House
p. 14
For more detail on our short-term outlook for London offices
1 GLA Economics London’s Economy Today, December 2018
Derwent London plc Report & Accounts 2018
A global city
With 6.0m jobs and a population of 8.8m, London is a major global
city and one of the largest cities in Europe. It is a significant creative,
financial and legal centre benefitting from first class cultural,
educational, retail and leisure facilities. The London economy
recovered strongly in the period 2010 to 2015 but subsequently,
growth has slowed, more recently impacted by Brexit uncertainty.
Current expectations of annual economic growth are c.1% to 2%1
over the next two years, with both the population and workforce
predicted to increase.
Brexit uncertainty
Forecasting growth in the short-term is particularly difficult given
the uncertainty surrounding the outcome of the Brexit negotiations
and the impact on trade and immigration. Most commentators
appear to be assuming some form of ‘soft Brexit’ and an extension
of the status quo until at least December 2020. However, no final
decision has yet been made and the risk of a ‘hard Brexit’ remains,
which we would expect to lead to greater economic disruption,
at least in the short-term. To date, the impact on job relocation
has been relatively modest but Brexit may well impact future
demand patterns. Further information on how Brexit could impact
Derwent London is detailed on page 47.
Other factors impacting future demand
As well as economic and political change, future demand for London
offices is likely to be impacted by the rise in agile working practices
and the increasing impact of AI (Artificial Intelligence). Some believe
that these latter two factors will have a more fundamental impact on
London’s office design and demand in the longer term than Brexit.
1
2
8
3
4
5
13
14
7
6
9
12
10
11
Strategic report
The London office cycle
Index
(1980 = 100)
350
300
250
200
150
100
50
0
1982
1987
1992
1997
2002
2007
2012
2018
Capital growth
Rental value growth
Source: MSCI IPD
Historically, the London office market has been cyclical, with a
long-term growth trend broken by a number of downturns, some more
significant than others. It can be argued that the London office cycle
today is in its mature phase given that there has been no significant
downturn for nine years, and rents and yields are near historical
highs and lows, respectively. The past two years have seen the
London office market unusually stable despite the considerable
underlying economic and political uncertainties.
We attribute this stability to the fact that economic growth and occupier
demand have been resilient, against a background of historically
very low interest rates. The latter has helped support high levels of
investment demand. Steady occupier take-up has held back the rise
in vacant space despite the modest increase in supply. That supply looks
likely to moderate in the next few years.
18
17
13
OUR INTEREST IN THE MARKET
Locations
There is currently 225m sq ft of central London office
space predominantly in the West End and the City,
as shown in the pie chart below. Our portfolio is
concentrated in the West End and in the City Borders.
The latter forms the majority of our Tech Belt portfolio
which, since 2009, has seen strong growth along with
London’s creative industries. We have no property in
the City, London’s main financial district, and our focus
on mid-market rents means that we have only one
property in Mayfair and St James’s, the traditional
heart of the West End.
Central London office stock
Percentage of floor area
City
West End
Midtown
Southbank
Docklands
33
40
11
8
8
Source: CBRE
Recent letting activity
Professional and business services continue to
dominate demand closely followed by financial and
creative industries. Our own letting activity shows
relatively strong interest from creative industries
and less from financial services.
Central London offices (CLO) by business sector
Percentage of London office take-up
100
80
60
40
20
0
CBRE CLO
5-year take-up
Derwent London CLO
5-year take-up
Business services
Creative industries
Banking & finance
Consumer services & leisure
Public sector
Manufacturing
16
15
Impact of flexible office space
The past few years have experienced significant
expansion by various short-term office providers,
with WeWork garnering most of the headlines.
Despite representing 15-20% of take-up in the last two
years, it is estimated1 that these businesses currently
occupy c.5% of the total market. Flexible office users
also occupy 5% of our portfolio. In addition, we have
created fully fitted flexible spaces in some smaller units
at Morelands EC1 and Hardwick Street EC1 in response
to changing demand and have also agreed leases on
more flexible terms where we believe this is appropriate.
Not to scale
1 Cushman & Wakefield
Derwent London plc Report & Accounts 2018
Underlying these figures is a dynamic office market. When considering
office space, corporate occupiers are increasingly valuing the
expected impact on their employees and customers ahead of the
traditional focus on cost efficiencies. In our own business this is
reflected in the increased use of non-financial measures in our
reporting. This shift may explain why new space is letting much
faster than secondhand space, and the continuing expansion of
the serviced office providers. CBRE report that the availability of
secondhand space has been rising steadily since late 2015, so that
in Q4 2018 it represented 70% of total availability, and 40% of this
(c.4m sq ft) is tenant controlled or ‘grey’ space. This background
suggests that unimproved older space is set to lag the market.
The positive outlook for new space is supported by supply having
remained relatively subdued this cycle, and the pre-letting of a high
proportion of space under construction. In 2018, 4.6m sq ft of new
space was delivered, which was 21% below 2017. This year, supply is
expected to pick up with 6.6m sq ft due for completion, of which 57%
is pre-let. Overall, there is currently 13.3m sq ft under construction
for delivery in the next three years, of which 54% has been pre-let.
This leaves c.6m sq ft potentially available or under 3% of the total
market. Of this availability, only 20% is located in the West End.
The investment market remained liquid in 2018, with transactions
totalling £17.6bn, which was 10% ahead of 2017. Once again the
market was led by a number of large deals notably in the City,
and dominated by overseas purchasers with a focus on long-term
income streams. At the beginning of 2019, CBRE estimated that
there was £34bn of equity targeting London office property,
which was approximately ten times the £3.3bn that was available
on the market at that date.
14
central
london office
market
The London office market is not following
the typical cyclical pattern that it has
experienced over the last 30 years.
Investment yields have remained firm
even though rental growth has slowed.
Occupational demand and investment turnover is good, and vacancy
levels below average. Interest rates remain close to historical lows.
Normally these market fundamentals might be expected to lead to
rental growth but the continuing political uncertainty is providing
a brake. Property yields, although low, remain attractive against
comparable European cities and other asset classes. However,
the current political and economic backdrop has meant that
occupiers remain discerning over product and disciplined when
committing to new occupational costs. These trends are playing
to our strengths.
Central London office take-up rose 2.2% in 2018 to 13.7m sq ft,
which was 7.2% above the long-term average. Demand remains
dominated by business services (27%), creatives (23%) and financial
services (19%). During the year, the central London office vacancy
rate rose 0.4% to 4.6%, but is below the long-term average of 5.1%.
City vacancy rose to 5.4%, while West End vacancy was broadly
unchanged at 3.3%. There is 3.3m sq ft of office space under offer,
which is the highest year end level since 1999.
Central London office take-up
Central London office development pipeline
Floor area million sq ft
Floor area million sq ft
20
15
10
5
12
9
6
3
Vacancy rate %
12
9
6
3
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
0
West End
Central London average
Completed
Proposed
Vacancy rate
Rest of central London
Source: CBRE
Under construction
Completed average
Source: CBRE
Strategic report
PORTFOLIO STATISTICS
£159.5m
Contracted net rental income
2017: £160.1m
£274.4m
Estimated rental value1
2017: £270.1m
1 After additional capex of £133m
Central London rent
‘Topped-up’ income %
£0-£30 per sq ft
£30-£40 per sq ft
£40-£50 per sq ft
£50-£60 per sq ft
£60+ per sq ft
9
11
17
29
34
15
6.1 years
Weighted average unexpired lease term (WAULT)
2017: 6.0 years
8.2 years
WAULT including rent-frees and pre-lets
2017: 7.8 years
Tenant diversity3
Media, TV, marketing
and advertising
Professional and
business services
Retail head offices
Retail and leisure
Government and
public administration
Financial
Other
29
20
19
12
6
4
10
3 Expressed as a percentage of annualised rental
income of the whole portfolio
6.1
5.9
5.6
3.7
3.3
3.0
2.5
2.3
1.8
1.6
3.4%
EPRA net initial yield
2017: 3.4%
4.7%
True equivalent yield
2017: 4.7%
Ten largest tenants
% of rental income2
Expedia
Burberry
Government
WPP Group
Publicis Groupe
The Office Group
IWG
FremantleMedia Group
Ticketmaster
VCCP
2 Based upon contracted net rental income of £159.5m
West End office development pipeline
Central London office investment transactions
Floor area million sq ft
3
2
1
Vacancy rate %
12
£bn
20
8
4
15
10
5
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
0
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Completed
Proposed
Vacancy rate
Average
Under construction
Completed average
Source: CBRE
Source: CBRE
Derwent London plc Report & Accounts 2018
16
A WELL
PLACED
PORTFOLIO
98% of our portfolio is located
in central London, grouped in
13 ‘villages’, each with its own
individual identity.
Our ‘villages’
Fitzrovia1
Victoria
Paddington
Baker Street/Marylebone
Mayfair
Soho/Covent Garden
Islington/Camden
Clerkenwell
Old Street
Shoreditch/Whitechapel
Holborn
Holborn (non-Tech Belt)
Provincial
1
Includes North of Oxford Street
t
l
e
B
h
c
e
T
Portfolio weighting
West End
City Borders
Provincial
p. 203 Principal properties
30%
10%
5%
3%
2%
2%
9%
12%
11%
9%
3%
2%
2%
61%
37%
2%
River ThamesRiver ThamesRiver ThamesPADDINGTONBAKER STREET/MARYLEBONEMAYFAIRVICTORIAST JAMES’SSOHO/COVENT GARDENFITZROVIACLERKENWELLSHOREDITCHWHITECHAPELHOLBORNOLD STREETTHE CITYBLOOMSBURYISLINGTONNORTH OF OXFORDSTREET Liverpool Street FarringdonTottenham Court Road PaddingtonWhitechapelKing’s CrossSt. PancrasVictoriaEustonWaterlooCannon StreetLondon BridgeBlackfriarsFenchurch StreetBond Street PaddingtonOne of London’s best performing office markets in the last two years with prime rents having increased 7.4%, reflecting significant improvements to the area. We have contributed to and benefitted from this trend through the pre-letting at Brunel Building.Fitzrovia/North of Oxford Street/SohoThese villages have our largest single concentration of properties, totalling 32%. The area will benefit from the Elizabeth line as well as the significant investment at the eastern end of Oxford Street. Our largest current development is 80 Charlotte Street which is 74% pre-let. Our next major project is Soho Place, to be built over the Tottenham Court Road Elizabeth line station.
Strategic report
17
IN NUMBERS
86Buildings
5.4m sq ft
Area (includes 0.6m sq ft of on-site
developments)
743Leases
Key
Our villages
Tech Belt
Our properties
Our developments
Elizabeth line
465Tenants
River ThamesRiver ThamesRiver ThamesPADDINGTONBAKER STREET/MARYLEBONEMAYFAIRVICTORIAST JAMES’SSOHO/COVENT GARDENFITZROVIACLERKENWELLSHOREDITCHWHITECHAPELHOLBORNOLD STREETTHE CITYBLOOMSBURYISLINGTONNORTH OF OXFORDSTREET Liverpool Street FarringdonTottenham Court Road PaddingtonWhitechapelKing’s CrossSt. PancrasVictoriaEustonWaterlooCannon StreetLondon BridgeBlackfriarsFenchurch StreetBond Street Clerkenwell and Old StreetTwo important Derwent London clusters are within these villages. Together, they total 23% of the portfolio, up from 15% five years ago. Old Street is home to White Collar Factory as well as our next Tech Belt development, The Featherstone Building, which will start in 2019.Tech BeltApproximately 44% of our portfolio is located in this arc stretching from King’s Cross to Whitechapel, including most of our City Borders portfolio. In the past decade, this area has become the preferred location for many of London’s most dynamic and creative industries.Elizabeth lineThe Elizabeth line (Crossrail) is currently expected to open in 2020. We have 76% of our portfolio located close to a Crossrail station. 18
Our
Stakeholders
We believe that, to maximise value
and secure our long-term success,
we must take account of what is
important to our key stakeholders.
This is best achieved through
proactive and effective engagement.
s172 Companies Act 2006
We set out in the adjacent table our key stakeholder groups,
their material issues and how we engage with them.
Each stakeholder group requires a tailored engagement
approach to foster effective and mutually beneficial relationships.
By understanding our stakeholders, we can factor into Boardroom
discussions the potential impact of our decisions on each
stakeholder group and consider their needs and concerns,
in accordance with s172 of the Companies Act 2006 (see page 94).
This in turn ensures we continue to provide office space that
our occupiers desire, work effectively with our colleagues and
contractors, make a positive contribution to local communities
and achieve long-term sustainable returns for our investors.
Acting in a fair and responsible manner is a core element of
our business practice as seen in our Responsibility report on
pages 74 to 81.
Derwent London plc Report & Accounts 2018
Our stakeholders
OCCUPIERS
Their material issues
How we engage
2018 highlights
Further links
The continued strong performance of our
business would not be possible without
understanding our occupiers’ needs and
future aspirations. Many of our occupiers
have moved within our portfolio as their
businesses have grown, which is
testament to our proactive approach
• Suitable lease terms
• Well-designed and
sustainable buildings
• Well-being and talent
attraction/retention
EMPLOYEES
We have an experienced, diverse
and dedicated workforce which we
recognise as a key asset of our business.
Therefore, it is important that we
continue to create the right environment
to encourage and create opportunities
for individuals and teams to realise their
full potential
• Opportunities for
development and
progression
• Agile working patterns
• Opportunity to share ideas
and make a difference
• Diversity and inclusion
LOCAL COMMUNITIES
We are committed to supporting the
communities in which we operate,
including local businesses, residents
and the wider public
• Local disruption
• Impact on the local economy
• Derwent London being a
responsible neighbour
SUPPLIERS
We outsource many of our activities
to third-party suppliers and providers.
As a result, it is crucial that we develop
strong working relationships with
our suppliers, so we can enhance
the efficiency of our business and
create value
• Long-term partnerships
• Collaborative approach
• Open terms of business
• Fair payment terms
Via our dedicated asset and property management
teams and close Director involvement, we communicate
regularly with our existing occupier base to anticipate trends
and preferences and incorporate them early into our designs.
We do this through meetings, engagement events and forums.
This active engagement ultimately ensures our high quality,
sustainable space meets their needs and helps them to
attract and retain talent.
• £26.8m of lettings
• 1.8% EPRA vacancy rate
• 90% tenant retention/re-lets
We have an open, collaborative and inclusive management
• 90.0% staff retention
• 90.4% staff satisfaction
• ‘Fit for the Future’ initiative launched
structure and engage regularly with our employees.
We do this through an appraisal process, structured career
conversations, employee surveys, our intranet site, company
presentations, away days and our well-being programme.
Employee engagement is frequently measured and we
have a designated Non-Executive Director, Cilla Snowball,
who chairs the Responsible Business Committee.
We engage with the local community not only through the
planning process but also through our Community Fund,
volunteering, charity work and providing employment
and work experience opportunities. We also liaise with
Non-Governmental Organisations (NGO’s) and industry
bodies to enhance the positive impact we have on the
communities in which we operate.
• 141.5 hours of staff volunteering
• £350k of charitable and community donations
• Extended our support to the Community Fund
until 2021
Through effective collaboration, we aim to build long-term
• £187.5m capital expenditure
relationships with our suppliers so that we can develop and
operate great spaces for our occupiers. We are signatories
to the CICM Prompt Payment Code and are clear about our
payment practices. We expect our suppliers to adopt similar
practices throughout their supply chains to ensure fair and
prompt treatment of all creditors.
• 28 day average payment
• Received confirmation that our key suppliers were
compliant with our Sustainability Standard
p. 42
KPIs – tenant retention
and void management
p. 62 Asset management
p. 125
Executive annual bonus –
void management target
p. 43 KPI – staff satisfaction
p. 48
p. 125
Principal risk – management
of succession
Executive annual bonus –
staff satisfaction target
p. 26
Investing in communities
p. 94
p. 125
The Featherstone Building
case study
Executive annual bonus –
carbon intensity target
p. 47 Brexit
p. 52
p. 113
Principal risk –
contractor default
Supply Chain
Sustainability Standard
Below: Building management team at White Collar Factory EC1
CENTRAL AND LOCAL GOVERNMENT
As a responsible employer and
business, we are committed to
engaging constructively with central
and local government to ensure we
are supporting the wider community
• Openness and transparency
• Proactive and compliant
with new legislation
• Proactive engagement
with local authorities
• Support for local economic
plans and strategies
DEBT PROVIDERS
Our debt providers play an important role
in our business. We maintain close and
supportive relationships with this group
of long-term stakeholders, characterised
by openness, transparency and mutual
understanding
• Current financial performance
• Openness and transparency
• Proactive approach
to communication
• Credit rating
We take a constructive, positive approach to working
with local authorities to ensure high quality planning
applications are submitted. Similarly, we maintain positive
and proactive relationships with Government departments
such as HMRC via regular dialogue and correspondence.
This has helped us maintain a ‘low risk’ tax rating.
• 14 units of affordable housing under construction
as part of the 80 Charlotte Street development
p. 56
Principal risk – regulatory
non-compliance
• Progressing a public theatre as part of the
Soho Place development
p. 70
Taxation
The Featherstone Building
p. 94
case study
We arrange debt facilities from a diverse group of providers
• £250m new long-term debt arranged
ranging from banks to institutional pension funds. We engage
with these providers and credit rating agencies through
regular meetings and presentations to ensure that they
• 491% interest cover
• 17.2% loan-to-value ratio
remain fully informed on all relevant areas of our business.
• Fitch assigned corporate credit rating of A-
This high level of engagement helps to support our credit
relationships.
p. 42 KPI – interest cover ratio
p. 72
Debt and financing
arrangements
p. 170 Note 23: Net debt
SHAREHOLDERS
Our shareholders play an important
role in monitoring and safeguarding
the governance of our Group
• Financial performance
• Strategy and business model
• ESG performance
• Dividend
Through our investor relations programme which includes
• 10.2% increase in dividend
regular updates, meetings, roadshows and our Annual General
Meeting, we ensure shareholder views are brought into our
Boardroom and considered in our decision making.
• 75p special dividend paid in June
• 260+ investor meetings
p. 41
p. 93
KPI – Total shareholder
return (TSR)
Shareholder engagement
in 2018
Remuneration – annual bonus
p. 125
and LTIP
Our stakeholders
OCCUPIERS
The continued strong performance of our
• Suitable lease terms
business would not be possible without
• Well-designed and
understanding our occupiers’ needs and
sustainable buildings
future aspirations. Many of our occupiers
• Well-being and talent
have moved within our portfolio as their
attraction/retention
businesses have grown, which is
testament to our proactive approach
EMPLOYEES
We have an experienced, diverse
and dedicated workforce which we
• Opportunities for
development and
recognise as a key asset of our business.
progression
Therefore, it is important that we
• Agile working patterns
continue to create the right environment
• Opportunity to share ideas
to encourage and create opportunities
and make a difference
for individuals and teams to realise their
• Diversity and inclusion
full potential
LOCAL COMMUNITIES
We are committed to supporting the
communities in which we operate,
including local businesses, residents
and the wider public
• Local disruption
• Impact on the local economy
• Derwent London being a
responsible neighbour
SUPPLIERS
We outsource many of our activities
to third-party suppliers and providers.
As a result, it is crucial that we develop
strong working relationships with
our suppliers, so we can enhance
the efficiency of our business and
create value
• Long-term partnerships
• Collaborative approach
• Open terms of business
• Fair payment terms
CENTRAL AND LOCAL GOVERNMENT
As a responsible employer and
business, we are committed to
engaging constructively with central
and local government to ensure we
are supporting the wider community
• Openness and transparency
• Proactive and compliant
with new legislation
• Proactive engagement
with local authorities
• Support for local economic
plans and strategies
DEBT PROVIDERS
Our debt providers play an important role
• Current financial performance
in our business. We maintain close and
• Openness and transparency
supportive relationships with this group
• Proactive approach
of long-term stakeholders, characterised
to communication
by openness, transparency and mutual
• Credit rating
understanding
SHAREHOLDERS
Our shareholders play an important
role in monitoring and safeguarding
the governance of our Group
Strategic report
19
Their material issues
How we engage
2018 highlights
Further links
Via our dedicated asset and property management
teams and close Director involvement, we communicate
regularly with our existing occupier base to anticipate trends
and preferences and incorporate them early into our designs.
We do this through meetings, engagement events and forums.
This active engagement ultimately ensures our high quality,
sustainable space meets their needs and helps them to
attract and retain talent.
• £26.8m of lettings
• 1.8% EPRA vacancy rate
• 90% tenant retention/re-lets
We have an open, collaborative and inclusive management
structure and engage regularly with our employees.
We do this through an appraisal process, structured career
conversations, employee surveys, our intranet site, company
presentations, away days and our well-being programme.
Employee engagement is frequently measured and we
have a designated Non-Executive Director, Cilla Snowball,
who chairs the Responsible Business Committee.
• 90.0% staff retention
• 90.4% staff satisfaction
• ‘Fit for the Future’ initiative launched
p. 42
KPIs – tenant retention
and void management
p. 62 Asset management
p. 125
Executive annual bonus –
void management target
p. 43 KPI – staff satisfaction
p. 48
p. 125
Principal risk – management
of succession
Executive annual bonus –
staff satisfaction target
We engage with the local community not only through the
planning process but also through our Community Fund,
volunteering, charity work and providing employment
and work experience opportunities. We also liaise with
Non-Governmental Organisations (NGO’s) and industry
bodies to enhance the positive impact we have on the
communities in which we operate.
• 141.5 hours of staff volunteering
• £350k of charitable and community donations
• Extended our support to the Community Fund
until 2021
p. 26
Investing in communities
p. 94
p. 125
The Featherstone Building
case study
Executive annual bonus –
carbon intensity target
Through effective collaboration, we aim to build long-term
relationships with our suppliers so that we can develop and
operate great spaces for our occupiers. We are signatories
to the CICM Prompt Payment Code and are clear about our
payment practices. We expect our suppliers to adopt similar
practices throughout their supply chains to ensure fair and
prompt treatment of all creditors.
• £187.5m capital expenditure
• 28 day average payment
• Received confirmation that our key suppliers were
compliant with our Sustainability Standard
p. 47 Brexit
p. 52
p. 113
Principal risk –
contractor default
Supply Chain
Sustainability Standard
We take a constructive, positive approach to working
with local authorities to ensure high quality planning
applications are submitted. Similarly, we maintain positive
and proactive relationships with Government departments
such as HMRC via regular dialogue and correspondence.
This has helped us maintain a ‘low risk’ tax rating.
• 14 units of affordable housing under construction
as part of the 80 Charlotte Street development
p. 56
Principal risk – regulatory
non-compliance
• Progressing a public theatre as part of the
Soho Place development
p. 70
Taxation
p. 94
The Featherstone Building
case study
We arrange debt facilities from a diverse group of providers
ranging from banks to institutional pension funds. We engage
with these providers and credit rating agencies through
regular meetings and presentations to ensure that they
remain fully informed on all relevant areas of our business.
This high level of engagement helps to support our credit
relationships.
• £250m new long-term debt arranged
• 491% interest cover
• 17.2% loan-to-value ratio
• Fitch assigned corporate credit rating of A-
p. 42 KPI – interest cover ratio
p. 72
Debt and financing
arrangements
p. 170 Note 23: Net debt
• Financial performance
• Strategy and business model
• ESG performance
• Dividend
Through our investor relations programme which includes
regular updates, meetings, roadshows and our Annual General
Meeting, we ensure shareholder views are brought into our
Boardroom and considered in our decision making.
• 10.2% increase in dividend
• 75p special dividend paid in June
• 260+ investor meetings
p. 41
p. 93
KPI – Total shareholder
return (TSR)
Shareholder engagement
in 2018
p. 125
Remuneration – annual bonus
and LTIP
20
Derwent London plc Report & Accounts 2018
OUR business model
We apply our asset management and regeneration
skills to the Group’s 5.4m sq ft property portfolio
using our people, relationships and financial resources
to add value and grow income while benefitting the
communities in which we operate and the wider
environment beyond.
How we add value
Our core activities
ASSET
MANAGEMENT
Understanding our occupiers
helps us tailor buildings and
leases to their needs thereby
growing our income streams
and adding value.
p. 62
DEVELOPMENT AND
REFURBISHMENT
Our focus on design,
innovation and value-for-
money creates sustainable
and flexible buildings
characterised by generous
volumes, good natural light
and amenities.
Impacted by
The world we live in
The London office market
and its wider context
p. 12
Our assets and resources
Properties
p. 16
Financial resources
p. 68
People and relationships
p. 65
p. 78
The views of our
stakeholders
Understanding their key
issues through effective
engagement
p. 18
OUR CULTURE
• Hard-working and adaptable
• A passion to improve London’s
office spaces
• Progressive and pragmatic
• ‘Open door’ and inclusive
• Collaborative and supportive
INVESTMENT ACTIVITY
We are recyclers of capital,
acquiring properties with future
regeneration opportunities to
build a pipeline of projects and
disposing of those with limited
future potential.
p. 63
Strong governance and
risk management
p. 84
DISTINCTIVELY DERWENT
• Investing in emerging locations
• Focus on middle-market rents
• Strong balance sheet
Driven by
Our purpose
To help improve and upgrade
the stock of office space in
central London, providing
above average long-term
returns to our shareholders
while bringing social and
economic benefits to all
our stakeholders.
By promoting values that
include building long-term
relationships and setting an
open and progressive
corporate culture, our
design-led ethos has created
a brand of well-designed,
flexible and efficient buildings
at affordable rents.
OUR VALUES
• Reputation, integrity and good
• Building long-term relationships
governance
and trust
• Focus on creative design and
embracing change
• Openness and transparency
• Sustainability and responsibility
Strategic report
21
How we add value
Outputs
Adding value for stakeholders
Driven by our five
strategic objectives
1.
TO OPTIMISE RETURNS
AND CREATE VALUE
FROM A BALANCED
PORTFOLIO
p. 34
2.
TO GROW RECURRING
EARNINGS AND
CASH FLOW
p.36
3.
TO ATTRACT,
RETAIN AND
DEVELOP TALENTED
EMPLOYEES
p.37
4.
TO DESIGN, DELIVER
AND OPERATE
OUR BUILDINGS
RESPONSIBLY
p.38
5.
TO MAINTAIN
STRONG AND
FLEXIBLE
FINANCING
p.39
Office space for today’s
businesses
p. 22
Delivering above average
long-term returns
p. 25
Investing in neighbourhoods
and communities
p. 26
DISTINCTIVELY DERWENT
• Investing in emerging locations
• Focus on middle-market rents
• Strong balance sheet
• Experienced and collaborative team
• Proactive occupier relationships
• Design focus and innovation
Outcomes
427,100 sq ft
New lettings in 2018,
at a rent of £26.8m pa
£187.5m
Capital expenditure
in 2018 and over
£1bn in past 10 years
+10.4%
Average annual
ordinary dividend
growth over 10 years
+13.4%
Average annual total
return over 10 years
£564,000
Invested to date in
local initiatives by
our Community Fund
Measured via
our KPIs
p. 40
22
Derwent London plc Report & Accounts 2018
OFFICE SPACE FOR TODAY’S BUSINESSESBRUNEL BUILDING, PADDINGTON W2Cutting-edge design in a prominent locationProviding good quality cutting-edge office space is a core part of Derwent London’s business, with an underlying focus on design excellence. Following our ground-breaking White Collar Factory, our 243,000 sq ft Brunel Building is due for completion in the first half of 2019. Occupying a prominent canalside island site, opposite Paddington station and its new Crossrail entrance, we had the opportunity to create something different. With architects Fletcher Priest, we came up with a striking diagrid structure. The external steel frame echoes the 19th century industrial aesthetic of Isambard Kingdom Brunel, but is also immensely practical, supporting column-free office floors. The 17,000 sq ft floors are infused with natural light from tall windows and our signature 3.5m ceiling heights, substantially more generous than standard office designs. This follows our view that buildings should work as well on the inside as the outside.Design inside and outThe building will have a double-storey reception with a ground floor restaurant and café, and glass doors opening up the space to the waterfront. There will be two large terraces on the upper levels, one for communal use, both having excellent views. The development will also open up a new public towpath along the canal which has been inaccessible for over 60 years.InnovationConstruction work started in 2016 with the groundworks being particularly sensitive due to their position beside the canal and above the Bakerloo underground line. The steel structure incorporated many bespoke pre-fabricated concrete sections that contractors Laing O’Rourke created off-site at their factory in Yorkshire. This approach has enabled a very good quality fast-track construction programme.Broad appealIn line with our strategy, we committed to the development on a speculative basis with the aim of de-risking it as the project progressed. During 2018, we pre-let almost two thirds of the building and were very pleased to secure Sony Pictures as the first occupier. We followed this by letting the top two floors to a leading international private equity group. Including a further letting in 2019, the building is now 77% pre-let. Lease terms range from 10 to 15 years and we achieved rents on average 15% above December 2017 ERV. The wide range of occupiers reflects the broad appeal of our space and demonstrates that we are building office space that suits today’s businesses. Strategic report
23
24
Derwent London plc Report & Accounts 2018
Strategic report
25
DELIVERING ABOVE AVERAGE LONG-TERM RETURNS TEA BUILDING, SHOREDITCH E1Creating the strategy‘Core income’ properties currently represent over half our portfolio balancing the more opportunity-rich elements of the portfolio. However, this doesn’t mean that these buildings lack growth and we continually look to enhance them through a series of rolling initiatives. These often attract less public attention then our major developments but are important to keep the portfolio up-to-date.Our Tea Building, Shoreditch E1 is one such example. It was acquired in 2001 as a warehouse, at one stage owned by Lipton Tea, hence its name. It was first placed in the ‘under appraisal’ part of the portfolio with a plan to create modern offices serving the City market. An office market downturn intervened but, as we buy buildings with ‘good bones’ (i.e. good structures), we were able to adapt it. Instead we undertook a low cost rolling refurbishment highlighting the building’s industrial heritage.Delivering the planIn 2003 the building attracted advertising agency Mother who shared our vision and moved from Midtown into bespoke space in an up-and-coming location. They took a 15-year lease on 44,000 sq ft, which was extended for another 10 years to 2028. Elsewhere the building was typically let as multiple small office suites on five-year leases with rents averaging c.£9 per sq ft. In 2010 Shoreditch House opened its doors, introducing a private members’ club and a roof-top swimming pool, reinforcing the building’s status as an exciting hub.The second decade of ownership has seen the building become the heart of an established location for creative businesses. The average size of units has grown with the scale of the occupiers. The ground floor has also been improved with the introduction of Brat, Pizza East, Lyles and The Smoking Goat. The space’s environmental performance has also improved, as we rolled out our ‘Green Tea’ strategy, with upgraded windows and insulation, motion sensitive lighting and the introduction of a thermal loop shifting warm and cool air around the building. This initiative now covers 80% of the building, and the most recent office rent achieved is £58 per sq ft.Looking forwardTea Building has become an extraordinary 269,300 sq ft property, which has helped transform the surrounding area into a thriving Tech Belt hub. Our progress has benefitted from significant interaction with the occupiers which has seen our leasing and design strategies evolve not just here but in other properties. Tea Building has produced very good long-term returns for us with its value alone, allowing for capex, increasing by almost 300% since 2001. However, we believe there is more to come as there is reversion to capture, and we are currently transforming the entrance and reception areas to bring these in line with the building’s other improvements. 26
Derwent London plc Report & Accounts 2018
INVESTING IN COMMUNITIES AND NEIGHBOURHOODS FITZROVIA W1Long-term commitmentsOur roots in Fitzrovia W1 run deep starting with the purchase of The Cartwright Estate by London Merchant Securities in 1958. This was followed by further purchases building up holdings in the area north of Goodge Street. The merger with Derwent Valley in 2007 broadened this exposure adding more properties closer to Oxford Street to the south. Today we own 1.4 million sq ft in the area, c.30% of our portfolio.Attracting employersIn the 60 years we have invested in the area, we have built headquarter buildings for global engineers Arup and renowned advertising agents Saatchi & Saatchi. The latter were in occupation for 40 years, but recently relocated to new premises. Their property is now the site of our 80 Charlotte Street development, representing a c.£400m capital commitment, started in 2016 and due for completion in 2020. We are very excited that this scheme will accommodate Arup’s further expansion for another 20 years, as well as introducing another global brand, The Boston Consulting Group, to the area.Shifting focus of amenityAlthough we are principally known for our office buildings, we have enhanced the retail provision along Tottenham Court Road, diluting the historical dominance of furniture and hi-fi retailers. While a number of furniture retailers remain, including a recently introduced new IKEA in-town concept at our 95 Tottenham Court Road, changing shopping practices have seen most of the hi-fi shops disappear. We created nine new shop units at Tottenham Court Walk which were better suited to current retail requirements and these have been let to retail and restaurant outlets new to the area. Overall there has been a significant increase in businesses that serve the daily needs of local residents and office users. Our next major development, Soho Place in the south of this cluster, includes five retail units and a new theatre as well as 209,000 sq ft of offices.Our 80 Charlotte Street development includes 55 new residential units helping to ensure that the vibrancy of this wonderfully mixed-use area is maintained. Supporting local community initiativesIn recognition of our deep involvement in the area, we set up a local community fund in 2013 with the commitment to invest £250,000 into local causes over three years. We honoured that promise supporting 16 local initiatives including Fitzrovia Youth in Action, Fitzrovia Centre, All Souls Club House, All Souls Primary School and the American Church Soup Kitchen. The success of this work has led us to extend the fund, and we recently committed to provide funds until 2021. Strategic report
27
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Derwent London plc Report & Accounts 2018
OUR DEVELOPMENT PIPELINE
2019
2020
On-site
2021
2022
The Featherstone Building EC1
This warehouse-inspired office building will be a fitting neighbour to our ground-breaking White Collar Factory, and is one block south
of ‘Silicon roundabout’. The new 125,000 sq ft building will replace two tired properties totalling 69,000 sq ft. The design incorporates
a number of typical Derwent London features: 3.1m from floor to soffit, concrete core cooling, opening windows, multiple terraces
and a ground floor cafe linking with the reception area. We gained possession of the site at the end of 2018.
Soho Place W1 (above)
Our next major project is located on one of London’s most strategic sites at the eastern end of Oxford Street and above the Tottenham Court
Road Elizabeth line station. The development comprises two buildings together with a new piazza linking to Soho Square. 1 Soho Place
totals 191,000 sq ft of office space with three roof terraces including one for communal use. The ground and first floors will have five retail
units totalling 36,000 sq ft. The adjoining building 2 Soho Place will comprise a new 40,000 sq ft theatre as well as 18,000 sq ft of offices.
Strategic report
29
2023
2024
2025
2026
Planning consents – potential starts
Future consideration
Holden House W1
We have received a ‘resolution to grant’ consent for a 150,000 sq ft redevelopment either
as retail or for mixed office and retail use at the fast improving eastern end of Oxford Street.
The site is particularly appealing due to its relative depth which is rare at this end of the street.
The current property totals 90,000 sq ft and is let to a mix of retail and office occupiers.
Network Building W1
The current Fitzrovia building comprises
64,000 sq ft, which preliminary studies
suggest could rise to c.100,000 sq ft.
19-35 Baker Street W1
We have a resolution to grant consent for 293,000 sq ft of offices, retail and residential.
This represents double the existing area. The property is currently held in a joint venture
with The Portman Estate in which we have a 55% interest.
Francis House SW1
A scheme under consideration could
increase this building’s area from
86,000 sq ft to c.130,000 sq ft.
30
Our strategy
Our purpose is to help improve and
upgrade the stock of office space in
central London, providing above average
long-term returns to our shareholders
while bringing social and economic
benefits to all our stakeholders.
John Burns
Chief Executive Officer
OUR PRIORITIES IN 2019
• Maintain balance between income generation and
development activity
• De-risk the pipeline through further pre-lets
• Capital recycling where opportunities are identified
• Complete Brunel Building W2 and progress 80 Charlotte
Street W1, The Featherstone Building EC1 and Soho Place W1
• Manage voids and extend income through renewals and
• Continue to promote diversity, inclusion and well-being
• Develop COP21 action plans for properties in the managed
re-gears
initiatives
portfolio
Derwent London plc Report & Accounts 2018
An open and progressive corporate culture, combined with our focus
on design and long-term relationships, has established our brand of
well-designed, flexible, efficient and affordable buildings. These help
our occupiers attract talent but also revitalise and enhance their
neighbourhoods and local communities, contributing to workforce
well-being and reinforcing London’s place as a leading global
business hub.
Our strategy and priorities for 2018
Our strategy has been broadly consistent now for many years but
our priorities vary with the property cycle and changes in the general
economic environment.
Our main priority for 2018 was to maintain a good balance
between income generation and development risk by progressing
with our major schemes at 80 Charlotte Street and Brunel Building,
Paddington and de-risking them through letting activity. This was
successful and has also enabled us to progress the projects at
Soho Place and The Featherstone Building.
Our main asset management priorities were to focus on income
through extending leases, minimising voids and capturing reversion
(i.e. higher rents) through rent reviews or regearing existing leases.
Other priorities were to support well-being initiatives for our staff
and for our tenanted buildings, monitor progress against our
science-based carbon targets and review our refinancing options.
Further details are on page 32.
Risk management
Risk management is an integral part of our business and is
monitored regularly. This is split into categories considering the likely
impact on strategy, operations, financial position and stakeholders.
Our projects may take many years to complete, requiring long-term
planning, risk mitigation and financial discipline.
Performance measurement and remuneration
Key Performance Indicators (KPIs) help us measure our performance
and assess the effectiveness of our strategy.
These are listed on page 33 for each objective but the principal
measures that we apply to ascertain overall business performance
are total return (TR), total property return (TPR) and total shareholder
return (TSR).
TR combines our dividends with the growth in Net Asset Value (NAV)
per share to provide an overall return for the year and is measured
against a peer group.
TPR measures the income and growth in value from our properties
and is measured against an index of other properties.
TSR compares our dividends and share price performance with the
relevant index.
TR, TPR and TSR are the main performance measures we use to
determine the variable elements of executive remuneration to ensure
there is a strong alignment between the interests of shareholders
and our decision makers.
Strategic report
OUR FIVE STRATEGIC OBJECTIVES
31
1.
2.
TO OPTIMISE RETURNS
AND CREATE VALUE FROM
A BALANCED PORTFOLIO
TO GROW RECURRING
EARNINGS AND CASH FLOW
3. TO ATTRACT, RETAIN
AND DEVELOP TALENTED
EMPLOYEES
4. TO DESIGN, DELIVER AND
OPERATE OUR BUILDINGS
RESPONSIBLY
5. TO MAINTAIN STRONG
AND FLEXIBLE FINANCING
p. 34
p. 36
p. 37
p. 38
p. 39
Priorities
Annual priorities are set for each
strategic objective
Risk
Risk management is integral to the
delivery of our strategy
KPIs and remuneration
Success against our objectives is
measured using our KPIs and rewarded
through our incentive schemes
p. 32
p. 46
p. 40
Value creation for our stakeholders
Above average long-term returns for our
shareholders and benefits to all our
stakeholders
32
OUR STRATEGY CONTINUED
Derwent London plc Report & Accounts 2018
2018 priorities
2018 progress
Priorities for 2019
Key performance measures
Risks
1. TO OPTIMISE RETURNS AND CREATE VALUE FROM A BALANCED PORTFOLIO
Seek acquisitions that meet our criteria
Maintain balance between income generation and development activity
Progress 80 Charlotte Street W1, Brunel Building W2 and Soho Place W1
A 36-year leasehold interest in 88-94 Tottenham Court Road W1, which forms
a cluster with other Derwent London properties, acquired for £44.3m
Balance maintained with 41% of the portfolio having development potential,
or currently being developed
Brunel Building and 80 Charlotte Street progressing well
Good progress made towards fixing the price of the contract at Soho Place
De-risk the pipeline through further pre-lets
80 Charlotte Street and Brunel Building were 70% pre-let at the end of 2018
Advance regeneration opportunities within the portfolio
Site demolition commenced for The Featherstone Building EC1 and planning
consents achieved at 19-35 Baker Street W1 and Holden House W1. Beyond these,
25% of the portfolio is designated for future development
2. TO GROW RECURRING EARNINGS AND CASH FLOW
Manage voids and maximise income from good asset management
Continuously monitor portfolio for further asset management initiatives
Considerable progress in void management and re-letting vacant space;
at 31 Dec 2018 the vacancy rate was at 1.8%
Asset management activity covered 833,000 sq ft (17% of the completed portfolio)
New lettings achieved £26.8m of income, 4.1% above Dec 2017 ERV, across
427,100 sq ft. Rent reviews increased income by 24% to £8.0m on 188,000 sq ft
Extend income through renewals and regears for properties not earmarked
for regeneration
Our retention and re-let rate was 90% in 2018
Renewals and regears increased income by 20% to £30.3m on 645,000 sq ft
Secure further pre-lets
During 2018, pre-lets were secured on 155,100 sq ft of the Brunel Building,
64% of the total. 80 Charlotte Street is 74% pre-let/pre-sold
3. TO ATTRACT, RETAIN AND DEVELOP TALENTED EMPLOYEES
Continue the ‘Fit for the Future’ programme
Identify additional well-being initiatives
Establish working group to recommend improvements
to lower scoring areas identified by the staff survey
Staff in managerial roles started a 12 month management and development
programme. Other staff attended core skills workshops
Private medical and dental insurance extended to all employees
Various initiatives run, including a ‘Heart Disease & Diabetes’ workshop
All key recommendations made by the working group were endorsed by the
Executive Committee and either have been enacted or will be during 2019
4. TO DESIGN, DELIVER AND OPERATE OUR BUILDINGS RESPONSIBLY
Develop our framework for health and well-being in developments
Implement a new carbon analysis tool to monitor
progress against our science-based targets
Deliver the next rounds of our Community Fund
We are continuing to develop our framework to encompass all aspects
of our business
Our new carbon scenario analysis tool was successfully developed
Three rounds of funding were successfully delivered,
with over £106,000 invested across a range of projects
5. TO MAINTAIN STRONG AND FLEXIBLE FINANCING
Review refinancing options for the 2019 convertible bonds
Several potential options are being considered and monitored
Maintain or strengthen available facilities
£250m of US Private Placement notes agreed in Nov 2018, with a weighted
average coupon of 2.89% and a weighted average maturity of 10.8 years
Maintain good interest cover
Interest cover increased to 491% in 2018
• Continue to review refinancing options
for the 2019 convertible bonds
• Maintain or strengthen available facilities
• Maintain good interest cover
• Interest cover ratio
• Gearing and available resources
• Reversionary percentage
• Continue to seek acquisitions and disposals
that meet our criteria
• Maintain balance between income
generation and development activity
• Complete Brunel Building
• Progress 80 Charlotte Street, Soho Place
and The Featherstone Building
• De-risk the pipeline through further pre-lets
• Advance regeneration opportunities within
the portfolio
• Total property return
• EPRA earnings per share
• Reversionary percentage
• Development potential
• Void management
• Continuously monitor portfolio for further
asset management initiatives
• Extend income through renewals and regears
for properties not earmarked for regeneration
• Manage voids and maximise income from
• Total property return
• EPRA earnings per share
• Reversionary percentage
• Tenant retention
• Void management
good asset management
• Secure further pre-lets
• Failure to implement the Group’s strategy
• Adverse Brexit settlement
• Management of succession
• Fall in property values
• Reduced development returns
• ‘On-site’ risk
• Cyber attack
• Contractor/subcontractor default
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Climate change and non-compliance with environmental
and sustainability legislation
• Failure to implement the Group’s strategy
• Adverse Brexit settlement
• Management of succession
• Reduced development returns
• ‘On-site’ risk
• Cyber attack
• Contractor/subcontractor default
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Continue to develop the ‘talent pipeline’
via the ‘Fit for the Future’ programme
• Continue to promote diversity, inclusion
and well-being initiatives
• Arrange a Company away day that focuses
on team building
• Conduct our next employee survey
• Staff satisfaction
• Management of succession
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Climate change and non-compliance with environmental
and sustainability legislation
• Other regulatory non-compliance
• Finalise and launch our corporate framework
for health and well-being in developments
• Develop COP21 action plans for properties
• Energy performance certificates
• BREEAM ratings
• Carbon intensity
in the managed portfolio
• Deliver the next rounds of our
Community Fund
• Failure to implement the Group’s strategy
• Management of succession
• ‘On-site’ risk
• Cyber attack
• Contractor/subcontractor default
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Climate change and non-compliance with environmental
and sustainability legislation
• Other regulatory non-compliance
• Failure to implement the Group’s strategy
• Adverse Brexit settlement
• Management of succession
• Fall in property values
• Reduced development returns
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Other regulatory non-compliance
p. 34
p. 36
p. 37
p. 38
p. 39
2018 priorities
2018 progress
Priorities for 2019
Key performance measures
Risks
Strategic report
Total return and total shareholder
return measure our performance
across all our strategic objectives
Key
Achieved
Still in progress
Not achieved
1. TO OPTIMISE RETURNS AND CREATE VALUE FROM A BALANCED PORTFOLIO
Seek acquisitions that meet our criteria
Maintain balance between income generation and development activity
Progress 80 Charlotte Street W1, Brunel Building W2 and Soho Place W1
A 36-year leasehold interest in 88-94 Tottenham Court Road W1, which forms
a cluster with other Derwent London properties, acquired for £44.3m
Balance maintained with 41% of the portfolio having development potential,
or currently being developed
Brunel Building and 80 Charlotte Street progressing well
Good progress made towards fixing the price of the contract at Soho Place
De-risk the pipeline through further pre-lets
80 Charlotte Street and Brunel Building were 70% pre-let at the end of 2018
Advance regeneration opportunities within the portfolio
Site demolition commenced for The Featherstone Building EC1 and planning
consents achieved at 19-35 Baker Street W1 and Holden House W1. Beyond these,
25% of the portfolio is designated for future development
2. TO GROW RECURRING EARNINGS AND CASH FLOW
Manage voids and maximise income from good asset management
Continuously monitor portfolio for further asset management initiatives
Extend income through renewals and regears for properties not earmarked
Our retention and re-let rate was 90% in 2018
for regeneration
Secure further pre-lets
Considerable progress in void management and re-letting vacant space;
at 31 Dec 2018 the vacancy rate was at 1.8%
Asset management activity covered 833,000 sq ft (17% of the completed portfolio)
New lettings achieved £26.8m of income, 4.1% above Dec 2017 ERV, across
427,100 sq ft. Rent reviews increased income by 24% to £8.0m on 188,000 sq ft
Renewals and regears increased income by 20% to £30.3m on 645,000 sq ft
During 2018, pre-lets were secured on 155,100 sq ft of the Brunel Building,
64% of the total. 80 Charlotte Street is 74% pre-let/pre-sold
3. TO ATTRACT, RETAIN AND DEVELOP TALENTED EMPLOYEES
Continue the ‘Fit for the Future’ programme
Identify additional well-being initiatives
Establish working group to recommend improvements
to lower scoring areas identified by the staff survey
Staff in managerial roles started a 12 month management and development
programme. Other staff attended core skills workshops
Private medical and dental insurance extended to all employees
Various initiatives run, including a ‘Heart Disease & Diabetes’ workshop
All key recommendations made by the working group were endorsed by the
Executive Committee and either have been enacted or will be during 2019
4. TO DESIGN, DELIVER AND OPERATE OUR BUILDINGS RESPONSIBLY
Develop our framework for health and well-being in developments
Implement a new carbon analysis tool to monitor
progress against our science-based targets
Deliver the next rounds of our Community Fund
We are continuing to develop our framework to encompass all aspects
of our business
Our new carbon scenario analysis tool was successfully developed
Three rounds of funding were successfully delivered,
with over £106,000 invested across a range of projects
5. TO MAINTAIN STRONG AND FLEXIBLE FINANCING
Review refinancing options for the 2019 convertible bonds
Several potential options are being considered and monitored
Maintain or strengthen available facilities
£250m of US Private Placement notes agreed in Nov 2018, with a weighted
average coupon of 2.89% and a weighted average maturity of 10.8 years
Maintain good interest cover
Interest cover increased to 491% in 2018
• Continue to seek acquisitions and disposals
that meet our criteria
• Maintain balance between income
generation and development activity
• Complete Brunel Building
• Progress 80 Charlotte Street, Soho Place
and The Featherstone Building
• De-risk the pipeline through further pre-lets
• Advance regeneration opportunities within
the portfolio
• Continuously monitor portfolio for further
asset management initiatives
• Extend income through renewals and regears
for properties not earmarked for regeneration
• Manage voids and maximise income from
good asset management
• Secure further pre-lets
• Continue to develop the ‘talent pipeline’
via the ‘Fit for the Future’ programme
• Continue to promote diversity, inclusion
and well-being initiatives
• Arrange a Company away day that focuses
on team building
• Conduct our next employee survey
• Finalise and launch our corporate framework
for health and well-being in developments
• Develop COP21 action plans for properties
in the managed portfolio
• Deliver the next rounds of our
Community Fund
• Continue to review refinancing options
for the 2019 convertible bonds
• Maintain or strengthen available facilities
• Maintain good interest cover
• Total property return
• EPRA earnings per share
• Reversionary percentage
• Development potential
• Void management
• Total property return
• EPRA earnings per share
• Reversionary percentage
• Tenant retention
• Void management
• Staff satisfaction
• Energy performance certificates
• BREEAM ratings
• Carbon intensity
• Failure to implement the Group’s strategy
• Adverse Brexit settlement
• Management of succession
• Fall in property values
• Reduced development returns
• ‘On-site’ risk
• Contractor/subcontractor default
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Climate change and non-compliance with environmental
and sustainability legislation
• Failure to implement the Group’s strategy
• Adverse Brexit settlement
• Management of succession
• Reduced development returns
• ‘On-site’ risk
• Contractor/subcontractor default
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Management of succession
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Climate change and non-compliance with environmental
and sustainability legislation
• Other regulatory non-compliance
• Failure to implement the Group’s strategy
• Management of succession
• ‘On-site’ risk
• Contractor/subcontractor default
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Climate change and non-compliance with environmental
and sustainability legislation
• Other regulatory non-compliance
• Interest cover ratio
• Gearing and available resources
• Reversionary percentage
• Failure to implement the Group’s strategy
• Adverse Brexit settlement
• Management of succession
• Fall in property values
• Reduced development returns
• Cyber attack
• Terrorism or other business interruption
• Reputational damage
• Non-compliance with health and safety legislation
• Other regulatory non-compliance
33
p. 34
p. 36
p. 37
p. 38
p. 39
34
OUR STRATEGY CONTINUED
Derwent London plc Report & Accounts 2018
1.
TO OPTIMISE RETURNS AND CREATE VALUE FROM A BALANCED PORTFOLIO
The chart below shows how our 5.4m sq ft portfolio is balanced between properties with potential
to add further value through regeneration and those which have already been improved but where
our asset management skills can continue to grow value and income. This section also sets out the
typical life cycle (A to G) of our properties, explaining how maintaining that portfolio balance is a key
consideration in the strategy we pursue for each property.
59%
CORE INCOME
G
Core income
59%
Income
producing
88%
F
41%
UNDER REDEVELOPMENT
/POTENTIAL
A
B
Future appraisal
19%
C
D
Under appraisal
6%
Consented
4%
On-site
developments
12%
E
D
Risk mitigation
We try to achieve the appropriate balance of
overall risk for the business. This enables us
to start schemes speculatively, i.e. without
any pre-letting in place. By ensuring the
end-product will appeal to as many
occupiers as possible, we often receive
early interest from potential tenants once
we are on site. Design and construction
of these large and complex projects
requires considerable skill, experience
and teamwork so we work with a chosen
group of consultants, contractors and
subcontractors to minimise the risks of
delivery. Those risks principally relate to
time delays and/or cost overruns, but there
are many technical and physical constraints
too. Preparation of an annual ‘five-year plan’
helps us anticipate and maintain a balance
between income/dividend growth and value
adding through our riskier projects, both
now and into the future.
E
Pre-letting during construction
Supported by our reputation for delivering
well-designed and affordable buildings,
we will typically de-risk each project by
agreeing pre-letting terms with one or
more tenants during the construction
phase. The momentum that this provides
encourages us to consider the next phase
of our project pipeline too, adding further
value where we see opportunities.
Strategic report
A
Acquiring opportunities
Our property life cycle starts with the
acquisition of buildings with low capital
values. These are usually income producing
but often with low rents. We particularly
look for potential to add area to the building
and/or to improve the quality of the space.
They may also be in locations which have
underperformed or are due to benefit from
infrastructure upgrades. If these features
are not apparent or we do not see good
value, we are disciplined in our capital
allocation and are not ‘forced buyers’.
B
The importance of cash flow
By acquiring properties that are almost
always occupied and provide cash flow,
we have time to work up our plans while
enjoying an income yield, giving us the
necessary flexibility to assess what to do
and when to do it. Our plans for a building
regularly go through several iterations
before settling on an optimal solution.
C
Dialogue with tenants
and landlords
When exploring the best plan for the
building, we speak with existing tenants and,
where appropriate, any ultimate landlord.
This helps us extend income but with
landlord breaks at future dates to provide
us with flexibility. This can involve accepting
income below market levels but helps
us retain cash flow until we are ready to
commence a scheme. During this period,
we will negotiate with landlords if we do not
hold the property freehold, and will work
with our many design team relationships,
including experts in minimising the social
and environmental impact, to arrive at a
firm design. This also requires liaising with
the relevant planning authorities to seek
planning consent and consulting with local
communities and other key stakeholders.
35
F
Income and reversion
Once a building is completed and let,
it moves to the ‘core income’ sector
of our so-called ‘doughnut’ chart.
Here, we focus our portfolio management
skills on satisfying our tenants’ needs,
growing our income and adding further
value where we see opportunities.
G
Recycling assets
We will normally look to sell on a property
when we believe that we have extracted
most of the upside in value, or where it
no longer satisfies our investment criteria.
This frees up time and finance for the next
generation of acquisitions and projects.
Our brand
Getting our marketing and branding
right is another area where we devote
significant resource and we have a
dedicated internal team who engage
specialist consultants to ensure that
we present our product in a fresh and
positive way and at the right time.
Teamwork
As we are a small team, we work with
many experts in their respective fields in
areas such as planning, architecture and
design, engineering and other technical
areas, lawyers, accountants and
contractors. We value and enjoy their
input and recognise the important
contribution that they make. We believe
that they also enjoy working with us,
many having worked with us for a number
of years, and they share our satisfaction
in improving the environment around our
buildings. Together, we strive to improve
with each job that we do.
36
OUR STRATEGY CONTINUED
2.
TO GROW RECURRING EARNINGS AND CASH FLOW
The value of property is essentially
determined by contracted and expected
future cash flows.
occupiers and always with a focus on the
needs of our local communities and other
stakeholders.
Creating and then
capturing reversion
By establishing the right conditions for
a property, we can both add value and
increase cash flow but they can occur
at different times of the property cycle.
The value creation normally comes first
as expectations of rental growth emerge
thereby giving rise to what we call ‘reversion’,
i.e. the expectation that income will grow
from its current passing level.
Asset management actions
Our asset managers seek to capture the
increased rents through rent reviews, lease
regears or other lease restructuring. This is
underpinned by strong relationships with
What we do to capture reversion
• we work with tenants and consultants to
arrive at appropriate rent review uplifts;
• we negotiate to extend leases or remove
break clauses;
• we arrange ‘block dates’ to gain access
to buildings at an appropriate time;
• we review levels of ‘grey’ space, i.e. floor
area that is let but which is not currently
occupied or is being marketed by a tenant;
• we look to reduce irrecoverable costs,
as measured by the EPRA cost ratio;
• we try to anticipate our tenants’ needs,
thereby optimising income. Examples
are fixed or minimum rental uplifts and
a flexible approach to dilapidations
and alienation clauses in leases; and
Our reversion
We measure and monitor the level of portfolio reversion as follows:
F
11.1
G
274.4
E
10.8
C
31.9
D
5.8
£114.9m
B
55.3
A
159.5
£m
300
250
200
150
100
50
0
Derwent London plc Report & Accounts 2018
• occupiers are increasingly looking for
flexibility. We have long taken a flexible
approach at many buildings, like the
Tea Building for example, to keep lease
lengths shorter, while at other buildings
aiming for longer leases, particularly on
larger lettings.
Performance measures
We use like-for-like rent analysis
(see EPRA definitions on page 205)
to measure how net and gross rental
income has grown within the non-
development part of the portfolio.
We monitor irrecoverable costs
through the EPRA cost ratio and void
percentages. We also place considerable
emphasis on growing EPRA earnings
and returns to shareholders.
A – Contracted rent
Passing as at December 2018
B – Contracted rental uplifts
This comes from the ‘burning off’ of
rent-free or half rent periods, or through
fixed or minimum future rental increases
C – Pre-let developments
and refurbishments
Where the contracted income increases
both on delivery of the scheme and again
as rental incentives expire
D – Vacant space
When let at open market rents, this leads
to increases in contracted income
E – Developments and refurbishments
This is the estimated rental value of current
schemes which are not yet pre-let
F – Marking to current market values
This is the pure ‘reversion’ inherent in
the existing leases taking their income
to estimated current rental value
G – Estimated rental value (ERV)
Our valuers’ estimate of the total rental
value of our portfolio, including
developments and refurbishments
under construction
Strategic report
37
3.
TO ATTRACT, RETAIN AND DEVELOP TALENTED EMPLOYEES
A talented team that embraces our values
and thrives in our culture is essential if
Derwent London is to fulfil its purpose.
We place great importance on having a
progressive, pragmatic and collaborative
culture coupled with a consultative and
professional leadership style – one that
focuses on teamwork and acting with
integrity in order to build long-term
relationships with our colleagues and
other stakeholders. Our employees are
ambassadors for our brand and we
therefore invest considerable time and
resources in recruiting outstanding
individuals, who bring new ideas, skills and
competencies to the business. Once with us,
we strive to ensure they are highly engaged
and our success in this is demonstrated by
our exceptional staff retention rates and
satisfaction scores, as well as by the fact
that 30% of employees have been with us
for more than ten years.
Our reputation stems from the behaviours
and values promoted by our Board and
these are reinforced through our induction
programme, performance management
process, core skills workshops and our new
management and leadership development
programmes entitled ‘Fit for the Future.’
Our structure enables complex transactions
to be managed effectively and decisions
made quickly with the overall aim of creating
value and driving income growth across our
portfolio. Although we are structured by
discipline, we assemble teams for specific
projects that draw on expertise from across
the business. We believe this collaborative
approach increases creativity and
innovation. Collaboration is also facilitated
through a number of supporting committees
(for example the Cost, Credit and Health
& Safety Committees) which, together with
the project teams, report into our Executive
Committee (see page 87).
This ensures accountability across the
business and enables changes in the
Group’s strategic focus to be communicated
and implemented.
Diversity and well-being initiatives have been
high on the agenda during 2018 and these
will continue into 2019. Other initiatives have
been implemented during the year as a
result of the employee survey carried out in
2017; part of our focus on making Derwent
London an even better place to work.
p. 74
Further information on employee engagement
and development can be found in the
responsibility section
Response rate to our
staff survey
91%
90%
90%
Staff satisfaction
Staff retention
Left: The Featherstone Building project team
38
OUR STRATEGY CONTINUED
4.
TO DESIGN, DELIVER AND OPERATE OUR BUILDINGS RESPONSIBLY
We work with our stakeholder groups to
ensure we are meeting their expectations
and standards, as well as acting responsibly.
This can range from working with the local
communities in and around our buildings,
through to designers and contractors,
to ensure our buildings meet the standards
we set (see page 18 for more on stakeholder
engagement).
Delivering well-designed, sustainable,
occupier-focused buildings is an integral
part of our business model. These buildings
offer better long-term value for occupiers
and tend to let quickly and on better terms.
Setting high standards in terms of design
and sustainability builds flexibility, longevity
and climate resilience into our portfolio
– not just in our new developments but also
the spaces we manage. This will ensure our
portfolio is fit for purpose over the long-term
and continues to generate the returns we
expect. Our approach to climate resilience is
set out in further detail in our Responsibility
section on pages 76 to 77, with a summary
of our TCFD (Task Force on Climate-related
Financial Disclosures) disclosures. Recently,
our science-based targets were validated
by the Science Based Targets Initiative.
Derwent London plc Report & Accounts 2018
Waste recycling rate
75%
20%
Reduction in like-for-like
carbon intensity
Below: Johnson Building EC1
Strategic report
39
5.
TO MAINTAIN STRONG AND FLEXIBLE FINANCING
We finance our business using a
combination of debt and equity, applying
policies which have been consistent and
well-proven over many years.
Our overriding principle is one of low leverage
with an emphasis on interest cover. Using a
combination of unsecured flexible revolving
bank facilities and longer-term fixed rate
debt, we can tailor the level of drawn debt
to our needs through the cycle. By keeping
adequate headroom, acquisitions can be
funded without delay and there is visibility
to us and our stakeholders that the
development pipeline is capable of being
delivered without overstretching the
balance sheet.
Derwent London’s financing model is based
on the following principles:
i)
conservative financial leverage to
balance the business’s relatively
high operational leverage;
ii) a growing focus on interest cover
to support the credit rating;
iii) borrowing from a diverse group of
relationship lenders, both banks and
institutions, who understand and
support our business model;
iv) managing the cost of debt but also
looking to have significant protection
against possible interest rate rises
while extending debt maturities; and
v) keeping structures and covenants
simple and understandable and
thinking ahead.
This approach provides financial stability
and helps us when considering issues such
as going concern and viability statements.
Our unsecured debt facilities have
essentially the same financial covenant
package so our lending relationships are
on a level playing field. In recent years,
we have also taken on more non-bank
debt which has extended the Group’s
unexpired duration of debt.
Finally, relationships with our funders – key
stakeholders in our business – are of great
importance to us and we communicate with
them all frequently.
p. 68
For further reading see the Finance review
Our REIT status
Derwent London plc has been a Real
Estate Investment Trust (REIT) since
July 2007.
The REIT regime (see page 206) was
launched to provide a structure which
closely mirrors the tax position of an
investor holding property directly and
seeks to provide potential holdings in
liquid publicly quoted vehicles to a wide
range of investors. REITs are principally
asset managers with tax exempt
property rental businesses, but remain
subject to corporation tax on non-exempt
income and gains. In addition, we are
required to deduct withholding tax from
certain shareholders on property income
distributions and in 2018 £6.3m was paid
to HMRC.
Left: Members of the Finance team
17.2%
LTV ratio
(2017: 13.2%)
491%
Interest cover
(2017: 454%)
£274m
Cash and undrawn facilities
(2017: £523m)
40
Measuring our
performance
Derwent London plc Report & Accounts 2018
We use a balance of financial and non-financial key
performance indicators (KPIs) to measure our performance
and assess the effectiveness of our strategy. They are also
used to monitor the impact of the principal risks that have been
identified and a number are used to determine remuneration.
KPIs
Financial
Non-financial
Operational measures
Gearing measures
Operational measures
Responsibility measures
Total return
Total property return
Total shareholder return
EPRA earnings per share*
* KPI introduced in 2018
Gearing and available
resources
Interest cover ratio
Reversionary percentage
BREEAM
Development potential
EPC
Tenant retention
Carbon intensity*
Void management
Staff satisfaction*
Our performance
Our total return in 2018 was 5.3%,
which comfortably exceeded the
benchmark return of 0.7%. Derwent
London’s average annual return
of 12.8% over the past five years
against a benchmark of 9.9% p.a.
demonstrates the ability of our
business model to generate above
average long-term returns.
2014
2015
2016
1.7
3.1
2017
7.7
6.6
2018
0.7
5.3
1. 2. 3. 4. 5.
R
%
30.1
21.9
23.0
18.7
Derwent London
Weighted average of major UK real estate companies
Financial KPIs
TOTAL RETURN
Total return equates to the
combination of NAV growth plus
dividends paid during the year.
We aim to exceed our benchmark,
which is the average of other major
real estate companies.
To optimise returns and create value
from a balanced portfolio
Key
Strategic objectives
1.
2. To grow recurring earnings and cash flow
3. To attract, retain and develop talented
4. To design, deliver and operate our
5. To maintain strong and flexible financing
Other
buildings responsibly
employees
R Remuneration
*
KPI introduced in 2018
Strategic report
Financial KPIs
Our performance
TOTAL PROPERTY RETURN
Total property return is used
to assess progress against our
property-focused strategic
objectives. We aim to exceed the
MSCI IPD Central London Offices
Index on an annual basis and the
MSCI IPD UK All Property Index
on a three-year rolling basis.
Continued strong pre-letting at
our developments and active
asset management meant we
outperformed MSCI IPD’s Central
London Offices Index by 70 bps
during 2018. Although over three
years we marginally underperformed
their UK All Property Index, our 6.0%
return in 2018 equalled the annual
index. This demonstrates London’s
continued attraction, which has seen
rents and yields remain firm, and the
particular appeal of our middle
market rental product.
Annual
2014
2015
2016
2017
2018
2.9
2.6
8.0
7.1
6.0
5.3
41
R
%
1. 2. 3. 4. 5.
25.1
23.5
19.9
19.7
18.4
%
21.2
Derwent London
MSCI IPD Central London Offices Index
Three-year rolling
2014
2015
2016
2017
2018
10.4
11.5
10.3
8.9
13.8
16.0
5.6
6.6
Derwent London
MSCI IPD UK All Property Index
TOTAL SHAREHOLDER RETURN (TSR)
To measure the Group’s achievement
of providing above average long-term
returns to its shareholders, we compare
our performance against the FTSE UK
350 Super Sector Real Estate Index,
using a 30-day average of the returns in
accordance with industry best practice.
Derwent London outperformed its
benchmark index in 2018 by 10.1%.
Our ability to deliver above average
long-term returns is demonstrated
by the fact that £100 invested in
Derwent London at the start of 2009
was worth £495 at the end of 2018,
compared with £214 for the
benchmark index.
2014
2015
1. 2. 3. 4. 5.
R
%
24.8
26.0
24.5
11.4
15.6
13.1
(26.5)
2016
(12.4)
2017
2018
0.9
(9.2)
Derwent London
FTSE UK 350 Super Sector Real Estate Index (FTSE All-Share REIT
Index used for 2014–2015)
EPRA EARNINGS PER SHARE (EPS)*
EPRA EPS is the principal
measure used to assess the Group’s
operating performance and a key
determinant of the annual dividend.
A reconciliation of this figure back
to the IFRS profit can be found in
note 38.
EPRA EPS rose by 20.0% in 2018
and has increased by 98% since
2014. In 2018 we have also reported
an underlying EPS, which excludes
a one-off receipt of 14p per share.
On this basis, EPS rose 5.1% to
99.08p.
2014
2015
2016
2017
2018
1. 2. 3. 4. 5
R
p
57.08
71.34
76.99
94.23
113.07
42
Derwent London plc Report & Accounts 2018
MEASURING OUR PERFORMANCE CONTINUED
Financial KPIs
Our performance
GEARING AND AVAILABLE RESOURCES
The Group monitors capital on the
basis of NAV gearing and the LTV
ratio. We also monitor our undrawn
facilities and cash, and the level
of uncharged properties, to ensure
that we have sufficient flexibility
to take advantage of acquisition
and development opportunities.
Cash and undrawn facilities fell in
the year due to net investment in our
portfolio of £228.6m. This also meant
an increase in the NAV gearing and
LTV ratio, but both remain at a low
level. In January 2019 we drew
down on £250m of proceeds from
a private placement, which
increased available funds to
over £500m, on a proforma basis.
£m
4,000
3,000
2,000
1,000
1. 2. 3. 4. 5.
9
0
7
,
3
7
7
7
,
3
4
6
8
,
3
7
1
1
,
4
8
1
7
,
2
R
%
80
60
40
20
6
3
3
9
6
2
3
8
3
3
2
5
4
7
2
0
2014
2015
2016
2017
2018
0
Cash and undrawn facilities (£m)
NAV gearing (%)
Uncharged properties (£m)
LTV (%)
INTEREST COVER RATIO (ICR)
We aim for our interest payable
to be covered at least two times by
net rents. The basis of calculation
is similar to the covenant included
in the loan documentation for
our unsecured bank facilities.
Please see note 40 for the
calculation of this measure.
Due to both an increase in property
income and decrease in finance
costs, the net interest cover ratio
increased during 2018. Rental
income would need to fall by over
70% before the main ICR covenant
was breached.
2014
2015
2016
2017
2018
Benchmark
1. 2. 3. 4. 5.
R
%
286
362
370
454
491
Non-financial KPIs
Our performance
REVERSIONARY PERCENTAGE
This is the percentage by which the
cash flow from rental income would
grow were the passing rent to be
increased to the estimated rental
value (ERV) and assuming the on-site
schemes are completed and let. It is
used to monitor the potential future
income growth of the Group.
New lettings helped increase the
reversion to 72%, giving a portfolio
ERV of £274.4m. Asset management
and letting activity in the year meant
that the proportion of the reversion
that is contracted, either through
fixed uplifts or pre-let schemes,
increased from 62% to 76%.
%
DEVELOPMENT POTENTIAL
We monitor the proportion of our
portfolio with the potential for
refurbishment or redevelopment
to ensure that there are sufficient
opportunities for future value
creation in the portfolio.
The percentage of our portfolio that
had redevelopment, regeneration or
refurbishment potential was 41% at
the end of 2018. We continue to seek
acquisitions that would provide value
creation opportunities.
%
TENANT RETENTION
1. 2. 3. 4. 5.
R
2014
64
2015
103
2016
89
2017
69
2018
72
1. 2. 3. 4. 5.
R
2014
52
2015
47
2016
43
2017
44
2018
41
1. 2. 3. 4. 5.
R
Maximising tenant retention
following tenant lease breaks or
expiries when we do not have
redevelopment plans minimises
void periods and contributes
towards net rental income.
Our retention and re-let rate was
90% in 2018 and averaged 87%
over the past five years, evidence
of the strong relationships we have
with our tenants and the appeal
of our mid-market product.
Exposure (£m pa)
Retention (%)
Re-let (%)
Total (%)
2014
17.3
63
10
73
2015
17.0
45
44
89
2016
11.0
63
26
89
2017
8.5
57
35
92
2018
14.9
76
14
90
43
R
%
4.1
Strategic report
Non-financial KPIs
Our performance
VOID MANAGEMENT
To optimise our rental income we plan
to minimise the space immediately
available for letting. We aim that
this should not exceed 10% of the
portfolio’s estimated rental value.
BREEAM RATINGS
BREEAM is an environmental impact
assessment method for commercial
buildings. Performance is measured
across a series of ratings: ‘Pass’,
‘Good’, ‘Very good’, ‘Excellent’ and
‘Outstanding’. We target minimum
BREEAM ratings of ‘Excellent’ for
both major developments and major
refurbishments.
1. 2. 3. 4. 5.
With two refurbishments that
completed in H1 2018 substantially
let by the year end, our vacancy
rate fell from 4.2% to 1.8%
between June and December 2018.
Our ability to retain tenants and let
space, particularly at our on-site
developments, has kept the vacancy
rate low.
2014
2015
2016
2017
2018
1.3
1.3
1.8
2.6
We have not completed any major
developments or refurbishments
during the year, but have been
focusing on Brunel Building W2
and 80 Charlotte Street W1, the
two developments due to complete
in the next 18 months.
Brunel Building W2
80 Charlotte Street W1
1. 2. 3. 4. 5.
R
Expected
completion
H1 2019
H1 2020
Target
rating
‘Excellent’
‘Excellent’
1. 2. 3. 4. 5.
R
ENERGY PERFORMANCE CERTIFICATES (EPC)
EPCs indicate how energy efficient a
building is by assigning a rating from
‘A’ (very efficient) to ‘G’ (inefficient).
We target a minimum certification
of ‘A’ for major new-build schemes
and ‘B’ for major refurbishments.
CARBON INTENSITY*
This is measured by emissions
intensity per sq m of landlord-
controlled floor area across our
managed like-for-like portfolio.
Our target is an annual decrease
of between 2% and 4% per annum.
During 2018 we undertook activities
that improved the EPC ratings within
14 of our buildings.
Number of buildings
8
6
Rating
B
C
In 2018, we reduced our landlord
(scope 1 & 2) emissions intensity
in the like-for-like portfolio by 20%.
A 43% reduction since our base
year of 2013 means that we are
on target to meet our emissions
target reduction by 2027.
1.20
1.00
0.80
0.60
0.40
0.20
1. 2. 3. 4. 5.
R
Index (2013 = 1.00)
0
2013
Derwent London
2015
2017
2019
2021
2023
2025
2027
IEA ETP emissions – see definition on page 206
STAFF SATISFACTION*
The satisfaction of our employees
is assessed through a number
of questions in a staff survey.
We aim to keep the satisfaction
rate above 80%.
Although the rate fell in 2018, staff
satisfaction remained over 90%.
This exceptional level is testament
to our collaborative and supportive
corporate culture.
%
1. 2. 3. 4. 5.
R
2015
96.0
2016
96.0
2017
96.0
2018
90.4
The Directors annually review the Group’s KPIs to ensure they reflect the measures employed to assess performance. Following the review
in 2017, the Directors agreed to introduce three new KPIs in 2018 (shown with an asterisk in this section). They also agreed that while capital
return and tenant receipts were important measures, others were more effective in assessing progress against objectives.
44
VIABILITY
STATEMENT
In accordance with the 2016 UK Corporate
Governance Code, the Directors and the
senior management team have assessed
the prospects of the Company over
a longer period than the 12 months
required by the ‘Going Concern’ provision.
Time period
The Directors have determined that the five-year period to
31 December 2023 is an appropriate period over which to assess
its viability based on the following:
• for a major scheme, five years is a reasonable approximation
of the typical time taken from obtaining planning permission
for a development to letting the property; and
• most leases contain a five-year rent review pattern or break
options. Therefore five years allows for the forecasts to include
the reversion arising from those reviews and to assess the
potential impact of income lost from breaks exercised.
This time period is challenged annually to ensure it remains
appropriate. Although the Board’s viability review focused on a
five-year period, it did consider a number of longer-term factors
when considering the Group’s future prospects, including:
• the weighted average lease length of 8.2 years
(including rent-frees and pre-lets);
• due to the long-term nature of our business,
some of our borrowings extend beyond five years;
• the nature of the property cycle and our expectations
of how this impacts us; and
• changes in technology and tenant expectations.
Derwent London plc Report & Accounts 2018
Assessment of prospects
The Board has assessed the Group’s prospects and long-term
viability with due consideration to:
• our current position and performance (pages 4 to 43);
• business model flexibility (pages 20 to 21);
• financing arrangements (page 72); and
• principal risks (pages 48 to 57).
The assessment highlighted that the Group has:
• a proven business model which has allowed us to remain flexible
and resilient during previous property cycle downturns;
• a high-quality customer base of tenants, with none of our
occupiers being responsible for more than 7% of our total rental
income;
• income visibility for the life of our leases which on average are
8.2 years (including rent-frees and pre-lets) with upward only
or contracted rent reviews;
• good interest in our mid-market space with strong pre-let
interest in our schemes;
• good relationships with our bankers and no issues anticipated
with respect to the renewal of our revolving credit facilities which
are due to expire in 2022; and
• a low loan-to-value ratio of 17.2% and an additional £250m
of long-term debt raised via the recent US private placement.
Principal risks
The Schedule of Principal Risks is routinely subject to a
comprehensive review by the Executive Committee, Risk Committee
and the Board. Consideration is given to the risk likelihood, impact
and velocity (speed at which the risk could impact on the Group).
It was agreed that none of the changes in risk likelihood or
probability during the year (see page 46) had a significant impact
on the Group’s viability.
The Directors identified that, of the principal risks detailed on pages
48 to 57, the following are the most important to the assessment
of the viability:
• Adverse Brexit settlement: As a predominantly London-based
Group, we are particularly susceptible to changes which can
adversely impact London’s future prosperity. Although an
adverse Brexit settlement for London would negatively impact
our business, it would be unlikely to significantly affect the
viability of the Group within the five-year review period.
• Risk arising from our development activities: Our current
development pipeline is sizeable and its delivery remains a
top priority. Despite developments being inherently risky, our
pipeline is expected to be a significant driver of our earnings
growth over the next five years. In addition, development
uplifts should enhance valuation returns even in a flat or
declining market.
The Directors’ considered that none of the individual principal
risks would in isolation compromise the Group’s viability.
p. 46 Our principal risks
Strategic report
Qualifications and assumptions
The key assumptions which underpin our strategic plan are:
• the Group’s business model remains broadly unchanged
and continues to focus on the central London office market;
• we continue to operate a progressive dividend policy whilst
ensuring dividend cover remains in or above the range of
1.25% to 1.5%; and
• our portfolio remains approximately the same size.
We have the ability to flex our business model to react to unforeseen
circumstances or changes in the property cycle by either selling a
property to generate additional cash flow or commencing or stopping
development projects to manage our capital expenditure. We aim to
maintain an adequate level of cash and available financial facilities.
Regular financial forecasting enables us to identify and plan for
additional funding requirements in advance.
Assessment of viability
To assess the Group’s viability, the business model and strategy
were stress tested against our principal risks (in isolation and
combination), various Brexit scenarios and other sensitivities.
Sensitivity analysis of our strategy
A detailed five-year strategic review was conducted which considers
the Group’s cash flows, dividend cover, REIT compliance and other
key financial ratios over the period.
These metrics were subjected to sensitivity analysis to assess
the impact of the principal risks to the Group’s ability to deliver its
strategic objectives, which are set out on page 31, both individually
and in unison.
45
Stress testing our risk resilience
The Directors stress tested our strategy against a combination of
principal and emerging risks which were likely to have a significant
impact on the Group’s solvency and liquidity over the five-year review
period. A scenario was modelled that assumed a severe decrease
in property values combined with significant letting delays at the
Group’s developments and a fall in rental income.
As at 31 December 2018, the value of the portfolio could fall by 69%
without breaching the gearing covenants and our property income
could fall by 73% before breaching the interest cover covenant.
Brexit scenarios
The Board, under the stress testing of our risk resilience, tested
the potential impact of various Brexit scenarios, by estimating
their financial impact and overlaying this on the detailed financial
forecasts included within the strategic plan and five-year forecasts
for viability.
A range of Brexit scenarios of ‘soft’, ‘hard’ and ‘disorderly’ were
modelled with various levels of impact on our property values and
rental income. In all scenarios, our net interest cover remained
above 350% and our loan-to-value ratio below 40%, both of which
are comfortably within our financial covenants.
p. 47 Brexit
VIABILITY STATEMENT
Based on the Board’s assessment, the Directors have a reasonable expectation that the Company will be able
to continue in operation and meet its liabilities as they fall due over the five-year period to 31 December 2023.
46
Our principal
risks
At Derwent London we aim to deliver on
our strategic objectives for the benefit of
our stakeholders whilst operating within
the risk tolerance levels set by our Board.
The risk profile of the Group
As a predominantly London-based Group, we are particularly
sensitive to factors which impact upon central London’s growth
and demand for office space. Any decline in the demand for London
office space or a significant increase in supply could negatively
impact upon:
• the value of our property portfolio;
• occupancy rates and, subsequently, our income; and
• availability of properties for acquisition and the ease of disposal
and refinancing.
The London office market has proven to be cyclical and can be
impacted by a number of external and internal factors. For example,
changes in political agendas or economic factors can impact upon:
• the ease of gaining planning permission for new
development projects;
• cost of acquisitions, e.g. stamp duty land tax; and
• value of our properties to overseas investors due
to exchange rate fluctuations.
Derwent London plc Report & Accounts 2018
Changes to our principal risks
The principal risks and uncertainties facing the Group in 2019 are
set out on pages 48 to 57 together with the potential impact and the
mitigating actions and controls in place. Our principal risks are not
an exhaustive list of all risks facing the Group but are a snapshot
of the Company’s main risk profile as at 26 February 2019.
During the year under review, there has been a number of changes
to our principal risks:
New principal risk
(i)
‘Management of succession’ has been elevated to
a principal risk, due to the importance of retaining our
senior management team and maintaining our culture
(see page 48).
Increasing risks
(i) As at 26 February 2019, arrangements to leave the EU have
not been agreed and subsequently the risk that negotiations
result in arrangements which are damaging to the London
economy has increased.
(ii) The possibility that property values will fall has increased
due to Brexit uncertainty and as we approach the end of
the current property cycle. Recent property cycles last for
approximately seven years and the current cycle is over
eight years.
(iii) Due to our successful programme to de-risk our
developments through pre-lets, there is increased ‘on-site’
risk of completing 80 Charlotte Street on time. Practical
completion of 80 Charlotte Street is expected to be in the
first half of 2020, making 2019 an important year. If late,
we could face penalties and a loss of rental income.
(iv) Partly driven by Brexit uncertainty and the concerns
over contractor business models, the risk of reduced
development returns has increased.
Effect of mitigation actions on our principal risks
High
y
t
i
l
i
b
a
b
o
r
P
4
2
1
5c
5b
4
8a
8b
8c
3
5a
7
3
2
6a
6b
5c
5b
8a
6a
8b
8c
5a
7
1
6b
p. 48 Risks
1 Failure to implement the Group’s
strategy
2 Adverse Brexit settlement
3 Management of succession
4 Fall in property values
5a Reduced development returns
5b ‘On-site’ risk
5c Contractor/subcontractor default
6a Cyber attack
6b Terrorism or other business
interruption
7 Reputational damage
8a Non-compliance with health and
safety legislation
8b Climate change and non-compliance
with environmental and sustainability
legislation
Low
Impact on the Group
High
8c Other regulatory non-compliance
Gross risk basis
Net risk basis (post mitigation)
Strategic report
Risk management
Risk is inherent in running any business. Our risk management
procedures are routinely reviewed and strengthened to ensure
that all foreseeable and emerging risks are identified, understood
and managed. Our overall low risk tolerance (see page 112),
alongside a transparent and collaborative work style, ensures
that any potential risk is identified quickly. Our approach to risk
management is contained on pages 111 to 112.
The role of our Board, with support from the Risk Committee, is to
ensure that our risk management and internal controls are robust
so that we remain able to swiftly identify and react to new threats
and uncertainties. Balanced with the maintenance of a flexible
business model and strong financial structure, this better enables
us to weather uncertainties and take advantage of opportunities.
BREXIT
Since the referendum decision in June 2016 to leave the EU,
we have been operating through a period of heightened economic
and political uncertainty.
• If a deal is not agreed between the UK and the EU by 29 March
2019, or no alternative arrangements are agreed, trade to and
from the UK will default to WTO (World Trade Organization)
rules with the associated tariffs.
• If a deal is reached with a ‘transition period’ to 31 December
2020 or such other date that is agreed, there will be less
impact on our business over the next two years or so.
However, uncertainty is likely to continue until new trade
and international agreements have been finalised and this
may take some time.
As outlined on page 45, we have considered various Brexit
scenarios when reviewing our five-year strategy. Although ‘no deal’
and more adverse Brexit scenarios would likely cause a decrease
in earnings and NAV, our financial covenants were not close to being
compromised in any of the scenarios, and we continued to be able
to carry on with our current business plans.
How could Brexit impact us?
Our core income
Derwent London has no buildings in the City and few occupants
from the financial services industry (4% of our portfolio).
Our EPRA vacancy rate is low at 1.8% and the majority of recent
rent reviews have been above ERV. To date we have not seen,
nor are we forecasting in our base case, any significant impact
on our operating performance in respect to Brexit.
The current market is supply limited, a situation that may even
have been enhanced by the Brexit vote, which has maintained the
demand for our buildings and developments leading to substantial
pre-letting of the Brunel Building W2 and 80 Charlotte Street W1
developments.
If a deal is reached, we would not expect a significant short-term
change in supply within the central London property market and
rents would likely remain stable during the transition period.
In a ‘no deal’ situation, if the importance of London as a global
centre is diminished, demand for space could decline over time
which would likely see an increase in void periods and risk of lower
rents when leases come up for renewal. However, our focus on good
value, well-designed, middle market rent properties means we are
less susceptible to reductions in tenant demand.
Our developments
The highest potential impact on Derwent London will be in respect
of our developments. In the event of a ‘no deal’ Brexit, the cost
and timeline of our developments could be impacted where we
are importing building materials or components from Europe,
as they may be subject to tariffs and border delays.
47
Derwent London brand
The Derwent London brand is well-regarded and respected within
our industry and is recognised for its innovation and for developing
design-led buildings. The protection of our brand and our reputation
is important to the future success of the Group (see page 54).
Development risks
Our developments are large, high-value projects with life cycles
which can be up to five years. The success of our development
activities is reliant on taking managed and carefully considered risk,
which aims to deliver the office space our occupiers desire when it is
needed. In August 2018, the Risk Committee visited the 80 Charlotte
Street development to see first-hand how construction and health
and safety risks are managed (see page 112).
In addition, development costs are likely to increase due to:
• devaluation of the pound leading to price inflation for imported
materials on contracts that are not at fixed prices; and
• shortage of skilled construction workers leading to increased
labour costs on future development projects.
There will be a heightened risk of contractor or subcontractor
default due to the increased costs arising from the risks stated
above, which will be carefully monitored as we work closely with
our contractors to mitigate this issue.
We have been working with our principal contractors to determine
the likely effect of a ‘no deal’ Brexit on 80 Charlotte Street.
As a contingency measure, our contractors have started to
pre-order materials and store them in advance of use, where
required. Any increase in handling or storage costs of materials
will be a contractual cost for our contractors.
The Brunel Building and 80 Charlotte Street developments have not
yet been noticeably impacted by Brexit and their building contracts
do not contain Brexit clauses. Currently any risks arising on these
developments from Brexit are the responsibility of the principal
contractor, although delays in completion could potentially result
in a reduction in our revenue. In respect to new developments, such
as Soho Place and The Featherstone Building, we may be required
to accept additional risks in respect to delays and increased costs.
Value of our buildings
Since the decision to leave the EU, the valuation of our portfolio has
continued to grow, albeit more slowly: 2018: +2.2%, 2017 +3.9%.
If a deal is not reached and there is a significant reduction in
demand for central London properties, the value of our buildings
may decrease. Our external valuers, CBRE, might also add market
uncertainty clauses into their valuation (as they did in the 2008
financial crisis).
Although a decrease in value will not have a direct impact on
our business model, it will reduce the headroom available for
our covenants. Our internal modelling indicated that, as at
31 December 2018, the value of the portfolio could fall by 69%
without breaching the gearing covenants.
If there is a fall in property values, there could be opportunities
to buy property for future development. Alongside a fall, the
devaluation of the pound could increase demand for London
properties from overseas buyers, as was seen immediately after
the referendum decision. With increased investment in London
property, this will provide underlying support for the value of
our buildings.
48
OUR PRINCIPAL RISKS CONTINUED
Derwent London plc Report & Accounts 2018
STRATEGIC RISKS
That the Group’s business model and/or strategy does not create the anticipated
shareholder value or fails to meet investors’ and other stakeholders’ expectations.
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
1. FAILURE TO IMPLEMENT THE GROUP’S STRATEGY
The Group’s strategy is not met due to poor strategy implementation
or a failure to respond appropriately to internal or external factors
such as:
• an economic downturn and/or the Group’s development programme
being inconsistent with the current economic cycle; and
• The Group conducts an annual five-year strategic review and prepares a budget
and three rolling forecasts covering the next two years.
• The Board considers the sensitivity of the Group KPIs to changes in the assumptions
underlying our forecasts in light of anticipated economic conditions. If considered
necessary, modifications are made.
• London losing its global appeal with a consequential impact on the
property investment or occupational markets.
• The Group’s development pipeline has a degree of flexibility that enables plans for
individual properties to be changed to reflect prevailing economic circumstances.
Movement during the year: Risk unchanged
The Board considers this risk to have remained broadly the same.
Throughout the year, the Group continued to benefit from a resilient
central London office market despite continuing political uncertainty.
Executive responsibility: John Burns
• The Group seeks to maintain income from properties until development commences
and has an ongoing strategy to extend income through lease renewals and regearing.
• The Group aims to de-risk the development programme through pre-lets.
• The Group maintains sufficient headroom in all the Group’s key ratios and financial
covenants with a focus on interest cover.
Strategic objectives
• The annual strategic review was performed by the Executive
• Continue to de-risk the Brunel Building
1. 2. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• Total property return
Committee and reviewed at the Board’s strategy meeting on
13 June 2018.
development through pre-letting strategy
and monitoring of construction progress.
• The Board considered the sensitivity of our KPIs to changes in
• Market The Featherstone Building and Soho Place
underlying assumptions including interest rates, timing of projects,
to start de-risking these developments via our
level of capital expenditure and the extent of capital recycling.
pre-letting strategy.
• Three rolling forecasts and a budget for 2019 were prepared.
• Monitor our portfolio for further asset
management activities and manage the
• In respect to our de-risking strategy, 77% (188,100 sq ft) of the
Brunel Building and 74% (279,600 sq ft) of 80 Charlotte Street have
vacancy rate.
now been pre-let.
• Extend income through renewals and regears
for properties not earmarked for regeneration.
• The Group’s loan-to-value ratio remained low, its net interest cover
ratio was 491% and the REIT ratios were comfortably met.
• Examine opportunities for disposals.
• Total shareholder return
Place developments.
A- assigned by Fitch in August 2018.
• The Board has committed to The Featherstone Building and Soho
• Focus on maintaining our credit rating of
2. ADVERSE BREXIT SETTLEMENT
Risk that negotiations to leave the European Union result in
arrangements which are damaging to the London economy.
As a predominantly London-based group, we are particularly sensitive
to any factors which impact upon London’s growth and demand for
office space.
Movement during the year: Slight increase
• The Group’s strong financing and covenant headroom enables it to weather a downturn.
Strategic objectives
• A detailed review of our construction contracts was performed
• Extend loan durations, where appropriate.
• The Group’s diverse and high-quality tenant base provides resilience against tenant
default.
• The Group focuses on good value, middle market rent properties which are less
susceptible to reductions in tenant demand. The Group’s average ‘topped’ up office rent
is only £53.25 per sq ft (2017: £49.74 per sq ft).
• The Group develops properties in locations where there is good potential for future
demand, such as near Crossrail stations.
Further commentary on Brexit can be found on page 47.
• Income is maintained at future developments for as long as possible.
Executive responsibility: John Burns
• Ongoing strategy is to extend income through lease renewals and regearing and to de-risk
the development programme through pre-lets.
• Updates received on occupier trends by engaging with our current tenants and advisers.
3. MANAGEMENT OF SUCCESSION
Risk that the Board’s succession plans, due to become effective
during 2019, fail to retain our senior management team and lead
to a loss of our culture and/or talent.
Movement during the year: New principal risk
Executive responsibility: John Burns
• John Burns will be the Non-Executive Chairman until May 2021 and will aim to
retain the culture of the Group and ensure an orderly succession.
• Simon Fraser, Senior Independent Director, acts as a ‘sounding board’ for the
Chairman and an independent point of contact for Directors and Shareholders.
• Remuneration packages are benchmarked regularly.
• Six-monthly performance appraisals identify training requirements and
career aspirations.
• The Board monitors the culture of the Group (see page 85).
1. 2. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• Total property return
• Total shareholder return
Strategic objectives
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
Could impact on any Group KPIs
which included foreign currency impact.
• Redemption or conversion of the unsecured
• Put in place contingency plans with our principal contractors.
convertible bonds.
• Brexit risk assessments have been performed to understand how
• We will continue with our current controls
the different Brexit scenarios could impact on our business model
and mitigating actions including operating
the business on a basis that balances risk
and income generation.
and strategy.
with external advisers.
• Monitored Brexit negotiations and discussed potential outcomes
• Monitored letting progress and demand for our buildings.
• As at 31 December 2018, the Group had cash and undrawn facilities
of £274m.
• We have continued to cultivate the ‘talent pipeline’ via the ‘Fit for
• The Remuneration Committee will be reviewing
the Future’ programme to identify key individuals and enable them,
the effectiveness of the incentive schemes to
in future, to take on key roles.
retain and motivate the senior management team.
• Appointed Cilla Snowball, Non-Executive Director, as the Director
• Conduct the third biennial employee survey.
responsible for gathering the views of the workforce (see page 92).
• Continue to support the Group in creating a
• A working group proposed ideas to the Executive Committee in
working environment that promotes individual
November 2018 on how to address the higher priority areas arising
well-being and a respectful, inclusive and
from the latest employee survey.
collaborative culture.
Strategic report
To optimise returns and create value from
a balanced portfolio
Key
Strategic objectives
1.
2. To grow recurring earnings and cash flow
3. To attract, retain and develop talented employees
buildings responsibly
4. To design, deliver and operate our
5. To maintain strong and flexible financing
Movement during the year
Risk increased
Risk unchanged
Risk decreased
49
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
The Group’s strategy is not met due to poor strategy implementation
• The Group conducts an annual five-year strategic review and prepares a budget
Strategic objectives
1. 2. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• Total property return
• The annual strategic review was performed by the Executive
Committee and reviewed at the Board’s strategy meeting on
13 June 2018.
• Continue to de-risk the Brunel Building
development through pre-letting strategy
and monitoring of construction progress.
• The Board considered the sensitivity of our KPIs to changes in
• Market The Featherstone Building and Soho Place
underlying assumptions including interest rates, timing of projects,
level of capital expenditure and the extent of capital recycling.
to start de-risking these developments via our
pre-letting strategy.
• Three rolling forecasts and a budget for 2019 were prepared.
• Monitor our portfolio for further asset
• In respect to our de-risking strategy, 77% (188,100 sq ft) of the
Brunel Building and 74% (279,600 sq ft) of 80 Charlotte Street have
now been pre-let.
• The Group’s loan-to-value ratio remained low, its net interest cover
management activities and manage the
vacancy rate.
• Extend income through renewals and regears
for properties not earmarked for regeneration.
ratio was 491% and the REIT ratios were comfortably met.
• Examine opportunities for disposals.
• The Board has committed to The Featherstone Building and Soho
• Focus on maintaining our credit rating of
• Total shareholder return
Place developments.
A- assigned by Fitch in August 2018.
• The Group’s strong financing and covenant headroom enables it to weather a downturn.
Strategic objectives
• A detailed review of our construction contracts was performed
• Extend loan durations, where appropriate.
1. 2. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• Total property return
• Total shareholder return
Strategic objectives
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
Could impact on any Group KPIs
which included foreign currency impact.
• Redemption or conversion of the unsecured
• Put in place contingency plans with our principal contractors.
convertible bonds.
• Brexit risk assessments have been performed to understand how
the different Brexit scenarios could impact on our business model
and strategy.
• Monitored Brexit negotiations and discussed potential outcomes
• We will continue with our current controls
and mitigating actions including operating
the business on a basis that balances risk
and income generation.
with external advisers.
• Monitored letting progress and demand for our buildings.
• As at 31 December 2018, the Group had cash and undrawn facilities
of £274m.
• We have continued to cultivate the ‘talent pipeline’ via the ‘Fit for
the Future’ programme to identify key individuals and enable them,
in future, to take on key roles.
• The Remuneration Committee will be reviewing
the effectiveness of the incentive schemes to
retain and motivate the senior management team.
• Appointed Cilla Snowball, Non-Executive Director, as the Director
responsible for gathering the views of the workforce (see page 92).
• A working group proposed ideas to the Executive Committee in
November 2018 on how to address the higher priority areas arising
from the latest employee survey.
• Conduct the third biennial employee survey.
• Continue to support the Group in creating a
working environment that promotes individual
well-being and a respectful, inclusive and
collaborative culture.
STRATEGIC RISKS
That the Group’s business model and/or strategy does not create the anticipated
shareholder value or fails to meet investors’ and other stakeholders’ expectations.
1. FAILURE TO IMPLEMENT THE GROUP’S STRATEGY
Risk
such as:
or a failure to respond appropriately to internal or external factors
and three rolling forecasts covering the next two years.
• an economic downturn and/or the Group’s development programme
underlying our forecasts in light of anticipated economic conditions. If considered
being inconsistent with the current economic cycle; and
necessary, modifications are made.
• The Board considers the sensitivity of the Group KPIs to changes in the assumptions
• London losing its global appeal with a consequential impact on the
• The Group’s development pipeline has a degree of flexibility that enables plans for
property investment or occupational markets.
individual properties to be changed to reflect prevailing economic circumstances.
Movement during the year: Risk unchanged
The Board considers this risk to have remained broadly the same.
Throughout the year, the Group continued to benefit from a resilient
central London office market despite continuing political uncertainty.
Executive responsibility: John Burns
• The Group seeks to maintain income from properties until development commences
and has an ongoing strategy to extend income through lease renewals and regearing.
• The Group aims to de-risk the development programme through pre-lets.
• The Group maintains sufficient headroom in all the Group’s key ratios and financial
covenants with a focus on interest cover.
2. ADVERSE BREXIT SETTLEMENT
Risk that negotiations to leave the European Union result in
arrangements which are damaging to the London economy.
As a predominantly London-based group, we are particularly sensitive
default.
to any factors which impact upon London’s growth and demand for
office space.
Movement during the year: Slight increase
• The Group’s diverse and high-quality tenant base provides resilience against tenant
• The Group focuses on good value, middle market rent properties which are less
susceptible to reductions in tenant demand. The Group’s average ‘topped’ up office rent
is only £53.25 per sq ft (2017: £49.74 per sq ft).
• The Group develops properties in locations where there is good potential for future
demand, such as near Crossrail stations.
Further commentary on Brexit can be found on page 47.
• Income is maintained at future developments for as long as possible.
Executive responsibility: John Burns
• Ongoing strategy is to extend income through lease renewals and regearing and to de-risk
the development programme through pre-lets.
• Updates received on occupier trends by engaging with our current tenants and advisers.
3. MANAGEMENT OF SUCCESSION
to a loss of our culture and/or talent.
Movement during the year: New principal risk
Executive responsibility: John Burns
Risk that the Board’s succession plans, due to become effective
• John Burns will be the Non-Executive Chairman until May 2021 and will aim to
during 2019, fail to retain our senior management team and lead
retain the culture of the Group and ensure an orderly succession.
• Simon Fraser, Senior Independent Director, acts as a ‘sounding board’ for the
Chairman and an independent point of contact for Directors and Shareholders.
• Remuneration packages are benchmarked regularly.
• Six-monthly performance appraisals identify training requirements and
career aspirations.
• The Board monitors the culture of the Group (see page 85).
50
OUR PRINCIPAL RISKS CONTINUED
Derwent London plc Report & Accounts 2018
FINANCIAL RISKS
Significant steps have been taken in recent years to reduce or mitigate the Group’s financial risks such that few
are now considered to be principal risks of the Group. The main financial risk is that the Group becomes unable
to meet its financial obligations, which is not currently a principal risk. Financial risks can arise from movements
in the financial markets in which we operate and inefficient management of capital resources.
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
4. FALL IN PROPERTY VALUES
(previously, ‘Increase in property yields’)
Increasing property yields, which may be a consequence of rising
interest rates, would cause property values to fall. Interest rates
have remained low for an extended period and are expected to
rise gradually over the next few years. Though there is no direct
relationship, this may cause property yields to increase.
The underlying value of our investment portfolio has remained
resilient, increasing by 2.2% in 2018, despite the continuing
economic uncertainties.
Movement during the year: Slight increase
The possibility that property values will fall has increased over
the last year as we approach the end of the current property cycle
(normal property cycles last for approximately seven years and we
are currently at just over eight years). The Bank of England’s Monetary
Policy Committee increased interest rates during the year from 0.5%
to 0.75%. Despite this rise, future interest rate increases are
anticipated to be slow and incremental.
Executive responsibility: Nigel George
• The impact of yield changes is considered when potential projects are appraised.
Strategic objectives
• The Group produced a budget, five-year strategic review and three
• Continue with our current controls and
• The impact of yield changes on the Group’s financial covenants and performance
is monitored regularly and subject to sensitivity analysis to ensure that adequate
headroom is preserved.
• The Group’s mainly unsecured financing makes the management of our
financial covenants straightforward.
• The Group’s low loan-to-value ratio reduces the likelihood that falls in property
values have a significant impact on our business.
rolling forecasts during the year which contain detailed sensitivity
mitigating actions.
analyses, including the effect of changes to yields.
• Examine opportunities for disposals.
• Quarterly management accounts were provided to the Board and
included the Group’s performance against the financial covenants.
1. 5.
Business model
• Our assets and resources
• Adding value for stakeholders
KPIs
• Interest cover ratio
• Total return
• Total property return
• Gearing and available resources
OPERATIONAL RISKS
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
5. RISKS ARISING FROM OUR DEVELOPMENT ACTIVITIES
a. Reduced development returns
The Group’s development projects do not produce the targeted
financial returns due to one or more of the following factors:
• delay on site;
• increased construction costs; and
• adverse letting conditions.
For example: delays could lead to penalties payable to pre-let tenants
at 80 Charlotte Street.
Movement during the year: Slight increase
Due to our significant development pipeline, with a number of key
projects currently under construction including 80 Charlotte Street
and the Brunel Building, the risk of delays to our projects and/or cost
overruns remain a principal risk. By the end of 2018 we had largely
de-risked these projects.
Executive responsibility: Paul Williams
• Investment appraisals, which include contingencies and inflationary cost increases,
are prepared and sensitivity analysis is undertaken to measure that an adequate return
is made in all likely circumstances.
• The procurement process used by the Group includes the use of highly regarded firms
of quantity surveyors and is designed to minimise uncertainty regarding costs.
• Development costs are benchmarked to ensure that the Group obtains competitive
pricing and, where appropriate, fixed-price contracts are negotiated.
• Procedures carried out before starting work on site, such as site investigations,
historical research of the property and surveys conducted as part of the planning
application, reduce the risk of unidentified issues causing delays once on site.
• The Group’s pre-letting strategy reduces or removes the letting risk of the development
as soon as possible.
• Detailed reviews are performed on construction projects to ensure that forecasts
are aligned with our contractors.
• Post-completion reviews are carried out for all major developments to ensure
that improvements to the Group’s procedures are identified, implemented and
lessons learned.
Strategic objectives
• Demand for our developments is evidenced by the significant
• Further de-risk the Brunel Building,
pre-letting activity in the year.
• In respect to our de-risking strategy, 77% (188,100 sq ft) of the
Brunel Building and 74% (279,600 sq ft) of 80 Charlotte Street
• Continue with our current controls and mitigating
have now been pre-let.
actions with a major focus on project monitoring.
The Featherstone Building and Soho Place
developments through our pre-letting strategy.
1. 2. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total shareholder return
• Construction costs now substantially fixed on the 80 Charlotte
Street and the Brunel Building developments.
• The Board and Executive Committee received regular updates
on our principal developments.
• Approved The Featherstone Building development.
Strategic report
To optimise returns and create value from
a balanced portfolio
Key
Strategic objectives
1.
2. To grow recurring earnings and cash flow
3. To attract, retain and develop talented employees
buildings responsibly
4. To design, deliver and operate our
5. To maintain strong and flexible financing
Movement during the year
Risk increased
Risk unchanged
Risk decreased
51
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
Increasing property yields, which may be a consequence of rising
• The impact of yield changes is considered when potential projects are appraised.
Strategic objectives
1. 5.
Business model
• Our assets and resources
• Adding value for stakeholders
KPIs
• Interest cover ratio
• Total return
• Total property return
• Gearing and available resources
• The Group produced a budget, five-year strategic review and three
rolling forecasts during the year which contain detailed sensitivity
analyses, including the effect of changes to yields.
• Continue with our current controls and
mitigating actions.
• Examine opportunities for disposals.
• Quarterly management accounts were provided to the Board and
included the Group’s performance against the financial covenants.
FINANCIAL RISKS
Significant steps have been taken in recent years to reduce or mitigate the Group’s financial risks such that few
are now considered to be principal risks of the Group. The main financial risk is that the Group becomes unable
to meet its financial obligations, which is not currently a principal risk. Financial risks can arise from movements
in the financial markets in which we operate and inefficient management of capital resources.
4. FALL IN PROPERTY VALUES
(previously, ‘Increase in property yields’)
interest rates, would cause property values to fall. Interest rates
have remained low for an extended period and are expected to
rise gradually over the next few years. Though there is no direct
relationship, this may cause property yields to increase.
The underlying value of our investment portfolio has remained
resilient, increasing by 2.2% in 2018, despite the continuing
economic uncertainties.
Movement during the year: Slight increase
• The impact of yield changes on the Group’s financial covenants and performance
is monitored regularly and subject to sensitivity analysis to ensure that adequate
headroom is preserved.
• The Group’s mainly unsecured financing makes the management of our
financial covenants straightforward.
• The Group’s low loan-to-value ratio reduces the likelihood that falls in property
values have a significant impact on our business.
The possibility that property values will fall has increased over
the last year as we approach the end of the current property cycle
(normal property cycles last for approximately seven years and we
are currently at just over eight years). The Bank of England’s Monetary
Policy Committee increased interest rates during the year from 0.5%
to 0.75%. Despite this rise, future interest rate increases are
anticipated to be slow and incremental.
Executive responsibility: Nigel George
OPERATIONAL RISKS
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
5. RISKS ARISING FROM OUR DEVELOPMENT ACTIVITIES
a. Reduced development returns
The Group’s development projects do not produce the targeted
• Investment appraisals, which include contingencies and inflationary cost increases,
financial returns due to one or more of the following factors:
are prepared and sensitivity analysis is undertaken to measure that an adequate return
For example: delays could lead to penalties payable to pre-let tenants
pricing and, where appropriate, fixed-price contracts are negotiated.
• delay on site;
• increased construction costs; and
• adverse letting conditions.
at 80 Charlotte Street.
Movement during the year: Slight increase
is made in all likely circumstances.
• The procurement process used by the Group includes the use of highly regarded firms
of quantity surveyors and is designed to minimise uncertainty regarding costs.
• Development costs are benchmarked to ensure that the Group obtains competitive
• Procedures carried out before starting work on site, such as site investigations,
historical research of the property and surveys conducted as part of the planning
application, reduce the risk of unidentified issues causing delays once on site.
• The Group’s pre-letting strategy reduces or removes the letting risk of the development
as soon as possible.
• Detailed reviews are performed on construction projects to ensure that forecasts
Due to our significant development pipeline, with a number of key
projects currently under construction including 80 Charlotte Street
and the Brunel Building, the risk of delays to our projects and/or cost
are aligned with our contractors.
overruns remain a principal risk. By the end of 2018 we had largely
de-risked these projects.
• Post-completion reviews are carried out for all major developments to ensure
that improvements to the Group’s procedures are identified, implemented and
Executive responsibility: Paul Williams
lessons learned.
Strategic objectives
• Demand for our developments is evidenced by the significant
• Further de-risk the Brunel Building,
1. 2. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total shareholder return
pre-letting activity in the year.
• In respect to our de-risking strategy, 77% (188,100 sq ft) of the
Brunel Building and 74% (279,600 sq ft) of 80 Charlotte Street
have now been pre-let.
• Construction costs now substantially fixed on the 80 Charlotte
Street and the Brunel Building developments.
• The Board and Executive Committee received regular updates
on our principal developments.
• Approved The Featherstone Building development.
The Featherstone Building and Soho Place
developments through our pre-letting strategy.
• Continue with our current controls and mitigating
actions with a major focus on project monitoring.
52
OUR PRINCIPAL RISKS CONTINUED
Derwent London plc Report & Accounts 2018
OPERATIONAL RISKS CONTINUED
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
5. RISKS ARISING FROM OUR DEVELOPMENT ACTIVITIES
b. ‘On-site’ risk
Risk of project delays and/or cost overruns caused by unidentified
issues, e.g. asbestos in refurbishments or ground conditions in
developments.
For example, delays could lead to penalties payable to pre-let tenants
at 80 Charlotte Street. Our pre-let strategy has increased this risk.
• Prior to construction beginning on site, we conduct site investigations including
the building’s history and various surveys to identify any potential issues.
• Regular monitoring of our contractors’ cash flows.
• Off-site inspection of key components to ensure they have been completed
to the requisite quality.
Movement during the year: Slight increase
• Frequent meetings with key contractors and subcontractors to review their
work programme.
Due to our successful pre-letting programme, there is increased risk
on completing 80 Charlotte Street on time. If late, we could face a loss
of rental income and penalties.
Executive responsibility: Paul Williams
c. Contractor/subcontractor default
Returns from the Group’s developments are reduced due to delays
and cost increases caused by either a main contractor or major
subcontractor defaulting during the project.
• The financial standing of our main contractors is reviewed prior to awarding the
Strategic objectives
• The Board and Executive Committee received regular updates
• Continue with our current controls and
project contract.
• Regular monitoring of our contractors, including their project cash flows, is carried out.
Movement during the year: Risk unchanged
• Key construction packages are acquired early in the project’s life to reduce the risks
There have been well-publicised issues for a number of major
contractors, including the insolvency of Carillion and the funding
problems of other major contractors. Although the insolvency of
Carillion did not significantly impact on our contractors (or
subcontractors) it did highlight the ongoing issues within the
construction industry and the level of risk (and thin profit margins)
being accepted by contractors. We regularly monitor our contractors
who are currently not showing any trading concerns.
Executive responsibility: Paul Williams
associated with later default.
• Whenever possible the Group uses contractors/subcontractors that it has previously
worked with successfully.
• Regular on-site supervision by a dedicated Project Manager. Monitor contractor
performance and identify problems at an early stage, thereby enabling remedial action
to be taken.
• Payments to contractors to incentivise them to achieve agreed project timescale
and damages agreed in the event of delays/cost overruns.
• Performance bonds are sought if considered necessary.
• Our main contractors are responsible, and assume the immediate risk,
for subcontractor default.
• We use known contractors with who we have established long-term working relationships.
• Contractors are paid promptly and are encouraged to pay subcontractors promptly.
Strategic objectives
• The Board and Executive Committee received regular updates
• We will aim to substantially fix the costs and
on our principal developments.
• Quarterly cost reports provided an update on development
programme for the Soho Place scheme through
the appointment of a main contractor.
progress from a cost, profitability and programme perspective.
• Fix the costs for The Featherstone Building in
• Our development teams have managed to substantially fix the
costs for 80 Charlotte Street and the Brunel Building.
Q2 2019.
• Seek to provide the tenants with early access to
80 Charlotte Street to avoid penalties if practical
completion is delayed.
• Continue with our current controls and
mitigating actions.
on our principal developments.
mitigating actions.
• Quarterly cost reports provided an update on development
progress from a cost, profitability and programme perspective.
• To mitigate risk at Soho Place, we conducted a two-stage
procurement process which allowed us to assess and have
input into the selection of subcontractors.
• Maintained regular contact with our contractors and major
subcontractors.
• Suppliers were paid on average within 28 days.
1. 2. 4.
Business model
• Our core activities
• Adding value for stakeholders
KPIs
• Total return
• Total property return
• Total shareholder return
1. 2. 4.
Business model
• Our core activities
• Adding value for stakeholders
KPIs
• Total return
• Total property return
• Total shareholder return
Strategic report
To optimise returns and create value from
a balanced portfolio
Key
Strategic objectives
1.
2. To grow recurring earnings and cash flow
3. To attract, retain and develop talented employees
buildings responsibly
4. To design, deliver and operate our
5. To maintain strong and flexible financing
Movement during the year
Risk increased
Risk unchanged
Risk decreased
53
OPERATIONAL RISKS CONTINUED
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
5. RISKS ARISING FROM OUR DEVELOPMENT ACTIVITIES
b. ‘On-site’ risk
developments.
Risk of project delays and/or cost overruns caused by unidentified
• Prior to construction beginning on site, we conduct site investigations including
issues, e.g. asbestos in refurbishments or ground conditions in
the building’s history and various surveys to identify any potential issues.
For example, delays could lead to penalties payable to pre-let tenants
at 80 Charlotte Street. Our pre-let strategy has increased this risk.
• Regular monitoring of our contractors’ cash flows.
• Off-site inspection of key components to ensure they have been completed
Movement during the year: Slight increase
• Frequent meetings with key contractors and subcontractors to review their
to the requisite quality.
work programme.
Due to our successful pre-letting programme, there is increased risk
on completing 80 Charlotte Street on time. If late, we could face a loss
of rental income and penalties.
Executive responsibility: Paul Williams
c. Contractor/subcontractor default
and cost increases caused by either a main contractor or major
project contract.
subcontractor defaulting during the project.
Movement during the year: Risk unchanged
There have been well-publicised issues for a number of major
contractors, including the insolvency of Carillion and the funding
problems of other major contractors. Although the insolvency of
Carillion did not significantly impact on our contractors (or
subcontractors) it did highlight the ongoing issues within the
construction industry and the level of risk (and thin profit margins)
being accepted by contractors. We regularly monitor our contractors
who are currently not showing any trading concerns.
Executive responsibility: Paul Williams
• Regular monitoring of our contractors, including their project cash flows, is carried out.
• Key construction packages are acquired early in the project’s life to reduce the risks
associated with later default.
worked with successfully.
• Whenever possible the Group uses contractors/subcontractors that it has previously
• Regular on-site supervision by a dedicated Project Manager. Monitor contractor
performance and identify problems at an early stage, thereby enabling remedial action
to be taken.
• Payments to contractors to incentivise them to achieve agreed project timescale
and damages agreed in the event of delays/cost overruns.
• Performance bonds are sought if considered necessary.
• Our main contractors are responsible, and assume the immediate risk,
for subcontractor default.
• We use known contractors with who we have established long-term working relationships.
• Contractors are paid promptly and are encouraged to pay subcontractors promptly.
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
Strategic objectives
• The Board and Executive Committee received regular updates
• We will aim to substantially fix the costs and
on our principal developments.
• Quarterly cost reports provided an update on development
programme for the Soho Place scheme through
the appointment of a main contractor.
progress from a cost, profitability and programme perspective.
• Fix the costs for The Featherstone Building in
• Our development teams have managed to substantially fix the
costs for 80 Charlotte Street and the Brunel Building.
Q2 2019.
• Seek to provide the tenants with early access to
80 Charlotte Street to avoid penalties if practical
completion is delayed.
• Continue with our current controls and
mitigating actions.
1. 2. 4.
Business model
• Our core activities
• Adding value for stakeholders
KPIs
• Total return
• Total property return
• Total shareholder return
Returns from the Group’s developments are reduced due to delays
• The financial standing of our main contractors is reviewed prior to awarding the
Strategic objectives
• The Board and Executive Committee received regular updates
• Continue with our current controls and
on our principal developments.
mitigating actions.
• Quarterly cost reports provided an update on development
progress from a cost, profitability and programme perspective.
• To mitigate risk at Soho Place, we conducted a two-stage
procurement process which allowed us to assess and have
input into the selection of subcontractors.
• Maintained regular contact with our contractors and major
subcontractors.
• Suppliers were paid on average within 28 days.
1. 2. 4.
Business model
• Our core activities
• Adding value for stakeholders
KPIs
• Total return
• Total property return
• Total shareholder return
54
OUR PRINCIPAL RISKS CONTINUED
Derwent London plc Report & Accounts 2018
OPERATIONAL RISKS CONTINUED
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
6. RISK OF BUSINESS INTERRUPTION
a. Cyber attack
The Group is subject to a cyber attack that results in it being unable
to use its IT systems and/or losing data. This could lead to an increase
in costs while a significant diversion of management time would have
a wider impact.
Movement during the year: Slight reduction
Considerable time has been spent assessing cyber risk and
strengthening our controls and procedures.
• The Group’s Business Continuity Plan is regularly reviewed and tested.
Strategic objectives
• A full business continuity test was conducted on 21 and
• Independent internal and external ‘penetration’ tests are regularly conducted
to assess the effectiveness of the Group’s security.
• Multifactor authentication exists for remote access to our systems.
• Incident response and remediation policies are in place.
• The Group’s data is regularly backed up and replicated and our IT systems are
protected by anti-virus software and firewalls that are frequently updated.
• Annual staff awareness and training programmes are implemented.
Executive responsibility: Damian Wisniewski
• Security measures are regularly reviewed by the IT Liaison Committee.
b. Terrorism or other business interruption
Considered a principal risk due to attacks in European cities.
Movement during the year: Slight reduction
The risk that an act of terrorism interrupts the Group’s operations is
considered a principal risk due to terrorist activity in European cities.
Executive responsibility: All Executive Directors
• The Group has comprehensive business continuity and incident management procedures
both at Group level and for each of our managed buildings which are regularly reviewed
and tested.
• Fire protection and access/security procedures are in place at all of our managed
properties.
• Comprehensive property damage and business interruption insurance which includes
terrorism.
• At least annually, a fire risk assessment and health and safety inspection is performed
for each property in our managed portfolio.
7. REPUTATIONAL DAMAGE
The Group’s reputation is damaged, for example through
unauthorised and/or inaccurate media coverage or failure
to comply with relevant legislation.
• Close involvement of senior management in day-to-day operations and established
Strategic objectives
• Monitored investor views and press comments while maintaining
• Continue with our current controls and
procedures for approving all external announcements.
• All new members of staff benefit from an induction programme and are issued with
Movement during the year: Risk unchanged
our Group staff handbook.
The Board considers this risk to have remained broadly the same
during the year. We have invested significantly in developing a
well-regarded and respected brand. Our strong culture, low overall
risk tolerance and established procedures and policies mitigate
against the risk of internal wrongdoing.
Executive responsibility: All Executive Directors
• The Group employs a Head of Investor and Corporate Communications and retains
services of an external PR agency, both of whom maintain regular contact with external
media sources.
• A Group whistleblowing system for staff is maintained to report wrongdoing anonymously.
• Social media channels are monitored.
• Ongoing engagement with local communities in areas where the Group operates.
contact with other stakeholders (see page 18).
mitigating actions.
• Strengthened our whistleblowing procedures through the
introduction of an independent helpline for employees to report
their concerns anonymously.
• Implemented the social media strategy, including providing
some staff with additional social media training.
22 September (see page 115).
• Perform an exercise to better understand the
potential impact of a cyber attack on our Group.
• Independent internal and external ‘penetration’ tests were
• Further develop our IT governance framework
conducted to assess the effectiveness of the Group’s security.
and incident response plans.
• Independent benchmarking review of the Group’s cyber security
• Enhance data breach notification mechanisms.
was carried out in November.
• Upgraded firewall protection to enhance cyber defences.
• Conducted ‘social engineering’ and simulated ‘phishing’ exercises
as part of the ongoing security awareness programme.
• Reviewed whether the Group would benefit from cyber insurance.
Strategic objectives
• Updated our incident management procedures for each of the
• Continue with our current controls and
buildings in the managed portfolio.
mitigating actions.
• Provided training to our building managers on the management
of major incidents.
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total shareholder return
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
Could impact on any Group KPIs
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• Total property return
• Total shareholder return
Could indirectly impact on a number
of our other KPIs
Strategic report
To optimise returns and create value from
a balanced portfolio
Key
Strategic objectives
1.
2. To grow recurring earnings and cash flow
3. To attract, retain and develop talented employees
buildings responsibly
4. To design, deliver and operate our
5. To maintain strong and flexible financing
Movement during the year
Risk increased
Risk unchanged
Risk decreased
55
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
The Group is subject to a cyber attack that results in it being unable
• The Group’s Business Continuity Plan is regularly reviewed and tested.
Strategic objectives
• A full business continuity test was conducted on 21 and
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total shareholder return
22 September (see page 115).
• Perform an exercise to better understand the
potential impact of a cyber attack on our Group.
• Independent internal and external ‘penetration’ tests were
• Further develop our IT governance framework
conducted to assess the effectiveness of the Group’s security.
and incident response plans.
• Independent benchmarking review of the Group’s cyber security
• Enhance data breach notification mechanisms.
was carried out in November.
• Upgraded firewall protection to enhance cyber defences.
• Conducted ‘social engineering’ and simulated ‘phishing’ exercises
as part of the ongoing security awareness programme.
• Reviewed whether the Group would benefit from cyber insurance.
Considered a principal risk due to attacks in European cities.
• The Group has comprehensive business continuity and incident management procedures
Strategic objectives
• Updated our incident management procedures for each of the
• Continue with our current controls and
buildings in the managed portfolio.
mitigating actions.
• Provided training to our building managers on the management
of major incidents.
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
Could impact on any Group KPIs
• Close involvement of senior management in day-to-day operations and established
Strategic objectives
• Monitored investor views and press comments while maintaining
• Continue with our current controls and
contact with other stakeholders (see page 18).
mitigating actions.
• Strengthened our whistleblowing procedures through the
introduction of an independent helpline for employees to report
their concerns anonymously.
• Implemented the social media strategy, including providing
some staff with additional social media training.
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• Total property return
• Total shareholder return
Could indirectly impact on a number
of our other KPIs
OPERATIONAL RISKS CONTINUED
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
6. RISK OF BUSINESS INTERRUPTION
a. Cyber attack
to use its IT systems and/or losing data. This could lead to an increase
in costs while a significant diversion of management time would have
a wider impact.
Movement during the year: Slight reduction
Considerable time has been spent assessing cyber risk and
strengthening our controls and procedures.
• Independent internal and external ‘penetration’ tests are regularly conducted
to assess the effectiveness of the Group’s security.
• Multifactor authentication exists for remote access to our systems.
• Incident response and remediation policies are in place.
• The Group’s data is regularly backed up and replicated and our IT systems are
protected by anti-virus software and firewalls that are frequently updated.
• Annual staff awareness and training programmes are implemented.
Executive responsibility: Damian Wisniewski
• Security measures are regularly reviewed by the IT Liaison Committee.
b. Terrorism or other business interruption
Movement during the year: Slight reduction
The risk that an act of terrorism interrupts the Group’s operations is
considered a principal risk due to terrorist activity in European cities.
Executive responsibility: All Executive Directors
both at Group level and for each of our managed buildings which are regularly reviewed
and tested.
properties.
terrorism.
• Fire protection and access/security procedures are in place at all of our managed
• Comprehensive property damage and business interruption insurance which includes
• At least annually, a fire risk assessment and health and safety inspection is performed
for each property in our managed portfolio.
7. REPUTATIONAL DAMAGE
The Group’s reputation is damaged, for example through
unauthorised and/or inaccurate media coverage or failure
to comply with relevant legislation.
Movement during the year: Risk unchanged
our Group staff handbook.
The Board considers this risk to have remained broadly the same
during the year. We have invested significantly in developing a
well-regarded and respected brand. Our strong culture, low overall
risk tolerance and established procedures and policies mitigate
against the risk of internal wrongdoing.
Executive responsibility: All Executive Directors
procedures for approving all external announcements.
• All new members of staff benefit from an induction programme and are issued with
• The Group employs a Head of Investor and Corporate Communications and retains
services of an external PR agency, both of whom maintain regular contact with external
media sources.
• A Group whistleblowing system for staff is maintained to report wrongdoing anonymously.
• Social media channels are monitored.
• Ongoing engagement with local communities in areas where the Group operates.
56
OUR PRINCIPAL RISKS CONTINUED
Derwent London plc Report & Accounts 2018
OPERATIONAL RISKS CONTINUED
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
8.NON-COMPLIANCE WITH REGULATION
a. Non-compliance with health and safety legislation
The Group’s cost base is increased and management time is diverted
through an incident or breach of health and safety legislation leading
to reputational damage and/or loss of our licence to operate.
• The Group has a qualified health and safety team whose performance is monitored
Strategic objectives
• Recruited a new Head of Health and Safety.
• Continue with our current controls and
and managed by the Health and Safety Committee.
• External advisers (ORSA) appointed to advise on construction health and safety.
mitigating actions.
Movement during the year: Risk unchanged
• The Board and Executive Committee receive regular updates and presentations
Following independent review of our health and safety procedures,
the Group has gained a better understanding of health and safety
risks. There is no evidence that this risk has increased for the Group.
Executive responsibility: Paul Williams
on key health and safety matters.
• All our properties have health, safety and fire management procedures in place
which are reviewed annually.
• External project managers review health and safety on each construction site
on a monthly basis.
b. Climate change and non-compliance with environmental and sustainability legislation
The Group’s cost base is increased and management time is diverted
due to the impacts of climate change on our portfolio and/or a breach
of any legislation. This could lead to damage to our reputation, loss
of income and/or property value, and loss of our licence to operate.
• The Board and Executive Committee receive regular updates and presentations
on environmental and sustainability performance and management matters.
• The Sustainability Committee monitors our performance and management controls.
Movement during the year: Risk unchanged
Executive responsibility: Paul Williams
• Employment of a qualified team led by an experienced Head of Sustainability.
• The Group benchmarks its ESG (environmental, social and governance) reporting
against various industry benchmarks.
• The Group has set long-term, science-based carbon targets and actively monitors
portfolio performance against these.
• Production of an Annual Sustainability Report, the key data points and performance
of which are externally assured.
c. Other regulatory non-compliance
The Group’s cost base is increased and management time is diverted
through a breach of any of the legislation that forms the regulatory
framework within which the Group operates. This could lead to
damage to our reputation and/or loss of our licence to operate.
• The Board and Risk Committee receive regular reports prepared by the Group’s legal
advisers identifying upcoming legislative/regulatory changes. External advice is taken
on any new legislation.
• Staff training and awareness programmes.
Movement during the year: Risk unchanged
• Group policies and procedures dealing with all key legislation are available on the
Group’s intranet.
• A Group whistleblowing system for staff is maintained to report wrongdoing anonymously.
Considerable time has been spent during the year on areas such
as GDPR and the project to prevent and detect any facilitation of
tax evasion (see page 114).
Executive responsibility: Damian Wisniewski
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total shareholder return
• The Executive Committee approved the composition and revised
terms of reference of the Health and Safety Committee.
• ORSA reported to the Risk Committee and the Health and Safety
Committee on construction health and safety matters.
• Deloitte performed an independent review of construction health
and safety and our health and safety indicators during the year.
• Performed a detailed health and safety audit of all residential
properties.
• The Risk Committee received regular updates on the Group’s
review of insulation cladding and fire protetion procedures.
A significant diversion of time could
affect a wider range of KPIs
• The Health and Safety Committee received regular reports from
each external Project Manager on health and safety at each of our
construction sites during the year.
Strategic objectives
• The Group continues to set sustainability targets which are
• Project approval forms to be updated to ensure
monitored during the year.
• Reviewed and updated our sustainability policy and strategy.
• Implementation of a new carbon measurement tool to help the
Group track its performance against the new science-based
targets.
any capital expenditure will not adversely affect
our carbon target performance or the EPC rating
of the property.
• Continue with our current controls and
mitigating actions.
Could potentially impact on all
aspects of our business model
1. 3. 4.
Business model
KPIs
• Total return
• BREEAM rating
• Science based target performance
A significant diversion of time could
affect a wider range of KPIs
Strategic objectives
• Quarterly review of our anti-bribery and corruption procedures
• Continue with our current controls and
by the Risk Committee.
mitigating actions.
3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
1 January 2019.
KPIs
• Total shareholder return
A significant diversion of time could
affect a wider range of KPIs
• Board and Risk Committee received updates on General Data
Protection Regulations (GDPR) and preventing the facilitation
of tax evasion.
• Governance procedures were reviewed to determine our
compliance with the 2018 UK Corporate Governance Code from
• As part of our 2018 staff performance appraisals, all employees
confirmed they have reviewed and understood Group policies.
Strategic report
To optimise returns and create value from
a balanced portfolio
Key
Strategic objectives
1.
2. To grow recurring earnings and cash flow
3. To attract, retain and develop talented employees
buildings responsibly
4. To design, deliver and operate our
5. To maintain strong and flexible financing
Movement during the year
Risk increased
Risk unchanged
Risk decreased
57
Risk
Our key controls
Potential impact
What we did in 2018
Further mitigating actions for 2019
The Group’s cost base is increased and management time is diverted
• The Group has a qualified health and safety team whose performance is monitored
Strategic objectives
• Recruited a new Head of Health and Safety.
• Continue with our current controls and
mitigating actions.
1. 2. 3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
• The Executive Committee approved the composition and revised
terms of reference of the Health and Safety Committee.
• ORSA reported to the Risk Committee and the Health and Safety
Committee on construction health and safety matters.
• Deloitte performed an independent review of construction health
and safety and our health and safety indicators during the year.
• Performed a detailed health and safety audit of all residential
KPIs
properties.
• Total shareholder return
A significant diversion of time could
affect a wider range of KPIs
• The Risk Committee received regular updates on the Group’s
review of insulation cladding and fire protetion procedures.
• The Health and Safety Committee received regular reports from
each external Project Manager on health and safety at each of our
construction sites during the year.
Strategic objectives
• The Group continues to set sustainability targets which are
monitored during the year.
• Reviewed and updated our sustainability policy and strategy.
• Implementation of a new carbon measurement tool to help the
Group track its performance against the new science-based
targets.
1. 3. 4.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total return
• BREEAM rating
• Science based target performance
A significant diversion of time could
affect a wider range of KPIs
• Project approval forms to be updated to ensure
any capital expenditure will not adversely affect
our carbon target performance or the EPC rating
of the property.
• Continue with our current controls and
mitigating actions.
Strategic objectives
• Quarterly review of our anti-bribery and corruption procedures
• Continue with our current controls and
3. 4. 5.
Business model
Could potentially impact on all
aspects of our business model
KPIs
• Total shareholder return
A significant diversion of time could
affect a wider range of KPIs
by the Risk Committee.
mitigating actions.
• Board and Risk Committee received updates on General Data
Protection Regulations (GDPR) and preventing the facilitation
of tax evasion.
• Governance procedures were reviewed to determine our
compliance with the 2018 UK Corporate Governance Code from
1 January 2019.
• As part of our 2018 staff performance appraisals, all employees
confirmed they have reviewed and understood Group policies.
OPERATIONAL RISKS CONTINUED
The Group suffers either a financial loss or adverse consequences due to processes
being inadequate or not operating correctly, human factors or other external events.
8.NON-COMPLIANCE WITH REGULATION
a. Non-compliance with health and safety legislation
through an incident or breach of health and safety legislation leading
and managed by the Health and Safety Committee.
to reputational damage and/or loss of our licence to operate.
• External advisers (ORSA) appointed to advise on construction health and safety.
Movement during the year: Risk unchanged
• The Board and Executive Committee receive regular updates and presentations
Following independent review of our health and safety procedures,
the Group has gained a better understanding of health and safety
risks. There is no evidence that this risk has increased for the Group.
Executive responsibility: Paul Williams
on key health and safety matters.
• All our properties have health, safety and fire management procedures in place
which are reviewed annually.
• External project managers review health and safety on each construction site
on a monthly basis.
b. Climate change and non-compliance with environmental and sustainability legislation
The Group’s cost base is increased and management time is diverted
• The Board and Executive Committee receive regular updates and presentations
due to the impacts of climate change on our portfolio and/or a breach
on environmental and sustainability performance and management matters.
of any legislation. This could lead to damage to our reputation, loss
of income and/or property value, and loss of our licence to operate.
Movement during the year: Risk unchanged
Executive responsibility: Paul Williams
• The Sustainability Committee monitors our performance and management controls.
• Employment of a qualified team led by an experienced Head of Sustainability.
• The Group benchmarks its ESG (environmental, social and governance) reporting
against various industry benchmarks.
• The Group has set long-term, science-based carbon targets and actively monitors
portfolio performance against these.
• Production of an Annual Sustainability Report, the key data points and performance
of which are externally assured.
c. Other regulatory non-compliance
The Group’s cost base is increased and management time is diverted
• The Board and Risk Committee receive regular reports prepared by the Group’s legal
through a breach of any of the legislation that forms the regulatory
advisers identifying upcoming legislative/regulatory changes. External advice is taken
framework within which the Group operates. This could lead to
damage to our reputation and/or loss of our licence to operate.
on any new legislation.
• Staff training and awareness programmes.
Movement during the year: Risk unchanged
• Group policies and procedures dealing with all key legislation are available on the
Group’s intranet.
• A Group whistleblowing system for staff is maintained to report wrongdoing anonymously.
Considerable time has been spent during the year on areas such
as GDPR and the project to prevent and detect any facilitation of
tax evasion (see page 114).
Executive responsibility: Damian Wisniewski
Derwent London plc Report & Accounts 2018
58
PROPERTY
REVIEW
Valuation ���������������������������������������������������������������������������������59
Asset management & investment activity ������������������������62
Development & refurbishment ��������������������������������������������65
Strategic report
Valuation
The Group’s investment portfolio was
valued at £5�2bn at 31 December 2018�
The valuation surplus was £100�2m,
which after accounting adjustments
of £16�3m (see note 16) is a reported
surplus of £83�9m�
Nigel George
Executive Director
59
This reflects an underlying valuation increase of 2�2% (3�9% in 2017)
and an outperformance against our benchmarks: the MSCI IPD Index
for Central London Offices of 1�8% and 1�4% for the wider MSCI IPD
UK All Property Index� By location, our central London properties,
98% of the portfolio, were up 2�4%, with the West End at 2�3% and
the City borders, principally the Tech Belt, at 2�6%� The balancing
2% of the portfolio is our non-core Scottish holdings, and these
declined 8�0%, due to the weak retail market�
The principal contribution to the valuation uplift came from our
two on-site developments, with the underlying portfolio producing
a more modest 0�4%� Brunel Building W2 and 80 Charlotte Street W1
saw excellent progress both on delivery and pre-lettings� Valued at
£618�8m, these were up 18�0% after allowing for capital expenditure�
At Brunel Building the structure and cladding are complete,
with building delivery scheduled for H1 2019� We commenced
marketing in February and by the end of the year 64% of the space
had been pre-let (now 77%)� At 80 Charlotte Street, which had been
predominantly pre-let in 2017, there was also good construction
progress and delivery is scheduled for 2020�
On an EPRA basis the portfolio’s initial yield was 3�4% and
unchanged over the year� The ‘topped-up’ yield, after the expiry
of rent free periods and contractual rental uplifts, increased from
4�4% to 4�6%, following our asset management actions increasing
net rents� The true equivalent yield remained at 4�73%, however this
represented a 3 basis point rise in the second half, a reversal of the
tightening in the first half�
As evidenced by our strong lettings, London remains active,
however rental growth has generally levelled off, a market trend
since 2016� Our EPRA ERV was up 1�1% compared to 1�7% in 2017�
While the development team had one of its busiest years, our asset
managers were also very active, focusing on maintaining our low
vacancy rate, locking in reversion, building out income and managing
lease dates for our future developments� There is more detail in the
Asset Management section� Several properties added long-term
value through significantly extended lease lengths, thereby building
in longer sustainable cashflows� These helped to take our portfolio’s
average weighted lease length, including rent-free periods and
pre-lets, over the year from 7�8 to 8�2 years� However, as part of
these initiatives, rent-free incentives were granted, which initially
impact value� Overall, our portfolio activities translated to a 6�0%
total property return in 2018 (8�0% in 2017)� This was above the 5�3%
MSCI IPD Total Return Index for Central London Offices and in line
with the 6�0% for UK All Property�
Total property return
%
25
20
15
10
5
0
1
.
5
2
5
.
3
2
9
.
9
1
7
.
9
1
9
.
7
1
1
.
3
1
2
.
0
1
0
.
8
1
.
7
0
.
6
3
.
5
0
.
6
9
.
2
5
.
6 3
.
2
2014
2015
2016
2017
2018
Derwent London
MSCI IPD UK All Property1
Left: Johnson Building EC1
MSCI IPD Central London Offices1
1 Quarterly Index
Derwent London plc Report & Accounts 2018
60
VALUATION CONTINUED
Our year end annualised contracted rent stood at £159�5m with the
portfolio’s ERV of £274�4m, representing £114�9m of reversionary
potential� Within this, £55�3m is contracted under existing leases
from the expiry of rent-free periods and fixed uplifts� This is already
accounted for in our income statement under the IFRS accounting
treatment� Future growth is expected to come from our development
pre-lets of £31�9m, and there is a further £16�6m from letting space,
either available to occupy or under construction� Of this, 65% is the
balance of the on-site developments, and we have already let some
of this space since the year end� The £11�1m final component of the
reversion comes from achieving market rents at future lease events
on the existing portfolio�
Looking forward, our reversion has been further enhanced with
the commencement this year of the next two major developments:
Soho Place W1 and The Featherstone Building EC1� These vacant
sites, which were valued at £85�2m, could add £30�0m of rental
income to the portfolio post development� Further details,
including the associated costs to complete, are provided in
the Development section�
Above: Members of the Valuation team
Valuation yields
Portfolio income potential
%
8
6
4
2
Rental income £m
300
Reversion %
120
225
150
75
90
60
30
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
0
2014
2015
2016
2017
2018
0
Derwent London True Equivalent Yield (TEY)
Derwent London Initial Yield
10-year Gilt
Gap between DL TEY and 10-year Gilt
Average gap (267 bp)
Contractual rent
Contractual rental uplifts (including pre-lets)
Available to occupy
Under refurbishment/development
Rent reviews and lease renewals
Reversion
Strategic report
Portfolio statistics – valuation
61
Valuation
£m
Weighting
%
Valuation1
performance
%
Let floor
area2
‘000 sq ft
Vacant
available
floor area
‘000 sq ft
Vacant
refurbishment
floor area
‘000 sq ft
Vacant
project
floor area
‘000 sq ft
Total
floor area
‘000 sq ft
West End
Central
Borders
City
Borders
Central London
Provincial
Total portfolio
2,713�0
462�5
3,175�5
1,948�3
5,123�8
93�8
5,217.6
4,897�6
52
9
61
37
98
2
100
100
2�6
0�5
2�3
2�6
2�4
(8�0)
2.2
3�9
2,316
494
2,810
1,924
4,734
338
5,072
5,000
16
0
16
82
98
9
107
67
2018
2017
19
0
19
12
31
0
31
97
1 Underlying – properties held throughout the year
2
Includes pre-lets
Rental income profile
Annualised contracted rental income, net of ground rents
Contractual rental increases across the portfolio
Contractual rental from 423,000 sq ft pre-lets on developments
Letting 107,000 sq ft available floor area
Completion and letting 31,000 sq ft of refurbishments
Completion and letting 200,000 sq ft of developments
Anticipated rent review and lease renewal reversions
Portfolio reversion
Potential portfolio rental value
Portfolio statistics – rental income
200
0
200
0
200
0
200
348
Rental
uplift
£m
55�3
31�9
4�1
1�7
10�8
11�1
2,551
494
3,045
2,018
5,063
347
5,410
5,512
Rental
per annum
£m
159�5
114�9
274�4
West End
Central
Borders
City
Borders
Central London
Provincial
Total portfolio
2018
2017
Net
contracted
rental income
per annum
£m
Average
rental income
£ per sq ft
Vacant space
rental value
per annum
£m
Lease
reversions1
per annum
£m
Portfolio
estimated
rental value
per annum
£m
Average
unexpired
lease length2
Years
72�0
15�9
87�9
66�4
154�3
5�2
159.5
160�1
31�41
32�09
31�53
35�33
33�07
15�46
31.90
32�42
12�9
0�0
12�9
3�7
16�6
0�0
16.6
27�3
59�3
9�7
69�0
29�1
98�1
0�2
98.3
82�7
144�2
25�6
169�8
99�2
269�0
5�4
274.4
270�1
6�5
7�9
6�8
5�5
6�2
3�5
6.13
6�0
1 Contractual uplifts, rent review/lease renewal reversion and pre-lets
2 Lease length weighted by rental income at year end and assuming tenants break at first opportunity
3 8�2 years after adjusting for ‘topped-up’ rents and pre-lets
62
ASSET
MANAGEMENT
& INVESTMENT
ACTIVITY
In 2018, we achieved £26�8m of new
lettings across 427,100 sq ft, on average
4�1% above December 2017 ERV�
David Silverman
Executive Director
Derwent London plc Report & Accounts 2018
Asset management
By value, open market lettings represented 90% of the total and
these achieved 9�0% above ERV, with the overall average brought
down by a number of short-term lettings principally to preserve
income on 19-35 Baker Street W1, which we intend to redevelop�
Second half activity proved busier than the first, with 47% of our
lettings by value achieved in the final quarter�
Letting activity 2018
Let
Area
sq ft
130,300
296,800
427,100
Performance against
Dec 17 ERV (%)
Income
£m pa
7�8
19�0
26.8
Open market
8�1
9�4
9.0
Overall1
8�2
2�5
4.1
H1
H2
2018
1
Includes short-term lettings at properties earmarked for redevelopment
New lettings (see table on page 63) included the five pre-lets at
Brunel Building W2, which totalled £11�3m and were on average 15%
above December 2017 ERV� We also achieved this level of growth on
the pre-let of the office space at Asta House, part of our 80 Charlotte
Street W1 project� Other major transactions include two floors at
1-2 Stephen Street W1, all the available space at 25 Savile Row W1
and one floor at Johnson Building EC1�
Most of the short-term lettings related to the part of 19-35 Baker
Street W1 occupied by House of Fraser� Following going into
administration in 2018, House of Fraser vacated some of their space,
relinquishing the remainder in Q1 2019� All of this space has been let
at a low rent, reflecting a landlord’s rolling option to break from 2021,
as we plan to redevelop the building� The Group has a 55% interest
in this property held in a joint venture with The Portman Estate�
We show our 2018 asset management activity in the table below�
In total it covered 833,000 sq ft (17% of our portfolio by area), and we
increased rents from £31�8m to £38�3m, which represented an uplift
of 20�4% but was marginally below December 2017 ERV� As well as
agreeing new rents, we lengthened a number of tenures, notably
at Horseferry House SW1 where we extended the term certain of
the lease with Burberry from five to 20 years� We also introduced
fixed uplifts in years five and 10� We extended VCCP’s leases in
Greencoat and Gordon House SW1 by five years to 2025, The Doctors
Laboratory lease at 60 Whitfield Street W1 by 13 years to 2042 and
FremantleMedia’s leases in 1-2 Stephen Street W1 by three years
to 2024 term certain� These regears have the benefit of increasing
and extending core income but required additional incentives�
Asset management 2018
Rent reviews
Lease renewals
Lease regears
Total
Area
‘000 sq ft
188
265
380
833
Previous
rent
£m pa
6�5
12�7
12�6
31.8
New rent
£m pa
8�0
15�3
15�0
38.3
Uplift
%
24�0
20�3
18�8
20.4
Income vs
Dec17
ERV %
2�6
(3�6)
(1�2)
(1.4)
Included in the table above is £14�9m of income that was subject to
breaks or expiries in 2018� Of this, 90% was retained or re-let with
10% remaining vacant at the year end� Our year end vacancy rate
remains low at 1�8%, up from 1�3% a year earlier but down from
4�2% in June 2018�
Strategic report
Principal lettings 2018
Tenant
Various (5)
Metropolitan Housing Trust
Expedia
Odeon
Clarks
Newell Rubbermaid
Alken Asset Management
Elliott Wood
Knotel
Hanover Investors
Property
Brunel Building W2
Johnson Building EC1
Angel Building EC1
1 Stephen Street W1
Holden House W1 retail
Tea Building E1
25 Savile Row W1
80 Charlotte St (Asta) W1
19-35 Baker Street W1
25 Savile Row W1
45-51 Whitfield Street W1 Knotel
25 Savile Row W1
Charlotte Building W1
19-35 Baker Street W1
Harris Williams
First Quantum Minerals
Howard de Walden Estate
63
Area
sq ft
155,100
22,200
17,100
11,100
2,900
13,200
6,900
11,000
14,600
5,600
12,800
6,200
6,800
18,300
303,800
Office
rent
£ psf
72�90
62�50
62�50
75�00
–
57�20
102�50
56�10
41�00
108�00
48�00
102�50
73�20
26�30
68.80
Total
annual rent
£m
11�3
1�4
1�1
0�8
0�8
0�8
0�7
0�6
0�6
0�6
0�6
0�6
0�5
0�5
20.9
Lease
term
Years
10-15
10
11�5
10
10
5
10
10
5
10
5�5
10
10
2
Lease
break
Year
10-12
–
–
–
2
–
5
5
3
0
3�5
5
5
–
Rent free
equivalent
Months
20-32
21
0
18
8
9
12, plus 10 if no break
12, plus 6 if no break
9
21
6
12, plus 7 if no break
11, plus 9 if no break
4
Like our development schemes, our managed properties are subject
to some of the highest sustainability standards – a key feature of our
management approach� One of the targets we have set ourselves is
to reduce landlord carbon intensity by 55% by 2027 compared to our
2013 emissions level� So far, we have made good progress towards
this with a 43% reduction since 2013� We will be using our COP21
scenario analysis tool to map a five-year programme to ensure the
target is met�
Investment activity
During 2018, we acquired £57�2m of property with the larger
transactions previously announced� The main acquisition was a
36-year leasehold interest in 88-94 Tottenham Court Road W1 for
£44�3m after costs, which comprises 37,400 sq ft of offices and
8,500 sq ft of retail� We already owned the freehold, which adjoins a
number of existing ownerships and is located in our Fitzrovia village�
Longer term, these could form the basis of a significant development�
The main disposal was Porters North N1, which was sold at a 5%
premium to book value early in 2018 following a lease extension and
refurbishment programme� The building was held in a joint venture
and our share of the net proceeds was £22�3m�
Since the year end the Group has exchanged contracts on the sale
of 9 Prescot Street E1 for £53�85m before costs, which represents a
small premium to December 2018 book value� The property produced
a net rental income of £2�3m per annum, and was held in 50:50 joint
venture with LaSalle Investment Management� The joint venture
retains 16 Prescot Street�
Below: Members of the Asset Management team
Net investment
£m
400
300
200
100
0
(100)
(200)
(300)
(400)
(500)
2014
2015
2016
2017
2018
Capital expenditure
Disposals
Acquisitions
64
Derwent London plc Report & Accounts 2018
ASSET MANAGEMENT & INVESTMENT ACTIVITY CONTINUED
Rental value growth
Average unexpired lease length
Half-yearly rental value growth (%)
Years
6
.
6
2
.
5
8
.
4
2
.
4
1
.
4
8
6
4
2
0
H1 14 H2 14 H1 15 H2 15 H1 16 H2 16 H1 17 H2 17
H1 18 H2 18
0
.
1
1
.
1
6
.
0
5
.
0
6
.
0
8
6
4
2
0
Jun
2014
Dec
2014
Jun
2015
Dec
2015
Jun
2016
Dec
2016
Jun
2017
Dec
2017
Jun
2018
Dec
2018
West End
City Borders
Central London
Profile of rental income expiry
Five-year vacancy trend
%
70
60
50
40
30
20
10
0
1
6
7
3
5
3
3
2
6
1
Up to 5
5-10
10-15
Years to expiry
15-20
Over 20
8
0
1
6
2 2
No lease breaks exercised
Lease breaks exercised at first opportunity
%
5
4
3
2
1
0
Dec
2013
Jun
2014
Dec
2014
Jun
2015
Dec
2015
Jun
2016
Dec
2016
Jun
2017
Dec
2017
Jun
2018
Dec
2018
Derwent London (by rental value)
CBRE Central London (by floor area)
Derwent London (by floor area)
Retaining occupiers – Lease expiry and break analysis
Letting activity by rental income
Percentage of income
100
27
10
63
80
60
40
20
11
44
45
11
26
63
8
35
57
10
14
76
£m pa
40
30
20
10
3
.
1
1
5
.
0
1
1
.
4
1
2.6
0
.
6
3
.
7
0
.
8
0
2014
2015
2016
2017
2018
0
2010
2011
2012
2013
Retained
Re-let
Vacant
Pre-lets
Non pre-lets
3
.
3
1
2
.
8
2
6
.
6
8
.
4
2
2
.
5
1
9
.
1
1
8
.
4
1
9
.
1
1
2015
2016
2017
2018
8
.
6
2.4
2014
Strategic report
development &
refurbishment
We have made good progress on our
two major schemes� At the year end,
we had 623,000 sq ft under construction
which is now 75% pre-let, up from 45%
a year earlier�
Simon Silver
Executive Director
65
Brunel Building W2 is now 77% pre-let with the remaining three
office floors under offer� This project is due for completion in the first
half of 2019, while 80 Charlotte Street W1 is on course for completion
one year later� The commercial element is 80% pre-let, principally
to Arup and The Boston Consulting Group, which was announced
in 2017� During 2018, we pre-let the 11,000 sq ft office space in the
adjoining Asta House to Elliott Wood� Together, our two on-site
projects have an ERV of £42�7m, and require £133m of capex to
complete� 80 Charlotte Street also has 55 residential units of which
we expect to let 19 and sell 36� The latter includes 14 affordable
units, which we have agreed to sell�
We have also made further progress on our next two major schemes�
The preliminary site works at Soho Place W1 are ongoing and we
signed the main construction contract with Laing O’Rourke last
week� Demolition work has recently started at The Featherstone
Building EC1� The first project is one of the most strategic positions
in London’s West End over the Tottenham Court Road Elizabeth line
station and at the eastern end of Oxford Street� The latter is beside
our highly successful White Collar Factory� Together, the ERV is £30m
and the estimated additional capital expenditure and site costs total
£359m� We expect the projects to complete in the first half of 2022�
Our developments are designed to some of the highest sustainability
standards� Both Brunel Building and 80 Charlotte Street are on track
for BREEAM Excellent and LEED Gold� Our new projects, Soho Place
and The Featherstone Building, are set to meet their minimum
BREEAM and LEED ratings of Excellent and Gold respectively and,
if possible, we are looking to exceed them� Moreover, we require
our main contractors to work proactively with local communities to
ensure disruption is minimised and to foster positive relationships�
Looking further out, we have two significant potential West End
projects that have a ‘resolution to grant’ planning� These buildings are
currently let at least until 2021, which means that we are unlikely to
start redevelopment until 2022� Beyond these, we have a further 25%
of the portfolio, or 1�4m sq ft of existing space, identified for future
development� These include properties such as Network Building W1,
Francis House SW1 and Bush House (South West Wing) WC2�
At the beginning of 2018, we had three refurbishment projects:
The White Chapel Building E1 Phase 2, the upper floors at 25 Savile
Row W1 and parts of the lower floors at Johnson Building EC1�
Together, these projects totalled 166,000 sq ft with an ERV of £7�5m�
They were completed in 2018 and 78% let by the year end (by ERV),
up from 32% in August 2018� The remaining 36,300 sq ft of space,
with an ERV of £1�8m is at Johnson Building and forms part of our
year end vacancy reported above� We had no significant
refurbishment schemes under way at the year end�
Completions and capital expenditure
‘000 sq ft
500
400
300
200
100
£m
250
200
150
100
50
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 2020
Completions (‘000 sq ft)
Capital expenditure (£m)
Estimated capital expenditure (£m)
66
Derwent London plc Report & Accounts 2018
DEVELOPMENT & REFURBISHMENT CONTINUED
Major developments pipeline
Property
On-site projects
Brunel Building, 2 Canalside Walk W2
80 Charlotte Street W1
2019 starts
Soho Place W1
The Featherstone Building EC1
Other major planning consents
19-35 Baker Street W12
Holden House W12
Delivery
H1 2019
H2 2020
Area
sq ft
243,000
380,000
623,000
285,000
125,000
410,000
293,0003
150,000
443,000
1,476,000
Grand total
1 As at 31 December 2018
2 Resolution to grant planning permission
3 Total area – Derwent London has a 55% share of the joint venture
4
Includes remaining site acquisition cost and profit share to Crossrail
Capex to
complete
£m1
16
117
133
2834
76
359
Comment
Offices – 77% pre-let
321,000 sq ft offices, 45,000 sq ft residential
and 14,000 sq ft retail – 74% pre-let overall
209,000 sq ft offices, 36,000 sq ft retail
and 40,000 sq ft theatre
110,000 sq ft offices, 13,000 sq ft workspaces
and 2,000 sq ft retail
206,000 sq ft offices, 52,000 sq ft residential
and 35,000 sq ft retail
Retail flagship or retail and office scheme
Left: 80 Charlotte Street W1
Strategic report
Project summary – current
Property
On site
Brunel Building W2
80 Charlotte Street W1
2019 starts
Soho Place W1
The Featherstone Building EC1
Other
Total
Capitalised interest
Total including interest
67
Current net
income
£m pa
Pre-scheme
area
‘000 sq ft
Proposed
area
‘000 sq ft
2019
capex
£m
2020
capex
£m
2021+
capex
£m
Total capex
to complete
£m
Delivery
date
Current office
c.ERV
psf
(0�1)
–
(0.1)
–
–
–
–
(0.1)
–
(0.1)
78
234
312
–
–
–
–
312
–
312
243
380
623
285
125
410
–
1,033
–
1,033
16
92
108
53
17
70
29
207
15
222
–
25
25
94
32
126
6
157
10
167
–
–
–
136
27
163
8
171
12
183
16
117
133
2831
76
359
43
535
37
572
H1 2019
H1 2020
£75�00
£80�00
H1 2022
H1 2022
1
Includes remaining site acquisition cost and profit share to Crossrail
Project summary – future
Property
Consented
19-35 Baker Street W11
Holden House W1
Adjustment for JV
Under appraisal2
Premier House SW1
Network Building W1
Francis House SW13
Angel Square EC1
Current net
income
£m pa
Pre-scheme
area
‘000 sq ft
Proposed
area
‘000 sq ft
Earliest
possession
year
3�2
5�8
9.0
(1�4)
7.6
2�1
3�6
2�1
4�8
12.6
143
90
233
(64)
169
62
64
86
126
338
293
150
443
(132)
311
80
100
130
126
436
2021
2021
2018
2021
TBC
TBC
Consented and under appraisal
On-site and 2019 starts
Pipeline
747
1,033
1,780
Includes 88-100 George Street, 30 Gloucester Place and 69-85 Blandford Street W1
20.2
(0�1)
20.1
507
312
819
1
Comment
Joint venture – The Portman Estate
Eastern end of Oxford Street
19-35 Baker Street W1 – Derwent 55% interest
Potential disposal
Rolling refurbishment
Previous table
2 Areas proposed are estimated from initial studies
3
Includes 6-8 Greencoat Place SW1
Left: Members of the Development team
68
FINANCE REVIEW
Against a background of significant
asset management and letting activity,
it was development uplifts that drove
our valuation and net asset performance
again in 2018.
Derwent London plc Report & Accounts 2018
Financial overview
While the underlying central London office rental market was
relatively flat, high-quality space in newly constructed buildings
was in short supply in our villages; as a result, the Brunel Building
at Paddington attracted rents well above our estimates and helped
the total return for the year to 5.3%.
EPRA earnings have grown strongly again, enhanced by non-
recurring premiums received during the year, and we have been
able to propose an increase in the final dividend of just over 10%.
Project expenditure has raised our debt level from its low point in
December 2017 but leverage remains modest and, with uncertainty
persisting both in the UK and internationally, we remain alive to
the risks to the economic outlook; our operational priorities have
therefore been to pre-let space and capture early rental uplifts
where we can rather than to wait.
Financial highlights
IFRS NAV
EPRA NAV per share
Property portfolio at fair value
Net rental income
Profit before tax
EPRA earnings per share (EPS)
Underlying earnings per share (EPS)
Interim and final dividend per share
LTV ratio
NAV gearing
Net interest cover ratio
2018
£4,263.4m
3,776p
2017
£4,193.2m
3,716p
£5,190.7m £4,850.3m
£161.1m
£314.8m
94.23p
94.23p
59.73p
13.2%
15.7%
454%
£161.1m
£221.6m
113.07p
99.08p
65.85p
17.2%
22.4%
491%
Damian Wisniewski
Finance Director
PRESENTATION OF FINANCIAL RESULTS
The financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS).
In common with usual and best practice in our sector, alternative
performance measures have also been provided to supplement
IFRS based on the recommendations of the European Public
Real Estate Association (EPRA). EPRA Best Practice and Policy
Recommendations (BPR) have been adopted widely throughout
this report and are used within the business when considering
our operational performance as well as matters such as
dividend policy and elements of our Directors’ remuneration.
Full reconciliations between IFRS and EPRA figures are provided
in note 38 and all the EPRA definitions are included in the list
of definitions.
Delivering above average long-term returns
Our well-established business model aims to balance risk through
the economic cycle, growing returns from our regeneration projects
while also focusing on long-term sustainable earnings growth.
While our total return (i.e. dividends plus EPRA net asset value
growth per share) is the best single measure of our performance,
we also focus on EPRA earnings growth as this provides resilience
to the business and enhances the distributions we can pay our
shareholders.
The total return in 2018 slowed a little to 5.3% from 7.7% in 2017
but represented 196.5p per share with the EPRA net asset value
per share up 60p to 3,776p after 61.5p of ordinary dividends and
75p of special dividends paid in the year. Revaluation gains provided
75p per share with Brunel Building contributing 64p alone following
earlier than expected pre-lets at strong rents. EPRA earnings are
dealt with in more detail below.
Looking at the longer term performance too, the table below shows
how growth in the annual dividend/PID (excluding specials) and total
return have performed over one, two, five and ten years:
Year to 31 December 2018
2 years to 31 December 2018
5 years to 31 December 2018
10 years to 31 December 2018
Ordinary
dividend
growth
% pa
10.2
12.1
12.5
10.4
Total return
%
5.3
13.2
83
251
Total return
% pa
5.3
6.4
12.8
13.4
Strategic report
Property portfolio
The value of our property portfolio increased to £5.2bn as at
31 December 2018 from £4.9bn a year earlier, allocated across
the balance sheet as follows:
Investment property
Owner occupied property
Trading property
Property carrying value
Accrued income (non-current)
Accrued income (current)
Grossing up of headlease liabilities
Revaluation of trading property
Fair value of property portfolio
Dec 2018
£m
5,028.2
47.0
36.3
5,111.5
123.1
15.8
(60.7)
1.0
5,190.7
Dec 2017
£m
4,670.7
46.5
25.3
4,742.5
105.2
15.4
(14.1)
1.3
4,850.3
Capital expenditure added £181.5m and, out of the total revaluation
gain for the year of £84.1m, £83.4m related to the investment
property portfolio. An additional £0.7m came from our own offices at
25 Savile Row W1, the latter figure appearing in the Group Statement
of Comprehensive Income. Property acquisitions during the year
totalled £57.2m, mainly at 88-94 Tottenham Court Road W1, and
we recognised a further £46.6m of discounted headlease liabilities
in the balance sheet of which £45.9m relates to Soho Place W1.
This takes total headlease liabilities to £60.7m at the year end (2017:
£14.1m) with an equal and opposite amount included in net debt.
69
Accrued income from the ‘straight-lining’ of rental income under
IAS17 and SIC15 has increased to £138.9m (2017: £120.6m) due
partly to rent incentives at recently completed developments
(e.g. White Collar Factory EC1) or where leases have been regeared
(e.g. Angel Building EC1). In addition, the lease extension and rent
review at Horseferry House SW1 agreed in 2018 was accompanied
by incentives which added £6.4m to the balance, including an
additional rent-free period, to extend the lease by 15 years.
The net carrying value of joint venture investments at 31 December
2018 fell to £29.1m (2017: £39.7m) following the sale of Porters North
N1 in March. After repaying the related bank loan within the joint
venture company, we received a dividend of £13.5m in H2 2018.
9 and16 Prescot Street E1 are now our only joint venture property
holdings but contracts have now been exchanged to sell 9 Prescot
Street later in 2019.
Property income and earnings
Gross property and other income increased to £228.0m from
£202.6m in 2017 due mainly to a number of non-recurring property
items; these included net surrender premiums of £3.2m (2017: £0.1m)
and rights of light/access receipts totalling £17.7m. After the record
net property disposals in 2017 which reduced rental income in
2018 by £4.2m, gross rental income was up by 2% over the year
to £175.1m. Lettings in 2017 and 2018 added £12.4m of rent while
reviews provided a further £3.5m but breaks and lease expiries
reduced income by £8.7m. With ground rents and other property
costs increasing to £14.0m, net rental income was unchanged at
£161.1m. However, net property and other income, which includes
dilapidations receipts and the one-off premiums referred to above,
rose by 13% to £185.9m from £164.8m in 2017.
EPRA net asset value per share
Gross property income
p
4,000
3,900
3,800
3,716
3,700
113
(62)
(75)
75
5
4
3,776
3,600
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3.3
11.3
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172.2
70
FINANCE REVIEW CONTINUED
Administrative expenses increased to £32.3m from £28.2m in 2017,
the prior year figure having been reduced by the reversal of an
overprovision in variable rate pay and the current year figure
taking account of an underprovision in 2017. Adjusting for these,
administration costs increased year-on-year by £2.2m or 7%,
the increase being mainly attributable to higher staff costs and
variable pay. We have also seen costs rise in areas such as staff
training, GDPR compliance, pensions legislation and recruitment,
altogether adding over £0.6m compared with 2017. Our development
team of 14 people works entirely on regeneration projects; direct
employment costs of this team totalled £3.0m but, as in previous
years, we have not capitalised any of these costs or other overheads.
In line with these cost increases and our policy of not capitalising
overheads, our EPRA cost ratio (see note 38 for calculation)
has increased to 23.3% in 2018 (2017: 20.8%) or 20.8% excluding
direct vacancy costs (2017: 19.3%).
Cost ratios
EPRA cost ratio, incl. direct vacancy costs
EPRA cost ratio, excl. direct vacancy costs
Portfolio cost ratio, incl. direct vacancy costs
2018
%
23.3
20.8
0.8
2017
%
20.8
19.3
0.7
EPRA and underlying earnings
23.8
(1.7)
(4.1)
3.6
(0.5)
126.1
(15.6)
Derwent London plc Report & Accounts 2018
There were no significant disposals of investment properties in
2018 but we have booked a further £3.0m of overage in relation to
the residential project at Riverwalk House SW1. This takes the total
overage booked over the past two years to £8.0m in relation to the
site that was sold in 2012. In addition, sales at the residential site at
Balmoral Grove N7 sold in 2016 are now over 70% contracted so we
have recognised £2.0m of overage with more to come if current
pricing levels prevail on the remainder.
Although debt increased over the year, average borrowings were
actually slightly lower in 2018 than in 2017 and total finance costs
fell to £23.5m from £27.1m in 2017 after capitalised interest of £10.7m
(2017: £9.4m). Derivative financial instruments also showed a small
overall gain of £0.8m in 2018 (2017: £2.1m) as medium-term interest
rates moved up slightly during the year.
Our share of the results at our unconsolidated joint ventures fell
to £2.1m (2017: £5.0m), following the sale of Porters North in
March 2018.
Due mainly to the lower uplifts on revaluation and disposals,
IFRS profit before tax fell to £221.6m for the year ended 31 December
2018 against £314.8m in the prior year. However, on an EPRA basis,
which excludes fair value movements and profits on disposals of
investment properties, earnings increased by 20.1% to £126.1m from
£105.0m in 2017. EPRA earnings per share (EPS) were up by a similar
amount to 113.1p from 94.2p a year earlier. As EPRA earnings and
EPS include the non-recurring £15.6m access rights receipt at
Holden House net of fees, we have also provided ‘underlying’ figures,
giving an adjusted EPS of 99.1p, a rise of 5.1% over 2017. Note that the
underlying figures do include rights of light and dilapidations receipts
of £3.6m as these items occur frequently within our ongoing property
operations. A table providing a reconciliation of the IFRS results to
EPRA earnings per share is included in note 38.
EPRA like-for-like rental income
The unusually high level of premiums received in 2018, with a
corresponding sacrifice of short-term rental income while the
buildings are re-let, has distorted EPRA like-for-like income in 2018.
Adjusting the EPRA like-for-like net rental income by removing the
£15.6m (net) access rights premium and treating as rent that part
of the surrender premium which relates to 2018 gives an increase
in gross rent of 3.6%, net rent of 2.8% and net property income
of 5.1% when compared with 2017. Without adjustment, the
EPRA like-for-like income figures range from 0.6% to 15.4%.
Taxation
The corporation tax charge for the year ended 31 December 2018
was £3.1m, broadly in line with the previous year’s tax charge
of £3.3m.
110.5
105.0
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2017 85.7
16.2
(1.6)
2.7
0.7
1.3
105.0
–
105.0
The movement in deferred tax liabilities for the year was a credit
of £0.5m, of which £0.4m (2017: £1.5m credit) passed through the
income statement due to the valuation impact for non-REIT Group
properties and £0.1m through comprehensive income in relation
to the owner-occupied property at Savile Row.
In addition to other taxation and levies paid during the year,
in accordance with our status as a REIT, £6.3m of tax was withheld
from shareholders on property income distributions and paid to
HMRC during the year.
Derwent London’s principles of good governance extend to a
responsible approach to tax. Our statement of tax principles is
available on our website: www.derwentlondon.com/investors/
governance/tax-principles and is approved by the Board in line
with the Group’s long-term values, culture and strategy.
£m
130
120
110
100
90
71
Properties owned throughout the year
Adjustments1
£m
EPRA
£m
Underlying
£m
158.5
(9.9)
148.6
17.7
7.3
173.6
155.5
(7.8)
147.7
2.7
150.4
1.9%
0.6%
15.4%
2.6
0.7
3.3
(15.8)
(3.1)
(15.6)
–
–
–
–
–
161.1
(9.2)
151.9
1.9
4.2
158.0
155.5
(7.8)
147.7
2.7
150.4
3.6%
2.8%
5.1%
Strategic report
EPRA like-for-like rental income
2018
Gross rental income
Property expenditure
Net rental income
Other property income
Other1
Net property income
2017
Gross rental income
Property expenditure
Net rental income
Other1
Net property income
Total
£m
Development
property
£m
Acquisitions
and disposals
£m
175.1
(14.0)
161.1
17.7
7.1
185.9
172.1
(11.0)
161.1
3.7
164.8
(15.9)
3.6
(12.3)
–
–
(12.3)
(11.8)
3.1
(8.7)
(1.0)
(9.7)
(0.7)
0.5
(0.2)
–
0.2
–
(4.8)
0.1
(4.7)
–
(4.7)
Increase based on gross rental income
Increase based on net rental income
Increase based on net property income
1
Includes surrender premiums paid or received, dilapidation receipts and other income
Net debt and cash flow
Group borrowings increased to £914.5m at 31 December 2018 from
£730.8m a year earlier after capital expenditure invested in our
projects, dividend payments totalling £152.0m and net property
acquisitions of £57.3m. Grossing up for leasehold liabilities and
netting off cash balances, net debt increased from £657.9m to
£956.9m at December 2018. This has raised the Group loan-to-value
ratio from its low point in December 2017 of 13.2% to 17.2% in
December 2018, but it remains at the second lowest year-end level
over the past decade. Interest cover rose again to 491% for the year
compared with 454% in 2017. Note that interest cover is calculated
on net rental income and does not include surrender premiums for
rights of light/access premiums. Full details of the calculation are
in note 40.
The cash received from the various premiums in 2018 has driven a
significant rise in net cash from operating activities to £115.2m from
£83.5m in 2017. However, even if these premiums are ignored, the
underlying cash flow from operations increased by over 10% over
the year.
Capital spend on projects increased to £187.5m in 2018 but was
partially offset by £15.9m of reimbursed expenditure, £7.2m of which
was in connection with the Soho Place project. In 2019, we expect to
invest a further £207m in capital expenditure plus £15m of
capitalised interest across the portfolio.
Maturity profile of debt facilities as at 31 December 2018
Maturity profile of fixed rates and swaps as at 31 December 2018
150
175
£m
2019
2022
2024
2026
2028
30
2029
25
2031
2034
Drawn
Headroom
83
75
75
298
255
2020
28
£m
2019
30
25
2024
2026
2028
2029
2031
2034
Fixed rate
Hedged
150
175
298
83
75
75
72
Derwent London plc Report & Accounts 2018
FINANCE REVIEW CONTINUED
Debt and financing arrangements
The only change to our debt facilities during the year was the repayment
of a small bank facility within the Porters North joint venture.
In relation to interest rate hedging, we extended the swap on the
£28m bank facility secured on the Baker Street properties out to
March 2020 and paid £0.6m to reduce the fixed rate from 3.525% to
0.875%. We also paid £2.9m to defer £110m of ‘forward start’ swaps;
the £70m 3.99% swap is now due to start in March 2019 and the
£40m 2.45% swap in October 2019. In addition, a £75m swap at
1.36% is due to commence in April 2019.
The higher year end level of debt has brought cash and undrawn
facilities down to £274m at December 2018 from £523m in 2017.
In anticipation of this and following the credit rating upgrade,
we took action in the second half of 2018 to raise fresh debt.
An agreement was signed in November 2018 with eight institutional
investors for a private placement of £250m new senior unsecured
notes. The issue was made up of four tranches with maturities
ranging between 7 and 15 years. The weighted average coupon of
the fixed rate notes was 2.89% with a weighted average maturity of
10.8 years. In addition to our usual debt covenants, a test requiring
unencumbered assets to be at least 1.6 times unsecured debt has
been provided and this is gradually being extended to our other
unsecured lenders. Funds were drawn on 31 January 2019 and
used to repay existing Group revolving credit facilities.
These changes brought the proportion of fixed rate and swapped
debt down to 70% at December 2018, helping reduce the average
cost of our debt. At December 2018, the weighted average interest
rate was 3.43% (2017: 3.80%) or 3.68% (2017: 4.11%) allowing for
the IFRS charge on our convertible bonds. The bonds have a current
conversion price of £31.78 and fall due in July 2019 so they are
shown as a current liability as at the balance sheet date. As our
share price was below this level at the year-end, the dilutive impact
on conversion of the bonds has not been included in earnings per
share or net asset per share measures. Were the bonds to convert,
the impact on net asset value per share would be a reduction of
about 25 pence per share and we continue to weigh up our options
to redemption or conversion of the bonds; these considerations will
partially be dependent on the share price movement over the next
few months.
The weighted average maturity of our debt was 5.9 years at
31 December 2018 (2017: 7.6 years) but increases on a proforma
basis with the drawdown of the new senior £250m notes to around
8.0 years.
Dividend
Our dividend policy has been consistent for many years: to maintain
a progressive dividend supported by rising recurring earnings.
The earnings increase in 2018 means we have been able to propose
another increase of just over 10% in our final dividend per share,
taking it to 46.75p. This will be paid in June 2019 with 30.0p to
be paid as a PID with the balance of 16.75p as a conventional
dividend. The full year’s dividend is 1.5 times covered by underlying
earnings and 1.7 times by EPRA earnings. There will not be a scrip
dividend alternative.
In August 2018, we received an upgrade to our corporate credit
rating. Fitch assigned Derwent London a long-term issuer default
rating of A- and a senior unsecured debt rating of A. The London
Merchant Securities Ltd senior secured bonds 2026 were
subsequently given a Fitch rating of A+. At our request, Standard &
Poors withdrew their corporate and bond ratings on 3 October 2018.
Borrowings and net debt
Bank facilities
3.99% secured loan 2024
6.5% secured bonds 2026
Acquired fair value of secured bonds less amortisation
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
1.125% unsecured convertible bonds 2019
Equity components and unwinding of discounts on convertible bonds
Unamortised issue and arrangement costs
Borrowings
Leasehold liabilities
Cash
Net debt
2018
£m
297.5
83.0
175.0
11.8
30.0
25.0
75.0
75.0
150.0
(1.3)
(6.5)
914.5
60.7
(18.3)
956.9
2017
£m
117.0
83.0
175.0
12.9
30.0
25.0
75.0
75.0
150.0
(3.5)
(8.6)
730.8
14.1
(87.0)
657.9
Strategic report
Gearing and interest cover ratio
Loan-to-value ratio
NAV gearing
Net interest cover ratio
Debt facilities
6.5% secured bonds
3.99% secured loan
1.125% unsecured convertible bonds
4.41% unsecured private placement notes
4.68% unsecured private placement notes
3.46% unsecured private placement notes
3.57% unsecured private placement notes
Non-bank debt
Bilateral term – secured
Bilateral revolving credit – unsecured
Club revolving credit – unsecured
Committed bank facilities
At 31 December 2018
Debt summary
Bank loans
Floating rate
Swapped
Non-bank debt
3.99% secured loan 2024
6.5% secured bonds 2026
1.125% unsecured convertible bonds 2019
Unsecured private placement notes 2028 – 2034
Total
Hedging profile (%)
Fixed
Swaps
Percentage of debt that is unsecured (%)
Percentage of non-bank debt (%)
Weighted average interest rate – cash basis (%)
Weighted average interest rate – IFRS basis (%)
Weighted average maturity of facilities (years)
Weighted average maturity of borrowings (years)
Undrawn facilities and cash
Uncharged properties
73
2017
%
13.2
15.7
454
2018
%
17.2
22.4
491
Maturity
£m
March 2026
175
83 October 2024
July 2019
150
25 January 2029
75 January 2034
May 2028
30
75
May 2031
613
28
75
July 2022
July 2022
450 January 2022
553
1,166
2018
£m
269.5
28.0
297.5
83.0
175.0
150.0
205.0
613.0
910.5
67
3
70
69
67
3.43
3.68
5.3
5.9
274
4,117
2017
£m
89.0
28.0
117.0
83.0
175.0
150.0
205.0
613.0
730.0
84
4
88
61
84
3.80
4.11
6.3
7.6
523
3,864
74
responsibility
As a responsible business, we
understand, balance and manage our
environmental, social and governance
(ESG) risks and opportunities.
Dame Cilla Snowball
Chair of the Responsible Business Committee
Derwent London plc Report & Accounts 2018
Dear Stakeholder,
This Responsibility section integrates the reporting on the ESG
aspects of our business and provides an overview of how we manage
ESG matters. We do this to reduce risk and create new, or maximise
existing, opportunities. The Responsibility section should be read
in conjunction with our Annual Sustainability Report, which provides
a comprehensive review of our environmental and community-
based work.
Being a responsible business is embedded in Derwent London
– it is visible in our culture, approach to risk and in the design and
the management of our buildings. Central to the success of this
approach is the linkage of ESG matters to our strategy. Two of our
five strategic objectives, detailed on pages 37 to 38, focus on our
stakeholder responsibilities:
• Objective 3: to attract, retain and develop talented employees
• Objective 4: to design, deliver and operate our buildings responsibly
Our management structure and style ensure that we can respond to
changes in regulation and occupier demand. Likewise, they enable us
to plan more effectively for the long-term and ensure we are putting
the right systems and processes in place to maintain our position as
London’s leading office-focused REIT.
In 2018 we continued to make progress against our strategic
objectives and sustainability priorities. Board oversight of
environmental and social issues has been strengthened through
the establishment of a new Board-level Committee, the Responsible
Business Committee, which will be dedicated to overseeing our
corporate responsibility agenda and stakeholder engagement.
I will chair the new Committee and am delighted to have been
designated by the Board to act as the dedicated Non-Executive
Director for gathering the views of our workforce. During 2019,
two employees will be nominated by the workforce to become
members of the Responsible Business Committee (see page 92).
ESG matters are interlinked and cannot be managed in isolation.
In 2019 the Group will be undertaking a strategic review of its
sustainability work. The aim of the review is to ensure that each of
our ESG priorities is set into a specifically designed structure which
will allow for even greater efficiency in management and reporting.
INTEGRATED REPORTING
The table below summarises where key elements of our ESG reporting are disclosed. Some of these are integrated
with other sections of the Annual Report.
Environmental
Social
p. 76 Climate resilience
p. 26 Communities
Governance
p. 01 Culture
p. 76 Science-based carbon targets
p. 102 Gender diversity targets
p. 18 Our stakeholders
p. 113 Supply Chain Sustainability Standard
p. 79 Health and well-being
p. 87 Our governance framework
p. 76 SECR disclosure
p. 75 Protection of human rights
p. 111 Risk management
p. 77
TCFD summary
p. 75 Modern Slavery Statement
p. 113 Anti-bribery and corruption
p. 108 Whistleblowing
p. 114
GDPR and preventing the facilitation
of tax evasion
The Annual Sustainability Report can be downloaded from our website at: www.derwentlondon.com/sustainability
Strategic report
Stakeholder engagement
Effective stakeholder engagement is critical to fostering mutually
beneficial relationships and securing our long-term success.
Our engagement programmes for key stakeholders are described
on pages 18 to 19 of the Strategic report and pages 92 to 93 of the
Corporate governance statement.
Developing and maintaining strong relationships within the
communities in which we operate is an essential part of our
management approach. Being active in and contributing positively
to the neighbourhoods in which our properties are located means
we can understand the needs of our community stakeholders
in greater depth. This is backed by our Community Fund which
supports numerous grass roots projects and initiatives across
our Tech Belt and Fitzrovia/West End villages.
We also support a variety of organisations through ‘pro bono’ work,
volunteering, employment opportunities and mentoring. Full details
of our community initiatives can be found within our Annual
Sustainability Report.
Human rights
The protection of human rights and fundamental freedoms is
one of our key ESG priorities which we manage from an internal
(within our business) and external perspective (within our supply
chain and our relationships with contractors).
Internally, the Board monitors our culture to ensure we maintain
our values and high standards of transparency and integrity.
Our Human Resources team ensures that we have the right systems
and processes in place to strengthen and sustain our culture.
Further information on the development of our employees can be
found on page 78. The Board’s role in managing the Group’s culture
can be found in the Introduction from the Chairman on page 85.
Alongside other stakeholders, the interests and well-being of
our employees and the local and wider community is factored
into Boardroom decisions (see page 94).
75
Externally, we are active in ensuring our ESG standards are clearly
communicated to our supply chains, principally via our Supply Chain
Sustainability Standard (more on page 113). In addition, we are clear
on our zero-tolerance position with regards to slavery and human
trafficking as set out in our Modern Slavery Statement, which can
be found at: www.derwentlondon.com/investors/governance/
modern-slavery-act
Reporting frameworks
We report under several frameworks to provide a complete picture
of our progress and activities and to allow comparison with our
peers and other companies. Our reporting aims to show not only a
property-sector specific perspective (EPRA Best Practice Reporting
measures) but also a broader international perspective (the Global
Reporting Index and the United Nations Sustainable Development
Goals). For further details on our EPRA measures, please see pages
201 to 202, and for our Global Reporting Index disclosures and United
Nations Sustainable Development Goals alignment, see our Annual
Sustainability Report.
Data assurance
As part of our commitment to robust and transparent reporting,
Deloitte LLP assure our environmental data points and health
and safety data. Our audit assurance statement from Deloitte LLP
is available in our Annual Sustainability Report.
Further engagement
I will be available at this year’s AGM, on 17 May, if you wish to
ask any questions in respect to the role or remit of the newly
established Responsible Business Committee. If you wish
to contact me, I am available via our Company Secretary,
David Lawler (telephone: +44 (0)20 7659 3000 or
email: company.secretary@derwentlondon.com)
Dame Cilla Snowball
Chair of the Responsible Business Committee
26 February 2019
Non-financial reporting
As we have fewer than 500 employees, the Non-Financial Reporting requirements contained in the Companies Act 2006 do not apply to us.
However, due to our commitment to promoting transparency in our reporting and business practices, we have elected to provide further
information in the table below.
Environmental
matters
Social and
employee matters
Respect for human
rights
Anti-bribery and
corruption issues
Key policies and standards
• Sustainability Policy
• Science-based carbon targets
• Task Force on Climate-related Financial Disclosures
• Streamlined Energy and Carbon Reporting (SECR) disclosure
• Volunteering Policy
• Equal Opportunities & Diversity Policy
• Professional Development & Training
• Shared Parental Leave
• Flexible Working Policy
• Individual Rights Policy
• Health & Safety Policy Statement
• Supply Chain Sustainability Standard
• Modern Slavery Statement
• Anti-bribery Policy
• Whistleblowing Policy
• Expenses Policy
• Money Laundering & Terrorist Financing Policy
• Preventing facilitation of Tax Evasion Policy
Additional information
• Annual Sustainability Report
• Climate change resilience (see page 76)
• Executive Directors’ annual bonus (see page 125)
• Our principal risks (see page 56)
• Community (see pages 18 and 26)
• Our employees (see pages 18 and 78)
• Promoting diversity (see page 79 and 102)
• Our principal risks (see page 48)
• Health and safety (see page 80 and 112)
• Human rights and modern slavery (see page 75)
• Supply Chain Sustainability Standard (see page 113)
• Audit Committee’s report (see pages 104 to 109)
• Risk Committee’s report (see pages 110 to 115)
• Our principal risks (see page 54)
p. 20 Business model
p. 42 Non-financial key performance indicators
p. 102 Board diversity
76
RESPONSIBILITY CONTINUED
Derwent London plc Report & Accounts 2018
Climate resilience
Climate change represents a principal long-term risk for our business.
We invest significant time and effort into ensuring we are managing the risks it presents.
OUR ACHIEVEMENTS IN 2018
• 20% reduction in like-for-like carbon intensity (tCO2e/m2)
• 75% waste recycling rate
We made good progress over the past year with a reduction
of 20% in carbon intensity across the like-for-like portfolio.
This means we are on track to meet our targets by 2027
(see our Annual Sustainability Report).
OUR FOCUS AREAS FOR 2019
• Develop COP21 action plans for each managed property
in our five-year plan
• Undertake our statutory audit programme for phase 2
of Energy Savings Opportunity Scheme (ESOS)
• Complete an evaluation of the environmental and social
impact study of our White Collar Factory building
As a real estate investment trust (REIT) we invest in, develop and
manage property. Our properties are subject to physical climate-
related risks, such as increasing temperatures, which could
lead to greater stresses on our properties and cost increases.
We therefore factor climate resilience into our new developments
and our management approach to existing buildings. Significant
focus is given to energy and carbon reduction to ensure our buildings
operate as efficiently as possible.
Science-based carbon targets
In 2016, Derwent London agreed its first set of science-based
targets, aligned with the International Energy Agency’s (IEA) Energy
Technology Perspectives 2°C scenario data and the UK Carbon Plan
2050 Futures model. Recently, the Science Based Targets Initiative
validated our science-based targets, which are to reduce scope 1
and 2 emissions 55% per m2 and scope 3 emissions by 20% per m2
by 2027 from a 2013 and 2017 base line, respectively.
Our existing portfolio and development pipeline incorporate the right
resilience measures to mitigate any potential negative impacts and
ensure we meet our targets.
Energy efficiency actions taken during 2018
As part of our ongoing energy efficiency programme, we have
installed advanced energy analytics in several of our multi-let
properties as a means of driving down their energy consumption
profiles. During 2018 these included BMS optimisations,
chiller staging and lockout, optimised night purging, variable
speed drive optimisations and eliminating heating and cooling
conflicts, which resulted in savings of over 4.5m kWh of energy
during the year.
Streamlined Energy and Carbon Reporting (SECR)
disclosure
Following the Government announcing the replacement of the
CRC Energy Efficiency Scheme and extension of the scope of
the Mandatory Carbon Reporting, we now report in line with
new SECR regulations, which are provided below:
GHG and energy data
Total Scope 1 emissions (tCO2e)
Total Scope 2 emissions (tCO2e)
Location based
Market based
Total Scope 3 emissions (tCO2e)
Carbon intensity ratio (tCO2e/m2)
Total energy use (kWh of electricity,
gas and biomass use)
2018
4,223
3,458
4,478
12,538
0.019
2017
4,189
3,538
5,475
14,859
0.020
34,297,942
29,207,987
For further analysis of our GHG emissions, energy consumption and
renewable energy generation, use and procurement see our Annual
Sustainability Report.
SECR data notes
Reporting period
Boundary
(consolidation
approach)
Alignment with
financial reporting
1 January to 31 December 2018
Operational control, based on our corporate activities and property portfolio all of which are in central London (UK) only.
The only variation is that the GHG emission/energy data presented does not account for single-let properties or properties
for which we do not have management control. This is because we have no control or influence over the utility consumption
in these buildings. However, the rental income of these properties is included in our consolidated financial statements.
Reporting method We arrange our GHG emissions reporting in line with the Greenhouse Gas (GHG) Protocol Corporate Accounting and
Reporting Standard. For further details on our data calculation methodology please the data section of our Annual
Sustainability Report.
DEFRA, 2018 – www.gov.uk/government/collections/government-conversion-factors-for-company-reporting for
all emissions factors apart from the Scope 2 market based (residual mix) factor which is from Reliable disclosure systems
for Europe, 2014 European residual mixes – www.reliable-disclosure.org/documents
Emissions factor
source
Scope 3 emissions We use the GHG Protocol Scope 3 Standard to collate and report on our relevant Scope 3 emissions. Our relevant emissions
Independent
assurance
categories include fuel and energy-related activities, waste generated in operations, business travel and emissions from
downstream leased assets (tenant emissions).
Public reasonable assurance (using ISAE 3000) provided by Deloitte LLP over all Scope 1, 2 and 3 GHG emissions data,
intensity ratio and energy data. Our assurance statement can be found in our Annual Sustainability Report.
Strategic report
77
TCFD summary
The Task Force on Climate-related Financial Disclosures (TCFD) released its first draft disclosure guidelines in June 2017.
We present a summary of our disclosures below. Our full disclosures can be found in our Annual Sustainability Report.
GOVERNANCE
Describe the Board’s oversight of
climate-related risks and opportunities
• Our Responsible Business Committee, a principal committee of the Board, oversees the
management of our climate-related risks and opportunities, which is in turn informed by our
Sustainability Committee.
Describe management’s role in
assessing and managing climate-
related risks and opportunities
• Paul Williams is the main Board Director with overall accountability for sustainability. As part of
his role as chair of the Sustainability Committee, he oversees the review and performance of our
climate-related work.
STRATEGY
Describe the climate-related risks and
opportunities the organisation has
identified over the short, medium and
long-term
Describe the impact of climate-
related risks and opportunities on the
organisation’s businesses, strategy and
financial planning
Describe the resilience of the
organisation’s strategy, taking into
consideration different climate-related
scenarios, including a 2°C or lower
scenario
RISK MANAGEMENT
• Short-term (0-5 years): market shift in terms of stricter legislation, e.g. the introduction in the UK
of the new minimum energy efficiency standards (MEES) for commercial and domestic property.
• Medium-term (5-10 years): market demand from occupiers in terms of buildings and spaces
• Long-term (15+ years): the changing climate conditions in London, principally temperature
with higher levels of efficiency and low carbon footprint.
increases and their effect on our buildings.
• As a property investor, climate-related issues affect the way we develop new buildings and
how we manage existing ones.
• To help us plan climate-related investments into our managed properties, we have built a
scenario analysis tool. This allows us to test the impact of different energy/carbon management
measures into specific buildings to estimate the effect they will have on our science-based
carbon targets.
• Our business strategy involves both investing in new developments and acquiring older
properties with future regeneration opportunities. We ensure a high degree of resilience in
our new developments and the regeneration of older properties by setting high standards for
environmental sustainability. When managing our core income portfolio, we have a significant
focus on energy and carbon reduction, ensuring our buildings operate as efficiently as possible.
As a result, our strategy centres around the concept of continual improvement which ensures
a high degree of both climate and financial resilience. Ultimately we do not envisage having
to make changes to our strategic approach when considering climate related scenarios.
• Our properties are subject to climate-related risks such as increasing temperatures which could
lead to greater stresses on our properties and in turn increase our cost base, e.g. management
and utility costs and our GHG emissions.
Describe how processes for identifying,
assessing, and managing climate-
related risks are integrated into the
organisation’s overall risk management
• Each year senior managers from various areas of the business collate their key risks,
which includes sustainability/climate change related risks. The risks are assessed by
the Executive Committee to understand their severity, likelihood and the optimal controls
and/or mitigation required.
METRICS AND TARGETS
Disclose the metrics used by the
organisation to assess climate-related
risks and opportunities in line with its
strategy and risk management process
Disclose Scope 1, Scope 2, and, if
appropriate, Scope 3 greenhouse gas
(GHG) emissions, and the related risks
• We report an extensive range of consumption and intensity metrics relating to energy,
carbon, waste and water in our Annual Sustainability Report.
• Streamlined Energy and Carbon Reporting (SECR) disclosures on page 76.
Describe the targets used by the
organisation to manage climate-
related risks and opportunities and
performance against targets
• Following our review of the Paris Agreement on international climate change in 2016,
we developed a set of science-based targets to ensure we align our carbon reduction
programme with this agreement, and ensure we minimise our risk exposure to the effects
of climate change on our managed portfolio.
78
RESPONSIBILITY CONTINUED
People
Our objective is to attract, retain and develop talented employees.
Derwent London plc Report & Accounts 2018
OUR ACHIEVEMENTS IN 2018
• Continued to manage our ‘talent pipeline’ via the ‘Fit for
the Future’ management and leadership programme
• Established a steering group to address priority areas
arising from the 2017 employee survey
• Organised initiatives to promote well-being and ensure
a respectful, inclusive, collaborative and safe culture
OUR FOCUS AREAS FOR 2019
• Design and conduct our next employee survey
• Continue to develop and promote diversity, inclusion and
• Continue to cultivate the ‘talent pipeline’ via the ‘Fit for the
well-being initiatives
Future’ programme
• Arrange a Company ‘away day’ to focus on team building
and knowledge sharing
Headcount by department
Investment
6
Leasing &
Property
Marketing
10
Finance &
Information
Technology
27
Development
14
Building
Services
13
Board of
Directors
14
7
Asset
Management
Property
Management
24
4 Investor Relations
& Corporate
Communications
3 Sustainability
2 Human Resources
Attracting and optimising talent
Our employees are the most important ambassadors of the
Derwent London brand. In order to maintain our excellent employee
engagement and retention rates year-on-year, we want all our
employees to feel valued and have the opportunity to develop within
their roles. It is extremely important for us to support individual
aspirations and have robust succession plans in place, which are
fundamental to the future growth and stability of the business.
Although 30% of our employees have been with us for more than
10 years, a similar number have joined the business over the past
three years. We encourage the diversity of thought, competencies
and experience that make up our business. In addition, we work
hard to maintain the Derwent London culture, values and reputation,
which have stemmed from the behaviours and values promoted by
our Board.
We support staff through:
• an induction programme;
• biannual performance reviews;
• personal development plans and open discussions;
• external training courses and internal technical workshops;
• executive coaching;
• sponsorship of professional qualifications; and
• 360 degree feedback.
Following an in-depth review of the business-critical roles and ‘talent
pipeline’ within the Group, 2018 saw the launch of our ‘Fit for the
Future’ initiative. This is being run as three 12-18 month modular
management and leadership development programmes for 30 of
our employees. Each module is run by a dedicated Executive Coach
and sponsored by two Executive Directors who are involved in the
design and content of the modules, which tie in with our values.
The modules are focused on increasing self-awareness, learning
and collaboration and are supplemented with one-to-one and group
coaching sessions. Inclusivity is important to us and this initiative
sits alongside a new ‘Core Skills’ programme available to all
employees, whatever their role or level of experience, to aid their
personal development.
Enabling employees to move into new roles helps them fulfil their
potential. We were delighted, therefore, to announce 10 internal
promotions during 2018, several of whom were participants in the
‘Fit for the Future’ programme.
124
Employees
90%
Retention rate
10
Internal promotions
57/43
Male/Female ratio %
98%
Are proud to work at Derwent
Strategic report
Employee engagement
We gather feedback regularly from our employees to assess their
levels of engagement. We conduct a formal biennial employee
survey, designed and developed in conjunction with an independent
provider and sponsored by the Executive Directors. Recently,
the Directors have started hosting monthly forums with small groups
of employees to encourage feedback and provide an opportunity
for employees to propose innovative ideas (see page 19 and 92).
We were delighted with the 97% response rate to our 2017 employee
survey and a steering group was established in 2018 to discuss
the results and suggest improvements for the lower scoring areas.
The steering group presented suggestions to the Executive
Committee and various initiatives have since been launched.
The impact of these changes will be measured via the next survey
in Q4 2019.
In January 2019, we conducted a short ‘pulse check’ to obtain
interim feedback and enable us to support our employees during
the forthcoming period of change. We were pleased that we achieved
a 91.0% response rate and that the overall employee satisfaction
levels were 90.4%.
Diversity and inclusion
The Group is committed to being an inclusive and respectful
employer that welcomes diversity and promotes equality,
acceptance and teamwork.
We regularly review our recruitment and working practices to identify
how we can continue to attract and retain a diverse workforce.
Our definition of diversity extends beyond the traditional facets of
gender, ethnicity, age and sexual orientation to include personality,
communication and work styles. We recognise that diversity
enriches our creative solutions and adds value for our stakeholders.
In accordance with our Equal Opportunities Policy, we give full
and fair consideration to all employment applicants. Recruitment,
training, reward and career progression are based purely on merit.
Wherever possible, we also accommodate part-time, agile and
flexible working requests.
Our employee base is relatively well balanced in respect to
gender, with 57% male and 43% female while, within our senior
management team, about one-third are female. Around three-
quarters of our employees classify themselves as white and
a quarter as non-white.
Current activities to advance diversity include:
79
Health and well-being
The health and well-being of our employees is a priority.
We recognise that individuals work best and can achieve sustainable
high-performance over time when they are healthy and feeling
valued. This is supported by our culture, leadership and how we
manage our people.
Our HR team and Directors operate an open-door policy with the
hope that individuals feel able to discuss any issues they have at
work or in their private lives and can receive reassurance and
support. Our absence levels continue to be very low and wherever
necessary we work with our occupational health provider to support
our employees appropriately.
In addition to launching agile working, we received extremely
positive feedback on our Savile Row office refurbishment with
94% of respondents saying that the new facilities supported
their well-being. We continue to provide healthy breakfasts and
fruit and vegetables throughout the day. We work closely with
our occupational health provider and offer well-being seminars,
on topics including cholesterol, heart disease and diabetes,
and services such as flu vaccinations. Attendance and feedback
have been excellent and similar seminars, on subjects such
as emotional and mental health, will be run in 2019.
During 2018 we reviewed our benefit package and introduced dental
insurance to all employees regardless of seniority, in addition to
private medical insurance and a healthcare cash plan. Through the
healthcare cash plan, all employees have access to an Employee
Assistance Programme, fitness and exercise discounts and other
health and well-being resources.
ENGAGING WITH STAKEHOLDERS
As part of a combined well-being initiative for our staff,
occupiers and charities, our building management team at
White Collar Factory EC1 organised a relay marathon on
the building’s unique rooftop running track in September 2018.
With considerable support via social media, they raised over
£6,000 for Macmillan Cancer Support.
• mandatory unconscious bias training for all our line managers
in partnership with the charity Chickenshed;
• nurturing a culture of transparency and openness which
encourages people to raise concerns and to speak out
about bias or discrimination;
• a review of our agile working procedures. In addition,
wider adoption across the business is being encouraged
by management, who are leading by example and using
agile working;
• attracting women into our industry through work experience
opportunities and school presentations to raise awareness
of real estate careers;
• requiring recruitment agencies to provide gender balanced
shortlists; and
• introducing parental transition coaching for employees
before, during and when returning from maternity or shared
parental leave.
Please refer to pages 102 to 103 for further details of our diversity
and our progress against the recommendations of the Hampton-
Alexander Review.
80
RESPONSIBILITY CONTINUED
Health and safety
We continued to improve our health and safety performance
in 2018 as we strive to create an industry leading capability.
Derwent London plc Report & Accounts 2018
OUR ACHIEVEMENTS IN 2018
• A comprehensive review of fire safety procedures undertaken
across our portfolio
• Updated our reporting criteria and key performance
indicators
• Increased our health and safety compliance resources
and upskilled our building managers
• Completed over 600 hours of health and safety training
• Reduced our accident frequency rate (AFR) from 0.12 in 2017
to 0.09, with an increase in hours worked of over 35%
OUR FOCUS AREAS FOR 2019
• Deliver against our health and safety strategy
• Progress our employee well-being and mental health
initiatives
wellness
• Invest in new air and water quality initiatives to support
• Complete our review of the regulatory framework and
guidance issued by the Secretary of State for Housing,
Communities and Local Government
Our integrated approach to health and safety (H&S) compliance
Acquisitions
Property
& Asset
Management
Development
H&S
COMPLIANCE
Leasing
Construction
We have an excellent health and safety record and have made further
progress in 2018 (key statistics are on page 81). We aim to achieve an
industry leading capability across a wide range of health and safety
aspects, including well-being and mental health. During the year
we recruited a new Head of Health and Safety, who will be developing
the team to deliver our strategy and support our integrated approach
(illustrated in the chart below).
This integrated approach ensures that health and safety and
well-being are considered at every stage during the life cycle of our
properties, from acquisition, through to management, development
and leasing. The principles of ensuring safe buildings and working
practices are achieved by specifying the materials and design of our
buildings, whilst ensuring that maintenance operations can be safely
carried out. This approach should ensure our occupiers, staff and
visitors are safe, well and productive.
Development and construction
2018 was a busy year for development, with more than two million
hours worked across the portfolio. This included the on-site
developments at Brunel Building W2, 80 Charlotte Street W1
and Soho Place W1, as well as major refurbishments at The White
Chapel Building E1 and Johnson Building EC1.
Health and safety is a key element of Derwent London’s
Construction, Design and Management (CDM) of development
projects, demonstrated by our performance during 2018:
• 1.96m man hours worked without a reportable accident; and
• an accident frequency rate (AFR) of 0.09, well below the
construction industry average.
Our performance is monitored using a robust set of standards and
procedures which are applied to all construction projects. We strive
to be at the forefront of construction best practice and continue to
support industry-wide initiatives. For example, we partner with the
appointed Principal Contractors to monitor on-site occupational
and mental health. During 2019, we are committed to achieving
the ambitious targets set for our project teams.
Wellness
We work hard to ensure our buildings support the well-being of our
occupiers, for example through the provision of terraces and cycling
facilities. We also ensure diligent maintenance of lighting, water and
air quality in our buildings and will be investing in new initiatives in
2019 to enhance environmental conditions for our occupiers.
Acquisitions
Due diligence
Identify risks/non-compliance
Development
Design for safety
Operations & management review
Construction
Site reviews & audits
Leasing
Tenant fit-out guides
Property & Asset Management
Building handbooks
Occupier relationships
5-year property strategy
H&S management system
Supplier management
Pre-sale enquiries
Documentation
1.96m
Man hours worked
without a reportable
accident
0.09
Development accident
frequency rate
600
Hours of health
and safety training
Strategic report
81
Portfolio review
Following the tragic events at Grenfell Tower, we surveyed all
our properties to establish if aluminium composite materials
(ACM) were present, and we enhanced our fire safety procedures
across the portfolio. We commissioned Arup to assess the façades
and fire precautions of our high rise residential and office buildings.
The results of our surveys confirmed an isolated area of ACM and,
although this did not represent a significant risk to life safety,
it was replaced with a composite material.
OUR RESPONSE TO THE HACKITT REVIEW
We continue to monitor changes to the regulatory framework
that are likely to arise as a result of the Hackitt Review and
the guidance contained in ‘Building a Safer Future’ issued in
December 2018 by the UK Government. Although the guidance
relates primarily to high-rise residential buildings, it is the
Group’s opinion that many of the recommendations will
become best practice across the whole industry.
Our aim is to stay ahead of legislative changes and to implement
best practice wherever possible. Therefore, we are carefully
reviewing the guidance issued and will be implementing
improvements to the way we undertake construction and
property management activities. These will include:
• maintaining a digital record of our buildings by extending
our current use of Building Information Modelling (BIM) and
Computer Aided Facilities Management Systems (CAFM);
• an ongoing review of materials and components specified
in our new developments;
• greater focus on competence assessments and training;
• improvements to how and what we communicate to tenants,
adding to our existing communications on fire safety
procedures;
• reviewing the new role of Building Duty Holder and roles
of the project team; and
• implementing a more rigorous ‘gateway’ design,
construction and management process aligned with
the digital building record.
In addition to the surveys and risk assessments, we have
strengthened our inspection regimes, changed the specification
of materials to be used in the construction of new developments
and increased management focus on any locations which we define
as ‘high risk’, including all residential locations and commercial
buildings that are ten storeys or more in height. We also covered
locations that are not under our direct management by working
more closely with managing agents or long leaseholders.
Training
We delivered more than 600 hours of training to 412 attendees
during 2018. The training ranged from health and safety leadership
to Construction Skills Certification Scheme (CSCS) cards.
We have also introduced an online programme that enables
improved management of our data and training plans.
Our in-house Building Management conferences serve as an
excellent forum to share information, ideas, solutions and training.
Their success has led us to increase their frequency to quarterly
during 2019.
Compliance Management System
Our electronic management system, Quooda, has been updated
to improve the tracking of actions across our portfolio. In addition,
Quooda generates reports which focus on the key management
priorities. In accordance with our standard protocols, we are
undertaking a comprehensive review of our procedures, particularly
around water hygiene and accident reporting, to ensure they are
aligned to our integrated management approach. We have revised
our health and safety KPIs to enable the identification of trends
and the introduction of preventative measures.
Health and safety statistics
The table below details our key health and safety statistics and accident frequency rate (AFR) for 2017 and 2018.
Above: Members of the Property Management team
Man hours worked
Minor accidents
RIDDORS
Fatalities
Improvement notices
Prohibition notices
RIDDOR (AFR)
Employees
Managed portfolio
2018
n/a
1
0
0
0
0
n/a
2017
n/a
2
0
0
0
0
n/a
2018
n/a
28
0
0
0
0
n/a
2017
n/a
35
2
0
0
0
n/a
Developments
2018
2,196,901
2017
1,606,311
20
2
0
0
0
0.09
23
2
0
0
0
0.12
Public reasonable assurance provided by Deloitte LLP over all minor accidents, RIDDORs, fatalities and improvement notices data. Our assurance statement can be found
in our Annual Sustainability Report.
82
Derwent London plc Report & Accounts 2018
WHITE COLLAR FACTORY EC1The White Collar Factory totals 291,400 sq ft, incorporating many of our latest building innovations. It was completed in 2017, achieving a 96% profit on cost, BREEAM Outstanding, LEED and WiredScore Platinum. During 2018 it received a further eight awards, including RIBA and BCO National awards, a New London Wellbeing award, and the MIPIM UK/Estates Gazette Visionary Building of the Year. 83
Governance
GOVERNANCE
Introduction from the Chairman �������������������������������������������84
Governance at a glance ���������������������������������������������������������86
Board of Directors ������������������������������������������������������������������88
Senior management ��������������������������������������������������������������90
Corporate governance statement ����������������������������������������92
Nominations Committee report �����������������������������������������100
Audit Committee report ������������������������������������������������������104
Risk Committee report �������������������������������������������������������� 110
Remuneration Committee report �������������������������������������� 116
Annual statement ������������������������������������������������������������� 116
Remuneration at a glance������������������������������������������������ 118
Annual report on remuneration �������������������������������������� 119
Schedules to the Annual report on remuneration ��������129
Directors’ report �������������������������������������������������������������������132
84
introduction
from the
chairman
Robert Rayne
Chairman
FOCUS AREAS IN 2019
• Ensure an orderly succession following Robert Rayne’s
retirement on 17 May 2019
• Monitor the progress of our key development projects:
80 Charlotte Street W1, The Featherstone Building EC1
and Soho Place W1
• Review the Group’s strategy, five-year plan and budget
• Monitor the success of initiatives which aim to improve our
diversity pipeline
• Begin the search for an independent Non-Executive Chairman
Derwent London plc Report & Accounts 2018
Dear Shareholder,
On behalf of the Board, I am pleased to introduce the Group’s
Corporate governance statement for 2018�
Governance
During the year ended 31 December 2018, we have been compliant
with the provisions and principles of good governance contained
in the 2016 UK Corporate Governance Code (the 2016 Code)�
The 2018 UK Corporate Governance Code (the 2018 Code), published
in July, became effective for Derwent London from 1 January 2019�
We welcomed the simplification of the Code and the additional
direction contained in the FRC’s Guidance on Board Effectiveness�
The Board and its Committees have spent considerable time
reviewing the 2018 Code to ensure our continuing compliance�
Further information on the Code can be found on the Financial
Reporting Council’s website at: www�frc�org�uk
Management changes
After 12 years as Chairman, I have decided to retire at the 2019 AGM�
I am delighted to hand over the chairmanship to John Burns and
wish Paul Williams every success in his new role as Chief Executive�
The Nominations Committee’s decision to appoint John as my
successor for a two-year transition period was made after careful
deliberation and consultation with major shareholders� It reflects
our desire to protect our culture and facilitate an orderly succession�
Simon Fraser has provided additional detail within the Nominations
Committee’s report, on page 100, on the safeguards being
implemented to ensure the separation of leadership between
the Chairman and the Chief Executive�
I would also like to extend a personal welcome to Lucinda Bell,
who joined us as a Non-Executive Director from 1 January 2019�
Stakeholders
The Board takes seriously its responsibility for ensuring the Group is
capable of delivering on our strategic objectives and operating in the
best interests of our stakeholders over the long-term� This has led to
the establishment of a new principal committee – the Responsible
Business Committee�
The Committee will strengthen our oversight of environmental and
social issues and will monitor the Group’s corporate responsibility,
sustainability and stakeholder engagement activities (see pages
74 to 81 of the Responsibility report)�
The Committee is chaired by Cilla Snowball, who is the designated
Director for gathering the views of the workforce� In addition to
Cilla, the Committee is currently composed of Claudia Arney and
Paul Williams�
It has been agreed that, during 2019, two Group employees will
become members of the Committee� Nominations are open to
all employees who have worked at Derwent London for at least two
years as at 1 January 2019� We hope that the addition of employee
representation on a principal Board Committee will further improve
our engagement with the wider workforce and bring their voice to
the forefront of our discussions�
The Responsible Business Committee’s terms of reference were
approved in December 2018 and are available to view on the
corporate website�
BOARD MEMBERS AND ATTENDANCE
85
Attendance
100%
Chairman
Robert Rayne
Executive Directors
John Burns
Nigel George
Simon Silver
David Silverman
Paul Williams
Damian Wisniewski
Independent Non-Executive Directors
100%
Claudia Arney
100%
Richard Dakin
100%
Simon Fraser
100%
Helen Gordon
100%
Cilla Snowball
100%
Stephen Young
• Percentages based on the meetings entitled to attend for the
100%
100%
100%
100%
100%
100%
12 months ended 31 December 2018
• Lucinda Bell joined the Board as a Non-Executive Director on
1 January 2019
Governance
Diversity
The Board is committed to ensuring that the Group is free of
discrimination and is equitable to all employees� It has been a
Board priority during the year to monitor the initiatives to improve
diversity across the Group and reassess our targets and focus areas
(further information on diversity is provided on pages 102 to 103)�
Human rights
We support and respect the protection of human rights and are
guided by the principles of the International Labour Organization’s
declaration on Fundamental Principles and Rights at Work,
amongst others�
On an annual basis, we publish our statement under the Modern
Slavery Act 2015 on our website, reporting on the steps we have
taken to ensure that slavery and human trafficking is not taking
place in any part of our business or our supply chain�
Although we consider the risk of slavery and human trafficking
taking place in our business to be negligible, and in our supply chain
to be low, we have established policies and procedures to ensure
that any potential issues can be identified and prevented�
Reporting
We continue to be pleased that the transparency of our reporting is
recognised� This is an area that the Company works hard to improve
year-on-year� Further details of the awards received for our 2018
Annual Report are available on the inside back cover (IBC)�
Annual General Meeting
As in previous years, I would encourage you to attend the Company’s
Annual General Meeting on 17 May 2019 where you will have the
opportunity to meet the Chairs of the Board Committees and
members of senior management� This year, upon request from a
shareholder, we will be providing a presentation on our business
which I hope will be a valuable addition to the meeting's proceedings�
Robert Rayne
Chairman
26 February 2019
THE IMPORTANCE OF PURPOSE, VALUES AND CULTURE
Purpose
Why we do
what we do
Values
The qualities
we embody
Culture
How we work
together
Purpose and values
The Board has established the Group’s purpose and values which
are disclosed on page 01�
The Group’s purpose was reviewed by the Responsible Business
Committee in December 2018 and approved by the Board in
February 2019�
As the cultural tone of a business comes from the Boardroom,
safeguarding our culture was a key factor in the development of
Board succession plans following Robert Rayne’s decision to retire
as Chairman (see page 100)�
The Board monitors and assesses the culture of the Group by
regularly meeting with management and reviewing the outcomes
of employee surveys� The Board also assesses cultural indicators
such as management’s attitude to risk, behaviours and compliance
with the Group’s policies and procedures�
The Executive Committee has been delegated responsibility
for ensuring that policies and behaviours set at Board level are
effectively communicated and implemented across the business�
Our intranet is used as a platform for employees to access our
policies and be kept fully informed of the latest Group news�
Culture
Our culture is a key strength of our business and we see the
benefits of our strong culture in our employees’ engagement,
retention and productivity� Our culture is described on page 01�
If the Board is concerned or dissatisfied with any behaviours or
actions, it seeks assurance from the Executive Committee that
corrective action is being taken� The Board did not have to seek
corrective action during 2018�
86
GOVERNANCE
AT A GLANCE
At Derwent London, we do not view
corporate governance as an exercise
in compliance but as an evolving and
core discipline which generates value
for our stakeholders and underpins
our success�
HIGHLIGHTS AT A GLANCE
90%
Employee retention rate for the
year ended 31 December 2018
54%
Board independence
as at 1 January 2019
65.9p
Dividend per share in 2018�
An increase of 10�2%
100%
Board and Committee meeting
attendance for the year ended
31 December 2018
29%
Female representation on our
Board as at 1 January 2019�
This will improve to 33%
following the implementation
of the Board's succession plans
Derwent London plc Report & Accounts 2018
BOARD CHANGES
Board succession and strengthening the independence of the
Board was a key priority for 2018�
• Robert Rayne will retire at the 2019 AGM after 12 years as
Board Chairman�
• From the 2019 AGM, John Burns will become Non-Executive
Chairman for two years (until May 2021)�
• Paul Williams, who has been a Director of the Group since
1998, will become Chief Executive from 17 May 2019�
• Lucinda Bell joined the Board as a Non-Executive Director
on 1 January 2019 and will become the Audit Committee
Chair when Stephen Young steps down from the Board�
• Received positive feedback from major shareholders,
representing 57�5% of our share capital, during consultation
on the Board’s succession plans�
p. 100 Nominations Committee’s report
GOVERNANCE IMPROVEMENTS
The Board has taken a number of steps during the year under
review to further strengthen its governance framework and
processes including:
• Appointed Cilla Snowball as the designated Director
for gathering the views of the workforce�
• Appointed RSM to act as an outsourced internal
audit/business assurance function�
• Appointed Deloitte as the Remuneration Committee’s
new independent advisers�
• Updated and approved the Board's procedures and
Committee’s Terms of Reference in response to the
2018 UK Corporate Governance Code�
• Strengthened whistleblowing procedures through
the introduction of an independent reporting line for
anonymous reporting of concerns�
• Established the Responsible Business Committee
to focus on social and environmental matters�
p. 92 Corporate governance statement
MAJOR BOARD DECISIONS
The Board factored the needs and concerns of our stakeholders
into its decisions in accordance with s172 of the Companies Act
2006 (see pages 18 to 19)� The major decisions taken by the
Board and its Committee’s during 2018 include:
• Approved Soho Place development which will deliver
285,000 sq ft of offices, retail and a new public theatre�
• Approved the comprehensive redevelopment of
The Featherstone Building which will deliver c�125,000 sq ft
of commercial and retail space (a substantial 95% increase
on the existing net area of 64,100 sq ft)�
• Approved the US private placement which raised £250 million
via senior unsecured notes drawn down in January 2019�
• Approved the acquisition of the 45,900 sq ft 36-year leasehold
interest in 88-94 Tottenham Court W1�
p. 95 Key activities of the Board during 2018
Governance
GOVERNANCE FRAMEWORK
87
We pride ourselves on conducting our business in an open and transparent manner� Our well-established culture ensures that our governance
framework remains flexible, allowing for fast decision making and effective oversight�
The Board
The Board is primarily responsible for setting the Group’s strategy for delivering long-term value to our shareholders and other stakeholders,
providing effective challenge to management concerning the execution of the strategy and ensuring the Group maintains an effective risk
management and internal control system�
p. 88 Biographies
p. 95 Board activities in 2018
p. 96 Roles and responsibilities
The Board delegates certain matters to its five principal committees
Nominations
Committee
Ensures the Board (and
its Committees) have
the correct balance of
skills, knowledge and
experience and that
adequate succession
plans are in place�
Audit
Committee
Oversees the Group’s
financial reporting,
maintains an appropriate
relationship with the
External Auditor and
monitors the Group’s
internal controls�
Risk
Committee
Reviews and monitors
the Group’s principal
and emerging risks and
the effectiveness of the
Group’s risk management
systems�
Remuneration
Committee
Establishes the Group’s
Remuneration Policy
and ensures there is
a clear link between
performance and the
remuneration we pay�
Responsible Business
Committee
Monitors the Group’s
corporate responsibility,
sustainability and
stakeholder engagement
activities�
p. 100 Report
p. 104 Report
p. 110 Report
p. 116 Report
p. 74 Responsibility
The terms of reference of each Board Committee are available on the Group’s website at: www�derwentlondon�com
The Board delegates the execution of the Company’s strategy and the day-to-day management of the business to the Executive Committee�
Executive Committee
p. 30 Our strategy
p. 90 Members
The Executive Committee operates a number of supporting committees which provide oversight on key business activities and risks such as:
the Credit, Cost, Health and safety, IT liaison and Sustainability Committees�
Supporting committees
Derwent London plc Report & Accounts 2018
14
7
1
12
10
88
BOARD OF
DIRECTORS
1. The Hon. Robert A. Rayne, 70
Non-Executive Chairman� Appointed to the Board: 2007
Due to retire from the Board: 17 May 2019
Skills and expertise: Robert Rayne was Chief Executive Officer of
London Merchant Securities plc and has been on the boards of a
number of public companies, including First Leisure Corporation
plc and Crown Sports plc� Other current appointments:
Non-Executive Director of LMS Capital plc and Richoux Group plc
and Chairman of Voreda Capital and The Rayne Foundation�
2. John D. Burns, 74
Chief Executive� Appointed to the Board: 1984
Skills and expertise: A chartered surveyor and founder
of Derwent Valley Holdings in 1984, John has overall
responsibility for Group strategy, business development
and day-to-day operations� From 17 May 2019, John will
become the Non-Executive Chairman of Derwent London plc�
Other current appointment: Member of the Strategic
Board of the New West End Company Limited�
3. Damian M.A. Wisniewski, 57
Finance Director� Appointed to the Board: 2010
Skills and expertise: A chartered accountant who, prior
to joining Derwent London, held senior finance roles at
Chelsfield plc, Wood Wharf Limited Partnership and Treveria
Asset Management� Damian has overall responsibility for
financial strategy, treasury, taxation and financial reporting�
Other current appointments: Trustee and member of
the governing body at the Royal Academy of Music and
Non-Executive Director at the ABRSM�
4. Simon P. Silver, 68
Executive Director� Appointed to the Board: 1986
Skills and expertise: Co-founder of Derwent Valley Holdings,
Simon has overall responsibility for the Group’s development
and regeneration programme together with the commissioning
of architects� He is also at the forefront of the Company’s brand
identity� He is an honorary fellow of the Royal Institute of
British Architects�
5. Paul M. Williams, 58
Executive Director� Appointed to the Board: 1998
Skills and expertise: Paul is a chartered surveyor who joined
the Group in 1987� He has overall responsibility for lease
management and lettings, sustainability, and the delivery of the
Group’s substantial projects� He takes a leading role in Derwent
London’s support for Teenage Cancer Trust� From 17 May 2019
Paul will become the Chief Executive of Derwent London plc�
Other current appointments: Chairman of The Paddington
Partnership, Director of Sadler’s Wells Foundation, member
of BCO and Deputy Chairman of the Westminster Property
Association� Committee: Responsible Business�
6. Nigel Q. George, 55
Executive Director� Appointed to the Board: 1998
Skills and expertise: Nigel is a chartered surveyor who joined
the Group in 1988� His responsibilities include acquisitions and
disposals and investment analysis� Other current appointment:
Director of the Chancery Lane Association Limited�
7. David G. Silverman, 49
Executive Director� Appointed to the Board: 2008
Skills and expertise: David is a chartered surveyor who joined
the Group in 2002� His responsibilities include overseeing
the Group’s investment acquisitions and disposals� David is
a past Chairman of the Westminster Property Association�
Other current appointment: Chairman of Chickenshed Property Co�
6
2
Governance
89
9
4
5
11
3
13
8
8. Helen C. Gordon, 59
Non-Executive Director� Appointed to the Board: 2018
Skills and expertise: Helen is a chartered surveyor and is CEO
of Grainger plc� Previously, she was Global Head of Real Estate
Asset Management of Royal Bank of Scotland plc and has held
senior property positions at Legal & General Investment
Management, Railtrack and John Laing Developments�
Other current commitments: Chief Executive Officer of Grainger
plc, Vice President of the British Property Federation, Board
Member of EPRA (European Public Real Estate Association)�
Committees: Remuneration, Nominations�
9. Richard D.C. Dakin, 55
Non-Executive Director� Appointed to the Board: 2013
Skills and expertise: Richard has been Managing Director of
Capital Advisors Limited, part of CBRE, since 2014� Previously,
he had been employed at Lloyds Bank since 1982 where
he undertook a variety of roles and gained an extensive
knowledge of property finance and the real estate sector�
He is a Fellow of the Royal Institution of Chartered Surveyors
and an Associate Member of Corporate Treasurers�
Committees: Risk (chair), Audit, Nominations�
10. Claudia I. Arney, 48
Non-Executive Director� Appointed to the Board: 2015
Skills and expertise: Claudia was Group Managing Director
of Emap until 2010� Prior to that she held senior roles at
HM Treasury, Goldman Sachs and the Financial Times�
Other current appointments: Chair of the Governance
Committee of Aviva PLC, chair of the Remuneration
Committee of Halfords PLC, Interim Chairman of the
Premier League and Non-Executive Director of Kingfisher plc�
Committees: Remuneration (chair), Audit, Responsible
Business, Nominations�
11. Dame Cilla D. Snowball, 60
Non-Executive Director� Appointed to the Board: 2015
Skills and expertise: Cilla is the former Group Chairman and
Group CEO at AMV BBDO, the UK’s largest advertising agency�
Other current appointments: Women’s Business Council
(chair), Private Sector Council, GREAT campaign (chair)�
Committees: Responsible Business (chair), Nominations, Risk�
12. Simon W.D. Fraser, 55
Senior Independent Director� Appointed to the Board: 2012
Skills and expertise: Simon started his career in the City in
1986 and, from 1997 to his retirement in 2011, worked at
Bank of America Merrill Lynch where from 2004 he was
Managing Director and co-head of corporate broking�
Other current appointments: Non-Executive Director
of Lancashire Holdings Limited, Cathedral Underwriting
Limited and of Legal and General Investment Management
Holdings and Trustee of Glyndebourne Estate�
Committees: Nominations (chair), Audit, Remuneration�
13. Stephen G. Young, 63
Non-Executive Director� Appointed to the Board: 2010
Due to step down from the Board: 17 May 2019
Skills and expertise: Stephen is a chartered management
accountant� Previously, he has held a number of senior
positions, including Chief Executive of Meggitt PLC and
Group Finance Director at Meggitt PLC, Thistle Hotels plc
and the Automobile Association�
Other current appointment: Non-Executive Director of
The Weir Group PLC and Non-Executive Director of Mondi
Limited and Mondi plc�
Committees: Audit (chair), Risk, Remuneration�
14. Lucinda Bell, 54
Non-Executive Director� Appointed to the Board: 2019
Skills and expertise: Lucinda is a chartered accountant and
from 2011 to 2018 was CFO of The British Land Company plc
('British Land')� Prior to that, she held a range of finance and
tax roles at British Land� Other current appointments:
Non-Executive Director of Crest Nicholson Holdings plc and
Rotork plc� Treasurer and National Trustee at Citizens Advice�
Committees: Audit, Risk, Nominations�
90
Derwent London plc Report & Accounts 2018
SENIOR MANAGEMENT
3
4
2
1
6
5
EXECUTIVE SENIOR MANAGEMENT
1. Ben Ridgwell Head of Asset & Property Management 2. Jennifer Whybrow Head of Financial Planning & Analysis
3. David Lawler Company Secretary 4. Richard Baldwin Head of Development 5. Emily Prideaux Head of Leasing
6. Rick Meakin Group Financial Controller
Governance
91
7
8
10
12
9
11
13
SENIOR MANAGEMENT
7. Giles Sheehan Head of Investment 8. Katy Levine Head of Human Resources 9. David Westgate Head of Tax
10. Umar Loane Head of Property Accounts 11. Quentin Freeman Head of Investor Relations & Corporate Communications
12. John Davies Head of Sustainability 13. Lesley Bufton Head of Property Marketing
92
CORPORATE
GOVERNANCE
STATEMENT
Structure of the Governance section
The Governance section has been reorganised to follow the structure
of the 2018 UK Corporate Governance Code (the ‘Code’). Although we
are not required to report under the 2018 Code until the 2019 Annual
Report (due to be published in April 2020), we wished to transition
our reporting to demonstrate how we will meet the new requirements
and to provide additional disclosure on our governance
arrangements.
BOARD LEADERSHIP AND COMPANY PURPOSE
An effective Board
Our Board is composed of highly skilled professionals who bring
a range of skills, perspectives and corporate experience to our
Boardroom (biographies are on pages 88 to 89). It is through this
diversity, its deep understanding of our business, culture and
stakeholders, that the Board generates sustainable long-term value.
Matters reserved for the Board
The Board maintains a formal schedule of matters which are
reserved solely for its approval. These matters include decisions
relating to the Group’s strategy, capital structure, financing, any
major property acquisition or disposal, the risk appetite of the Group
and the authorisation of capital expenditure above the delegated
authority limits.
Board approval is required for:
Major property acquisitions
or disposals
Major capital expenditure
projects
Material occupier leases
or contracts
Valued above £20m
Projected costs above £10m
Rental income greater than 7.5%
of the Group’s total rental income
Although the Board is formally required to authorise capital
expenditure above this limit, the open nature of our organisation
means that the Board is aware of all active projects within our
portfolio. The Board reviewed and approved the ‘Schedule of matters
reserved for the Board’ in February 2019.
Annual strategy review
On an annual basis, the Board conducts a detailed review of its
strategy to ensure it remains relevant, flexible and capable of
adapting to our changing environment.
Through its review, the Board is able to assess and identify changing
or emerging risks which could impact on the Group in the short and
medium-term (further information on our principal risks is on pages
48 to 57). Our risk management procedures are discussed on page
111 to 112 of the Risk Committee’s report.
Derwent London plc Report & Accounts 2018
The Board, Executive Committee and members of the senior
management team met on 13 June 2018 to review, discuss and
challenge the strategy. The meeting included:
• presentations from external advisers with insights into the
political environment and how new technology may impact on
our business;
• reviewing the five-year plan, various scenarios and sensitivity
tests and the key assumptions underlying the projections; and
• discussions with senior management on occupier trends, our
‘Fit for the Future’ initiative (see page 78) and planning policy
changes expected after local elections.
Information sharing
The Directors utilise an electronic Board paper system which
provides immediate and secure access to papers. The Chairman
of the Board and the chairs of the Committees set the agendas for
upcoming meetings with support from the Company Secretary.
We aim to ensure that the information shared with our Board is of
sufficient depth to facilitate debate and to fully understand the
content without becoming unwieldy and unproductive. Papers are
required to be clear and concise with any background material
included as an appendix.
Stakeholder engagement
We recognise the importance of clear communication and proactive
engagement with all of our stakeholders. A summary of our
stakeholder engagement programmes is provided on pages 18 to 19.
How do we generate value for our stakeholders?
Through our core activities, illustrated in our business model,
we add value to our unique portfolio and deliver long-term benefits
to our stakeholders (more on our business model on pages 20 to 21).
Our shareholders have seen value through the total shareholder
returns (TSR) achieved over the last 10 years (+395%) which has
significantly outperformed the FTSE 350 Real Estate Super Sector
(+114%). We have a progressive dividend policy – the compound
growth of the ordinary dividend over the past ten years is 10.4%.
Further information on value creation for our other key stakeholders
is on pages 18 to 19 of the Strategic report.
How do we engage with our employees?
We have an experienced, diverse and dedicated workforce which
is recognised as a key asset of our business. The Board and its
Committees routinely invite members of the management team
to attend meetings to present on the matters being discussed,
enabling their input into discussions. In order to reach all employees,
the Board utilises the following additional engagement methods:
• Cilla Snowball is the dedicated Non-Executive Director for
gathering the views of the workforce and oversees our employee
engagement methods as chair of the newly established
Responsible Business Committee;
• During 2019, two employees will be nominated by the workforce
to become members of the Responsible Business Committee;
• The Directors host regular informal lunches with small groups
of employees to share ideas, gather feedback and discuss the
future of the Group;
• Our whistleblowing system includes an anonymous reporting line
for employees to raise any concerns directly with the Board; and
• ‘Town hall’ meetings are frequently hosted by our Chief Executive.
Employees can ask questions, anonymously if they wish, which
are then answered to the whole workforce.
We are fortunate that more than 95% of our staff are based at a
single location, 25 Savile Row, which enables effective and daily
engagement.
Governance
93
How do we engage with our shareholders?
Shareholders play a valuable role in safeguarding the Group’s
governance through, for example, the annual re-election of Directors,
monitoring and rewarding their performance and engagement and
constructive dialogue with the Board.
Annual General Meeting (AGM)
Our 2018 AGM was held on 18 May 2018 and we were delighted to
receive in excess of 90% votes in favour for all of our resolutions.
In total, 84.49% of our shareholders (voting capital) voted at the
2018 AGM, which was an 8.95% increase from the prior year’s AGM.
Calendar of our main shareholder events in 2018
January
February
March
Property conference (London)
2017 results presentation, Roadshow (London)
Roadshows (Netherlands and UK), Property
conferences (London, Miami and New York),
salesforce presentations
Investor meetings (Brussels)
Annual General Meeting, 2018 Q1 Business
update, Property conferences (London and
Amsterdam)
Property conference (London)
Sustainability roadshow (Netherlands)
2018 H1 Results presentation, Roadshow (UK)
Roadshow (Netherlands), Property conferences
(Berlin, London and New York)
Property conference (London)
2018 Q3 Business update, Investor presentation
and property tour, Property conference (London)
Property conference (Cape Town)
April
May
June
July
August
September
October
November
December
Shareholder consultation
In November 2018, our Senior Independent Director (Simon Fraser)
consulted with 10 major shareholders (representing 57.5% of our
issued share capital) on the Board’s succession plans in respect of
John Burns becoming Chairman for a two-year term. The Board were
pleased with the level of support received from the consultation
process (further information can be found on page 100).
We will always seek to engage with shareholders when considering
material changes to either our Board, strategy or remuneration
policies. In 2019, with the Remuneration Committee reassessing
the Remuneration Policy for Executive Directors, shareholders will
be consulted on any proposed changes in advance of its submission
for shareholder approval at the 2020 AGM.
Investor meetings
During 2018, the Group held over 260 investor meetings with 200
existing and potential investors. Of these, 78 were shareholders
at the year-end and their ownership represented circa 60% of the
shares in issue.
Investor meetings are predominantly attended by our CEO,
Finance Director and at least one other senior executive. After our
announcement on 23 November that Paul Williams would succeed
John Burns as Chief Executive, Paul also attended most meetings.
The meetings focused on the Group’s portfolio, strategy, the London
office outlook and Board succession. Where significant views were
expressed, either during or following the meetings, these were
recorded and circulated to all Directors.
Investor presentations and property tours
On 30 November 2018, we hosted an investor and analyst day.
We briefly presented on lettings, asset management and
development to 31 investors and analysts, in addition to tours
of our Paddington and Fitzrovia buildings.
Property conferences
In 2018, we attended 13 property conferences in Amsterdam, Berlin,
Brussels, Cape Town, London, Miami and New York.
The 2019 AGM is to be held on 17 May at The Westbury hotel,
37 Conduit Street, London W1S 2YF and we encourage our
shareholders to attend. The AGM provides an opportunity for
private shareholders, in particular, to question the Directors and
the chairs of each of the Board Committees.
As requested by a shareholder last year, we will be providing a short
presentation on our business at the forthcoming AGM, which
we hope will prove to be a valuable addition to the meeting.
In the event we receive 20% or more votes against a recommended
resolution at a General Meeting, we would announce the actions
we intend to take to engage with our shareholders to understand
the result, in accordance with the Code. We would follow this
announcement with a further update within six months of the
meeting, with an overview of our shareholders’ views on the
resolutions and the remedial actions we have taken. To date,
the Board has not been required to follow these procedures
due to the high level of support received from shareholders.
Annual Report
Our Annual Report is available to all shareholders. Through our
electronic communication initiatives, we aim to make our Annual
Report as accessible as possible. Shareholders can opt to receive
a hard copy in the post or PDF copies via email or from our website.
Additionally, if a shareholder holds their Derwent London shares via
a nominee account and encounters difficulty receiving our Annual
Report via their nominee provider, they are welcome to contact the
Company Secretary to request a copy.
Corporate website
Our website, www.derwentlondon.com, has a dedicated investor
section which includes our Annual Reports, results presentations
(which are made to analysts and investors at the time of the interim
and full year results) and our financial and dividend calendar for the
upcoming year.
We also create websites for specific developments which are used
to explain the Group’s current projects in greater detail. For example,
you can find further information on the Brunel Building W2 and
80 Charlotte Street W1 here:
• www.brunelbuilding.com
• www.80charlottestreet.com
Senior Independent Director
If shareholders have any concerns, which the normal channels of
communication to the CEO, Finance Director or Chairman have failed
to resolve, or for which contact is inappropriate, then our Senior
Independent Director, Simon Fraser, is available to address them.
Other contacts
Contact details for our Investor Relations team, Company Secretary
and our Registrars are available on page 208.
94
Derwent London plc Report & Accounts 2018
CORPORATE GOVERNANCE STATEMENT CONTINUED
The stakeholder impact analysis identifies:
• potential benefits and areas of concern for each stakeholder
group;
• the procedures and plans being implemented to mitigate against
any areas of concern; and
• who is responsible for ensuring the mitigation plans are being
effectively implemented.
We have detailed in the case study below an overview of the key
benefits and concerns which arose from the stakeholder impact
analysis for The Featherstone Building.
Factoring our stakeholders into our decisions
By thoroughly understanding our key stakeholder groups,
we can factor their needs and concerns into Boardroom discussions
(further information on our stakeholders is on pages 18 to 19).
The Board’s procedures have been updated to require a stakeholder
impact analysis to be completed for all material decisions requiring
its approval that could impact on one or more of our stakeholder
groups.
The stakeholder impact analysis assists the Directors in performing
their duties under s172 of the Companies Act 2006 and provides the
Board with assurance that the potential impacts on our stakeholders
are being carefully considered by management when developing
plans for Board approval.
THE FEATHERSTONE BUILDING EC1
In June 2018, the Board approved the redevelopment of Monmouth
House 58-64 City Road and 19-23 Featherstone Street into a new
development – The Featherstone Building – which will see the existing
buildings demolished and the new development constructed on the
existing site. The Featherstone Building will provide 110,000 sq ft of
commercial office space, 2,000 sq ft of retail space on the ground
floor and 13,000 sq ft of small/micro workspace on the ground and
lower floors.
In addition to making a satisfactory return to our shareholders, our
stakeholder impact analysis identified the following additional key
benefits to our stakeholders:
• The Featherstone Building will assist with the regeneration of
the Old Street Yard area through its design, additional retail and
office space and employment opportunities.
• To assist small local businesses and start-ups, the small/micro
workspace will be let at 75% of market rent and will be fully
fitted out for immediate occupancy.
• Construction trainees will be employed through Skanska
(the project’s principal contractor) to provide employment
and development opportunities.
• Where possible, we will use local procurement opportunities.
• As part of our planning obligations, we are required to provide
funding (s106 contributions and Community Infrastructure Levy)
for local infrastructure, including affordable housing, carbon
offsetting, employment, Crossrail and TfL cycle hire.
Our stakeholder impact analysis identified the following key concerns:
• increased traffic in the area during development;
• increased noise during the project; and
• general disruption to the surrounding area including
local businesses.
To mitigate the impact on the local neighbourhood, we have produced
neighbourhood liaison plans which set out the project phases,
timetable and details of site representatives to contact if any issues
arise during the project. In addition, monthly newsletters will be sent
throughout the project to local residents. Although cycles routes and
pedestrian routes will be redirected during construction, we will
ensure they are safely maintained for the duration of the works.
Extensive consultation has been undertaken with Islington Council
to develop our construction management and logistic plans.
Governance
95
KEY ACTIVITIES OF THE BOARD DURING 2018
Overview
The Board met seven times during the year (including the Annual General Meeting). One meeting every year is arranged specifically to
consider the Group’s strategy and five-year plan. Additional meetings are arranged if necessary for the Board to properly discharge its
duties. An overview of our Board’s key activities is provided below.
Property portfolio
• Approved the Soho Place development
• Approved The Featherstone Building development
• Approved the purchase of the leasehold interest in
88-94 Tottenham Court W1
• Provided with regular updates on asset management,
leasing and investment from the senior management team
• Reviewed and approved the independent valuations of the
Group’s property portfolio
• Received regular updates on the key construction projects:
–Brunel Building W2
–80 Charlotte Street W1
–White Chapel Building E1 (Phase II)
• Reviewed quarterly project cost reports
Strategy and financing
• Annual strategic review in June 2018 to approve the five-year
plan which included receiving presentations from the Executive
Committee and updates from external advisers
• Ongoing updates from the Executive Committee on the
implementation of strategy throughout the year
• Regularly considered the impact of Brexit on our business
and strategy
• Considered the emerging risks and scenarios which could
impact on the Group over the long-term
• Regularly reviewed the Group’s financial structure and position
• Approved the US private placement of £250m senior unsecured
notes (see page 32)
Risk management and internal control
• Regularly reviewed the Group’s principal risks and considered
emerging risks which could impact on the five-year plan
• Received updates from the Risk and Audit Committee Chairs
on the key areas discussed
• Approved the appointment of RSM as the Group’s outsourced
internal audit function
• Received regular reports on health and safety matters
Corporate reporting and performance monitoring
• Reviewed the Group’s KPIs and agreed changes for 2018
(see page 40)
• Reviewed the rolling forecast and approved the 2019 budget
• Received updates from the chair of the Remuneration
Committee on the key areas discussed
• Conducted a review of the Company’s viability over the
next five-year period
• Approved the year end and interim results
• Approved the Q1 and Q3 business updates
• Reviewed the 2018 Annual Report to check it is fair,
balanced and understandable
Stakeholder engagement
• Met shareholders at the Annual General Meeting (AGM)
held on 18 May 2018
• Established the Responsible Business Committee to focus
on social and environmental matters.
• Received updates on our investor engagement programme
and regular investor relations reports
• Received an update on the actions taken since the last
employee survey and the success of the ‘Fit for the Future’
initiative
• Received updates on our sustainability initiatives
Governance
• Approved the Nominations Committee’s succession plans
(see page 100)
• Reviewed the new requirements arising from the 2018 UK
Corporate Governance Code and developed an action plan
• Agreed diversity targets and focus areas to improve female
representation in senior management and on our Board
(see pages 102 to 103)
• Approved the schedule of matters reserved for the Board
• Evaluated the performance of the Board, its Committees
and all Directors
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Derwent London plc Report & Accounts 2018
CORPORATE GOVERNANCE STATEMENT CONTINUED
DIVISION OF RESPONSIBILITIES
Board roles
There is clear division between executive and non-executive responsibilities which ensure accountability and oversight. The roles of
Chairman and Chief Executive are separately held and their responsibilities are well defined, set out in writing and regularly reviewed
by the Board.
Chairman
• Responsible for the effective running of the Board and ensuring
it is appropriately balanced to deliver the Group’s strategic
objectives
• Promote a Boardroom culture that is rooted in the principles
of good governance and enables transparency, debate and
challenge
• Ensure that the Board as a whole plays a full and constructive
part in the development of strategy and that there is sufficient
time for Boardroom discussion
• Effective engagement between the Board and its shareholders
Senior Independent Director
• Provide a ‘sounding board’ for the Chairman in matters of
governance or the performance of the Board
• Available to shareholders if they have concerns which have not
been resolved through the normal channels of communication
with the Company
• To at least annually lead a meeting of the Non-Executive
Directors without the Chairman present to appraise the
performance of the Chairman
• To act as an intermediary for Non-Executive Directors when
necessary
• To act as an independent point of contact in the Group’s
whistleblowing procedures
Non-Executive Directors (NEDs)
• Provide constructive challenge to our executives, help to
develop proposals on strategy and monitor performance
against our KPIs
• Ensure that no individual or group dominates the Board’s
decision making
• Promote the highest standards of integrity and corporate
governance throughout the Company and particularly at
Board level
• Determine appropriate levels of remuneration for the senior
executives
• Review the integrity of financial reporting and that financial
controls and systems of risk management are robust
Chief Executive
• Execute the Group’s strategy and commercial objectives
together with implementing the decisions of the Board
and its Committees
• To keep the Chairman and Board appraised of important
and strategic issues facing the Group
• To ensure that the Group’s business is conducted with the
highest standards of integrity, in keeping with our culture
• Manage the Group’s risk profile, including the maintenance
of appropriate health, safety and environmental policies
Finance Director and other Executive Directors
• Support the CEO in developing and implementing strategy
• Oversee the day-to-day activities of the Group
• Manage, motivate and develop staff
• Develop business plans in collaboration with the Board
• Ensure that the policies and practices set by the Board are
adopted at all levels of the Group
Company Secretary
• Secretary to the Board and its Committees
• Develop Board and Committee agendas and collate and
distribute papers
• Ensure compliance with Board procedures
• Advise on regulatory compliance and corporate governance
• Facilitate induction programmes
• Responsible for the organisation of the Annual General Meeting
• Available to support all Directors
Executive Committee
Delivering the Board’s strategy is the collective responsibility of the
Executive Committee. Following Jennifer Whybrow’s promotion to
the Committee in July 2018, it is composed of six Executive
Directors and six senior managers (see page 90).
To assist the Committee, a number of supporting committees have
been established, to provide additional oversight of key business
activities and risks (see page 87). The Committee usually meets
monthly and can also meet on an ad hoc basis. This, together with
the close proximity within which we work, enables us to handle
complex transactions and make quick decisions, with the overall
aim of creating value and driving income growth.
Governance
Board independence
Chairman
It was announced on 23 November that John Burns would succeed
Robbie Rayne as Non-Executive Chairman for a two-year term from
17 May 2019.
As John is our current Chief Executive, he will not be considered
independent upon appointment which is in contradiction to a
provision of the Code. The Nominations Committee report on
page 100 sets out how we intend to mitigate any potential
governance risks this deviance from the Code could cause.
The Nominations Committee has confirmed to shareholders that
the subsequent Non-Executive Chairman will be independent upon
appointment, in compliance with the Code.
Non-Executive Directors
The Non-Executive Directors play an important role in ensuring
that no individual or group dominates the Board’s decision making.
It is therefore of paramount importance that their independence
is maintained.
The Chairman held a number of meetings with the Non-Executive
Directors without executive management being present.
These meetings are useful to safeguard the independence of
our Non-Executive Directors by providing them with time to discuss
their views in a more private environment.
Any Director who has concerns about the running of the Group or a
proposed course of action is encouraged to express those concerns
which are then minuted. No such concerns were raised during 2018.
All Directors have confirmed (as they are required to do annually)
that they have been able to allocate sufficient time to discharge their
responsibilities effectively.
The Board considers that our Non-Executive Directors remain
independent from executive management and free from any
business or other relationship which could materially interfere with
the exercise of their judgement.
Other external appointments
Our Directors are required to notify the Chairman of any alterations
to their external commitments that arise during the year with an
indication of the time commitment involved.
On 1 May 2018, Stephen Young became a Non-Executive Director of
Mondi Limited and Mondi plc and on 1 November 2018, Claudia Arney
became a Non-Executive Director of Kingfisher plc. Stephen and
Claudia both notified our Chairman in advance of their appointments,
and the Board has confirmed that it does not believe that these
additional directorships will affect either Stephen’s or Claudia’s
commitment to, or involvement with, the Derwent London Board
nor will it give rise to a potential conflict of interest.
Executive Directors
Executive Directors may accept a non-executive role at another
company with the approval of the Board. Currently, none of our
Executive Directors are directors of other listed companies.
However, several of our Executive Directors are Trustees of
charitable organisations or members of industry-related bodies.
97
Conflict of interests
Directors are required to notify the Company as soon as they
become aware of a situation that could give rise to a conflict or
potential conflict of interest. The register of potential conflicts
of interest is regularly reviewed by the Board to ensure it remains
up-to-date. The Board is satisfied that potential conflicts have
been effectively managed throughout the year.
As a Non-Executive Director’s independence could be impacted
where a Director has a conflict of interest, the Board operates a
policy that restricts a Director from voting on any matter in which
they might have a personal interest unless the Board unanimously
decides otherwise. Prior to all major Board decisions, the Chairman
requires the Directors to confirm that they do not have a potential
personal conflict with the matter being discussed. If a conflict does
arise, the Director is excluded from discussions.
An example of this policy in effect, is in relation to Richard Dakin,
who is the Managing Director of Capital Advisors Limited (a wholly-
owned subsidiary of CBRE) who are the Group’s external valuers.
To mitigate against a potential conflict of interest, Richard does not
take part in any discussions on the valuation of the Group’s property
portfolio at either Board or Committee level. In addition, he has no
involvement in any decisions regarding the appointment of CBRE or
the fees paid to them. During the annual performance evaluation of
the Board, its Committees and individual Directors, the impact of this
role on Richard’s independence has been considered.
The Board continue to conclude that Richard remains independent
both in character and judgement.
COMPOSITION, SUCCESSION AND EVALUATION
Training and development
With the ever-changing environment in which Derwent London
operates, it is important for our Executive and Non-Executive
Directors to remain aware of recent, and upcoming, developments.
We require all Directors to keep their knowledge and skills up-to-date
and include training discussions with the Chairman in their annual
performance reviews.
As required, we invite professional advisers to provide in-depth
updates. Updates and training are not solely reserved for legislative
developments but aim to cover a range of issues including, but not
limited to, market trends, the economic and political environment,
environmental, technological and social considerations. Our Company
Secretary provides regular updates to the Board and its Committees
on regulatory and corporate governance matters.
During 2019, we have organised presentations for the Board and
its Committees on the following topics:
• climate change;
• responsibility reporting;
• cyber risk management;
• regular Audit Committee training sessions (which will include
an update on accounting standards); and
• executive remuneration trends and best practice.
All Directors have access to the services of the Company
Secretary and any Director may instigate an agreed procedure
whereby independent professional advice may be sought at the
Company’s expense.
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Derwent London plc Report & Accounts 2018
CORPORATE GOVERNANCE STATEMENT CONTINUED
Board composition
At Derwent London, we ensure that appointments to our Board are
made solely on merit with the overriding objective of ensuring that
the Board maintains the correct balance of skills, length of service
and knowledge of the Group to successfully determine the
Group’s strategy.
Appointments are made based on the recommendation of the
Nominations Committee with due consideration given to the benefits
of diversity in its widest sense, including gender, social and ethnic
backgrounds. The charts on page 99 provide an overview of our
Boardroom diversity.
The UK Corporate Governance Code 2016 recommends that at least
half of the Board, excluding the Chairman, should be composed
of independent Non-Executive Directors. Our Board is composed
of 53.8% independent Non-Executive Directors (excluding the
Chairman) as at 1 January 2019. Following the Board succession
changes and the retirement of Robbie Rayne and Stephen Young,
the Board will be composed of 54.5% independent Non-Executive
Directors (excluding the Chairman) as at 31 December 2019.
As part of the Board’s annual effectiveness review, described on
page 99, the Nominations Committee considers the composition
of the Board and its Committees in terms of its balance of skills
(detailed in the table below), experience, length of service,
knowledge of the Group and wider diversity considerations.
The Nominations Committee has confirmed that the membership
of the Committees continues to be appropriate and in accordance
with best practice and the UK Corporate Governance Code.
Directors’ skills and experiences
An effective Board requires the right mix of skills and experience. Our Board is a diverse and effective team focused on promoting the
long-term success of the Group. The table below provides an overview of the skills and experience of our Directors as at 1 January 2019.
Following the appointment of Lucinda Bell as a Non-Executive Director, we have further increased our Board’s financial, property and
corporate responsibility experience.
Skills and experience (i)
Executive and strategic leadership
Senior executive and directorship experience
Financial acumen
Senior executive experience in financial accounting, reporting or corporate finance
Property and real estate
Experience in property development, construction or real estate management
Governance and compliance
Prior experience as a Board member, industry or membership of governance bodies
Corporate responsibility and community relations
Experience in corporate or social responsibility, charitable bodies or human resources
Health and safety, risk management
Experience in health and safety, risk management or internal controls
Investor relations and engagement
Experience in investor relations (private or institutional) and engagement
Capital projects
Experience working in an industry with projects involving large-scale capital outlays and
long-term investment horizons
Remuneration
Prior Remuneration Committee membership and/or experience in relation to remuneration
including incentive programmes
Notes:
(i) Requires senior management or executive level responsibility relative to that skill
Number of
Non-Executive
Directors
(including the
Chairman)
Number of
Executive
Directors
8
5
4
8
5
5
8
7
5
6
3
6
4
5
2
6
6
1
Governance
Board composition as at 1 January 2019
Tenure of the Non-Executive Directors
Years
99
Under 3
3-6
6-9
9+
2
3
2
0
Evaluation
On an annual basis, an evaluation process is undertaken which
considers the effectiveness of the Board, its Committees and
individual Directors. This review identifies areas for improvement,
informs training plans for our Directors and identifies areas of
knowledge, expertise or diversity which should be considered
in our succession plans.
The evaluation for the year ended 31 December 2018 was conducted
in Q1 2019 and consisted of a questionnaire which focused on any
areas raised for further improvement in the prior year evaluation
and how the Board handled particular topics in 2018, including:
Gender balance of the Board
Gender
Independence of the Board
(excluding the Chairman)
Status
Areas of focus for 2018
People and talent
management
Gender pay
Progress
• Oversaw the introduction of ‘Fit for
the Future’ initiatives (see page 78).
• Appointed Cilla Snowball to be the
Director responsible for gathering the
views of our workforce.
• Established targets and focus areas
to improve the representation of women
in senior management (see page 102).
• Monitored the gender balance of new
recruits, leavers and interns (see page 103).
Succession planning
at Board level
Compliance matters
(including GDPR)
• Finalised Board succession plans for
the Non-Executive Chairman and
Chief Executive (see page 100).
• Received positive feedback from major
shareholders (representing 57.5% of our
issued share capital) on the Board’s
succession plans.
• Received regular updates on the Group’s
project to ensure GDPR compliance
from May 2018.
• The policies and procedures to prevent the
facilitation of tax evasion (see page 114).
Female
Male
4
10
29%
Female
Independent
Executive
7
6
In addition, the questionnaire sought feedback on the following
matters:
54%
Independent
• composition of the Board and its Committees (including diversity
considerations);
• knowledge, skills and experience of the Committees;
• how the Directors work together and contribute to meetings; and
• the quantity, quality and timeliness of reports/papers.
The responses were collated and provided on an anonymous basis
to the Chairman of the Board and the Chairs of the Committees.
As a result of this evaluation, the Board is satisfied that its structure,
balance of skills and operation continues to be satisfactory and
appropriate for the Group. The Board has identified a number of
areas which it wishes to focus upon during 2019:
• support the new Chief Executive and Non-Executive Chairman;
• establish the Responsible Business Committee and ensure it
operates effectively;
• ensure the Group is adequately prepared for Brexit; and
• monitor the progress of key development projects.
We conduct externally facilitated reviews at least every three years.
As the last external review was for the year ended 31 December 2016,
we anticipate that our next externally facilitated review will be
conducted in Q1 2020 for the year ending 31 December 2019.
100
NOMINATIONS
COMMITTEE
REPORT
Derwent London plc Report & Accounts 2018
Dear Shareholder,
I am pleased to present to you the report of the work of the
Nominations Committee for 2018.
As previously identified in our 2017 Annual Report, Board succession
has been a key priority during 2018. We had been mindful for some
time that Robbie Rayne and John Burns might wish to retire from
their current roles and had factored this possibility into our
succession discussions.
A key factor in our succession plans has always been the importance
of retaining the culture of the Group, which is a valuable core strength
of the business. The appointment of John Burns as the next
Non-Executive Chairman of the Company, for a two-year term,
was a natural transitionary step to preserve our culture and ensure
an orderly succession.
In advance of finalising our succession plans, I consulted with
10 major shareholders (representing 57.5% of our issued share
capital) to explain the Committee’s rationale for John’s appointment.
During my discussions with shareholders and proxy voting agencies,
I provided assurance that the Committee had factored the principles
of good corporate governance into its planning, which included the
following ‘safeguards’ to ensure the separation of leadership
between the Chairman and Chief Executive:
Simon Fraser
Chair of the Nominations Committee
FOCUS AREAS IN 2019
• Continue to focus on succession planning and our talent
pipeline
• Monitor the induction programme for Lucinda Bell
• Begin the search for our next Non-Executive Chairman
• John’s appointment is for a finite period of two years and he will
be based at a separate office (not 25 Savile Row);
• The responsibilities of Chairman and Chief Executive are clearly
defined and regularly reviewed;
• The next Non-Executive Chairman will be independent upon
appointment; and
• I remain available as an intermediary to shareholders and
Directors to raise any questions and concerns.
I was pleased with the overwhelming support received from our
shareholders who posed no objections to our proposals and support
John stepping into the role of Chairman until May 2021.
In conjunction with our Chairman succession planning, we undertook
a thorough recruitment process for the role of Chief Executive.
The calibre of our internal senior team is outstanding, and the
Committee commends them for their commitment and passion for
the business. It was after careful deliberation that the Committee
unanimously recommended the appointment of Paul Williams as
Chief Executive from 17 May 2019.
If you wish to discuss any aspect of the Committee’s activities or
succession plans, I will be attending the forthcoming AGM on 17 May
2019 and would welcome your questions. I am also available via our
Company Secretary, David Lawler (telephone: +44 (0)20 7659 3000
or email: company.secretary@derwentlondon.com).
I would like to take this opportunity to thank our shareholders
for their continuing support.
Simon Fraser
Chair of the Nominations Committee
26 February 2019
Governance
Committee composition
Our Committee consists of three independent Non-Executive
Directors. At the request of the Committee, members of the Executive
Committee, senior management team and external advisers may be
invited to attend all or part of any meeting, as and when appropriate.
Simon Fraser, Chair
Cilla Snowball
Richard Dakin
Independent
Yes
Yes
Yes
Number of
meetings
4
4
4
Attendance
100%
100%
100%
It has been agreed by the Board that all Non-Executive Directors would
become members of the Nominations Committee to ensure they are
involved in discussions relating to succession planning and talent
management. Therefore, with effect from 1 January 2019, Claudia
Arney, Lucinda Bell and Helen Gordon will become members of the
Nominations Committee. The Committee’s role and responsibilities
are set out in the terms of reference, which were last updated in
August 2018 and are available on the Company’s website at:
www.derwentlondon.com/investors/governance/board-committees
Meetings of the Committee
During the year under review, the Committee held four meetings
(in May, August, and two in November) (2017: four meetings).
In addition to the scheduled meetings, the chair of the Committee
met with advisers and brokers for three meetings and held ad hoc
calls in relation to Board succession.
Board composition
As part of the Board’s annual effectiveness review, described on
page 99, the Committee considers the composition of the Board and
its Committees in terms of its balance of skills, experience, length of
service, knowledge of the Group and wider diversity considerations.
In addition, consideration was given to the Committee(s) which
Lucinda Bell would join following her appointment. The Committee
consulted its succession plans and considered Lucinda’s skills and
experience before recommending her memberships to the Board.
Following the annual effectiveness review, it was confirmed that
the membership of the Committees continues to be appropriate
and in accordance with best practice and the 2016 UK Corporate
Governance Code.
Succession planning
As Directors we have a duty to ensure the long-term success of the
Company, which includes ensuring that we have a steady supply of
talent for executive positions and established succession plans for
Board changes. The Committee considers the Group’s succession
planning on a regular basis to ensure that changes to the Board are
proactively planned and co-ordinated.
101
Chief Executive
Russell Reynolds Associates, an independent search agency,
were retained to assist the Committee with the search for a new
Chief Executive (they perform no other work for the Group and
are signatories to the voluntary code of conduct for executive
search firms). Russell Reynolds Associates carried out a detailed
assessment of the available external candidates as well as the
internal candidates.
The importance of retaining the Group’s strong culture and the
extensive experience of the senior management team was of
paramount importance. It was after careful deliberation that
the Committee unanimously recommended the appointment
of Paul Williams as Chief Executive from 17 May 2019.
Non-Executive Directors
At the beginning of the year, we began the search for a successor
for Stephen Young who intends to step down, after nine years on the
Board, in May 2019. Stephen has brought considerable knowledge
and oversight as chair of the Audit Committee. It was therefore
a key component of our specification that a new member of the
Board bring a similar level of financial expertise and experience.
Due to its wide network of contacts, the Committee was able to
identify potential candidates without the use of an external search
consultancy or open advertising.
We were delighted that Lucinda Bell joined our Board on 1 January
2019 and will succeed Stephen as chair of the Audit Committee.
Lucinda’s biography is available on page 89.
Executive Committee
The Committee also monitors the development of the executive team
below the Board to ensure that there is a diverse supply of senior
executives and potential future Board members with appropriate
skills and experience. The Executive Committee considers the
adequacy of the Group’s succession plans below the Board as part of
the five-year strategy review and provides updates to the Committee.
Appointment review
The Committee performed a rigorous review of Claudia Arney’s,
Cilla Snowball’s and Simon Fraser’s appointments, as their current
term of office was due to expire in 2018. None of the Non-Executive
Directors were present when their term of appointment was
considered by the Committee.
The Committee is pleased to report that it is satisfied with the
ongoing performance and commitment of Claudia, Cilla and Simon
and has recommended that their appointments be extended for
another three years.
Non-Executive Directors (NED) terms of appointment
The Committee monitors a schedule on the length of tenure of the Non-Executive Directors, and reviews potential departure dates assuming
the relevant Directors are not permitted to serve more than three three-year terms (see the table below).
Stephen Young(i)
Simon Fraser
Richard Dakin
Claudia Arney
Cilla Snowball
Helen Gordon
Lucinda Bell
Note:
(i) Stephen Young will step down from the Board on 17 May 2019.
Appointment
2 August 2010
1 September 2012
6 August 2013
18 May 2015
1 September 2015
1 January 2018
1 January 2019
3 years
3 August 2013
1 September 2015
6 August 2016
18 May 2018
1 September 2018
1 January 2021
1 January 2022
Term of Appointment
6 years
4 August 2016
1 September 2018
6 August 2019
18 May 2021
1 September 2021
1 January 2024
1 January 2025
9 years
5 August 2019
1 September 2021
6 August 2022
18 May 2024
1 September 2024
1 January 2027
1 January 2028
102
Derwent London plc Report & Accounts 2018
NOMINATIONS COMMITTEE REPORT CONTINUED
Induction
The Company provides new Directors with a comprehensive and
tailored induction process which includes visiting a number of the
Group’s properties with senior management, meetings with the
Group’s audit partner and corporate lawyer together with meetings
with members of the senior management team.
If considered appropriate, new Directors are provided with external
training that addresses their role and duties as a Director of a quoted
public company.
Lucinda’s induction programme followed a similar structure to
Helen Gordon’s, which was described in detail on page 103 of the
2017 Annual Report. Induction programmes are developed by the
Group’s Company Secretarial department and approved by the
Chair of the Committee.
Diversity and inclusion
Having a diverse, highly talented and skilled group of people at all
levels at Derwent London is fundamental to our business success.
Diversity and inclusion bring new ideas and fresh perspectives which
fuel innovation and creativity. This is why we actively work to attract,
retain and develop employees to improve our talent pipeline.
We fully support, and are signatories to, the Property Week
Diversity Charter and the RICS Inclusive Employer Quality Mark.
We are founding supporters of Real Estate Balance and we are
also members of the City Women Network (CWN) which provides
membership to all our senior female employees.
During the year, we hosted a CWN event at 25 Savile Row on the
‘Changing workplace’ presented by Monica Parker (HATCH Analytics).
Monica was an exceptional speaker who brought to the forefront
the importance of change to facilitate diversity in a practical and
thought-provoking manner. We were delighted that a large number
of our own staff attended the event.
Board diversity
A diversified Board brings constructive challenge and fresh
perspectives to discussions. We consider diversity, in its widest
sense (and not limited to gender), during our Board composition
reviews and during the development of recruitment specifications.
Our gender diversity policy ensures that, where possible, each time
a Director is recruited, at least one of the short list of candidates
is female.
While we have identified areas where we could further improve our
diversity balance, principally our ethnic and gender diversity, we do
not positively discriminate during the recruitment process and are
conscious that altering the diversity of the Board can only be done
in conjunction with the underlying Board refreshment programme.
Gender diversity targets
The Board are aiming to achieve the recommendations of the
Hampton-Alexander Review and have 33% female representation
on its Board, Executive Committee and senior management teams
(direct reports to the Executive Committee) by 31 December 2020.
Following the appointment of Lucinda Bell on 1 January 2019, our
gender balance at Board level has further improved to be 29%
women (2017: 23%). From 17 May 2019, the Board’s succession
plans become effective, which results in:
• the gender balance of the Executive Committee being 18%
women (the combined gender balance of the Executive
Committee and its direct reports is 29.2% women); and
• Boardroom diversity improving to 33% women which achieves
the Hampton-Alexander targets well in advance of the
31 December 2020 deadline.
The Board is confident it will achieve the gender balance target for
the direct reports to the Executive Committee, however the gender
balance of the Executive Committee is likely to remain a challenge.
Improving the diversity of the Executive Committee can only be
achieved through either increasing the size of the Committee
(which is not considered a practical or effective solution) or through
natural succession changes. Although it is disappointing that this
target might not be achieved within the deadline, the Committee is
focusing on the talent pipeline to the Executive Committee and the
Board’s focus areas which aim to improve diversity throughout
the Group.
Hampton-Alexander Review
Target
Achieve the recommendations of the
Hampton-Alexander Review and have
33% female representation
Board
Executive Committee(ii)
Direct reports to the Executive Committee(iii)
Progress during 2018
+6%
+8%
+3%
1 January 2019
29%
17%
32%
Note(i)
33%
18%
n/a
Notes:
(i) Diversity balance of the Board and Executive Committee following the implementation of the announced succession plans due to become effective from 17 May 2019.
(ii) The combined diversity balance of the Executive Committee and its direct reports (excluding administrative and support staff) is 28.6% women as at 1 January 2019.
(iii) Direct reports to the Executive Committee, excluding administrative and support staff, is 32.4% women. Direct reports to the Executive Committee, including administrative
and support staff, is 46.0% women.
Governance
103
Diversity focus areas
The Board has established clear focus areas which aim to promote the importance of diversity at all stages from attracting diverse and
talented employees through to retention and promotion.
Area
Attracting diverse, highly skilled
and talented employees
Retaining the best talent
Promoting diversity
Focus
Tackle unconscious bias
Candidate shortlists to have gender balance
All recruiters are signatories to the Standard
Voluntary Code of Practice
Recruit from a wide pool of talent
(including women returning to work)
Focus on women returning to work
Promote the importance of work/life balance
Gender balance within our internships and
work experience placements
Aim to encourage more girls to be interested
in the construction and property industry and
challenge harmful gender stereotyping
Heads of Department demonstrate that we
are an inclusive employer
Actions
• Unconscious bias training to be provided to all staff
involved in recruitment or performance appraisals in
May 2019.
• Executives and Heads of Departments will complete
tests to enhance awareness of own unconscious bias.
• Monitored the gender balance of new recruits and
leavers (67% of professional recruits since 1 January
2018 were female).
• Identified the perceived barriers to agile working which
will be addressed during 2019.
• Introduction of parental transition coaching for men
and women taking paternity/maternity leave which
is provided in advance, during and upon their return.
• Four female Group employees took part in an ‘Inspire’
event which aimed to challenge industry stereotypes.
• Two young women recruited through the Hackney 100
work experience scheme.
• 24% of our interns were female (2017: 29%). Two of our
interns were via the ‘Fitzrovia Youth in Action’ charity.
The Group’s composition and diversity
We have an experienced, diverse and dedicated workforce. The charts below provide a breakdown of our diversity as at 1 January 2019.
The Board’s composition as at 1 January 2019 is shown on page 99.
Length of service
Years
Employees by age
Years
Gender diversity
Number
All
employees
Board of Directors
(incl. the Chairman)
4
10
Executive Committee
and its direct reports
14
Men
Women
Ethnic origin
Number
38
17
32
17
10
10
10
39
34
27
14
Under 3
3-5
5-10
10-15
15-20
20+
20-29
30-39
40-49
50-59
60+
69
55
35
Asian
Black
Middle Eastern
Mixed
White British
White other
11
9
1
7
83
13
104
AUDIT
COMMITTEE
REPORT
Stephen Young
Chair of the Audit Committee
FOCUS AREAS IN 2019
• Ensure a smooth transition as John Waters becomes the new
audit partner
• Approve the 2019 internal audit plan and review the outcome
of the assurance reviews
• Review the significant judgements applied in the preparation
of the Annual Report and Accounts
• Review our internal financial control procedures to ensure
they continue to operate effectively
Derwent London plc Report & Accounts 2018
Dear Shareholder,
I am pleased to present our Audit Committee report for 2018 which
describes our activities and areas of focus.
Financial reporting
Our review of the significant financial judgements made during the
year and key financial reporting issues are described on page 105
of this report.
We were pleased to advise the Board that the 2018 Annual Report
is fair, balanced and understandable and provides the necessary
information for our shareholders to assess the Company’s position,
prospects, business model and strategy. Our review process is
described in greater detail on page 108.
Audit quality
During the year, the FRC conducted an audit quality review (AQR)
of our 2017 year end audit which had been performed by PwC.
The Committee was delighted with the outcome of the AQR which
confirmed there were no significant recommendations for further
improvement (see page 107).
Internal audit
In conjunction with our review of the Group’s internal financial
controls, we consider on an annual basis whether Derwent London
could benefit from an internal audit function. After detailed
discussions with management in August 2018, it was agreed that an
outsourced internal audit function would be established to improve
the Group’s procedures and to help achieve the highest standards for
governance and compliance. Following a tender process, RSM have
been appointed, initially for a three-year period. The 2019 internal
audit plan will be approved by the Committee in May 2019.
Further information on the review of the internal financial controls
and the establishment of an outsourced internal audit function can
be found on pages 108 to 109.
Succession
After serving as a Non-Executive Director for nine years, and as
chair of the Audit Committee since April 2011, I will be stepping
down in May 2019 after a comprehensive handover to Lucinda Bell.
Lucinda is a qualified accountant and has significant and recent
financial experience, having been CFO of The British Land Company
plc for seven years. I am confident she will make an excellent
Audit Committee Chair.
Following the 2018 year-end audit, Craig Hughes will step down
as our audit partner in accordance with the five-year rotation and
will be succeeded by John Waters. After discussing the handover
process in detail with Craig Hughes and our Finance Director,
Damian Wisniewski, we are confident that the transition and
handover period will be efficiently managed.
Further engagement
I welcome questions from shareholders on the Committee’s activities.
If you wish to discuss any aspect of this report, please contact me
via our Company Secretary, David Lawler (telephone: +44 (0)20 7659
3000 or email: company.secretary@derwentlondon.com).
I will be attending the 2019 AGM, alongside my fellow Board
members, and look forward to meeting you there.
Stephen Young
Chair of the Audit Committee
26 February 2019
Governance
Committee composition
During the year under review, the Committee was composed of
four independent Non-Executive Directors with a wide range of
experience, including real estate and finance. The Chair, Stephen
Young, is a qualified accountant and has an appropriate level of
recent and relevant financial experience to discharge his duties
as chair of the Committee. Lucinda Bell, who joined the Committee
on 1 January 2019, will become chair of the Committee following
Stephen Young’s retirement from the Board on 17 May 2019.
Stephen Young, Chair
Simon Fraser
Richard Dakin
Claudia Arney
Independent
Yes
Yes
Yes
Yes
Number of
meetings
3
3
3
3
Attendance
100%
100%
100%
100%
The Committee’s role and responsibilities are set out in the terms
of reference, which were last updated in August 2017 and are
available on the Company’s website at: www.derwentlondon.com/
investors/governance/board-committees
Meetings of the Committee
During the year under review, the Committee met three times, in
February, August and November (2017: four meetings). In addition
to the Committee members, meetings are attended by the external
Auditor and members of the Group’s senior management team,
at the request of the Committee Chair. Two additional meetings
are held each year with the Group’s external property valuers to
consider the valuation of our property portfolio.
105
Financial reporting
One of the Committee’s principal responsibilities is to review and
report to the Board on the clarity and accuracy of the Group’s
financial statements, including the Annual Report and interim
statement. When conducting its reviews, the Committee considers
the overall requirement that the financial statements present a
‘true and fair view’ and the following:
• the accounting policies and practices applied (see page 109
of this report for further details on internal financial controls);
• material accounting judgements and assumptions made by
management;
• significant judgements or key audit matters identified by the
external Auditor (see pages 105 and 140); and
• compliance with relevant accounting standards and other
regulatory financial reporting requirements including the
UK Corporate Governance Code.
In order to assess the financial statements, the Committee regularly
reviews reports from members of the finance team and external
Auditors who are invited to attend the Committee’s meetings.
Through face-to-face discussions and detailed written reports,
the Committee are able to understand the business rationale for
transactions and how they are being recorded and disclosed in the
financial statements.
Significant financial judgements
Any key accounting issues or judgements made by management are monitored and discussed with the Committee throughout the year.
The table below provides information on the key issues discussed with the Committee in 2018 and the judgements adopted.
Issue
Judgement
Valuation of the Group’s property portfolio
The Committee considers this to be a
major area of judgement in determining the
accuracy of the financial statements as it is
the principal component of the Group’s net
asset value
Taxation and REIT compliance
The valuation is performed by CBRE Limited and Savills (UK) Limited (the ‘external valuers’)
and, due to its significance, is also reviewed by the external Auditor. The valuation is determined
without management being present (see page 106). The Committee reviewed the underlying
assumptions used in the valuation and the external valuers’ independence and methodology.
These procedures enabled the Committee to be satisfied with the assumptions and judgements
used in the valuation of the Group’s property portfolio.
Should the Group not comply with the REIT
regulations, it could incur tax penalties
or ultimately be expelled from the REIT
regime, which would have a significant
effect on the financial statements
The Group employs a qualified and experienced Head of Tax whom the Committee meets at
least annually. The Committee noted the frequency with which compliance with the regulations
was reported to the Board and considered the margin by which the Group complied. Based on
this and the level of headroom shown in the latest Group forecasts the Committee agreed that,
once again, no further action was required for the current year.
Borrowings and derivatives
Calculation of the fair values of the Group’s
financial instruments, such as the 2019
convertible bonds and interest rate swaps
The Committee noted that the valuations were carried out by an independent third party
which had valued the instruments in previous years and that the external Auditor used its own
treasury specialists to re-perform the valuation and to assess the reasonableness thereof.
The external Auditor subsequently confirmed that no issues had arisen relating to the valuation.
The Committee was satisfied with the level of assurance gained from these procedures.
106
Derwent London plc Report & Accounts 2018
AUDIT COMMITTEE REPORT CONTINUED
Valuation
Our property portfolio is valued by the external valuers for our
interim and year end results. As at 31 December 2018, it was
valued at £5.2 billion (2017: £4.9 billion) and principally consists
of 86 properties in 13 ‘villages’ across London.
External Auditor
The Committee has primary responsibility for overseeing the
relationship with the external Auditor, including assessing their
performance, effectiveness and independence annually and
recommending to the Board their reappointment or removal.
The valuation of the portfolio underlies the net asset value.
Movements in that valuation are a significant part of how we
measure our progress and a key determinate of the Group’s
total return (a KPI and a performance measure for our Executive
Directors’ variable remuneration – see pages 40 and 125).
Due to its significance, the Committee monitors the objectivity
and independence of the external valuers’ work and hosts the
valuation meetings without management being present.
Following a comprehensive tender in 2014, PricewaterhouseCoopers
LLP (PwC) were appointed as the Group’s Auditor. Prior to this
appointment, BDO had been the Group’s Auditor since 1985.
The Committee anticipates that the next competitive tender will be
conducted no later than 2024 in accordance with current regulation
that requires a tender every 10 years. There are no contractual
obligations which restrict the Committee’s choice of Auditor or
a minimum appointment period.
The valuation meetings typically occur in February and July prior to
Audit Committee meetings. Due to his position as Managing Director
of Capital Advisors Limited (a wholly-owned subsidiary of CBRE
Limited), Richard Dakin does not take part in discussions regarding
the valuation of the Group’s property portfolio (see page 97).
Key matters discussed during the meetings include the assumptions
underlying the valuation, any valuation which required a greater level
of judgement than normal, for example development properties,
and any valuation movements that were not broadly in line with
that of the MSCI Investment Property Databank (IPD) benchmark.
The assumptions are discussed with the external Auditor and
an update on the matters discussed at the meetings is provided
to the Board.
The Company has complied with the provisions of the Competition
and Markets Authority’s Order for the financial year under review in
respect to audit tendering and the provision of non-audit services.
Change in audit partner
Craig Hughes will reach the end of his term as audit partner
following the 2018 year end audit. The Committee met with the
new audit partner, John Waters, during the year. The transitionary
arrangements were discussed in detail with PwC and our Finance
Director to ensure a smooth handover and induction process.
The first audit under the supervision of John Waters will be the
2019 year end audit.
Working with the Auditor
The external Auditor (the lead audit partner and his team) attends
the Committee’s meetings to provide insight and challenge and to
present their reports on the review of the half-year results and audit
of the year end financial statements. To further facilitate open
dialogue and assurance, the Committee holds private sessions
with the Auditor without members of management being present.
107
Non-audit services
The objective of maintaining the Non-Audit Services Policy is to
ensure that the provision of such services do not impair the external
Auditor’s independence or objectivity. During 2018, PwC provided
non-audit services which totalled £45,095, including the review of
our half-year results (2017: £43,715).
£’000
Audit of Derwent London plc and
subsidiaries
Review of interim results
Other non-audit services
Total fees
2018
350
41
4
395
2017
340
40
4
384
Overview of our Non-Audit Services Policy
Under the policy, all services provided by the external Auditor (other
than the audit itself) are regarded as non-audit services. Our policy
draws a distinction between permissible services (which could be
provided subject to conditions set by the Committee) and prohibited
services (which may not be provided by the external Auditor except
in exceptional circumstances when the Auditor has been provided
with approval by the Financial Conduct Authority). The type of
non-audit services deemed to be permissible include: review
of the half-year results, assurance work on non-financial data,
tax services, including tax advisory, and reporting best practice.
The Committee has provided pre-approval which allows management
to appoint the external Auditor to conduct permissible non-audit
services if they fall below a set fee level. The Committee review
the pre-approval limit on an annual basis and it is currently set at
£25,000. Permissible services which are above the pre-approval limit
require approval from at least two members of the Audit Committee
(including the Committee Chair). When considering if the services
should be approved, the Committee will ensure that the Auditor’s
objectivity and independence are not threatened. Any non-audit
service provided by the external Auditor is reported to the Board.
In the unlikely event that the provision of non-audit services would
exceed £100,000, the Committee would request Board approval.
Governance
Annual review of the external Auditor
Following the year end audit, the Committee assessed the
effectiveness of the external Auditor. The assessment took into
account the views of senior management and was supported by
a questionnaire which covered the Auditor’s resources, objectivity,
character, knowledge, organisation, judgements and quality
of reporting.
As part of their review, the Committee reviewed the audit plan,
which was focused on risk and materiality, and considered the
quality of their planning, whether the agreed plan had been met,
the extent to which it was tailored to our business and its ability
to respond to any changes in the business.
An important aspect of managing the external Auditor relationship is
ensuring there are adequate safeguards to protect Auditor objectivity
and independence. In assessing this matter, the Committee
considered the following:
• the Auditor’s independence letter which annually confirms their
independence and compliance with the Financial Reporting
Council’s (FRC) Ethical Standard;
• the operation, and compliance with, the Group’s policy on
non-audit work being performed by the Auditor;
• the tenure of the external Auditor and the lead audit partner;
• how the Auditor identified risks to audit quality and how these
were addressed, including the network level controls the Auditor
relied upon; and
• the outcome of the FRC’s inspection of PwC’s audit quality
(further information is provided below).
After taking all of these matters into account, the Committee
concluded that PwC had performed their audit effectively, efficiently
and to a high quality. Accordingly, the Committee has recommended
to the Board that PwC be reappointed as Auditor to the Group for
the year ending 31 December 2019. Any feedback arising from the
annual assessment will be discussed with the external Auditor for
implementation into the audit plan for the next year end audit.
FRC’s Audit quality review
The FRC’s Audit Quality Review team (AQR) carried out a review of the
audit of our financial reporting for the 31 December 2017 financial
year as part of their routine process. The chair of the Committee was
involved in the planning for the review which included a preparatory
call with the FRC. Following completion of the AQR, the Committee
was provided with a report from the FRC’s AQR Team and received
a verbal update on the outcome from PwC. The Committee were
pleased to note that there were no significant recommendations
made by the FRC for further improvement.
108
Derwent London plc Report & Accounts 2018
AUDIT COMMITTEE REPORT CONTINUED
Internal audit
On an annual basis, the Committee considers whether Derwent
London would benefit from the establishment of an internal audit
function. Although historically this was not deemed necessary
– due to the relatively small scale and level of complexity of the
organisation, the focused nature of the Group’s business and the
close involvement of Directors in day-to-day operations – it was
agreed in August 2018 that an outsourced internal audit function
would be established to provide additional assurance and
suggestions for best practice improvements.
In November, four internal audit firms presented to the Committee
Chair and executive team. It was agreed that RSM would be appointed
to provide an outsourced internal audit function, initially for a
three-year period, to conduct a series of risk-based internal audits
and projects. RSM perform no other work for the Group and are
considered by the Committee to be independent.
The Committee will approve the internal audit plan for 2019 in
May 2019 in liaison with the Risk Committee. RSM will attend each
Committee meeting to present their findings and progress against
the internal audit plan. The other Board Committees will be kept
updated on the outcome of any reviews which fall within their areas
of responsibility.
Viability statement
We have reviewed the process and assessment of the Company’s
prospects and viability made by management for the next five years
which formed the basis for the viability statement (see page 44).
Whistleblowing
As a business, we seek to conduct ourselves with honesty and
integrity and believe that it is our duty to take appropriate measures
to identify and remedy any malpractice within or affecting the
Company. Our employees embrace our high standards of conduct
and are encouraged to speak out if they witness any wrongdoing
which falls short of those standards.
Our whistleblowing procedures are included within our staff
handbook, on our Group intranet and staff noticeboards. In addition
to an independent reporting line for anonymous reporting of
concerns, the Senior Independent Director acts as an independent
point of contact for whistleblowing concerns.
Review of the 2018 Annual Report
At the request of the Board, the Committee was asked to review the
Group’s Annual Report and to consider whether, taken as a whole,
it was fair, balanced and understandable. In carrying out its review,
the Committee had regard to the following:
Fairness and balance
• Is the report open and honest, are we reporting on our
weaknesses, difficulties and challenges alongside our successes
and opportunities?
• Do we provide clear explanations of our KPIs and is there strong
linkage between our KPIs and our strategy?
• Do we show our progress over time and is there consistency
in our metrics and measurements?
Understandable
• Do we explain our business model, strategy and accounting
policies simply using precise and clear language?
• Do we break up lengthy narrative with quotes, tables,
case studies and graphics?
• Do we have a consistent tone across the Annual Report?
• Are we clearly ‘signposting’ to where additional information
can be found?
Specific considerations for the 2018 Annual Report
Are we providing clear and detailed explanations in respect of:
• Our Board succession plans and how we intend to mitigate
against any governance issues?
• Brexit risk and opportunities?
• The remuneration paid to Executive Directors and senior
managers in respect to Board succession changes?
Structural changes to the 2018 Annual Report included:
• the introduction of a dedicated stakeholder section within
the Strategic report (see pages 18 to 19);
• restructuring the Responsibility report to provide clearer
explanation and linkage (see pages 74 to 81);
• expanded disclosures on our viability assessment (see pages
44 to 45); and
• the introduction of ‘Governance at a glance’ and ‘Remuneration
at a glance’ to improve readability (see pages 86 and 118).
Our whistleblowing policy ensures that any significant issues relating
to potential fraud are escalated to the chair of the Committee
immediately. The Committee receives updates from the Company
Secretary on the operation of the whistleblowing system. During the
year under review, we did not receive any whistleblowing messages
(2017: no messages).
The Committee paid particular attention to these changes to ensure
they did not impact on the balance and clarity of the Annual Report.
Following its review, the Committee confirmed to the Board that the
2018 Annual Report is fair, balanced and provides sufficient clarity
for shareholders to understand our business model, strategy,
position and performance.
Governance
Internal control
On an ongoing basis, the Committee reviews the adequacy and
effectiveness of the Group’s system of internal financial controls
which are described briefly in the table below.
While Derwent London is a large business in terms of the size of its
balance sheet and market capitalisation, we are relatively small
when considering the number of people working directly in the
business. Almost all of our staff work in the same building and
are in close proximity to our Executive Committee members,
making for close supervision and easy monitoring. Our Group
structure is organised to be simple and transparent (i.e. relatively
few subsidiaries, no offshore structure, very few joint ventures) and
our internal control procedures and policies are well established,
reviewed annually and subject to external verification.
The Committee received detailed reports on the operation and
effectiveness of the internal controls from members of the senior
management team. The outcome of the external audit at year end
and the half year review are considered in respect to our internal
controls. The Committee also receives updates on the policies and
procedures in place and how these are being communicated to and
complied with by our staff.
The Committee remains satisfied that the review of internal controls
did not reveal any significant weaknesses or failures and they
continue to operate effectively.
109
During 2018, the following changes were made to our system of
internal controls:
• Payroll: After the Head of HR has approved the payroll,
an analytical review is performed by the Group Financial
Controller of each employee’s pay and changes are investigated.
A summary sheet explaining the movements from one month to
the next is also now given to the approver and authoriser of the
salary BACS.
• ‘Know your client’ procedures: These have been subject to
in-depth review and have been further strengthened to
minimise risk exposure. The Committee reviewed a flowchart
of processes at its November meeting, and the forms which
require completion for all property acquisitions, disposals and
residential lettings. Further information on tenant covenants
is available on page 114.
• Anti-bribery and corruption: Our procedures have been reviewed
and strengthened during the year with a revised anti-bribery
policy and Hospitality & Gift Return (see page 113).
Whistleblowing: The Committee reviewed the whistleblowing
procedures and recommended the introduction of an anonymous
reporting line for concerns via an independent third party.
The new system will be operational in Q2 2019. Further
information on whistleblowing is available on page 108.
Overview of internal controls
Governance framework
Financial reviews and
internal procedures
Risk identification
and monitoring
Training and staff awareness
External verification
Our governance framework (see page 87) supports effective internal control through an approved schedule
of matters reserved for decision by the Board and the Executive Committee, supported by defined
responsibilities, levels of authority and supporting committees.
Comprehensive systems of financial reporting and forecasting which are conducted frequently and include
both sensitivity and variance analysis. An annual budgeting exercise is carried out with three rolling
forecasts prepared. A five-year strategic review is prepared annually. Break-even and sensitivity analyses
are included in both the five-year strategic review and the rolling forecasts.
The Risk Committee regularly reviews the Group’s risk register, the schedule of key controls and key risk
indicators. The schedule of key controls provides evidence of how the controls are being operated and their
effectiveness. Our risk management procedures are robust and include initiatives such as a ‘tenant at risk’
register and a back-up IT facility. The Risk Committee’s report is on pages 110 to 115.
Staff compliance with internal policies are routinely confirmed to the Committee. Staff are aware of the
delegated authority limits set by the Board and confirm their understanding of our internal policies which
are contained on our Group intranet and in our employee handbook. Staff have six-monthly performance
reviews with any training requirements identified and fulfilled within six months. The Group operates
a whistleblowing policy which includes access to an independent helpline for anonymous reporting of
concerns.
During the year, no significant deficiencies had been raised by PwC as a result of their controls testing
undertaken as part of the annual audit. The Group’s VAT procedures are subject to ongoing periodic review
by external advisers. Comprehensive reviews of the Group’s financial controls have also been undertaken
with assistance from external advisers. Regular annual credit ratings, including risk assessments, are
conducted. In 2018, we appointed Fitch to provide our corporate credit rating. Each year, at renewal,
a comprehensive review of the Group’s insurance cover is prepared by its independent insurance adviser.
110
RISK
COMMITTEE
REPORT
Richard Dakin
Chair of the Risk Committee
FOCUS AREAS IN 2019
• The ongoing review of the Group’s principal risks
• Monitor health and safety across the Group
• Review the emerging risks which could impact on the Group
in the medium to long-term
• Review the risk arising at our key developments: 80 Charlotte
Street W1, The Featherstone Building EC1 and Soho Place W1.
• Monitor Brexit and the political environment to assess the
potential impact on the Group
Derwent London plc Report & Accounts 2018
Dear Shareholder,
I am pleased to present our Risk Committee report for 2018
which describes our activities and areas of focus during the year.
Risk profile of the Group
The political and economic uncertainty triggered by the referendum
decision to leave the EU is likely to continue until the future trade
relationship with the EU is finalised.
The Committee’s responsibility is to ensure that management are
proactively planning for the risks and challenges which could arise
from the Brexit negotiations and the eventual outcome. Of particular
concern is the impact unfavourable negotiations could have on the
UK economy and specifically London which will feed through into
our leasing and development activities.
In June 2018, the Board as a whole considered potential Brexit
scenarios on the Group’s five-year strategic plan and long-term
viability (more on page 45). Despite the potential negative impact
of ‘worst case’ scenarios, the Group’s strong financial structure
and flexible business model provides sufficient flexibility to weather
the uncertainty.
Additional information on the potential impact of Brexit on the Group
is contained on page 47. The Board’s risk tolerance is contained on
page 112 of this report.
Key activities of the Committee
2018 was another busy year for the Committee. In addition to
routinely reviewing the Group’s risk register, the Committee’s main
areas of focus during 2018 were as follows:
• reviewed the tenant covenant review procedures and the work
of the credit committee (see page 114);
• undertook a site tour of the Charlotte Street construction site,
including a presentation on the management of construction
health and safety risks (see page 112);
• the Board is aware of the well-publicised issues experienced
by a number of major contractors, including the insolvency
of Carillion, which highlight the ongoing issues within the
construction industry. The Committee has been advised of the
actions being taken by management to monitor the Group’s
contractors and are satisfied with the sufficiency of these
controls (contractor default is a principal risk, see page 52);
• as part of our anti-bribery and corruption controls, the
Committee reviewed the Group’s gifts and hospitality register
(see page 113) and the Group’s conflict of interest register on
a quarterly basis;
• received an update on recent legal developments which are of
particular relevance to the Risk Committee from the Group’s
legal advisers, Slaughter & May LLP;
• reviewed frequent updates on the GDPR project (see page 114);
• received regular updates on our cyber security initiatives and
received a presentation from Capgemini on the outcome of their
benchmarking review (see page 115); and
• received an update on the full testing of the disaster recovery
procedures undertaken on 21/22 September 2018 (see page 115).
Further engagement
The forthcoming AGM is on 17 May 2019 and I will be in attendance
to answer any questions on the Committee’s activities that you may
have. If you wish to contact me, I am available via our Company
Secretary, David Lawler (telephone: +44 (0)20 7659 3000 or
email: company.secretary@derwentlondon.com)
Richard Dakin
Chair of the Risk Committee
26 February 2019
Governance
Committee composition
During the year under review, the Committee was composed of three
independent Non-Executive Directors. Lucinda Bell will become
a Committee member from 1 January 2019 in advance of Stephen
Young stepping down as a Director in May 2019. In addition to the
Committee members, the Board Chairman, other Directors, senior
management or the external Auditor may be invited to attend all or
part of any meeting as and when appropriate and necessary.
Richard Dakin, Chair
Cilla Snowball
Stephen Young
Independent
Yes
Yes
Yes
Number of
meetings
3
3
3
Attendance
100%
100%
100%
The Committee’s role and responsibilities are set out in the terms
of reference, which were last updated in November 2018, and are
available on the Company’s website at: www.derwentlondon.com/
investors/governance/board-committees
Meetings of the Committee
During the year under review, the Risk Committee met three times,
in May, August and November (2017: four meetings).
Risk management
At Derwent London, the management of risk is treated as a critical
and core aspect of our business activities. A robust assessment
of the principal risks facing the Group is regularly performed by the
Directors, which takes into account the risks that could threaten
our business model, future performance, solvency or liquidity,
as well as the Group’s strategic objectives over the coming
12 months.
In order to gain a more comprehensive understanding of the risks
facing the business and the management thereof, the Committee
periodically receives presentations from senior managers and
external advisers. Following these reviews, the Committee has
confirmed to the Board that it is satisfied that the Group’s risk
management procedures operated effectively throughout the period.
During the annual strategic review of the five-year plan, the Board
assesses the emerging risks being those that could impact on the
business in the medium to long-term.
Risk management framework
How do we identify risks?
Risks are identified through workshop debates between the
Executive Committee and members of senior management,
analytical techniques, independent reviews and use of historical
data and lessons learnt. At the Board’s strategy review on 13 June
2018, scenarios for the future were considered which assisted with
the identification of principal or emerging risks and how they could
impact on our strategy. The continuous review of strategy and our
environment ensures that we do not become complacent and that
we respond in a timely manner to any changes.
How do we assess risk?
Following the identification of a potential principal risk, the Executive
Committee undertakes a detailed assessment process to:
• gain sufficient understanding of the risk to allow an effective and
efficient mitigation strategy to be determined;
• allow the root cause of the risk to be identified;
• estimate the probability of the risk occurring and the potential
quantitative and qualitative impacts; and
• understand the Group’s current exposure to the risk and the ‘target
risk profile’ (in accordance with the Board’s risk appetite) which will
be achieved following the completion of mitigation plans.
Emerging risks are kept under review via the ‘on watch’ register and
reassessed during the annual strategy reviews.
111
How do we monitor risks?
Once a risk has been identified and assessed, a risk owner is
assigned who is considered to be in the best position to influence
and monitor the outcome of the risk. As part of our risk management
procedures, the Executive Committee and Risk Committee routinely
conduct monitoring exercises to ensure that risk management
activities are being consistently applied across the Group, that
they remain sufficiently robust and to identify any weaknesses
or enhancements which could be made to the procedures.
Monitoring activities include:
• the regular review and updating of the Schedule of Principal Risks,
the Group’s risk register and ‘on watch’ register;
• independent third-party reviews of the risk management process
to provide further assurance of its effectiveness;
• alerting the Board to new emerging risks and changes to existing
risks;
• monitoring how the risk profile is changing for the Group; and
• providing assurance that risks are being managed effectively and
where any assurance gaps exist, identifiable action plans are being
implemented.
How do we respond to risk?
We implement controls and procedures in response to identified
risks with the aim of reducing our risk exposure, so that it is aligned
or below our risk appetite. The successful management of risk
cannot be done in isolation without understanding how risks relate
and impact upon each other. At Derwent London, we consider the
interconnectivity between risks which allows us to prioritise areas
that require increased oversight and remedial action. The mitigation
plans in place for our principal risks are described in greater detail
on pages 48 to 57.
Risk management structure
Although the Board has ultimate responsibility for ensuring the
Group has robust risk identification and management procedures
in place, certain risk management activities are delegated to the
level that is most capable of overseeing and managing the risks.
Our risk management structure is illustrated below.
Board
• Overall responsibility for risk management and internal control
• Sets strategic objectives and risk appetite
• Sets delegation of authority limits for senior management
Risk Committee
Audit Committee
• Monitors and reviews the Group’s
risk register
• Identifies and evaluates key risks
and tolerance levels and ensures
they are appropriately managed
• Monitors assurance and internal
control arrangements
• Manages the external audit
process and reviews the
Auditor’s reports
Executive Committee
• Maintains the Group’s risk register
• Manages the Group’s risk management procedures
• Reviews the operation and effectiveness of key controls
• Provides guidance and advice to staff on risk identification
and mitigation plans
Senior management
• Engages with the Executive Committee to identify risks
• Allocated risk managers oversee and manage risks
112
Derwent London plc Report & Accounts 2018
RISK COMMITTEE REPORT CONTINUED
Risk tolerance
Like any business, we face a number of risks and uncertainties. An overview of the Group’s risk profile, including commentary on Brexit,
is available on page 46 to 47. The Group’s risk tolerance is set by the Board and is the level of risk we are willing to accept to achieve our
strategic objectives.
Our overall risk tolerance is low and is contained in our Risk Appetite Statement (see the table below for an overview of this statement).
This tolerance, alongside our culture, informs how our staff respond to risk. Due to our open and collaborative work style, any potential
problem, risk or issue is identified quickly so appropriate action can be taken.
Category
Operational
Risk tolerance
Operational risks include health and safety risks, continuity of the
IT system and retention of the senior management team.
Financial
Other than market-driven movements that are beyond the Group’s
immediate control, the Group will not generally accept risks where
it is probable that:
• Asset values decline by more than £100m from the Group’s annual
• EPRA profit before tax deviates by more than £5m from the Group’s
budget.
annual budget.
• Cost overruns occur on capital projects of more than 5% of the
approved capex budget.
• The Group’s interest cover ratio will fall to within 20% of the level
set in the Group’s borrowing covenants.
Health and safety
IT continuity
Staff retention
REIT status
Credit rating
Decrease in asset value (>£100m)
Profits (£5m)
Cost overruns (>5%)
Interest cover (<20%)
Zero
Low
Medium
Low
Low
Medium
Medium
Medium
Medium
Reputational
Regulatory
It is recognised that inherent market risk may result in these financial
tolerances, in particular the assets limit, being exceeded. The Board
accepts this market risk but seeks to manage and mitigate its impact
where possible.
The Group has a low tolerance for risk in connection with reputational
risk. In particular, this level of risk tolerance relates to any action that
could adversely affect the Derwent London brand.
The Group’s tolerance for regulatory risk arising from statute
or the UK Corporate Governance Code and from adherence to
‘best practice’ guides.
Brand value
Statutory
Governance
Zero:
Low:
The Board has a zero tolerance to risk-taking
The Board is not willing to take any significant risks
Medium:
The Board is willing to take measured risks if they are identified, assessed and controlled
High:
The Board is willing to take significant risks
Low
Zero
Low
Health and safety
The Group is committed to providing a safe environment at all
our properties for the benefit of tenants, employees, contractors
and visitors.
At each Committee meeting, a detailed update is provided on
health and safety matters on both the managed portfolio and
the development pipeline. The Committee also meet with ORSA,
who were appointed as our corporate health and safety advisers
for all construction projects from January 2017. ORSA outlined
to the Committee the key health and safety risks at the major
construction sites, including 80 Charlotte Street, the Brunel Building
and Soho Place, and how these are being effectively managed.
The Committee’s meeting in August included a site tour of the
80 Charlotte Street development hosted by Executive Directors
and the site Project Manager. The tour enabled the Committee to
see first-hand the health and safety procedures in place to protect
workers, visitors and the local community.
Further information on health and safety matters can be found
on page 80 of the Responsibility report. Although the majority of
activities covered under the Responsibility report are under the
remit of the new Responsible Business Committee, health and
safety remains under the oversight of the Risk Committee.
Governance
Anti-bribery and corruption
We are committed to the highest standards of ethical conduct
and integrity in our business practices and adopt a zero-tolerance
approach to bribery and corruption. An overview of our policies
and procedures in this area is contained in the table below.
Corporate
hospitality
Business gifts
Hospitality &
Gift Returns
Political donations
Charitable
donations
Contractors
and suppliers
Supply Chain
Sustainability
Standard
Payments
Facilitation
payments
Conflicts of interest
Training
Whistleblowing
procedures
Hospitality must be reasonable in value,
appropriate to the occasion and provided
openly and transparently. It must not
compromise, nor appear to compromise,
the Group nor the business judgement of
our staff.
Generally, gifts should not be accepted
unless valued less than £50, are not cash or
a cash equivalent (e.g. gift certificate), are
appropriate to the circumstances and are
not given with the intention of compromising
or influencing the party to whom it is
being given.
All staff are required to complete quarterly
Hospitality & Gift Returns which document
all instances of third-party hospitality or gifts
(given or received) over that three-month
period if the value is in excess of £25 for
hospitality and £10 for gifts. The Hospitality
& Gift Returns are subject to review by the
Risk Committee.
The Company strictly prohibits any political
donations being made on its behalf.
Charitable donations are handled by the
Sponsorships and Donations Committee.
‘Know your client’ procedures are applied
to charitable organisations to ensure we
are dealing with a valid body acting in good
faith and with charitable objectives.
Our zero-tolerance approach is
communicated to all suppliers, contractors
and business partners. Due diligence
procedures determine if a third party has
previous convictions under the Bribery Act.
All contracts with suppliers or contractors
prohibit the payment of bribes or engaging
in any corrupt practice. The Company has
the right to terminate agreements in the
event a bribe is paid or other corrupt practice
undertaken.
Contains the minimum standards we expect
from our major suppliers (further information
in the adjacent table).
All payments made must be warranted,
transparent and proper. All payments must
be accurately recorded through the normal
accounting and financial procedures without
any deception or disguise as to the recipient’s
identity or the purpose of the payment in
question. No one approves their own expense
claim. All expense claims must be approved
by a Director or senior manager.
Facilitation payments are bribes and are
strictly prohibited.
All conflicts of interest or potential conflicts
of interest must be notified to the Company
Secretary and a register of such notifications
is maintained. The Corporate governance
statement on page 97 explains our process
for managing potential conflicts.
We provide our employees with guidance
notes and regular training on anti-bribery,
corruption, ethical standards and the
prevention of the facilitation of tax evasion.
A confidential helpline is available for
staff to report concerns anonymously.
Further information on page 108.
113
Summary of the Supply Chain Sustainability Standard
All suppliers with whom we spend more than £20,000 per annum
are required to comply with, and provide evidence of how,
they are implementing our Supply Chain Sustainability Standard
(the Standard), which includes a minimum requirement that any
form of corruption, bribery or anti-competitive behaviour or actions
are not tolerated within our supply chain.
A summary of the Standard is below. The complete Standard is
available to download on our website.
During 2018, we requested evidence that our major suppliers were
compliant with the Standard. The Executive Committee reviewed
responses and agreed any follow-up actions required. A further
audit of our suppliers is scheduled for 2020.
Aspect
Anti-bribery and
corruption
Employment
and labour
practices
Health and
safety
Community
Environmental
Payment
practices
Standards expected from our suppliers
• Operate an ethical business policy which sets
out how they govern their business and supply
chains.
• We will not tolerate any form of corruption,
bribery or anti-competitive behaviour in our
supply chain.
• Fair pay and working time practices which
ensure compliance with the National Minimum
Wage and the London Living Wage together
with working time legislation.
• No use of exclusive ‘zero hours’ contracts.
• No illegal, forced or child labour.
• Suppliers to have appropriate equality and
diversity polices to ensure the active promotion
of employment diversity.
• Adequate health and safety policies and
management systems appropriate to the
nature and scale of their business and service
provision.
• To comply with Derwent London’s health and
safety standards and procedures.
• Support us in the successful delivery of our
Community Strategy.
• Development contractors on our larger
schemes have to achieve a minimum target
score, currently 38) in the Considerate
Constructors Scheme, and to undertake at
least one community day every year during the
life of a project.
• Offer full and fair opportunity for local suppliers
to actively participate in our supply chains.
• Offer local employment and apprenticeship
opportunities.
• Suppliers are to have robust environmental
management policies and procedures in place.
• To comply with the Derwent London
Sustainability Framework for Developments
and/or Assets.
• We expect our main contractors to have a
certified environmental management system
(EMS) in place, accredited to ISO14001 or EMAS
(Eco-Management and Audit Scheme).
• Unless otherwise stated, we aim to pay our
suppliers within 30 days or otherwise will do
so in accordance with specified contract
conditions.
• We are signatories of the Prompt Payment
Code. Suppliers are required to adopt similar
payment practices throughout their supply
chains to ensure fair and prompt payment.
114
RISK COMMITTEE REPORT CONTINUED
Tenant covenant review
Due to the uncertain economic environment, with a number of
large retail businesses going into administration, the Committee
conducted a review of how Derwent London assesses and monitors
the financial strength of potential and existing tenants. The chart
below illustrates that Derwent London has limited exposure to retail
or restaurants within our portfolio.
At its meeting in November, the Committee received a detailed
overview from the Head of Asset & Property Management and the
Group Financial Controller on the workings of the credit committee
and how it decides whether potential and existing tenants are
financially sound to transact. The Committee was satisfied with the
extensive due diligence process undertaken by the credit committee.
Portfolio income
Percentage
Offices
Retail
Restaurant/Leisure
Other
87
9
3
1
Analysis of the ‘tenants at risk’ register
Tenants
In administration
or liquidation
In CVA
Rent concessions
Are ‘on watch’ due to
a poor payment record
1
4
2
5
465
Tenants of which only 12
are on the ‘at risk’ register
Failure to prevent the facilitation of tax evasion
The Company will not tolerate any facilitation of tax evasion by staff,
subcontractors or any other of its associates. To address these risks,
the Company has established procedures which are designed to
prevent its associated persons from deliberately and fraudulently
facilitating tax evasion.
All staff have attended compulsory training sessions on our policies
and procedures. The training was hosted by our Head of Tax,
David Westgate, and included practical examples of how facilitation
of fraudulent tax evasion could occur and guidance on how these
should be addressed.
Derwent London plc Report & Accounts 2018
General Data Protection Regulations (GDPR)
The GDPR, which came into force on 25 May 2018, require
a tougher approach to the handling and using of personal data.
Derwent London holds relatively limited personal data, relating
mainly to human resources, CCTV and private residential lettings.
The Company’s project plan for GDPR commenced well in advance
of 25 May 2018 with the establishment of a GDPR Steering Group
which met weekly, dedicated Data Protection Champions from each
department and compulsory training for all staff. The project to
ensure our compliance continued throughout 2018 and included:
GDPR Steering
Group
Guidance and
training
Contract
remediation
Policies,
documentation
and procedures
The GDPR Steering Group initially met weekly
(for 18 weeks) and now meets fortnightly.
Ongoing training and support to staff, including
compulsory induction training. The creation of
a dedicated GDPR intranet page. Short internal
video explaining the employee privacy notice.
Conducted risk assessments of all contracts
followed by thorough contract remediation for
those processing personal data.
All policies, procedures, guidance notes,
contracts of employment, offer letters and
consultancy agreements have been updated to
be GDPR compliant. New procedures created
for subject access requests and Data Protection
Impact Assessments (DPIAs). The removal of
historical data from our shared drives (soft
copies) and the destruction of printed documents
(hard copies) is an ongoing exercise.
Since 25 May 2018, all new projects or changes to processes
involving data processing are subject to DPIA screening assessments
to determine the level of risk. A total of 19 DPIAs have been
completed during the year.
The Committee and Board have been routinely updated on the
project’s progress and, to date, are satisfied that management
have undertaken all necessary steps to ensure the Group’s ongoing
compliance with GDPR. A gap analysis will be performed in 2019
to review our progress and identify areas for further improvement.
CCTV
Our CCTV system is intended to provide an increased level of
security for the benefit of those who work in or visit Derwent London
properties by acting as a deterrent against crime and protecting
our buildings and assets from damage, disruption and vandalism.
CCTV images are not released unless satisfactory evidence has
been obtained by us that the third party requesting the personal
data has a legal and justifiable need.
Since May 2018, we have received 14 access requests for CCTV
footage. Requests are authorised in accordance with our CCTV policy
and CCTV disclosure procedures. Prior to disclosing CCTV images,
we redact any third-party personal data and images (for example,
by blurring the images) before saving the images to disc and placing
them in a sealed evidence bag.
Privacy notice
Derwent London respects privacy and is committed to
protecting personal data. Our privacy notice, which sets out
how we use personal data, is available on our website here:
www.derwentlondon.com/texts/privacy-policy
We also have tailored privacy notices for employees, recruitment
candidates and tenants, which are available upon request from
the Company Secretary.
115
FULL BUSINESS CONTINUITY TEST
At 5pm on Friday 21 September, our disaster recovery procedures
were tested by staging a complete loss of power at our head office
building at 25 Savile Row. The test required the evacuation of the
building and the transfer of key systems and personnel to our
disaster recovery suite.
The migration was overseen by independent verifiers,
IT Governance Limited, who assessed our procedures and
efficiency.
The Committee was pleased to note that the test was successful
and well managed with no major issues identified and no
downtime reported. A number of minor suggestions were raised
by IT Governance Limited to further strengthen our robust
Business Continuity Plan (BCP) which included:
• using the disaster recovery tests as an exercise to raise
the awareness, competence and capability of the CMT;
• appoint an individual responsible for noting all actions
taken and logging time-delayed actions; and
• monitor the UPS load as systems migrate to the disaster
recovery suite.
The entire process from the loss of primary power, transfer to our
disaster recovery suite and roll back to Savile Row took 6 hours
and 45 minutes (a 3 hour and 20-minute improvement on our
last full test completed in October 2016).
Business continuity tests planned for 2019/2020
Test
Business
Continuity Plan
review
IT Component
test
Desktop review
IT disaster
recovery test
Full business
continuity test
Date
Q1 2019
Q1 2019
Q2 2019
Q3 2019
Q4 2020
Purpose
The CMT meet to review and update
the business continuity plan, review
current threat levels and agree on
any action points.
A technical test of the individual
components required to carry out a
failover of IT services to our disaster
recovery suite.
A desktop exercise which uses a series
of scenarios to rehearse decision
making and familiarise the CMT
members with their roles.
A technical test to carry out a full
IT systems failover from our offices
to the disaster recovery suite.
A full plan invocation exercise covering
one disaster scenario and testing all
contingency functions at the disaster
recovering suite. Representatives
from each department will confirm
all business-critical functions are
still available.
Governance
Business continuity and disaster recovery
Information and cyber security
To safeguard the security and privacy of information entrusted to us,
we have robust procedures in place. The procedures ensure that we:
• safeguard the security and privacy of our customers and
employees, to ensure that the business retains their trust
and confidence;
• protect the Group’s intellectual property rights, financial
interests and competitive edge;
• maintain our reputation and brand value; and
• comply with applicable legal and regulatory requirements.
Our cyber security procedures have been strengthened considerably
in recent years in response to the increasing threat this poses
to businesses, and it remains an area that we keep under
continuous review.
During 2018, we requested that Capgemini conduct a benchmarking
review of our cyber security procedures. In November, the Committee
reviewed the outcome of the audit and were pleased that Capgemini
had noted the improvements made since the prior audit. The
Committee agreed the responses and timeframes for implementing
the audit recommendations. Management will be required to provide
the Committee with a status update on the implementation of the
recommendations at the Committee’s August 2019 meeting.
The Committee reviews a dashboard of key risk indicators at each
meeting which includes information security and cyber-risk-related
KPIs. During 2018, there were 474 attempted attacks on our systems,
none of which resulted in a security breach and 99.9% of the
attempts were stopped before they reached the intended targets –
this highlights the robustness of our cyber security posture. Our IT
team tested the effectiveness of our ongoing security awareness
programme by sending fake phishing emails to staff and monitoring
their response. Any staff member who clicked on the links contained
in the test emails was provided with further training on the dangers.
All staff attend mandatory information security workshops each
year which focus on our policies and procedures, cyber and personal
security. Our Group intranet also includes a ‘tips and tricks’ section
for our staff with guidance on issues such as cyber security,
social media and general security awareness.
Disaster recovery procedures
Derwent London has formal procedures for use in the event of an
emergency that disrupts our normal business operations which
consist of:
• Business Continuity Plan (BCP): The BCP serves as the
centralised repository for the information, tasks and procedures
that would be necessary to facilitate Derwent London’s decision-
making process and its timely response to any disruption or
prolonged interruption to our normal activities. The aim of the
BCP is to enable the recovery of prioritised business operations
as soon as practicable.
• Crisis Management Team (CMT): The CMT is composed of key
personnel deemed necessary to assist with the recovery of the
business. The BCP empowers the CMT to make strategic and
effective decisions to support the recovery of the business until
we are able to return to normal working.
• Off-site disaster recovery suite: An off-site disaster recovery
suite is available in the event of an emergency, to provide IT and
data facilities to our staff who either work on site at the suite or
via our ‘agile’ working capabilities.
• Testing and review: The strength of our business continuity
and disaster recovery plans are regularly tested to ensure they
are continually refined and to reduce the potential for failure.
An overview of the disaster recovery tests due to take place
during 2019 are provided in the adjacent table.
116
REMUNERATION
COMMITTEE
REPORT
Claudia Arney
Chair of the Remuneration Committee
FOCUS AREAS IN 2019
• Remuneration Policy review and consultation with
major shareholders and proxy voting agencies
• Review the wider workforce arrangements
• Review incentive performance conditions
• Finalise the Committee’s policies in respect of post-
employment shareholdings and malus and clawback
Derwent London plc Report & Accounts 2018
ANNUAL STATEMENT
Dear Shareholder,
As chair of the Remuneration Committee and on behalf of the Board,
I am pleased to present our report on Directors’ remuneration
for 2018.
The Annual report on remuneration, describing how the Remuneration
Policy has been applied for the year ended 31 December 2018 and
how we intend to implement policy for 2019, is provided on pages 119
to 131.
Our Remuneration Policy was last approved by shareholders at the
2017 AGM and received 98.4% of votes cast in favour. Rather than
reproduce the policy in full, we have provided a summary on pages
121 to 122. A copy of the complete Remuneration Policy can be found
on our website at: www.derwentlondon.com/investors/governance/
board-committees
Pay and performance outcomes in 2018
We will continue to be transparent about how pay and performance
is reported at Derwent London and how decisions made by the
Committee support the strategic direction of the business.
Executive performance is closely aligned to business performance,
with a high proportion of total remuneration delivered through
variable pay designed to reward achievement of long-term strategic
targets. In a remuneration context this means rewarding
performance that reflects our strategic objectives (which are
disclosed on page 31).
The Group’s results for 2018 are outlined in the Strategic report.
Despite continuing uncertainty, the Group has achieved a total
property return of 6.0% and a total return of 5.3%. Both these
financial KPIs are used in assessing the level of performance-related
pay for the Executive Directors under the annual bonus.
To ensure that remuneration reflects a balanced performance,
a scorecard of additional metrics is taken into account by the
Committee when considering the strategic element of the Group’s
annual bonus scheme.
Taking into account performance against these financial KPIs and
strategic targets resulted in a bonus of 102.75% of base salary
being earned.
Performance share awards made to Executive Directors in 2016
under the Group’s Performance Share Scheme (PSP) will vest in April
2019. These awards were subject to two performance conditions
each over 50% of the award and both measured over the three-year
period from 1 January 2016 to 31 December 2018. The first element
was based on total shareholder return (TSR) performance compared
with that of a group of 12 real estate companies. The second part was
based on the Group’s total property return compared to properties
in the MSCI IPD Central London Offices Total Return Index.
The combined assessment of these two performance measures
concluded that 46.0% of the total award will vest.
The Committee considered whether it was appropriate to exercise
discretion but it believes that the outturn of both the annual bonus
and the PSP fairly represents the Group’s underlying financial and
share price performance and progress against strategic objectives
over their respective performance periods.
Further information about the levels of executive remuneration
earned in 2018, including details of performance against the relevant
targets, are given on pages 123 and 128.
117
Paul Williams’ remuneration as Chief Executive
Paul Williams will become Chief Executive from 17 May 2019 and
will receive a salary of £600,000 per annum. There are no other
changes proposed to Paul’s benefits, pension, bonus or LTIP package
(further information on Paul’s current remuneration package can be
found on page 121).
UK Corporate Governance Code
Following the publication of the 2018 UK Corporate Governance Code
in July, the Board and its Committees have spent considerable time
reviewing the new requirements. We already comply with the new
Code in a number of areas and will be considering our approach to
compliance in the remaining areas during 2019.
One area of immediate change, however, is that in the interest of
fairness, the Committee has agreed that pension provision for any
new Directors appointed to the Board from 2019 will be aligned to a
significant proportion of the wider workforce at 15% of base salary.
The Committee’s terms of reference have been updated to
reflect the recommendations of the Code and is available on the
corporate website.
The Committee welcomes all developments which aim to improve
transparency in governance which is why we have voluntarily
disclosed our CEO pay ratio on page 128.
Remuneration Policy review
The current Remuneration Policy was approved by shareholders at
the 2017 AGM and is now approaching the end of its three-year term.
During the coming year, the Committee will conduct a comprehensive
review of its remuneration arrangements to ensure it remains closely
aligned with the Company’s strategic aims, vision, attitude to risk and
culture, and will seek consultation with our major shareholders on
any proposed changes.
Ongoing and transparent dialogue with our shareholders is important
to us and informs the Committee’s thinking on remuneration
matters. I therefore encourage all of our shareholders to engage
with us during the review process.
Shareholder engagement
I look forward to receiving your support at our 2019 AGM on Friday
17 May, where I will be available to respond to any questions
shareholders may have on this report or in relation to any of the
Committee activities.
In the meantime, if you would like to discuss any aspect of our
Remuneration Policy, please feel free to contact me through David
Lawler, the Company Secretary, (telephone: +44 (0)20 7659 3000
or email: company.secretary@derwentlondon.com)
Claudia Arney
Chair of the Remuneration Committee
26 February 2019
Governance
Implementation in 2019
The Committee reviewed the performance and development of
our Executive Directors during the year and decided to increase
Executive Directors’ salaries by 3% from 1 January 2019.
This increase is in line with the general cost of living increases
across the Group. Annual bonus and long-term incentive plan (LTIP)
opportunities remain unchanged for 2019.
The Board reviewed the Non-Executive Director fees during
the year (without the Non-Executive Directors being present)
and decided to increase the base fee by £5,000 to £47,500 and the
Senior Independent Director fee by £4,500 to £10,000. The Board
considers this level of fees appropriate for a company of our size
and complexity. The last increase to Non-Executive Director fees
was with effect from 1 January 2015.
Management changes
Robert Rayne’s retirement
As announced on 23 November 2018, Robert Rayne will retire as
Chairman on 17 May 2019 and will be succeeded by John Burns,
the Group’s founder and current Chief Executive, for a period of two
years. There will be no payment for loss of office on Robert Rayne
ceasing to be a Director. Robert Rayne’s letter of appointment,
currently due to expire on 25 March 2019, will be extended to his
retirement date, 17 May 2019, with no changes made to its terms.
John Burns remuneration as Chairman from 17 May 2019
John Burns will remain Chief Executive until 17 May 2019,
when he will become Non-Executive Chairman. He will receive a
fee of £250,000 per annum as Non-Executive Chairman which the
Committee believes is an appropriate fee for a company of our size
and complexity. Robert Rayne’s current chairman fee has not been
increased since 2007 and is positioned towards the lower end of the
market for a company of our size.
John Burns will have access to a driver as well as secretarial support.
He will also receive a contribution to his office expenses of £50,000
per annum.
John Burns remuneration as Chief Executive to 17 May 2019
and treatment of outstanding incentives
Until he becomes Non-Executive Chairman on 17 May 2019,
John Burns will continue to receive his salary, benefits and pension
contribution in the role of Chief Executive. The table below provides
information on the treatment of his annual bonus and LTIP
arrangements.
Annual bonus:
PSP awards:
• Annual bonus for the year ended 31 December
2018 will be paid in March 2019 based on
performance against targets and is detailed
on page 125. The deferred element will be
released in accordance with the normal
timetable.
• Eligible to earn a pro rata bonus for the period
to 17 May 2019. This will remain subject to
performance for the year ending 31 December
2019 and any bonus earned up to 100% of
salary will be paid in March 2020 but any
portion earned above this level deferred
into shares.
John Burns will not be eligible to receive a
PSP grant in 2019 or thereafter. In respect of
his outstanding PSP awards, they will:
• Vest in accordance to their normal vesting
timetable subject to the achievement of the
relevant performance conditions;
• Be subject to the normal holding period of
two years; and
• Will be subject to a pro rata reduction for
the period 17 May 2019 to the end of the
performance period.
118
REMUNERATION
AT A GLANCE
To incentivise our employees to achieve
our strategy, we provide market
competitive remuneration which is both
transparent and aligned with our culture.
BOARD SUCCESSION
With effect from 17 May 2019, the Committee agreed:
• John Burns’ Non-Executive Chairman fee will be £250,000
per annum
• Paul Williams’ CEO base salary will be £600,000 per annum
• There will be no payments for loss of office for Robert Rayne
Derwent London plc Report & Accounts 2018
REMUNERATION POLICY REVIEW
The Committee will develop a post-employment shareholding
policy and review its malus and clawback provisions in 2019.
This will form part of the wider Remuneration Policy review.
Pension opportunity for any new Executive Directors joining the
Board from 2019 will be 15% of salary, in line with a significant
proportion of our workforce.
p. 100 More information
p. 117 More information
GROUP PERFORMANCE IN 2018
6.0%
Total property return
5.3%
Total return
90.4%
Staff satisfaction
20%
Reduction in like-for-like
carbon intensity
p. 40 Measuring our performance
p. 125 Strategic targets
HIGHLIGHTS
2018
28 : 1
CEO pay ratio
(CEO: Median employee pay)
68.5%
2018 annual bonus achievement
for the Executive Directors
46.0%
Estimate vesting of
LTIP awards in April 2019
£76.8k
Total remuneration of the median
employee (50th percentile)
100%
Percentage of the workforce
who received an annual bonus
72%
Percentage of the workforce granted
an Option in 2018 under the Employee
Share Option Plan
2019
+3.0%
Increase to Executive Directors’
base salaries
+3.7%
Average increase to our
employees’ base salaries
p. 128 CEO pay ratio
p. 125 2018 annual bonus
p. 120 Wider workforce pay
p. 121 Pay in 2019
Governance
ANNUAL REPORT ON REMUNERATION
This part of the Directors’ remuneration report explains how
we have implemented our Remuneration Policy during 2018.
The Remuneration Policy in place for the year was approved by
shareholders at the 2017 AGM. We have provided a summary of our
Remuneration Policy on pages 121 to 122. Our full Remuneration
Policy can be found on our website at: www.derwentlondon.com/
investors/governance/board-committees
This Annual report on remuneration will be subject to an advisory
vote at our 2019 AGM on 17 May 2019.
Role of the Remuneration Committee
The role of the Committee is to determine and recommend to
the Board the Remuneration Policy for Executive Directors, and
set the remuneration for the Chairman, Executive Directors and
senior management. In doing so, the Committee ensures that
the Remuneration Policy is aligned with the Company’s key
remuneration principles.
Attract, retain
and motivate
Simple and
transparent
Alignment
Risk
management
Stewardship
Fairness
Support an effective pay for performance
culture which enables the Company to
attract, retain and motivate Executive
Directors who have the skills and experience
necessary to deliver the Group’s objectives
and long-term strategy.
Ensure that remuneration arrangements are
simple and transparent to key stakeholders
and take account of remuneration and
related policies for the wider workforce.
Align remuneration with the Group’s
objectives and long-term strategy and reflect
our culture through a balanced mix of short
and long-term performance-related pay and
ensure that performance metrics remain
effectively aligned with strategy.
Promote long-term sustainable performance
through sufficiently stretching performance
targets, whilst ensuring that the incentive
framework does not encourage Executive
Directors to operate outside the Group’s risk
appetite (see page 112).
Promote long-term shareholdings by
Executive Directors that support alignment
with long-term shareholder interests.
Total remuneration should fairly reflect the
performance delivered by the Executive
Directors and the Group.
The terms of reference for the Committee can be found on the
Company’s website at: www.derwentlondon.com/investors/
governance/board-committees and were last updated in February
2019 to reflect the requirements of the 2018 UK Corporate
Governance Code.
119
Committee composition
None of the members who have served on the Committee during
the year had any personal interest in the matters decided by the
Committee and are all considered to be independent. The Company
Secretary acted as Secretary to the Committee.
Claudia Arney, Chair
Simon Fraser
Stephen Young
Helen Gordon
Independent
Yes
Yes
Yes
Yes
Number of
meetings
4
4
4
4
Attendance
100%
100%
100%
100%
Lucinda Bell will replace Stephen Young as a member of the
Committee from 17 May 2019. The Committee’s composition,
responsibilities and operation comply with the principles of good
governance (as set out in the UK Corporate Governance Code),
with the Listing Rules (of the FCA) and with the Companies Act 2006.
Advisers to the Committee
The Committee has authority to obtain the advice of external
independent remuneration consultants. New Bridge Street
(a trading name for Aon plc) had been retained as the Committee’s
principal consultants since 2002, with the last competitive tender
being conducted in 2012.
During 2018, the Committee completed a competitive tender for the
role of its principal consultants which included three independent
candidates. Following the completion of the tender, the Committee
unanimously appointed Deloitte as its independent remuneration
consultants with effect from 2 July 2018.
During the year under review, Deloitte also provided sustainability
and health and safety audit assurance consultancy, corporate tax
consultancy and employment tax consultancy services to the Group.
Prior to appointing Deloitte as its independent consultants, the
Committee took this work into account and due to the nature and
extent of the work performed, concluded that it did not impair
Deloitte’s ability to advise the Committee objectively and free
from influence. It is the view of the Committee that the Deloitte
engagement partner and team that provide remuneration advice to
the Committee do not have connections with Derwent London that
may impair their independence. The Committee therefore deem
Deloitte capable of providing appropriate, objective and independent
advice. Deloitte is one of the founding members of the Remuneration
Consulting Group. The Committee has been fully briefed on Deloitte’s
compliance with the voluntary code of conduct in respect of the
provision of remuneration consulting services.
For the period 2 July to 31 December 2018, Deloitte provided
independent assistance to the Committee on the setting of the Chief
Executive’s remuneration, the setting of the Chairman’s fees and
provided updates on market practice and governance (including the
requirements of the 2018 UK Corporate Governance Code). The fees
paid to Deloitte and New Bridge Street for their services during the
year, based on time and expenses, amounted to £30,500 and
£32,800 respectively.
120
Derwent London plc Report & Accounts 2018
REMUNERATION COMMITTEE REPORT CONTINUED
Shareholder voting and engagement
The Committee’s resolutions at the Company’s 2017 AGM in respect of the Remuneration Policy and the 2018 AGM in respect of the Annual
report on remuneration, new Sharesave Plan and revised Employee Share Option Plan, received the following votes from shareholders:
Votes cast in favour
Votes cast against
Votes withheld
Total votes cast (including withheld)
Annual report
on remuneration
99.7%
0.3%
0.7%
93.4m
0.2m
0.6m
94.2m
2018 AGM
Derwent London
Sharesave Plan
99.6%
0.4%
0.0%
93.8m
0.4m
0.0m
94.2m
Derwent London Employee
Share Option Plan
99.8%
0.2%
0.0%
94.1m
0.1m
0.0m
94.2m
2017 AGM
Remuneration
Policy
98.4%
1.6%
0.1%
82.7m
1.3m
0.1m
84.1m
The Committee was extremely pleased with the level of shareholder support at the 2018 AGM; further information on page 93.
The Committee encourages an open and constructive dialogue with shareholders and their representative bodies and will consult with major
shareholders on any material changes to the Remuneration Policy or to how it is implemented. We are aware that the executive remuneration
landscape is evolving and of the potential for change and will continue to monitor developments as they arise.
Wider workforce considerations
When making remuneration decisions for Executive Directors, the Committee considers pay policies and practices across the wider workforce.
Remuneration structure of our wider workforce
We value and appreciate our employees and aim to provide market competitive remuneration and benefit packages in order to continue to be
seen as an employer of choice. The remuneration structure for our wider workforce is similar to that of our Executive Directors and contains
both fixed and performance-based elements. Base salaries are reviewed annually and any increases become effective from 1 January.
The Committee is kept informed of salary increases to the wider workforce.
We enrol all of our employees into an annual discretionary bonus scheme. Our approach is to reward our employees on individual performance
and their contribution to the performance of the Group. In 2018, 100% of our workforce below Board level received an annual bonus
(2017: 98%).
All employees are eligible to participate in our non-contributory occupational pension scheme. We offer all employees who join our pension
scheme a complimentary annual meeting with an independent financial adviser to advise them on their investment options. In addition,
our employees are invited into a non-contractual healthcare cash plan which offers an affordable way to help with everyday healthcare costs.
Further information on our benefit package is available on page 79.
In order to align the interests of our employees and those of our shareholders, we operate an Employee Share Option Plan (ESOP).
All of our employees, excluding the Directors, are eligible to join the ESOP subject to performance. The ESOP grants options which are
exercisable after three years at a pre-agreed option price. In 2018, we granted 132,600 options to 72% of our workforce below the
Board and Executive Committee.
In addition, to encourage Group-wide share ownership, the Committee sought shareholder approval for a new HMRC approved Sharesave
Plan (SAYE) at the 2018 AGM. The first grant under the SAYE is planned for April 2019 and will be open to all permanent UK-based employees.
Relative importance of the spend on pay
In order to give shareholders an understanding of how total expenditure on remuneration (for all employees) compares to certain core financial
dispersals of the Company, the table below demonstrates the relative importance of the Company’s spend on employee pay for the period
2017 to 2018.
£m
Staff costs
Distributions to shareholders
Net asset value attributable to equity shareholders
2018
24.2
152.2
4,202
2017
19.9
120.1
4,128
% change
21.6%
26.7%
1.8%
Outside appointments for Executive Directors
Executive Directors may accept a non-executive role at another company with the approval of the Board. The Executive Director is entitled
to retain any fees paid for these services. During 2018, our Executive Directors did not receive fees for their external appointments.
Further information on our Executive Directors’ external appointments is provided on pages 88 to 89.
Payments to past Directors and for loss of office
No payments were made to past Directors or in respect of loss of office during 2018.
Governance
121
Summary of Remuneration Policy
We have provided a summary of the key elements of the Remuneration Policy for Executive Directors and Non-Executive Directors approved
by shareholders at the 2017 AGM on pages 121 to 122. In addition, we have set out how the Remuneration Policy will be implemented in 2019.
Our full Remuneration Policy can be found on our website at: www.derwentlondon.com/investors/governance/board-committees
Maximum opportunity
No maximum but
increases will normally be
consistent with the policy
applied to the workforce
generally (in percentage
of salary terms).
Determined by the cost
of providing the benefits.
Car benefit is limited to
£50,000 per annum.
Maximum contribution or
cash supplement (or a mix
of both) of 20% of salary.
Legacy arrangements
mean that for some
Directors total
contributions/allowances
are 21% of salary.
Maximum opportunity of
up to 150% of salary may
be awarded in respect of
a financial year.
Maximum opportunity of
up to 200% of salary may
be awarded in respect of
a financial year.
Element
Base
salary
How operated
Normally reviewed annually.
Factors taken into account include:
• The role, experience and performance
of the individual and the Company.
• Economic conditions.
• Increases throughout the rest of the
• Practice in companies with similar
business.
business characteristics.
Benefits
Include, but are not limited to, private
medical insurance, car and fuel allowance
and life insurance.
Pension
Executive Directors participate in the
Company’s defined contribution pension
scheme or may receive a cash payment
in lieu.
Annual
bonus
Long-term
incentives
Share
ownership
guidelines
Bonuses up to 100% of salary are paid as
cash. Amounts in excess of 100% of salary
are deferred into shares of which 50% are
released after 12 months and the balance
after 24 months subject to continued
employment.
Dividend equivalents may accrue on
deferred shares.
Malus and clawback provisions apply
(see the table on page 122).
The Committee has discretion to adjust
the payment outcome if it is not deemed
to reflect appropriately the underlying
business performance of the Company
over the performance period.
Award of performance shares which vest
after three years subject to performance
metrics. The Committee has discretion
to adjust the vesting outcome if it is not
deemed to reflect appropriately the
underlying business performance of the
Company over the performance period.
A further holding period of two years is
required on the after-tax vested shares.
Dividend equivalents may accrue
on performance shares during the
vesting period.
Malus and clawback provisions apply
(see the table on page 122).
Executive Directors are expected to build
up a shareholding in the Company equal to
200% of salary.
Executive Directors are required to retain at
least the after-tax number of any deferred
bonus share awards or performance shares
vesting until the guideline is met.
Implementation for 2019
With effect from 1 January 2019, Executive Directors
salaries were increased by 3% which is consistent with
the increase received across the wider workforce.
Executive Director
John Burns
Simon Silver
Other Executive Directors
Notes:
(i) Other Directors are Damian Wisniewski, Paul Williams, Nigel George
2019 salary
(£’000)
677
581
442
2018 salary
(£’000)
657
564
429
and David Silverman.
(ii) With effect from 17 May 2019, Paul Williams will be appointed as
Chief Executive. His salary from this date will be £600,000 per annum.
(iii) Paul Williams’ salary has been positioned towards the lower end of
market for a company of our size, and below that of John Burns’
current salary. This reflects the fact that Paul is stepping up into the
role of Chief Executive. The Committee will keep the level of Paul’s
salary under review and may in the future make increases at rates
above the wider workforce average to move his salary closer to a
market competitive level reflecting his increase in experience as
Chief Executive, and taking into account his performance in the role.
Benefits will continue to include a fully expensed car
or car allowance, private medical insurance and life
assurance.
No change for current Executive Directors.
For any new Executive Directors appointed to the Board,
pension allowance will be limited to a maximum of 15%
of salary which is in line with the pension opportunity
received across a significant proportion of the wider
workforce.
Performance metrics and weightings (as a percentage
of maximum opportunity):
• financial targets (75%); and
• strategic objectives (25%).
The financial targets, weightings and amounts vesting for
threshold and maximum performance are structured the
same as in 2018 (see page 125). The real estate companies
contained in the total return comparator group will be
disclosed in next year’s Directors’ Remuneration Report.
The strategic objectives, weightings and target ranges are
broadly the same as those set in 2018 (see note (ii) on
page 125).
Paul Williams’ LTIP award for 2019 will be based on his
pro rata salary for 2019 to reflect his step up to Chief
Executive. An initial award will be made in March at the
same time as other Executive Directors at 200% of his
current salary with the remaining portion of the award
being made around August after he has been appointed
as Chief Executive to reflect his new salary.
Performance metrics, weightings and amounts vesting for
threshold and maximum performance are structured the
same as in 2018 (see page 126).
As at 26 February 2019, all of our Executive Directors have
achieved the share ownership guideline (see page 130).
122
Derwent London plc Report & Accounts 2018
REMUNERATION COMMITTEE REPORT CONTINUED
Malus and clawback
Malus and clawback provisions apply to annual bonus, deferred bonus and performance shares over the following time periods:
Annual bonus
Deferred bonus
Performance shares (LTIP)
Malus
To such time as payment is made.
To such time as the award vests.
To such time as the award vests.
Clawback
Up to two years following payment.
Up to two years following award.
Up to two years following vesting.
Malus and clawback may apply in the following circumstances:
1. Material misstatement of financial results.
2. An error in assessing performance conditions which has led to an overpayment.
3. Dismissal due to gross misconduct.
During 2019, as part of the Committee’s review of the Remuneration Policy, consideration will be given to the circumstances in which malus
and clawback may be applied to ensure they continue to be appropriate and in the context of the developing guidance.
Summary table for the Chairman and Non-Executive Directors
Chairman
Non-Executive
Directors
Operation
The remuneration of the Chairman is set by the Board
(excluding the Chairman).
The Chairman receives a consolidated fee and benefits
limited to a Company car and driver, secretarial provision
and office costs.
The Chairman does not receive pension or participate in
incentive arrangements.
The remuneration for Non-Executive Directors is set by the
Executive Directors.
Non-Executive Directors receive a base fee plus additional
fees for Committee membership, Committee chairmanship
and for the Senior Independent Director.
Non-Executive Directors do not receive a pension or
participate in incentive arrangements.
Implementation for 2019
Robert Rayne will continue to receive a Chairman’s fee of
£150,000 per annum until his retirement from the Board on
17 May 2019.
With effect from 17 May 2019, John Burns will take over the
role of Chairman. His Chairman fee from this date will be
£250,000 per annum.
With effect from 1 January 2019, the base fee for
Non-Executive Directors was increased by £5,000 and the
Senior Independent Director fee by £4,500. There are no
other fee changes. The last increase made to Non-Executive
Director fees was with effect from 1 January 2015.
Non-Executive Director fees
Base fee
Committee chair
Senior Independent Director
Committee membership fee
2019
(£’000)
47.5
7.5
10.0
4.0
A Committee chair receives a Committee membership fee in
addition to the Committee chair fee.
Service contracts
As part of his appointment as Chief Executive, Paul Williams entered into a new service contract dated 22 November 2018 which comes into
effect on 17 May 2019. All other Executive Directors’ service contracts are dated 16 May 2014 and are terminable either by the Company
providing 12 months’ notice or by the executive providing six months’ notice.
The Non-Executive Directors listed below do not have service contracts but are appointed for three-year terms which expire as follows:
Non-Executive Director
Robert Rayne(i)
Stephen Young(ii)
Simon Fraser
Richard Dakin
Claudia Arney
Cilla Snowball
Helen Gordon
Lucinda Bell(iii)
Notes:
(i) Robert Rayne’s letter of appointment will be extended to 17 May 2019.
(ii) Stephen Young will step down from the Board on 17 May 2019.
(iii) Lucinda Bell’s appointment commenced on 1 January 2019.
(iv) John Burns’ letter of appointment in respect of the role of Non-Executive Chairman (effective from 17 May 2019) will expire in May 2021 (see page 100).
Date of latest appointment letter
25 March 2016
2 February 2017
8 August 2018
2 February 2017
8 August 2018
8 August 2018
8 November 2017
8 August 2018
Expiry date
25 March 2019
31 July 2019
1 September 2021
31 July 2019
31 May 2021
31 August 2021
1 January 2021
1 January 2022
Governance
123
Total remuneration in 2018
The table below sets out the remuneration paid to each Director for the financial years ended 31 December 2018 and 31 December 2017
as a single figure. A full breakdown of fixed pay and pay for performance in 2018 can be found on pages 124 to 127.
Executive Directors
(£000)
2018
John Burns
Simon Silver
Damian Wisniewski
Nigel George
Paul Williams
David Silverman
2017
John Burns
Simon Silver
Damian Wisniewski
Nigel George
Paul Williams
David Silverman
Non-Executive Directors
Fixed pay
Salary
Taxable
benefits
Pension and
life assurance
Pay for Performance
Bonus
Performance
Subtotal
Cash
Deferred
LTIPs(i)(ii)
Subtotal
Total
remuneration
£’000
657
564
429
429
429
429
638
547
417
417
417
417
71
55
24
26
24
21
70
53
23
24
23
21
155
149
93
96
98
95
150
146
93
95
97
94
883
768
546
551
551
545
858
746
533
536
537
532
657
564
429
429
429
429
513
440
335
335
335
335
18
16
12
12
12
12
–
–
–
–
–
–
601
515
383
383
383
383
310
266
198
198
198
198
1,276
1,095
824
824
824
824
823
706
533
533
533
533
2,159
1,863
1,370
1,375
1,375
1,369
1,681
1,452
1,066
1,069
1,070
1,065
Year ended 31 December 2018
Year ended 31 December 2017
Taxable
benefits
46
–
–
–
–
–
–
(£000)
Robert Rayne(iii)
Stephen Young
Simon Fraser
Richard Dakin
Claudia Arney
Cilla Snowball
Helen Gordon(iv)
Notes:
(i) Performance LTIPs for 2018 relate to the 2016 PSP awards which will vest on 4 April 2019 and for which the performance conditions related to the year ended 31 December 2018.
The value is based on an estimate of expected vesting of 46.0% and the average share price over the last three months of the financial year ended 31 December 2018 of £29.23.
This amount includes the value of additional shares awarded in respect of dividend equivalents.
Total
195
62
68
62
58
51
–
Total
196
62
68
62
58
51
47
Fees
150
62
68
62
58
51
47
Fees
150
62
68
62
58
51
–
(ii) In the 2017 Annual Report, the potential value of vesting PSP awards for 2017 was calculated using the average share price for the three months ended 31 December 2017,
being £27.95. The 2017 Performance LTIP figures in the table above, have been restated to reflect the actual number of PSP awards which vested on 3 April 2018 (inclusive of
dividend equivalents) using the share price on the day of vesting (being, £30.78). The restated value provides a difference of £2.83 per vested share in comparison to the
estimates contained in the 2017 Annual Report on page 120. Further details of vesting and dividend equivalents is provided on page 126.
The PSP 2015 awards which vested on 3 April 2018 were granted on 30 March 2015 when the share price was £34.65. Between grant and the vesting date, the share price had
depreciated to £30.78 which equated to a reduction in value of each vesting share equivalent to £3.87. The Remuneration Committee did not exercise discretion in respect of the
share price deprecation.
(iii) In addition to his fee as Chairman, Robert Rayne’s letter of appointment provides for a car and fuel allowance which are included in the table above. In order to undertake his
duties, Robert Rayne is also provided with a driver and secretary, together with a contribution to his office running costs.
(iv) Helen Gordon was appointed to the Board on 1 January 2018.
Taxable
benefits
45
–
–
–
–
–
–
124
Derwent London plc Report & Accounts 2018
REMUNERATION COMMITTEE REPORT CONTINUED
Executive Directors’ remuneration in 2018
Remuneration for Executive Directors comprises the following elements:
Fixed pay
Variable pay
Base salary + Benefits + Pension
+
Annual bonus + Long-term incentive
=
Total remuneration
Performance-based
Fixed pay in 2018
Base salary
Salaries for the Executive Directors were increased by 3.0% with effect from 1 January 2018, which was in line with the cost of living increase
awarded to the wider workforce (see page 127).
Executive Director
John Burns
Simon Silver
Other Executive Directors(i)
Note:
(i) Other Directors are Damian Wisniewski, Paul Williams, Nigel George and David Silverman.
2018 base salary
£657,200
£564,000
£429,000
2017 base salary
£638,000
£547,500
£416,500
Benefits
Executive Directors are entitled to a car and fuel allowance and private medical insurance. Further details of the taxable benefits paid in 2018
can be found in the table below.
Executive Director
John Burns
Simon Silver
Damian Wisniewski
Nigel George
Paul Williams
David Silverman
Car and fuel allowance
£48,276
£38,786
£16,000
£18,428
£16,000
£16,000
Private medical insurance
£22,890
£16,482
£7,610
£7,116
£7,813
£5,648
Total 2018 taxable benefits
£71,166
£55,268
£23,610
£25,544
£23,813
£21,648
Pension and life assurance
In addition to life assurance, Directors receive a pension contribution or cash supplement (or a mix of both) of up to 20% of salary.
Legacy arrangements for some Directors mean that a fixed amount is paid in addition to the 20% contribution, which results in a maximum
pension contribution of up to 21% of salary.
There has been no change in the pension contributions or life assurance received by the Executive Directors in 2018. The change in the annual
cost of these benefits is due to increases in life assurance premiums.
Governance
125
Pay for performance
Determination of 2018 annual bonus outcome
The performance measures set for the year under review were a combination of financial-based metrics (worth 75% of the bonus potential)
and strategic targets (worth 25% of the bonus potential). The maximum bonus potential for Executive Directors is 150% of salary. Based on
actual 2018 performance, the annual bonus payment for Executive Directors is 68.5% of the maximum potential (2017: 53.6%; 2016: 23.3%).
This has been derived as follows:
Financial based metrics
Performance measure
Total return
Weighting % of bonus
37.5
Total property return (TPR)
37.5
Basis of calculation
Total return versus other major real
estate companies(i)
Versus the MSCI IPD Central
London Offices Total Return Index
Threshold(ii)
Maximum(iii)
%
0.8
5.3
%
6.2
8.3
Actual
%
5.3
Payable
%
33.0
6.0
14.6
Total bonus payable for financial based metrics
Notes:
(i) The major real estate companies contained in the comparator group for the 2018 annual bonus are: Big Yellow Group plc, The British Land Company plc, Capital & Regional plc,
47.6%
Capital & Counties Properties plc, Great Portland Estates plc, Hammerson plc, Intu Properties plc, Landsec plc, St Modwen Properties plc, Segro plc, Shaftesbury plc,
Workspace Group plc.
(ii) For achieving the threshold performance target, i.e. at the MSCI IPD Index or median total return against our sector peers, 22.5% of the maximum bonus opportunity will become
payable.
(iii) Total return pay-out accrues on a straight-line basis between the threshold level for median performance and maximum payment for upper quartile performance or better.
For TPR, the pay-out accrues on a straight-line basis between the threshold level for index performance and maximum payment for index +3.0%.
Strategic targets
Performance measure(ii)
Void management
This is measured by the Group’s average EPRA vacancy rate over
the year.
Tenant retention
This is measured by the percentage of tenants that remain in their
space when their lease expires.
Portfolio development potential
This is measured by the percentage of the Group’s portfolio by area,
where a potential development scheme has been identified.
Unexpired lease term
This is measured by the ‘topped-up’ weighted average unexpired
lease term of the Group’s portfolio, including pre-let developments.
Sustainability
This is assessed by the Group’s achievements against the BREEAM
benchmark at its new developments or major refurbishments.
Carbon intensity
This is measured by emissions intensity per m2 of landlord-
controlled floor area across our managed like-for-like portfolio.
Staff satisfaction
Staff surveys are used to assess this measure.
Target
range(i)
8% to 1%
Maximum
award
5.0%
2018
achievement
1.8%
Proportion
awarded for 2018
4.4%
50% to 75%
5.0%
76%
5.0%
37% to 47%
2.5%
41%
1.0%
5 to 10 years
2.5%
8.2 years
1.6%
New build – Excellent
Major refurbishment
– Very good
-2% to -4%
2.5% All sustainability
targets have
been achieved
-20%
2.5%
2.5%
2.5%
75% to >95%
of staff to be
satisfied or better
5.0%
90.4%
3.9%
25%
20.9%
Notes:
(i) Pay-out accrues on a straight-line basis, between threshold and maximum performance.
(ii) The strategic targets for the 2019 annual bonus will be broadly the same as those above except for the following changes: (1) The following target ranges have been amended
to be better aligned with our priorities for 2019: void management of 7% to 2%, portfolio development potential of 35% to 45% and staff satisfaction of 80% to 95%; (2) Void
management will be worth 7.5% of the bonus potential and unexpired lease term will be worth 5%; and (3) To reduce and simplify the number of strategic targets, tenant
retention has been removed for 2019.
The Committee also considered the underlying financial performance of the Group during 2019, taking into account performance against key
financial indicators including profits, NAV and share price performance. The Committee concluded the proposed pay-out outcome of 68.5%
of maximum to be appropriate. The total bonus for each executive is therefore:
Executive Director
John Burns
Simon Silver
Other Executive Directors(i)
Note:
(i) Other Directors are Damian Wisniewski, Paul Williams, Nigel George and David Silverman, whose base salary and subsequently, annual bonus pay-out will be identical.
£’000
18
16
12
Bonus payable
% of
maximum
68.5
68.5
68.5
% of
salary
102.75
102.75
102.75
Cash bonus
payable
£’000
657
564
429
Deferred bonus
% of
salary
2.75
2.75
2.75
In accordance with our Remuneration Policy, bonuses of up to 100% of base salary are paid as cash. Amounts in excess of 100% are deferred
into shares of which 50% are released after 12 months and the balance after 24 months.
126
Derwent London plc Report & Accounts 2018
REMUNERATION COMMITTEE REPORT CONTINUED
Performance Share Plan (PSP) Vesting of awards
As shown in the table below, the PSP awards granted in 2016 will vest on 4 April 2019 at 46.0%.
Performance measure
Total property return (TPR)
Weighting %
of award
50
Total shareholder return (TSR) 50
Basis of calculation
MSCI IPD Central London
Offices Total Return Index
TSR of major real estate
companies(i)
Three quarter
Threshold(ii)
vesting(iii)
Maximum(iii)
%
4.2
(17.3)
%
6.7
n/a
%
9.2
2.9
Actual
%
5.6
(13.2)
% vesting/
estimated
vesting
26.0
20.0
46.0
Notes:
(i) The major real estate companies contained in the comparator group for determining our TSR performance are: Big Yellow Group plc, The British Land Company plc,
Capital & Regional plc, Capital & Counties Properties plc, Great Portland Estates plc, Hammerson plc, Intu Properties plc, Landsec plc, St Modwen Properties plc, Segro plc,
Shaftesbury plc, Workspace Group plc.
(ii) For achieving the threshold performance target, i.e. at the MSCI IPD Index or median TSR against our sector peers, 22.5% of the maximum award will vest.
(iii) For TSR (which is calculated based on a three month weekday average Return Index excluding UK public holidays ended on: (1) the day before the performance period start date;
and (2) the performance period end date) pay-out accrues on a straight-line basis between the threshold level for median performance and maximum payment for upper
quartile performance or better. For TPR, the pay-out accrues on a straight-line basis between the threshold level for index performance, three quarter vesting for index +2.5%
and maximum pay-out for index +5.0%.
The Committee considered the underlying financial performance of the Group during the performance period, taking into account
performance against key financial indicators including profits, NAV and share price performance. The Committee concluded the proposed
vesting outcome of 46.0% of maximum to be appropriate.
Therefore, the vesting for each executive will be:
Executive Director
John Burns
Simon Silver
Other Executive Directors(ii)
Notes:
(i) In accordance with the PSP rules, the Remuneration Committee has discretion to allow PSP participants to receive the benefit of any dividends paid on vesting shares between
Dividend equivalents(i)
(number of shares)
1,824
1,565
1,161
Total estimate value
of award on vesting
£600,560
£515,325
£382,592
Total number
of shares vesting
20,546
17,630
13,089
Number of
awards granted
40,700
34,925
25,930
Number of shares
vesting based on
performance (46.0%)
18,722
16,065
11,928
the grant date and the vesting date in the form of additional vesting shares.
(ii) Other Directors are Damian Wisniewski, Paul Williams, Nigel George and David Silverman, who were granted identical number of awards under the PSP grant in 2016.
The value of the vesting awards is based on the average share price over the last three months of the financial year ended 31 December 2018
being £29.23. The estimated value of the vesting awards has been included within the ‘single figure’ total remuneration table on page 123.
The Company’s share price depreciated by £2.82 between the grant date (4 April 2016) and the end of the performance period (31 December
2018) from £31.35 to £28.53. None of the estimated value of the vesting awards detailed in the table above is attributable to share price
appreciation. It should be noted that as at 26 February 2019, the Company’s share price rose to c.£32.50 (which exceeds the share price at
grant by c.3%). The Remuneration Committee will not exercise discretion in respect of share price fluctuations since grant.
Holding period
In accordance with the PSP rules, vested awards are subject to a two-year holding period whereby at least the after-tax number of vested
shares must be retained by the executive for a minimum of two years from the point of vesting, i.e. until April 2021. An overview of the holding
periods for awards granted since 2015 has been provided below.
Grant
2015 Grant
Grant date
30 March 2015
2016 Grant
4 April 2016
2017 Grant
20 March 2017
2018 Grant
6 March 2018
Performance period
1 January 2015 to
31 December 2017
1 January 2016 to
31 December 2018
1 January 2017 to
31 December 2019
1 January 2018 to
31 December 2020
Vesting date
3 April 2018
Holding period
Two years
Holding period ceases
3 April 2020
4 April 2019
Two years
4 April 2021
20 March 2020
Two years
20 March 2022
8 March 2021
Two years
8 March 2023
Governance
127
Grant of LTIP awards
On 6 March 2018, the Committee made an award under the Group’s 2014 PSP to Executive Directors on the following basis:
John Burns
Simon Silver
Other Executive Directors(i)
Note:
(i) Other Directors are Damian Wisniewski, Paul Williams, Nigel George and David Silverman, who were granted identical number of awards under the PSP grant in 2018.
Number
of shares
awarded
44,586
38,263
29,104
Face value
of award
£
1,314,395
1,127,993
857,986
Awards were granted as nil-cost options and equivalent to 200% of base salary, with 22.5% of the award vesting at threshold performance.
The share price used to determine the level of the award was the closing share price on the day immediately preceding the grant date of £29.48.
The performance periods will run over three financial years and, dependent upon the achievement of the performance conditions, the awards
will vest on 6 March 2021 and will be subject to a two-year holding period as outlined above.
50% of the award vests according to the Group’s relative TSR performance versus the constituents of the FTSE 350 Super Sector Real Estate
Index with the following vesting profile:
TSR performance of the Company relative to the TSR of the constituents of the FTSE 350 Super Sector Real Estate Index tested over three years
Below Median
Median
Upper quartile and above
Straight-line vesting occurs between these points
Vesting
(% of TSR
part of award)
0%
22.5%
100%
50% of the award vests according to the Group’s TPR versus the MSCI IPD UK All Property Total Return Index with the following vesting profile:
Annualised TPR versus the MSCI IPD Quarterly UK All Property Index tested over three years
Below Index
At Index
Index + 3%
Straight-line vesting occurs between these points
Vesting
(% of TSR
part of award)
0%
22.5%
100%
The Committee has discretion to reduce the extent of vesting in the event that it considers that performance against either measure is
inconsistent with underlying financial performance. At least the after-tax number of vested shares must be retained for a minimum holding
period of two years. To the extent that awards vest, the Committee has discretion to allow the Executive Directors to receive the benefit of any
dividends paid over the vesting period in the form of additional vesting shares.
Managing shareholder dilution
The table below sets out the available dilution capacity for the Company’s employee share plans based on the limits set out in the rules of
those plans that relate to issuing new shares.
Total issued share capital as at 31 December 2018
Investment Association share limits (in any consecutive 10-year period):
Current dilution for all share plans
Headroom relative to 10% limit
5% for executive plans – current dilution for discretionary (executive) plans
Headroom relative to 5% limit
2018
111.5m
2.3%
7.7%
1.5%
3.5%
Percentage increase in the remuneration of the Chief Executive
The table below shows the movement in the salary, benefits and annual bonus for the Chief Executive between the current and previous
financial year compared to that for an average employee (excluding Directors).
£’000
Chief Executive
Salary
Benefits
Bonus
Average employee
Salary
Benefits
Bonus
Note:
(i) There has been no reduction in the type of benefits received by the workforce. The 2018 cost reduction is due to negotiating better terms on our insurance benefits.
638.0
220.1
513.0
657.2
225.6
675.3
75.3
14.2
27.7
72.6
14.4
27.0
2018
2017
% change
3.0%
2.5%
31.6%
3.7%
(1.3)%
2.6%
128
Derwent London plc Report & Accounts 2018
REMUNERATION COMMITTEE REPORT CONTINUED
Chief Executive pay for performance comparison
The graph below shows the value on 31 December 2018 of £100 invested in Derwent London on 31 December 2008 compared to that of £100
invested in the FTSE 350 Super Sector Real Estate Index. The other points plotted are the values at intervening financial year ends. This index
has been chosen by the Committee as it is considered the most appropriate benchmark against which to assess the relative performance of
the Company for this purpose.
Total shareholder return
£
700
600
500
400
300
200
100
0
577.8
464.1
424.9
491.1
495.6
211.9
237.2
207.9
235.2
213.7
371.6
175.0
319.2
223.1
229.6
181.4
108.6
31 Dec
2009
100.0
100.0
31 Dec
2008
119.5
31 Dec
2010
110.8
145.0
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
31 Dec
2015
31 Dec
2016
31 Dec
2017
31 Dec
2018
Derwent London
FTSE United Kingdom 350 Super Sector Real Estate Index
Source: Datastream (Thomson Reuters)
Note: The TSR chart data is based on the 30-day average over the period 2 December to 31 December for each year.
Remuneration of the Chief Executive
Financial year ending
Total remuneration (single figure)
(£000)
Annual bonus (% of maximum)
Long-term variable pay
(% of maximum)
31/12/2009
1,384
31/12/2010
2,304
31/12/2011
2,387
31/12/2012
2,721
31/12/2013
2,478
31/12/2014
2,648
31/12/2015
2,529
31/12/2016
1,403
31/12/2017
1,681
31/12/2018
2,159
62.5
47.6
87.5
50.0
90.0
50.0
85.4
83.8
95.0
55.2
92.6
50.0
74.2
65.7
23.3
24.9
53.6
26.5
68.5
46.0
Chief Executive pay ratio
As Derwent London has less than 250 employees, we are not required to disclose the CEO pay ratio. However, given our commitment to
high standards of transparency and corporate governance, the Committee considers it appropriate to disclose the CEO pay ratio voluntarily.
For the year ended 31 December 2018, the Chief Executive’s total remuneration as a ratio against the full-time equivalent remuneration
of UK employees is detailed in the table below:
25th percentile
50th percentile
75th percentile
Base salary
£45,057
£59,250
£75,000
Total remuneration
£58,237
£76,842
£148,867
CEO pay ratio
37 : 1
28 : 1
15 : 1
The Company has calculated the ratio in line with the reporting regulations using ‘Method A’ (determine total full-time equivalent remuneration
for all UK employees for the relevant financial year; rank the data and identify employees whose remuneration places them at the 25th,
50th and 75th percentile). The following should be noted:
(i) Chief Executive remuneration is the ‘single figure’ for the year ended 31 December 2018 contained on page 123.
(ii) The workforce comparison is based on the payroll data for the period 1 January 2018 to 31 December 2018 for all employees
(including the Chief Executive but excluding the Non-Executive Directors).
(iii) The workforce comparison includes employer pension contributions, life assurance and the healthcare cash plan.
(iv) The CEO pay ratio has been rounded to the nearest whole number.
The Board have confirmed that the ratio is consistent with the Company’s wider policies on employee pay, reward and progression.
Governance
SCHEDULES TO THE ANNUAL REPORT ON REMUNERATION
(unaudited unless otherwise indicated)
Directors’ interests (audited)
Directors’ interests in shares
Details of the Directors’ interests in shares are provided in the table below.
129
Number at 31 December 2018
Number at 31 December 2017
Beneficially
held
Deferred
shares
Conditional
shares
Total
Beneficially
held
Deferred
shares
Conditional
shares
Total
–
–
–
–
–
–
–
1,124
964
716
716
716
716
4,952
132,536
113,738
85,884
85,884
85,884
85,884
589,810
656,287
178,617
29,983
54,568
50,510
26,219
996,184
661,497
183,087
33,181
58,145
53,708
29,796
1,019,414
794,033
296,825
119,065
144,029
139,592
115,680
1,609,224
Executive
John Burns
Simon Silver
Damian Wisniewski
Nigel George
Paul Williams
David Silverman
Total
Non-Executive
Robert Rayne
Stephen Young
Simon Fraser
Richard Dakin
Claudia Arney
Cilla Snowball
Helen Gordon
Total
Notes:
(i) John Burns acquired and immediately sold 1,124 shares under the Company’s deferred bonus scheme when they were released from the 2016 deferral on 23 March 2018.
These shares were sold at an average price of £30.26 per share. A dividend equivalent cash payment totalling £1,757 was paid to John based on these released shares.
John acquired 9,473 shares from the PSP 2015 grant which vested on 3 April 2018. To satisfy the tax liability arising, John sold 4,263 shares immediately upon vesting at an
average share price of £30.78 per share. A dividend equivalent cash payment totalling £18,910 was paid to John based on these vesting shares.
4,120,093
1,000
2,000
–
2,500
–
892
4,126,485
4,120,093
1,000
2,000
–
2,500
–
892
4,126,485
4,127,125
1,000
2,000
–
2,500
–
–
4,132,625
123,700
106,150
79,550
79,550
79,550
79,550
548,050
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,127,125
1,000
2,000
–
2,500
–
–
4,132,625
781,111
285,731
110,249
134,834
130,776
106,485
1,549,186
(ii) Simon Silver acquired and immediately sold 964 shares under the Company’s deferred bonus scheme when they were released from the 2016 deferral on 23 March 2018.
These shares were sold at an average price of £30.26 per share. A dividend equivalent cash payment totalling £1,484 was paid to Simon based on these released shares.
Simon acquired 8,128 shares from the PSP 2015 grant which vested on 3 April 2018. To satisfy the tax liability arising, Simon sold 3,658 shares immediately upon vesting at an
average share price of £30.78 per share. A dividend equivalent cash payment totalling £16,213 was paid to Simon based on these vesting shares. On 20 April and 12 September
2018, Simon transferred 8,250 and 3,925 shares, respectively, from his executive nominee account to his self-invested personal pension. There was no change in the number
of shares beneficially held by Simon and he remains interested in the 8,250 and 3,925 shares that were the subject of the transfers.
(iii) Damian Wisniewski and Paul Williams each acquired and immediately sold 716 shares under the Company’s deferred bonus scheme when they were released from the 2016
deferral on 23 March 2018. These shares were sold at an average price of £30.26 per share. Damian and Paul both received a dividend equivalent cash payment totalling £1,060
on these released shares. Damian and Paul each acquired 6,034 shares from the PSP 2015 grant which vested on 3 April 2018. To satisfy the tax liability arising, they each sold
2,836 shares immediately upon vesting at an average share price of £30.78 per share. Damian and Paul both received a dividend equivalent cash payment totalling £12,028 on
these vesting shares.
(iv) Nigel George and David Silverman each acquired 716 shares under the Company’s deferred bonus scheme when they were released from the 2016 deferral on 23 March 2018.
To satisfy the tax liability arising, Nigel and David both sold 337 shares immediately upon their release at an average share price of £30.26 per share. Nigel and David both
received a dividend equivalent cash payment totalling £1,060 on these released shares. Nigel and David each acquired 6,034 shares from the PSP 2015 grant which vested
on 3 April 2018. To satisfy the tax liability arising, they each sold 2,836 shares immediately upon vesting at an average share price of £30.78 per share. Nigel and David both
received a dividend equivalent cash payment totalling £12,028 on these vesting shares.
(v) On 29 June 2018, Robbie Rayne donated 7,032 shares to BMR Charitable Trust for nil consideration.
(vi) On 1 March 2018, Helen Gordon acquired 858 shares at an average price of £28.98. During 2018, Helen reinvested her dividend to purchase an additional 34 shares.
130
Derwent London plc Report & Accounts 2018
REMUNERATION COMMITTEE REPORT CONTINUED
Directors’ shareholding guideline
The shareholding guideline in place for the year ended 31 December 2018 requires all Executive Directors to work towards holding shares in
Derwent London plc equivalent to 200% of base salary. All Executive Committee members granted PSP awards are required to work towards
holding shares in Derwent London plc equivalent to 50% of base salary. There is no shareholding guideline for Non-Executive Directors.
Executive Director
John Burns
Simon Silver
Damian Wisniewski
Nigel George
Paul Williams
David Silverman
Beneficially
held shares
661,497
183,087
33,181
58,145
53,708
29,796
2018
salary
£ 657,200
£ 564,000
£ 429,000
£ 429,000
£ 429,000
£ 429,000
Shareholding guideline (%)
Target
200%
200%
200%
200%
200%
200%
Achieved
3022%
975%
232%
407%
376%
209%
The value of the Executive Directors’ beneficially held shares has been calculated using the average closing share price during the year ended
31 December 2018 of £30.02.
The share ownership guidelines for Executive Directors and Executive Committee members requires them to retain at least half of any
deferred bonus shares or performance shares which vest (net of tax) until the guideline is met. Only wholly-owned shares will count towards
the guideline.
Due to the relatively large shareholdings of our Executive Directors, a small change in our share price would have a material impact on their
wealth. For example, a 5% drop in our share price would result in a loss of value for our Chief Executive, John Burns, equivalent to
approximately 150% of his base salary.
Long-term incentive plans (audited)
Deferred Bonus Plan
Details of the deferred bonus shares held by the Directors are set out in the table below:
At Grant
During the year
Market price
at date of
Grant (£)
31.21
31.21
31.21
31.21
31.21
31.21
Deferred
(number)
Executive Director
Date of Grant
John Burns
23/03/2016
Simon Silver
23/03/2016
Damian Wisniewski 23/03/2016
Nigel George
23/03/2016
Paul Williams
23/03/2016
David Silverman
23/03/2016
Total
Notes:
(i) The bonus deferred on 23 March 2016 was released in two tranches; 50% of the award was released 12 months after deferral (on 28 March 2017) and the remaining balance was
released after 24 months (on 23 March 2018). The bonus released in March 2018 has been valued using the average sale price on the release date and is inclusive of a dividend
equivalents payment made in cash (see note ii for further details).
Release
date
36 23/03/2018
31 23/03/2018
23 23/03/2018
23 23/03/2018
23 23/03/2018
23 23/03/2018
Released
(number)
1,124
964
716
716
716
716
4,952
159
–
Market price
at date of
release (£)
30.26
30.26
30.26
30.26
30.26
30.26
31 December
2018
(number)
–
–
–
–
–
–
–
01 January
2018
(number)
1,124
964
716
716
716
716
4,952
Original
Grant
(number)
2,249
1,929
1,432
1,432
1,432
1,432
9,906
Value at
release
£000
(ii) In accordance with the rules which govern the Deferred Bonus Plan, the Remuneration Committee has discretion to allow participants to receive a payment upon the release of
their awards, which is equivalent to the value of any dividends paid on those shares between the grant date and the release date. For the 2016 deferral, this dividend equivalent
payment was made in cash and equated to dividends paid between March 2016 and March 2018. The dividend equivalent payment has been included in the table above,
within the value of the released shares, and equates to £1,757 for John Burns, £1,484 for Simon Silver and £1,060 for the other Executive Directors.
(iii) As the 2017 annual bonus did not reach 100% of base salary, there was no bonus deferral during 2018.
(iv) The 2018 annual bonus in excess of 100% of salary, will be deferred in March 2019 and will be released in two tranches; 50% of the award will be released 12 months after
deferral (in March 2020) and the remaining balance after 24 months (in March 2021).
Governance
131
Performance Share Plan (PSP)
The outstanding PSP awards held by Directors are set out in the table below:
At Grant
During the year
Executive Director
Date of Grant
Market price
at date of
Grant (£)
01 January
2018
31 December
2018
Market price
at date of
vesting (£)
Value vested
(inclusive of
dividend
equivalents)
£000
Earliest
vesting date
John Burns
Simon Silver
30/03/2015
01/04/2016
20/03/2017
06/03/2018
30/03/2015
01/04/2016
20/03/2017
06/03/2018
Damian Wisniewski 30/03/2015
01/04/2016
20/03/2017
06/03/2018
Nigel George
Paul Williams
David Silverman
Other employees
30/03/2015
01/04/2016
20/03/2017
06/03/2018
30/03/2015
01/04/2016
20/03/2017
06/03/2018
30/03/2015
01/04/2016
20/03/2017
06/03/2018
30/03/2015
30/05/2015
02/04/2016
21/03/2017
06/03/2018
34.65
31.35
27.00
29.48
34.65
31.35
27.00
29.48
34.65
31.35
27.00
29.48
34.65
31.35
27.00
29.48
34.65
31.35
27.00
29.48
34.65
31.35
27.00
29.48
34.65
31.35
31.35
27.00
29.48
(number)
35,750
40,700
47,250
–
123,700
30,675
34,925
40,550
–
106,150
22,770
25,930
30,850
–
79,550
22,770
25,930
30,850
–
79,550
22,770
25,930
30,850
–
79,550
22,770
25,930
30,850
–
79,550
10,280
20,510
28,270
42,640
–
101,700
649,750
Granted
(number)
–
–
–
44,586
44,586
–
–
–
38,263
38,263
–
–
–
29,104
29,104
–
–
–
29,104
29,104
–
–
–
29,104
29,104
–
–
–
29,104
29,104
–
–
–
–
42,484
42,484
241,749
Vested
(number)
9,473
–
–
–
9,473
8,128
–
–
–
8,128
6,034
–
–
–
6,034
6,034
–
–
–
6,034
6,034
–
–
–
6,034
6,034
–
–
–
6,034
2,351
4,112
–
–
–
6,463
48,200
Lapsed
(number)
26,277
–
–
–
26,277
22,547
–
–
–
22,547
16,736
–
–
–
16,736
16,736
–
–
–
16,736
16,736
–
–
–
16,736
16,736
–
–
–
16,736
7,929
16,398
–
–
–
24,327
140,095
(number)
–
40,700
47,250
44,586
132,536
–
34,925
40,550
38,263
113,738
–
25,930
30,850
29,104
85,884
–
25,930
30,850
29,104
85,884
–
25,930
30,850
29,104
85,884
–
25,930
30,850
29,104
85,884
–
–
28,270
42,640
42,484
113,394
703,204
31.00
31.00
31.00
31.00
31.00
31.00
31.59
30.50
313 30/03/2018
04/04/2019
20/03/2020
06/03/2021
268 30/03/2018
04/04/2019
20/03/2020
06/03/2021
199 30/03/2018
04/04/2019
20/03/2020
06/03/2021
199 30/03/2018
04/04/2019
20/03/2020
06/03/2021
199 30/03/2018
04/04/2019
20/03/2020
06/03/2021
199 30/03/2018
04/04/2019
20/03/2020
06/03/2021
79 30/03/2018
137 22/05/2018
04/04/2019
20/03/2020
06/03/2021
Total
Notes:
(i) The PSP award granted on 30 March 2015 vested on 3 April 2018 at a vesting level of 26.5%. The value of the vesting awards was based on the middle market share price on the
1,593
vesting date and is inclusive of a dividend equivalents payment made in cash (see note ii for further details).
(ii) In accordance with the PSP rules, the Remuneration Committee has discretion to allow PSP participants to receive a payment upon the vesting of their awards, which is
equivalent to the value of any dividends paid on those shares between the grant date and the vesting date. For the 2015 PSP grant, this dividend equivalent payment was made
in cash and equated to dividends paid between March 2015 and March 2018. The dividend equivalent payment has been included in the table above, within the value of the
vesting awards, and equates to £18,910 for John Burns, £16,213 for Simon Silver and £12,028 for the other Executive Directors.
(iii) The PSP award granted on 6 March 2018 will vest on 6 March 2021. The performance targets attached to this award are detailed on page 127.
Weighted average exercise price of PSP awards
Weighted average remaining contracted life of PSP awards
31/12/2018
–
1.22 years
31/12/2017
–
1.24 years
01/01/2017
–
1.31 years
At each year end, none of the outstanding awards were exercisable. The weighted average exercise price of awards that either vested or lapsed
in 2018 was £nil (2017: £nil). The weighted average market price of awards vesting in 2018 was £30.78 (2017: £27.73).
132
Directors’
Report
David Lawler
Company Secretary
The Directors’ report for the financial year ended 31 December
2018 is set out on pages 132 to 135. Additional information which
is incorporated into this Directors’ report by reference, including
information required in accordance with the Companies Act 2006
and Listing Rule 9.8.4R of the Financial Conduct Authority’s
Listing Rules, can be located on the following pages:
p. 01
Future business developments
(throughout the strategic report)
p. 121 Long-term incentive schemes
p. 18 Stakeholder engagement
p. 135
Significant agreements
p. 44
Viability statement
p. 154
Interest capitalised
p. 83 Governance
p. 170 Financial instruments
p. 102 Diversity
p. 178 Financial risk management
p. 109
Internal control
p. 179
Credit, market and
liquidity risks
p. 111 Risk management
p. 189 Related party disclosure
Derwent London plc Report & Accounts 2018
The Directors present their Annual Report and audited financial
statements for the year ended 31 December 2018.
This Annual Report contains certain forward-looking statements.
By their nature, any statements about the future outlook involve
risk and uncertainty because they relate to events and depend
on circumstances that may or may not occur in the future. Actual
results, performance or outcomes may differ materially from any
results, performance or outcomes expressed or implied by such
forward-looking statements. Each forward-looking statement
speaks only as of the date of that particular statement.
No representation or warranty is given in relation to any forward-
looking statements made by Derwent London, including as to their
completeness or accuracy. Nothing in this report and accounts
should be construed as a profit forecast.
Both the Strategic report and the Directors’ report have been drawn
up and presented in accordance with and in reliance upon applicable
English company law, and the liabilities of the Directors in connection
with that report shall be subject to the limitations and restrictions
provided by such law.
Corporate governance arrangements
During the year ended 31 December 2018, we have applied the
principles and complied with the provisions of good governance
contained in the UK Corporate Governance Code 2016 (the ‘2016
Code’). Further details on how we have applied the 2016 Code can be
found in the Governance section on pages 83 to 135. From 1 January
2019, we will adopt the new UK Corporate Governance Code 2018
(the ‘2018 Code’). Both the 2016 Code and the 2018 Code can be
found in the Corporate Governance section of the Financial Reporting
Council’s website: www.frc.org.uk
Company status and branches
Derwent London plc is a Real Estate Investment Trust (REIT) and the
holding company of the Derwent London group of companies which
includes no branches. It is listed on the London Stock Exchange main
market with a premium listing.
Results and dividends
The financial statements set out the results of the Group for the
financial year ended 31 December 2018 and are shown on page 145.
The Directors recommend a final dividend of 46.75 pence per
ordinary share for the year ended 31 December 2018. When taken
together with the interim dividend of 19.10 pence per ordinary share
paid in October 2018, this results in a total dividend for the year of
65.85 pence (2017: 59.73 pence) per ordinary share. Subject to
approval by shareholders of the recommended final dividend,
the dividend to shareholders for 2018 will total £74m. If approved,
the Company will pay the final dividend on 7 June 2019 to
shareholders on the register of members at 3 May 2019.
PID and non-PID dividends
As a REIT, Derwent London must distribute at least 90% of
the Group’s income profits from its tax-exempt property rental
business by way of a dividend, which is known as a Property Income
Distribution (PID). These distributions can be subject to withholding
tax at 20%. Dividends from profits of the Group’s taxable residual
business are non-PID and will be taxed as an ordinary dividend.
Governance
133
Substantial shareholders
Table 1 shows the holdings in the Company’s issued share capital which had been notified to the Company pursuant to the Financial Conduct
Authority’s Disclosure Guidance and Transparency Rules. The information below was correct at the date of notification. It should be noted that
these holdings may have changed since the Company was notified. However, notification of any change is not required until the next notifiable
threshold is crossed.
Table 1
Invesco Limited
BlackRock Investment Management (UK) Ltd
Norges Bank
Stichting PGGM Depositary
Ameriprise Financial Inc
(Columbia Threadneedle)
Lady Jane Rayne
Direct/indirect
Indirect
Indirect
Direct
Direct
Indirect
31 December 2018
Number of shares
(m)
14.3
6.0
5.6
5.6
4.8
Direct
3.6
Direct/indirect
Indirect
Indirect
Direct
Direct
Indirect
26 February 2019
Number of shares
(m)
14.3
6.0
5.6
7.4
4.8
Direct
3.6
%
12.84
5.39
5.01
5.01
4.75
3.56
%
12.84
5.39
5.01
6.65
4.75
3.56
Employees
The Board recognises the importance of attracting, developing and
retaining the right people. In accordance with best practice, we have
employment policies in place which provide equal opportunities for
all employees, irrespective of sex, race, colour, disability, sexual
orientation, religious beliefs or marital status.
During the year under review, Cilla Snowball was designated the
Director responsible for gathering the views of the workforce.
Further information on the Board’s methods for engaging with
the workforce are on page 18 and 92.
Directors
The Directors of the Company who were in office during the year,
and up to the date of the signing of the financial statements, are
set out on pages 88 and 89. Each Director served throughout the
financial year ended 31 December 2018, save for Lucinda Bell who
was appointed to the Board with effect from 1 January 2019.
The Board shall consist of no fewer than two Directors and not more
than 15. Shareholders may vary the minimum and/or maximum
number of Directors by passing an ordinary resolution.
Copies of the Executive Directors’ service contracts are available
to shareholders for inspection at the Company’s registered office
and at the Annual General Meeting (AGM). Details of the Directors’
remuneration and service contracts and their interests in the
shares of the Company are set out on pages 116 to 131.
Powers of the Directors
Subject to the Company’s Articles of Association, the Companies
Act and any directions given by special resolution, the business of
the Company will be managed by the Board who may exercise all
the powers of the Company, whether relating to the management
of the business of the Company or not. In particular, the Board
may exercise all the powers of the Company to borrow money,
to guarantee, to indemnify, to mortgage or charge any of its
undertakings, property, assets (present and future) and uncalled
capital and to issue debentures and other securities and to give
security for any debt, liability or obligation of the Company or of
any third party.
Directors’ training and development
Details of the training that has been provided to the executive and
Non-Executive Directors during the year can be found on page 97.
Share capital
As at 26 February 2019, the Company’s issued share capital
comprised a single class of 5p ordinary shares and equalled an
amount of £5,576,996 divided into 111,539,937 ordinary shares.
The market price of the 5p ordinary shares at 31 December 2018 was
£28.53 (2017: £31.18). During the year, they traded in a range between
£27.40 and £32.41 (2017: £24.28 and £31.20).
Details of the ordinary share capital and shares issued during the
year can be found in note 27 to the financial statements.
Appointment and replacement of Directors
Directors may be appointed by ordinary resolution of the
shareholders, or by the Board. Appointment of a Director from
outside the Group is on the recommendation of the Nominations
Committee, whilst internal promotion is a matter decided by the
Board unless it is considered appropriate for a recommendation
to be requested from the Nominations Committee.
Rights and restrictions attaching to shares
Subject to the Articles of Association, the Companies Act and other
shareholders’ rights, shares in the Company may be issued with
such rights and restrictions as the shareholders may by ordinary
resolution decide, or if there is no such resolution, as the Board may
decide provided it does not conflict with any resolution passed by
the shareholders.
At every AGM of the Company, any of the Directors who have been
appointed by the Board since the last AGM shall seek election by the
members. Notwithstanding provisions in the Company’s Articles of
Association, the Board has agreed, in accordance with the 2016 Code
and in line with previous years, that all of the Directors wishing to
continue will retire and, being eligible, offer themselves for
re-election by the shareholders at the 2019 AGM.
Directors’ indemnity
Directors’ and officers’ liability insurance is maintained by the
Company.
These rights and restrictions will apply to the relevant shares as if
they were set out in the Articles of Association. Subject to the Articles
of Association, the Companies Act and other shareholders’ rights,
unissued shares are at the disposal of the Board.
134
DIRECTORS’ REPORT CONTINUED
Derwent London plc Report & Accounts 2018
Variation of rights
The rights attached to any class of shares can be amended if approved, either by 75% of shareholders holding the issued shares in that class
by amount, or by special resolution passed at a separate meeting of the holders of the relevant class of shares.
Every member and every duly appointed proxy present at a general meeting or class meeting has, upon a show of hands, one vote and every
member present in person or by proxy has, upon a poll, one vote for every share held by him or her. No person holds securities in the Company
carrying special rights with regard to control of the Company.
Derwent London shares held by the Group
During the year under review, the Group held 4,952 Derwent London shares in order to deliver the deferred bonus shares to the Directors and
other senior executives when the deferral period expired (see page 130). Movements on the holding of these shares are detailed below.
Number of 5p ordinary
shares
Percentage of issued share
capital
Price (£)
Year ended 31 December 2018
Year ended 31 December 2017
As at
1 January
2018
4,952
Acquired
–
Disposed
4,952
As at
31 December
2018
–
0%
As at
1 January
2017
25,040
Acquired
–
Disposed
20,088
As at
31 December
2017
4,952
0%
30.27
26.73
Restrictions on transfer of securities in the Company
There are no specific restrictions on the transfer of securities in
the Company, which is governed by its Articles of Association and
prevailing legislation. The Company is not aware of any agreements
between shareholders that may result in restrictions on the transfer
of securities.
Powers in relation to the Company issuing or buying back
its own shares
At the 2018 AGM, shareholders authorised the Company to allot
relevant securities,
(i) up to a nominal amount of £1,857,728; and
(ii) up to a nominal amount of £3,716,013, after deducting
from such limit any relevant securities allotted under (i),
in connection with an offer by way of a rights issue.
This authority is renewable annually. An ordinary resolution will
be proposed at the 2019 AGM to grant a similar authority to allot:
(i) up to a nominal amount of £1,860,601 (being one-third
of the issued share capital of the Company); and
(ii) up to a nominal amount of £3,721,759 (after deducting
from such limit any relevant securities allotted under (i)),
in connection with an offer by way of a rights issue
(being two-thirds of the issued share capital).
At the 2019 AGM, similar to previous years, authority will be sought
via a special resolution to enable the Directors to allot securities and/
or sell any treasury shares for cash on a non-pre-emptive basis up to
a nominal amount of £279,118 (representing 5% of the issued share
capital). In addition, authority will be sought via a special resolution
to enable the Directors to allot securities and/or sell treasury shares
for cash on a non-pre-emptive basis for the purposes of financing
(or refinancing, if the authority is to be used within six months after
the original transaction) an acquisition or other capital investment.
The allotment of equity securities or sale of treasury shares under
such authority will also be limited to a nominal amount of £279,118
(representing a further 5% of the issued share capital).
A further special resolution will be proposed to renew the Directors’
authority to repurchase the Company’s ordinary shares in the
market. The authority will be limited to a maximum of 11,164,720
ordinary shares and the resolution sets the minimum and maximum
prices which may be paid. The Directors will only purchase the
Company’s shares in the market if they believe it is in the best
interests of shareholders generally.
Voting
Shareholders will be entitled to vote at a general meeting whether
on a show of hands or a poll, as provided in the Companies Act.
Where a proxy is given discretion as to how to vote on a show of hands
this will be treated as an instruction by the relevant shareholder to
vote in the way in which the proxy decides to exercise that discretion.
This is subject to any special rights or restrictions as to voting which
are given to any shares or upon which any shares may be held at the
relevant time and to the Articles of Association.
If more than one joint holder votes (including voting by proxy), the only
vote which will count is the vote of the person whose name is listed
first on the register for the share.
Restrictions on voting
Unless the Directors decide otherwise, a shareholder cannot attend
or vote shares at any general meeting of the Company or upon a poll
or exercise any other right conferred by membership in relation to
general meetings or polls if he has not paid all amounts relating to
those shares which are due at the time of the meeting, or if he has
been served with a restriction notice (as defined in the Articles of
Association) after failure to provide the Company with information
concerning interests in those shares required to be provided under
the Companies Act.
The Company is not aware of any agreements between shareholders
that may result in restrictions on voting rights.
135
Greenhouse gas emissions
Due to our commitment to transparent and best practice reporting,
we have included our streamlined energy and carbon reporting
(SECR) disclosures on page 76 of the Responsibility report alongside
our annual GHG (greenhouse gas) emissions footprint and an
intensity ratio appropriate for our business, which fulfil the
requirements of the Companies Act 2006 (Strategic and Directors’
Report) Regulations 2013.
For further analysis and detail on our GHG emissions, please see
our Annual Sustainability Report, which can be found at:
www.derwentlondon.com/sustainability
Going concern
Under Provision C.1.3 of the 2016 Code, the Board is required to
report whether the business is a going concern. In considering this
requirement, the Directors have taken into account the following:
• the Group’s latest rolling forecast for the next two years,
in particular the cash flows, borrowings and undrawn facilities.
Sensitivity analysis is included within these forecasts;
• the headroom under the Group’s financial covenants; and
• the risks included on the Group’s risk register that could impact
on the Group’s liquidity and solvency over the next 12 months.
Having due regard to these matters and after making appropriate
enquiries, the Directors have a reasonable expectation that the Group
and Company have adequate resources to continue in operational
existence until at least February 2020. Therefore, the Board continues
to adopt the going concern basis in preparing the financial statements.
Annual General Meeting (AGM)
The 35th AGM of Derwent London plc will be held at The Westbury
hotel, 37 Conduit Street, London W1S 2YF on 17 May 2019 at
10.30 am. At the request of a shareholder, the 2019 AGM will include
a presentation on our business from the Executive Directors.
The Notice of Meeting together with explanatory notes is contained
in the circular to shareholders that accompanies the report
and accounts.
The Strategic report and Directors’ report have been approved
by the Board of Directors and signed on its behalf by:
David Lawler
Company Secretary
26 February 2019
Governance
Significant agreements
There are no agreements between the Company and its Directors
or employees providing for compensation for loss of office or
employment that occurs because of a takeover bid, except that,
under the rules of the Group’s share-based remuneration schemes
some awards may vest following a change of control.
Some of the Group’s banking arrangements are terminable upon
a change of control of the Company.
As a REIT, a tax charge may be levied on the Company if it makes a
distribution to another Company which is beneficially entitled to 10%
or more of the shares or dividends in the Company or controls 10% or
more of the voting rights in the Company, (a substantial shareholder),
unless the Company has taken reasonable steps to avoid such a
distribution being made. The Company’s Articles of Association give
the Directors power to take such steps, including the power to:
• identify a substantial shareholder;
• withhold the payment of dividends to a substantial shareholder;
• require the disposal of shares forming part of a substantial
and
shareholding.
There is no person with whom the Group has a contractual or other
arrangement which is essential to the business of the Company.
Amendment of Articles of Association
Unless expressly specified to the contrary in the Articles of
Association of the Company, the Company’s Articles of Association
may be amended by a special resolution of the Company’s
shareholders.
Fixed assets
The Group’s portfolio was professionally revalued at 31 December
2018, resulting in a surplus of £100.2m, before accounting
adjustments of £16.3m. The portfolio is included in the Group
balance sheet at a carrying value of £5,112m. Further details are
given in note 16 of the financial statements.
Post-balance sheet events
Details of post-balance sheet events are given in note 35 of the
financial statements.
Political donations
There were no political donations during 2018 (2017: nil).
Auditors
PricewaterhouseCoopers LLP, which was appointed in 2014 following
a competitive tender process, has expressed its willingness to
continue in office as the Group’s Auditor and, accordingly, resolutions
to reappoint it and to authorise the Directors to determine its
remuneration will be proposed at the AGM. These are resolutions
16 and 17 set out in the Notice of Meeting.
The Directors who held office at the date of approval of this Directors’
report confirm that, so far as they are each aware, there is no
relevant audit information of which the Company’s Auditor is
unaware and that each Director has taken all the steps that they
ought to have taken as a Director to make themselves aware of any
relevant audit information and ensure that the Auditor is aware of
such information.
136
Derwent London plc Report & Accounts 2018
THE BUCKLEY BUILDING EC1This 85,100 sq ft refurbishment was completed in 2013. It has proved highly successful and helped revitalise the Clerkenwell office market and the local economy attracting new occupiers to the area. During 2018 we conducted our first rent review on 20,800 sq ft, ahead of ERV, which saw passing rents rise by over 10%. 137
Financial statements
FINANCIAL
STATEMENTS
Statement of Directors’ responsibilities ...........................138
Independent Auditor’s report .............................................139
Group income statement ....................................................145
Group statement of comprehensive income ....................146
Balance sheets ..................................................................... 147
Statements of changes in equity .......................................148
Cash flow statements ..........................................................149
Notes to the financial statements .....................................150
Other information
Ten-year summary ...............................................................200
EPRA summary .....................................................................201
Principal properties .............................................................203
List of definitions ..................................................................205
Communication with our shareholders .............................208
Awards & recognition ............................................................IBC
138
Statement of Directors’
responsibilities
Derwent London plc Report & Accounts 2018
The Directors consider that the annual report and accounts,
taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess
the Group’s position, performance, business model and strategy.
Each of the Directors, whose names and functions are listed on
pages 88 and 89, confirm that to the best of their knowledge:
• The Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit and
loss of the Group; and
• The Strategic Report includes a fair review of the development
and performance of the business and the position of the Group,
together with a description of the principal risks and
uncertainties that it faces.
The financial statements on pages 145 to 199 were approved
by the Board of Directors and signed on its behalf by:
John Burns
Chief Executive
Damian Wisniewski
Finance Director
26 February 2019
The Directors are responsible for preparing the annual report,
the report of the Remuneration Committee and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have prepared
the Group and Company financial statements in accordance with
International Financial Reporting Standards (IFRS) as adopted by the
EU. Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and of the
profit or loss of the Group for that period. In preparing these financial
statements, the Directors are required to:
• select suitable accounting policies and then apply them
• make judgements and accounting estimates that are reasonable
consistently;
and prudent;
• state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and the Group and enable
them to ensure that the financial statements and the report of the
Remuneration Committee comply with the Companies Act 2006 and,
as regards the Group financial statements, Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets of
the Company and the Group and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the Company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Financial statements
Independent auditor’s report
TO THE MEMBERS OF DERWENT LONDON PLC
139
Materiality
Audit scope
Key audit
matters
Our audit approach
Overview
Materiality
• Overall group materiality:
£53.2 million (2017: £50.1 million),
based on 1% of total assets.
• Specific group materiality:
£4.0 million (2017: £4.0 million)
applied to property and other
income, administrative expenses,
provisions and working capital
balances.
• Overall company materiality:
£41.5 million (2017: £34.2 million),
based on 2% of total assets.
Scope
• We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the geographic
structure of the group, the accounting processes and controls,
and the industry in which the Group operates.
• The Group’s properties are spread across 28 statutory entities
with the Group financial statements being a consolidation of
these entities, the Company and the Group’s joint ventures.
Each statutory entity which owned a property was identified
as requiring an audit of its complete financial information,
either due to size, risk characteristics or statutory requirements.
This work, all of which was carried out by the Group audit team,
together with additional procedures performed on the
consolidation, gave us sufficient appropriate audit evidence
for our opinion on the Group financial statements as a whole.
Key audit matters
• Valuation of investment properties (Group).
• Compliance with REIT guidelines (Group).
• Accounting for borrowings and derivatives (Group and parent).
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
Report on the audit of the financial statements
Opinion
In our opinion, Derwent London plc’s group financial statements
and company financial statements (the “financial statements”):
• give a true and fair view of the state of the group’s and of the
company’s affairs as at 31 December 2018 and of the group’s
profit and the group’s and the company’s cash flows for the year
then ended;
• have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the
European Union and, as regards the company’s financial
statements, as applied in accordance with the provisions
of the Companies Act 2006; and
• have been prepared in accordance with the requirements of
the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Report
and Accounts (the “Annual Report”), which comprise: the Balance
sheets as at 31 December 2018; the Group income statement and
Group statement of comprehensive income, the Cash flow
statements, and the Statements of changes in equity for the year
then ended; and the notes to the financial statements, which include
a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities
for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard,
as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements.
To the best of our knowledge and belief, we declare that non-audit
services prohibited by the FRC’s Ethical Standard were not provided
to the group or the company.
Other than those disclosed in note 10 to the financial statements,
we have provided no non-audit services to the group or the company
in the period from 1 January 2018 to 31 December 2018.
140
Derwent London plc Report & Accounts 2018
INDEPENDENT AUDITOR’S REPORT CONTINUED
We gained an understanding of the legal and regulatory framework
applicable to the group and the industry in which it operates,
and considered the risk of acts by the group which were contrary
to applicable laws and regulations, including fraud. Based on our
understanding of the group/industry, we identified that the principal
risks of non-compliance with laws and regulations related to
non-compliance with health and safety or environmental and
sustainability legislation and breaches of the Real Estate Investment
Trust (REIT) status section 1158 of the Corporation Tax Act 2010
(see page 105 of the Annual Report). We designed audit procedures
at group and significant component level to respond to the risk,
recognising that the risk of not detecting a material misstatement
due to fraud is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through collusion.
We focused on laws and regulations that could give rise to a material
misstatement in the group and company financial statements,
including, but not limited to the Companies Act 2006, the Listing
Rules, Pensions legislation, and UK tax legislation. We evaluated
management’s incentives and opportunities for fraudulent
manipulation of the financial statements (including the risk of
override of controls), and determined that the principal risks were
related to posting inappropriate journal entries to increase revenue
or reduce expenditure, and management bias in accounting
estimates and judgemental areas of the financial statements
such as the valuation of investment properties. Our tests included,
but were not limited to:
• Discussion with management, including the Company Secretary,
including consideration of known or suspected instances
of non-compliance with laws and regulation and fraud;
• Evaluation of management’s controls designed to prevent
and detect irregularities;
• Review of the financial statement disclosures to underlying
supporting documentation;
• Assessment of matters reported on the group’s whistleblowing
helpline and the results of management’s investigation of such
matters where relevant;
• Obtaining confirmation of matters discussed with legal
advisors directly from the relevant advisors;
• Review of tax compliance with the involvement of our tax
specialists in the audit;
• Procedures relating to the valuation of investment properties
described in the related key audit matter below;
• Reviewing relevant meeting minutes, including those of the
Risk Committee and the Audit Committee; and
• Identifying and testing journal entries, in particular any journal
entries posted with unusual account combinations or posted
by senior management.
There are inherent limitations in the audit procedures described
above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the
financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities,
including fraud. As in all of our audits we also addressed the risk of
management override of internal controls, including testing journals
and evaluating whether there was evidence of bias by the directors
that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or
not due to fraud) identified by the auditors, including those which
had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement
team. These matters, and any comments we make on the results of
our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Financial statements
Key audit matter
Valuation of investment properties
Group
Refer to page 105 (Report of the Audit Committee), pages 162 to 165
(Notes to the financial statements - Note 16) and page 197 (Significant
accounting policies).
The Group’s investment properties were valued at £5,028.2 million
as at 31 December 2018 and a revaluation gain of £83.4 million
was accounted for under ‘revaluation surplus’ in the Group income
statement. In excess of 98% of the value of the Group’s investment
property portfolio comprises offices and commercial space within
Central London. The remainder of the portfolio represents a retail
park, cottages and strategic land in Scotland.
Valuations are carried out by third party valuers in accordance with
the RICS Valuation – Professional Standards and IAS 40.
There are significant judgements and estimates to be made in relation
to the valuation of the Group’s investment properties. Where available,
the valuations take into account evidence of market transactions for
properties and locations comparable to those of the Group.
The Central London investment property portfolio mainly features
office accommodation and includes:
Standing investments: These are existing properties that are
currently let. They are valued using the income capitalisation method.
Development projects: These are properties currently under
development or identified for future development. They have a different
risk and investment profile to the standing investments. These are
valued using the residual appraisal method (i.e. by estimating the fair
value of the completed project using the income capitalisation method
less estimated costs to completion and a risk premium).
The most significant estimates affecting the valuation included
yields and estimated rental value (“ERV”) growth (as described in
note 16 of the financial statements). For development projects,
other assumptions including costs to completion and risk premium
assumptions are also factored into the valuation.
The surplus on revaluation is primarily driven by the progress on the
development projects where further capital expenditure has been
incurred and the risk weighting applied to the valuation has decreased
– hence increasing the capitalised value. Excluding these properties,
the surplus reflects fairly flat ERVs in the central London property
market with some significant new lettings being offset by ERV
decreases at other sites.
The existence of significant estimation uncertainty, coupled with the
fact that only a small percentage difference in individual property
valuations when aggregated could result in material misstatement,
is why we have given specific audit focus and attention to this area.
Compliance with REIT guidelines
Group
Refer to page 105 (Report of the Audit Committee) and page 151
(Significant judgements, key assumptions and estimates).
The UK REIT regime grants companies tax exempt status provided they
meet the rules within the regime. The rules are complex and the tax
exempt status has a significant impact on the financial statements.
The complexity of the rules creates a risk of inadvertently breach and
the Group’s profit becoming subject to tax.
141
How our audit addressed the key audit matter
The valuers used by the Group are CBRE Limited for the Central
London portfolio and Savills for the majority of the remaining
investment property portfolio in Scotland. They are well-known
firms, with sufficient experience of the Group’s market. We assessed
the competence and capabilities of the firms and verified their
qualifications by discussing the scope of their work and reviewing the
terms of their engagements for unusual terms or fee arrangements.
Based on this work, we are satisfied that the firms remain independent
and competent and that the scope of their work was appropriate.
We tested the data inputs underpinning the investment property
valuation for a sample of properties, including rental income,
acquisitions and capital expenditure, by agreeing them to the
underlying property records held by the Group to assess the reliability,
completeness and accuracy of the underlying data. The underlying
property records were assessed for reliability by reviewing signed and
approved lease contracts or sale/purchase contracts and by reviewing
approved third party invoices. For the properties currently under
development, we traced the costs to date included within development
appraisals to quantity surveyor reports. In addition, we visited a
number of the key properties in Central London that are under
development to confirm the status of developments. We met with
the external valuers independently of management and obtained the
valuation reports to discuss and challenge the valuation methodology
and assumptions.
We involved our internal valuation specialists to compare the
valuations of each property to our independently formed market
expectations and challenged any differences. In doing this we used
evidence of comparable market transactions and focused in particular
on properties where the growth in capital values was higher or lower
than our expectations based on market indices.
We identified the following categories of assets for further testing:
standing investments where the valuation fell outside the expected
range; ongoing and planned development projects; high value assets
over £100m; and acquisitions.
In relation to these assets, we found that yield rates and ERVs were
predominantly consistent with comparable information for Central
London offices and assumptions appropriately reflected comparable
market information. Where assumptions did not fall within our
expected range, we assessed whether additional evidence presented
in arriving at the final valuations was appropriate, and, whether
this was robustly challenged by the external independent valuers.
Variances were predominantly due to property specific factors such
as new lettings at higher rents, movements in ERV or yield to reflect
market transactions in close proximity or the derisking of development
projects nearing completion. We verified the movements to supporting
documentation including evidence of comparable market transactions
where appropriate.
We challenged the Directors and Audit Committee on the movements
in the valuations and found that they were able to provide explanations
and refer to appropriate supporting evidence.
We confirmed our understanding of management’s approach to
ensuring compliance with the REIT regime rules.
We obtained management’s calculations and supporting
documentation, checking their accuracy by verifying the inputs and
calculation. We involved our internal taxation specialists to verify the
accuracy of the application of the rules.
We found that the assessment prepared was free from material error
and consistent with the UK REIT guidelines.
142
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INDEPENDENT AUDITOR’S REPORT CONTINUED
How our audit addressed the key audit matter
We obtained and reviewed each loan contract to understand the terms
and conditions. Where debt covenants were identified, we re-performed
management’s calculations to verify compliance with the contracts.
The carrying value of all debt was agreed to third party confirmations.
For derivatives, we agreed the carrying value to valuations obtained
directly from the third party valuers, JC Rathbone Associates.
We assessed the competence and capabilities of the external valuers
by considering their qualifications and market experience. We involved
our internal specialists who performed independent valuations to
recalculate the value using independent market data.
From our work on of the terms of the debt arrangements in place as
at 31 December 2018, we consider the borrowings and derivatives
to be accounted for appropriately, valued correctly in the context
of materiality, and disclosed appropriately.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing and extent of
our audit procedures on the individual financial statement line items
and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Key audit matter
Accounting for borrowings and derivatives
Group and parent
Refer to page 105 (Report of the Audit Committee), pages 170 to 179
(Notes to the financial statements – Note 23) and pages 198 to 199
(Significant accounting policies).
The Group has secured and unsecured debt totalling £914.5 million
(2017: £730.8 million). The debt includes unsecured convertible debt
of £148.4 million (2017: £145.6 million) with an option for the Group to
convert the debt when certain criteria have been met.
The Group uses interest rate swaps on a portion of its debt. The interest
rate swaps were valued at 31 December 2018 by external valuers and
the fair value was £3.6m million (2017: £7.9 million). The valuation of the
swaps is based on market movements which can fluctuate significantly
in the year and could have a material impact on the Group financial
statements. The valuation also involves the use of estimates and
therefore is considered an area of audit focus.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial statements
as a whole, taking into account the structure of the group and the
company, the accounting processes and controls, and the industry
in which they operate.
The Group’s properties are spread across 28 statutory entities with
the Group financial statements being a consolidation of these
entities, the Company and the Group’s joint ventures. Each statutory
entity which owned a property was identified as requiring an audit
of its complete financial information, either due to size, risk
characteristics or statutory requirements. This work, all of which
was carried out by the Group audit team, together with additional
procedures performed on the consolidation, gave us sufficient
appropriate audit evidence for our opinion on the Group financial
statements as a whole. The audit of the Company was also carried
out by the Group audit team.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
How we determined it
Rationale for benchmark applied
Group financial statements
£53.2 million (2017: £50.1 million).
1% of total assets.
The key driver of the business and determinant
of the Group’s value is direct property
investments. Due to this, the key area of focus
in the audit is the valuation of investment
properties. On this basis, we set an overall
Group materiality level based on total assets.
In addition, a number of key performance
indicators of the Group are driven by income
statement items and we therefore also applied
a lower specific materiality for testing property
and other income, administrative expenses,
provisions and working capital balances.
Company financial statements
£41.5 million (2017: £34.2 million).
2% of total assets.
The key driver of the business and determinant
of the Company’s value is investments in
subsidiaries. Due to this, the key area of focus
in the audit is the valuation of investments in
subsidiaries. On this basis, we set an overall
Company materiality level based on total
assets.
143
With respect to the Strategic Report and Directors’ report, we also
considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and matters
as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ report
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Strategic Report and Directors’
report for the year ended 31 December 2018 is consistent with the
financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the group and
company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic
Report and Directors’ report. (CA06)
The directors’ assessment of the prospects of the group and
of the principal risks that would threaten the solvency or
liquidity of the group
We have nothing material to add or draw attention to regarding:
• The directors’ confirmation on page 111 of the Annual Report that
they have carried out a robust assessment of the principal risks
facing the group, including those that would threaten its business
model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks
and explain how they are being managed or mitigated.
• The directors’ explanation on pages 44 and 45 of the Annual
Report as to how they have assessed the prospects of the group,
over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether they
have a reasonable expectation that the group will be able to
continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or
assumptions.
We have nothing to report having performed a review of the directors’
statement that they have carried out a robust assessment of the
principal risks facing the group and statement in relation to the
longer-term viability of the group. Our review was substantially less
in scope than an audit and only consisted of making inquiries and
considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code (the “Code”); and
considering whether the statements are consistent with the
knowledge and understanding of the group and company and their
environment obtained in the course of the audit. (Listing Rules)
Financial statements
For each component in the scope of our group audit, we allocated a
materiality that is less than our overall group materiality. The range
of materiality allocated across components was calculated based on
the materiality of each statutory entity, in all instances this was less
than our overall group materiality.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above £2.6 million
(for items audited using overall materiality) and £0.4 million (for items
audited using specific materiality) (Group audit) (2017: £2.5 million
and £0.4 million) and £2.0 million (Company audit) (2017: £1.7 million)
as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Outcome
We have nothing material to add
or to draw attention to. However,
because not all future events
or conditions can be predicted,
this statement is not a guarantee
as to the group’s and company’s
ability to continue as a going
concern.
For example, the terms on
which the United Kingdom may
withdraw from the European
Union, which is currently due
to occur on 29 March 2019,
are not clear, and it is difficult
to evaluate all of the potential
implications on the company’s
trade, customers, suppliers and
the wider economy.
We have nothing to report.
Reporting obligation
We are required to report if we
have anything material to add
or draw attention to in respect
of the directors’ statement in
the financial statements about
whether the directors considered
it appropriate to adopt the going
concern basis of accounting
in preparing the financial
statements and the directors’
identification of any material
uncertainties to the group’s and
the company’s ability to continue
as a going concern over a period
of at least twelve months from
the date of approval of the
financial statements.
We are required to report if the
directors’ statement relating to
Going Concern in accordance
with Listing Rule 9.8.6R(3) is
materially inconsistent with our
knowledge obtained in the audit.
Reporting on other information
The other information comprises all of the information in the Annual
Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or,
except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit,
or otherwise appears to be materially misstated. If we identify an
apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a
material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
We have nothing to report based on these responsibilities.
144
Derwent London plc Report & Accounts 2018
INDEPENDENT AUDITOR’S REPORT CONTINUED
Use of this report
This report, including the opinions, has been prepared for and only
for the company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose.
We do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• adequate accounting records have not been kept by the
company, or returns adequate for our audit have not been
received from branches not visited by us; or
• certain disclosures of directors’ remuneration specified by law
are not made; or
• the company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the Directors on 14 May 2014 to audit the financial
statements for the year ended 31 December 2014 and subsequent
financial periods. The period of total uninterrupted engagement
is 5 years, covering the years ended 31 December 2014 to
31 December 2018.
Craig Hughes (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
26 February 2019
Other Code Provisions
We have nothing to report in respect of our responsibility to report
when:
• The statement given by the directors, on page 138, that they
consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for
the members to assess the group’s and company’s position and
performance, business model and strategy is materially
inconsistent with our knowledge of the group and company
obtained in the course of performing our audit.
• The section of the Annual Report on pages 106 to 107 describing
the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
• The directors’ statement relating to the company’s compliance
with the Code does not properly disclose a departure from a
relevant provision of the Code specified, under the Listing Rules,
for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements and
the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities
set out on page 138, the directors are responsible for the preparation
of the financial statements in accordance with the applicable
framework and for being satisfied that they give a true and fair view.
The directors are also 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.
In preparing the financial statements, the directors are responsible
for assessing the group’s and the 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 the
directors either intend to liquidate the group or the company or to
cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial
statements
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 an
auditors’ report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a 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 the aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors’ report.
Financial statements
GROUP INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2018
Gross property and other income
Net property and other income
Administrative expenses
Revaluation surplus
Profit on disposal of investment property
Profit from operations
Finance costs
Movement in fair value of derivative financial instruments
Financial derivative termination costs
Share of results of joint ventures
Profit before tax
Tax charge
Profit for the year
Attributable to:
Equity shareholders
Non-controlling interest
Earnings per share
Diluted earnings per share
The notes on pages 150 to 199 form part of these financial statements.
145
2017
£m
202.6
164.8
(28.2)
147.9
50.3
334.8
(27.1)
9.4
(7.3)
5.0
314.8
(1.8)
2018
£m
228.0
185.9
(32.3)
83.4
5.2
242.2
(23.5)
4.3
(3.5)
2.1
221.6
(2.7)
218.9
313.0
222.3
(3.4)
218.9
314.0
(1.0)
313.0
199.33p
281.79p
198.91p
281.12p
Note
5
5
16
6
7
8
9
10
15
29
38
38
146
GROUP STATEMENT OF COMPREHENSIVE INCOME
Derwent London plc Report & Accounts 2018
FOR THE YEAR ENDED 31 DECEMBER 2018
Profit for the year
Actuarial losses on defined benefit pension scheme
Revaluation surplus of owner-occupied property
Deferred tax credit/(charge) on revaluation
Other comprehensive income that will not be reclassified to profit or loss
Total comprehensive income relating to the year
Attributable to:
Equity shareholders
Non-controlling interest
The notes on pages 150 to 199 form part of these financial statements.
Note
14
16
26
2018
£m
218.9
–
0.7
0.1
0.8
2017
£m
313.0
(0.9)
1.8
(0.7)
0.2
219.7
313.2
223.1
(3.4)
219.7
314.2
(1.0)
313.2
Financial statements
BALANCE SHEETS
AS AT 31 DECEMBER 2018
147
REGISTERED NO. 1819699
Non-current assets
Investment property
Property, plant and equipment
Investments
Deferred tax
Pension scheme surplus
Other receivables
Current assets
Trading property
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Borrowings
Trade and other payables
Corporation tax liability
Provisions
Non-current liabilities
Borrowings
Derivative financial instruments
Leasehold liabilities
Provisions
Pension scheme deficit
Deferred tax
Total liabilities
Total net assets
Equity
Share capital
Share premium
Other reserves
Retained earnings1
Equity shareholders’ funds
Non-controlling interest
Total equity
1 Retained earnings for the Company include profit for the year of £327.6m (2017: £125.7m).
Note
16
17
18
26
14
19
16
20
31
23
21
22
23
23
23
22
14
26
27
28
28
28
Group
2018
£m
5,028.2
53.1
29.1
–
0.3
123.1
5,233.8
36.3
61.4
18.3
116.0
2017
£m
4,670.7
52.2
39.7
–
–
105.2
4,867.8
25.3
58.0
87.0
170.3
Company
2018
£m
–
5.4
1,226.4
2.1
0.3
–
1,234.2
–
1,849.8
17.3
1,867.1
2017
£m
–
5.1
1,225.8
2.1
–
–
1,233.0
–
1,469.6
85.8
1,555.4
5,349.8
5,038.1
3,101.3
2,788.4
148.4
103.1
2.1
0.3
253.9
766.1
3.6
60.7
0.3
–
1.8
832.5
–
86.7
2.1
0.2
89.0
730.8
7.9
14.1
0.4
0.4
2.3
755.9
148.4
856.4
1.0
0.3
1,006.1
552.5
3.6
–
0.3
–
–
556.4
–
902.3
1.1
0.2
903.6
516.3
7.0
–
0.4
0.4
–
524.1
1,086.4
844.9
1,562.5
1,427.7
4,263.4
4,193.2
1,538.8
1,360.7
5.6
189.6
943.5
3,063.2
4,201.9
61.5
4,263.4
5.6
189.2
942.9
2,990.6
4,128.3
64.9
4,193.2
5.6
189.6
928.9
414.7
1,538.8
–
1,538.8
5.6
189.2
929.1
236.8
1,360.7
–
1,360.7
The financial statements were approved by the Board of Directors and authorised for issue on 26 February 2019.
John Burns
Chief Executive
Damian Wisniewski
Finance Director
The notes on pages 150 to 199 form part of these financial statements.
148
STATEMENTS OF CHANGES IN EQUITY
Derwent London plc Report & Accounts 2018
FOR THE YEAR ENDED 31 DECEMBER 2018
Group
At 1 January 2018
Profit/(loss) for the year
Other comprehensive income
Share-based payments
Dividends paid
At 31 December 2018
At 1 January 2017
Profit/(loss) for the year
Other comprehensive income/(expense)
Transfer of owner-occupied property
Share-based payments
Dividends paid
At 31 December 2017
Company
At 1 January 2018
Profit for the year
Share-based payments
Dividends paid
At 31 December 2018
At 1 January 2017
Profit for the year
Other comprehensive expense
Share-based payments
Dividends paid
At 31 December 2017
1 See note 28.
Share
capital
£m
Share
premium
£m
Other
reserves1
£m
Retained
earnings
£m
Equity
shareholders’
funds
£m
Non-
controlling
interest
£m
5.6
–
–
–
–
5.6
5.6
–
–
–
–
–
5.6
5.6
–
–
–
5.6
5.6
–
–
–
–
5.6
189.2
–
–
0.4
–
189.6
188.4
–
–
–
0.8
–
189.2
189.2
–
0.4
–
189.6
188.4
–
–
0.8
–
189.2
942.9
–
0.8
(0.2)
–
943.5
950.4
–
1.1
(6.9)
(1.7)
–
942.9
929.1
–
(0.2)
–
928.9
930.8
–
–
(1.7)
–
929.1
2,990.6
222.3
–
2.5
(152.2)
3,063.2
2,787.9
314.0
(0.9)
6.9
2.8
(120.1)
2,990.6
236.8
327.6
2.5
(152.2)
414.7
229.3
125.7
(0.9)
2.8
(120.1)
236.8
4,128.3
222.3
0.8
2.7
(152.2)
4,201.9
3,932.3
314.0
0.2
–
1.9
(120.1)
4,128.3
1,360.7
327.6
2.7
(152.2)
1,538.8
1,354.1
125.7
(0.9)
1.9
(120.1)
1,360.7
64.9
(3.4)
–
–
–
61.5
67.1
(1.0)
–
–
–
(1.2)
64.9
–
–
–
–
–
–
–
–
–
–
–
Total
equity
£m
4,193.2
218.9
0.8
2.7
(152.2)
4,263.4
3,999.4
313.0
0.2
–
1.9
(121.3)
4,193.2
1,360.7
327.6
2.7
(152.2)
1,538.8
1,354.1
125.7
(0.9)
1.9
(120.1)
1,360.7
The notes on pages 150 to 199 form part of these financial statements.
Financial statements
CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2018
Operating activities
Property income
Surrender premiums and other property income
Property expenses
Cash paid to and on behalf of employees
Other administrative expenses
Interest paid
Other finance costs
Other income
Tax paid in respect of operating activities
Net cash from/(used in) operating activities
Investing activities
Acquisition of properties
Capital expenditure on the property portfolio
Reimbursement of capital expenditure
Disposal of investment and trading properties
Investment in joint ventures
Repayment of shareholder loan
Dividend from joint venture
Purchase of property, plant and equipment
VAT received/(paid)
Net cash (used in)/from investing activities
Financing activities
Net movement in intercompany loans
Net movement in revolving bank loans
Payment of loan arrangement costs
Financial derivative termination costs
Net proceeds of share issues
Dividends paid to non-controlling interest holder
Dividends paid
Net cash from/(used in) financing activities
(Decrease)/increase in cash and cash equivalents in the year
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The notes on pages 150 to 199 form part of these financial statements.
Note
7
7
7
25
27
30
31
Group
2018
£m
159.5
22.2
(19.1)
(22.0)
(5.2)
(17.4)
(2.6)
2.9
(3.1)
115.2
(57.3)
(187.5)
15.9
0.3
(0.8)
–
13.5
(0.8)
7.6
(209.1)
–
180.5
(0.2)
(3.5)
0.4
–
(152.0)
25.2
(68.7)
87.0
18.3
2017
£m
154.2
0.1
(19.2)
(19.5)
(7.3)
(21.7)
(3.2)
2.9
(2.8)
83.5
(8.5)
(171.0)
6.0
472.9
–
1.3
–
(5.0)
(11.7)
284.0
–
(170.8)
–
(7.3)
0.8
(1.2)
(119.7)
(298.2)
69.3
17.7
87.0
Company
2018
£m
–
–
–
(21.9)
(5.9)
(13.9)
(1.9)
2.8
–
(40.8)
–
–
–
–
–
–
–
(0.8)
–
(0.8)
(52.7)
180.5
(0.2)
(2.9)
0.4
–
(152.0)
(26.9)
(68.5)
85.8
17.3
149
2017
£m
–
–
–
(19.5)
(7.9)
(16.8)
(2.2)
2.4
–
(44.0)
–
–
–
–
–
1.3
–
(2.7)
–
(1.4)
420.9
(170.4)
–
(7.3)
0.8
–
(119.7)
124.3
78.9
6.9
85.8
150
NOTES TO THE FINANCIAL STATEMENTS
Derwent London plc Report & Accounts 2018
FOR THE YEAR ENDED 31 DECEMBER 2018
IFRS 15 Revenue from Contracts with Customers
(effective from 1 January 2018)
IFRS 15 combines a number of previous standards, setting out a five
step model for the recognition of revenue and establishing principles
for reporting useful information to users of financial statements
about the nature, amount, timing and uncertainty of revenue.
The standard is applicable to service charge income, facilities
management income, investment property disposals and trading
property disposals, but excludes rent receivable, which is within the
scope of IFRS 16. The Group has completed its assessment of IFRS
15 and concludes that its adoption has no material impact on the
financial statements.
Standards in issue but not yet effective
The following standards, amendments and interpretations were
in issue at the date of approval of these financial statements but
were not yet effective for the current accounting year and have not
been adopted early. Based on the Group’s current circumstances,
the Directors do not anticipate that their adoption in future periods
will have a material impact on the financial statements of the Group.
IFRS 9 (amended) – Prepayment Features with Negative
Compensation;
IFRS 17 – Insurance Contracts;
IFRIC 23 – Uncertainty over Income Tax Treatments;
IAS 28 (amended) – Long-term interest in Associates and Joint
Ventures;
IAS 19 (amended) – Plan Amendment, Curtailment of Settlement;
Annual Improvements to IFRSs (2015 – 2017 cycle).
IFRS 16 Leases (effective 1 January 2019)
This standard does not substantially affect the accounting for rental
income earned by the Group as lessor. The main impact of the
standard is the removal of the distinction between operating and
finance leases for lessees, which will result in almost all leases being
recognised on the balance sheet. As the Group does not hold any
material operating leases as lessee, the impact of the standard is
not expected to be material to the financial statements.
1 Basis of preparation
The financial statements have been prepared in accordance
with International Financial Reporting Standards, as adopted
by the European Union (IFRS), IFRS Interpretations Committee
interpretations and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS. The financial
statements have been prepared under the historical cost convention
as modified by the revaluation of investment properties, property,
plant and equipment and financial assets and liabilities held
for trading.
Going concern
The Board continues to adopt the going concern basis in preparing
these consolidated financial statements. In considering this
requirement, the Directors have taken into account the following:
• The Group’s latest rolling forecast for the next two years, in
particular the cash flows, borrowings and undrawn facilities.
Sensitivity analysis is included within these forecasts.
• The headroom under the Group’s financial covenants.
• The current and forecast risks included on the Group’s risk
register that could impact on the Group’s liquidity and solvency
over the next 12 months from the date of signing.
2 Changes in accounting policies
The principal accounting policies are described in note 41 and are
consistent with those applied in the Group’s financial statements for
the year to 31 December 2017, as amended to reflect the adoption
of new standards, amendments and interpretations which became
effective in the year as shown below.
New standards adopted during the year
The following standards, amendments and interpretations
endorsed by the EU were effective for the first time for the Group’s
31 December 2018 year end and had no material impact on the
financial statements.
IFRS 2 (amended) – Share Based Payments;
IFRS 4 (amended) – Insurance Contracts;
IAS 40 (amended) – Investment Property;
IFRIC 22 – Foreign Currency Transactions and Advance
Consideration;
Annual Improvements to IFRSs (2014 – 2016 cycle).
IFRS 9 Financial Instruments (effective from 1 January 2018)
This standard applies to classification and measurement of financial
assets and financial liabilities, impairment provisioning and hedge
accounting. The Group’s assessment of IFRS 9 determined that
the main area of potential impact was impairment provisioning on
trade receivables, given the requirement to use a forward-looking
expected credit loss model. However, the Group concludes that
this has no material impact on its financial statements.
151
4 Segmental information
IFRS 8 Operating Segments requires operating segments to be
identified on the basis of internal financial reports about
components of the Group that are regularly reviewed by the chief
operating decision maker (which in the Group’s case is the Executive
Committee comprising the six executive Directors and six senior
managers) in order to allocate resources to the segments and to
assess their performance.
The internal financial reports received by the Group’s Executive
Committee contain financial information at a Group level as a whole
and there are no reconciling items between the results contained in
these reports and the amounts reported in the financial statements.
These internal financial reports include the IFRS figures but also
report the non-IFRS figures for the EPRA earnings and net asset
value. Reconciliations of each of these figures to their statutory
equivalents are detailed in note 38. Additionally, information is
provided to the Executive Committee showing gross property income
and property valuation by individual property. Therefore, for the
purposes of IFRS 8, each individual property is considered to be a
separate operating segment in that its performance is monitored
individually.
The Group’s property portfolio includes investment property,
owner-occupied property and trading property and comprised
97% office buildings1 by value at 31 December 2018 (2017: 97%).
The Directors consider that these individual properties have similar
economic characteristics and therefore have been aggregated into a
single operating segment. The remaining 3% (2017: 3%) represented
a mixture of retail, hotel, residential and light industrial properties,
as well as land, each of which is de minimis in its own right and below
the quantitative threshold in aggregate. Therefore, in the view of the
Directors, there is one reportable segment under the provisions of
IFRS 8.
All of the Group’s properties are based in the UK. No geographical
grouping is contained in any of the internal financial reports provided
to the Group’s Executive Committee and, therefore, no geographical
segmental analysis is required by IFRS 8. However, geographical
analysis is included in the tables below to provide users with
additional information regarding the areas contained in the Strategic
Report. The majority of the Group’s properties are located in London
(West End central, West End borders and City borders), with the
remainder in Scotland (Provincial).
1 Some office buildings have an ancillary element such as retail or residential.
Financial statements
3 Significant judgements, key assumptions and
estimates
The preparation of financial statements in accordance with IFRS
requires the use of certain critical accounting estimates and
judgements. It also requires management to exercise judgement in
the process of applying the Group’s accounting policies. The Group’s
significant accounting policies are stated in note 41. Not all of these
accounting policies require management to make difficult, subjective
or complex judgements or estimates. Estimates and judgements are
continually evaluated and are based on historical experience and
other factors, including expectations of future events that are
believed to be reasonable under the circumstances. Although these
estimates are based on management’s best knowledge of the
amount, event or actions, actual results may differ from those
estimates. The following is intended to provide an understanding of
the policies that management consider critical because of the level
of complexity, judgement or estimation involved in their application
and their impact on the consolidated financial statements.
Key sources of estimation uncertainty
Property portfolio valuation
The Group uses the valuation carried out by external valuers as
the fair value of its property portfolio. The valuation is based
upon assumptions including future rental income, anticipated
maintenance costs, future development costs and the appropriate
discount rate. The valuers also make reference to market evidence
of transaction prices for similar properties. More information is
provided in note 16.
Borrowings and derivatives
The fair values of the Group’s borrowings and interest rate swaps
are based on estimates provided by independent third parties.
The estimates are based on the terms of each of the financial
instruments using data available in the financial markets.
More information is provided in note 23.
Significant judgements
Compliance with the real estate investment trust (REIT)
taxation regime
As a consequence of the Group’s REIT status, income and chargeable
gains on the qualifying property rental business are exempt from
corporation tax.
In order for the Group to remain in the REIT regime, it is subject to
a number of criteria that it must meet in each accounting period.
The Group comfortably met all the criteria in 2018 ensuring its REIT
status is maintained. The Directors intend that the Group should
continue as a REIT for the foreseeable future.
Income that does not qualify as property income within the REIT
rules is subject to corporation tax in the normal way. Such income
includes development fees, interest income, sale of trading
properties and our interest in unelected joint ventures.
The Group has maintained its low risk rating with HMRC due to the
continued regular dialogue we maintain with them and our
transparent approach.
152
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
4 Segmental information (continued)
Gross property income
West End central
West End borders
City borders
Provincial
Office
buildings
£m
95.5
19.3
76.1
–
190.9
2018
2017
Other
£m
0.1
–
0.5
4.5
5.1
Total
£m
95.6
19.3
76.6
4.5
196.0
Office
buildings
£m
79.4
18.4
69.0
–
166.8
Other
£m
0.4
–
0.2
4.8
5.4
A reconciliation of gross property income to gross property and other income is given in note 5.
Property portfolio
Carrying value
West End central
West End borders
City borders
Provincial
Fair value
West End central
West End borders
City borders
Provincial
Office
buildings
£m
2,659.4
439.2
1,859.5
–
4,958.1
2,658.1
462.5
1,913.7
–
5,034.3
2018
2017
Other
£m
53.8
–
7.7
91.9
153.4
54.9
–
7.7
93.8
156.4
Total
£m
2,713.2
439.2
1,867.2
91.9
5,111.5
2,713.0
462.5
1,921.4
93.8
5,190.7
Office
buildings
£m
2,356.8
439.3
1,799.1
–
4,595.2
2,394.9
459.7
1,844.4
–
4,699.0
Other
£m
42.2
–
6.5
98.6
147.3
43.7
–
6.4
101.2
151.3
A reconciliation between the fair value and carrying value of the portfolio is set out in note 16.
Total
£m
79.8
18.4
69.2
4.8
172.2
Total
£m
2,399.0
439.3
1,805.6
98.6
4,742.5
2,438.6
459.7
1,850.8
101.2
4,850.3
Financial statements
5 Property and other income
Gross rental income
Surrender premiums received
Other property income
Gross property income
Service charge income
Other income
Gross property and other income
Gross rental income
Ground rent
Service charge income
Service charge expenses
Other property costs
Net rental income
Other property income
Other income
Other costs
Surrender premiums received
Reverse surrender premiums
Dilapidation receipts
(Write-down)/reversal of write-down of trading property
Net property and other income
153
2017
£m
172.1
0.1
–
172.2
27.7
2.7
202.6
172.1
(0.7)
27.7
(29.6)
(1.9)
(8.4)
161.1
–
2.7
–
0.1
(0.2)
0.1
1.0
164.8
2018
£m
175.1
3.2
17.7
196.0
29.1
2.9
228.0
175.1
(1.4)
29.1
(32.0)
(2.9)
(9.7)
161.1
17.7
2.9
(0.4)
3.2
(0.1)
1.7
(0.2)
185.9
Gross rental income included £13.4m (2017: £17.1m) relating to rents recognised in advance of cash receipts.
Other property income included £15.8m for granting a new access rights deed to a neighbouring property owner. The remaining £1.9m relates
to rights of light income in the year.
Other income relates to fees and commissions earned in relation to the management of the Group’s properties and was recognised in the
Group income statement in accordance with the delivery of services.
6 Profit on disposal of investment property
Gross disposal proceeds
Costs of disposal
Net disposal proceeds
Carrying value
Adjustment for lease costs and rents recognised in advance
Adjustment for capital contributions
Adjustment for headlease liability
2018
£m
5.4
–
5.4
(0.2)
–
–
–
5.2
2017
£m
486.3
(3.5)
482.8
(418.9)
(19.2)
(4.2)
9.8
50.3
Gross disposal proceeds reflect £3.0m (2017: £5.0m) of accrued overage in relation to Riverwalk House SW1 and Vauxhall Bridge Road SW1,
which were originally sold in 2012 and £2.0m (2017: £nil) of accrued overage in relation to Balmoral Grove N7, which was originally sold in
December 2016.
154
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
7 Finance costs
Bank loans and overdraft
Non-utilisation fees
Unsecured convertible bonds
Secured bonds
Unsecured private placement notes
Secured loan
Amortisation of issue and arrangement costs
Amortisation of the fair value of the secured bonds
Finance lease costs
Other
Gross interest costs
Less: interest capitalised
2018
£m
3.6
1.9
3.9
11.4
8.3
3.3
2.1
(1.2)
0.7
0.2
34.2
(10.7)
23.5
2017
£m
5.9
1.8
3.8
11.4
8.3
3.3
2.0
(1.1)
1.0
0.1
36.5
(9.4)
27.1
Finance costs of £10.7m (2017: £9.4m) have been capitalised on development projects, in accordance with IAS 23 Borrowing Costs, using the
Group’s average cost of borrowings during each quarter. Total finance costs paid to 31 December 2018 were £30.7m (2017: £34.3m) of which
£10.7m (2017: £9.4m) was included in capital expenditure on the property portfolio in the Group cash flow statement under investing activities.
8 Financial derivative termination costs
The Group incurred costs of £3.5m in the year to 31 December 2018 (2017: £7.3m) deferring, re-couponing or terminating interest rate swaps.
9 Share of results of joint ventures
Revaluation (deficit)/surplus
Profit on disposal of investment property
Other profit from operations after tax
2018
£m
(0.1)
1.3
0.9
2.1
2017
£m
3.9
–
1.1
5.0
In March 2018, Primister Limited, in which the Group has a 50% shareholding, disposed of its freehold interest in Porters North N1 for £45.4m
before costs, generating a profit of £2.6m net of tax.
See note 18 for further details of the Group’s joint ventures.
Financial statements
10 Profit before tax
This is arrived at after charging:
Depreciation and amortisation
Contingent rent payable under property finance leases
Auditor’s remuneration
Audit – Group
Audit – subsidiaries
155
2017
£m
0.7
0.7
0.3
0.1
2018
£m
0.7
1.4
0.3
0.1
In 2018, audit fees for the Group were £287,200 (2017: £280,000) and for the subsidiaries £63,000 (2017: £60,000). Fees for non-audit services,
relating to the half year review and a review of the turnover certificates, were £45,095 (2017: £43,715).
Details of the Auditor’s independence are included on pages 106 to 107.
11 Directors’ emoluments
Remuneration for management services
Share based payments
Post-employment benefits
National insurance contributions
2018
£m
6.2
1.4
0.7
8.3
1.1
9.4
2017
£m
5.4
1.4
0.7
7.5
1.0
8.5
In accordance with IFRS 2 Share-based Payment, there is £1.5m (2017: £0.3m) relating to the Directors included within the £2.3m (2017: £1.1m)
for Share-based payments expense relating to equity-settled schemes in note 12.
Details of the Directors’ remuneration awards under the long-term incentive plan and options held by the Directors under the Group share
option schemes are given in the report of the Remuneration Committee on page 116. The only key management personnel are the Directors.
12 Employees
Staff costs, including those of Directors:
Wages and salaries
Social security costs
Other pension costs
Share-based payments expense relating to equity-settled schemes
Group
2018
£m
17.3
2.4
2.2
2.3
24.2
2017
£m
14.8
2.2
1.8
1.1
19.9
Company
2018
£m
17.1
2.4
2.1
2.4
24.0
2017
£m
14.7
2.1
1.8
1.1
19.7
The monthly average number of employees in the Group during the year, excluding Directors, was 106 (2017: 105). The monthly average number
of employees in the Company during the year, excluding Directors, was 96 (2017: 94). All were employed in administrative or support roles.
Of the Group employees there were 10 (2017: 13) whose costs were recharged or partially recharged to tenants.
156
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
13 Share-based payments
Details of the options held by Directors under the Performance Share Plan (PSP) are given in the report of the Remuneration Committee on
pages 116 to 131.
Group and Company – equity-settled option scheme
The Employee Share Option Plan (ESOP) is designed to incentivise and retain eligible employees. The ESOP is separate to the PSP disclosed
in the report of the Remuneration Committee. The Directors are not entitled to any awards under the ESOP.
Year of grant
For the year to 31 December 2018
2009
2011
2012
2013
2014
2015
2016
2017
2018
For the year to 31 December 2017
2009
2011
2012
2013
2014
2015
2016
2017
Exercise
price
£
Adjusted
exercise price1
£
Outstanding
at
1 January
Movement in options
Granted
Adjustment1
Exercised
Lapsed
Outstanding
at
31 December
6.10
16.60
17.19
21.99
27.39
34.65
31.20
28.93
30.29
6.10
16.60
17.19
21.99
27.39
34.65
31.20
28.93
6.10
16.60
16.49
21.09
26.27
33.23
29.93
27.75
29.57
6.10
16.60
16.89
21.61
26.91
34.04
30.64
28.42
1,000
200
14,643
39,332
64,402
66,718
91,936
132,993
–
411,224
1,600
200
16,420
55,950
76,900
67,450
93,250
–
311,770
–
–
–
–
–
–
–
–
132,600
132,600
–
–
–
–
–
–
–
131,100
131,100
–
–
312
814
1,029
1,423
1,866
2,627
2,938
11,009
–
–
223
582
862
1,018
1,336
1,893
5,914
(1,000)
–
(1,500)
(2,724)
(11,692)
–
–
–
–
(16,916)
(600)
–
(2,000)
(17,200)
(13,360)
–
–
–
(33,160)
–
–
–
–
–
(4,166)
(5,211)
(11,036)
(2,560)
(22,973)
–
–
–
–
–
(1,750)
(2,650)
–
(4,400)
–
200
13,455
37,422
53,739
63,975
88,591
124,584
132,978
514,944
1,000
200
14,643
39,332
64,402
66,718
91,936
132,993
411,224
Number of shares:
Exercisable
Non-exercisable
Weighted average exercise price of share options:
Exercisable
Non-exercisable
Weighted average remaining contracted life of share options:
Exercisable
Non-exercisable
Weighted average exercise price of share options that lapsed:
Exercisable
Non-exercisable
31 December
2018
31 December
2017
1 January
2017
168,791
346,153
119,577
291,647
74,170
237,600
£27.14
£29.15
£23.75
£30.41
£20.57
£30.95
5.26 years
8.38 years
5.79 years
8.48 years
6.06 years
8.32 years
£33.26
£28.85
–
£32.57
–
£29.97
1
In 2018, following the payment of the special dividend of 75 pence per share (2017: 52 pence per share), the Remuneration Committee exercised their discretion and adjusted
the number of outstanding unapproved ‘B’ options and their option price, to ensure participants were not disadvantaged by the payment to shareholders of the special dividend.
Financial statements
157
The weighted average share price at which options were exercised during 2018 was £30.90 (2017: £28.87).
The weighted average fair value of options granted during 2018 was £6.83 (2017: £6.05).
The following information is relevant in the determination of the fair value of the options granted during 2018 and 2017 under the equity-settled
employee share plan operated by the Group.
Option pricing model used
Risk free interest rate
Volatility
Dividend yield
2018
Binomial lattice
1.1%
25.0%
2.0%
2017
Binomial lattice
0.4%
24.0%
1.8%
For both the 2018 and 2017 grants, additional assumptions have been made that there is no employee turnover and 50% of employees exercise
early when the share options are 20% in the money and 50% of employees exercise early when the share options are 100% in the money.
The volatility assumption, measured as the standard deviation of expected share price returns, is based on a statistical analysis of daily prices
over the last four years.
14 Pension costs
The Group and Company operate both a defined contribution scheme and a defined benefit scheme. The latter was acquired as part of the
acquisition of London Merchant Securities plc in 2007 and is closed to new members. All new employees are entitled to join the defined
contribution scheme. The assets of the pension schemes are held separately from those of the Group companies.
Defined contribution plan
The total expense relating to this plan in the current year was £1.9m (2017: £1.6m).
Defined benefit plan
The Company sponsors the scheme which is a funded defined benefit arrangement. This is a separate trustee-administered fund holding the
pension scheme assets to meet long-term pension liabilities for some 63 past and 4 present employees as at 31 October 2016. The level of
retirement benefit is principally based on basic salary at the last scheme anniversary of employment prior to leaving active service and is
linked to changes in inflation up to retirement for early leavers.
The scheme is subject to the funding legislation, which came into force on 30 December 2005, outlined in the Pensions Act 2004. This, together
with documents issued by the Pensions Regulator, and Guidance Notes adopted by the Financial Reporting Council, set out the framework for
funding defined benefit occupational pension schemes in the UK.
The trustees of the scheme are required to act in the best interest of the scheme’s beneficiaries. The appointment of the trustees is
determined by the scheme’s trust documentation. It is policy that one third of all trustees should be nominated by the members.
The English High Court ruling in Lloyds Banking Group Pension Trustees Limited v Lloyds Bank plc and others was published on 26 October
2018, and held that UK pension schemes with Guaranteed Minimum Pensions (GMPs) accrued from 17 May 1990 must equalise for the
different effects of these GMPs between men and women. The allowance has been estimated based on average impacts for schemes with
similar service periods and benefit structures. The impact of insured members has also been recognised.
A full actuarial valuation was carried out as at 31 October 2016 in accordance with the scheme funding requirements of the Pensions Act 2004
and the funding of the scheme is agreed between the Company and the trustees in line with those requirements. These in particular require
the surplus/deficit to be calculated using prudent, as opposed to best estimate actuarial assumptions.
This actuarial valuation showed a deficit of £8.3m. The Company agreed with the trustees that it will aim to eliminate the deficit over a period
of 7 years and 1 month from 14 November 2017 by the payment of annual contributions of £0.9m payable by each 31 December from
31 December 2017 to 31 December 2024 inclusive. In addition the company has agreed with the trustees that it will pay 91.5% of pensionable
salaries including member contributions in respect of the cost of accruing benefits and will meet expenses of the scheme, DIS premiums and
levies to the Pension Protection Fund separately.
For the purposes of IAS19 the actuarial valuation as at 31 October 2016, which was carried out by a qualified independent actuary, has been
updated on an approximate basis to 31 December 2018 for the non-insured members. For the insured members the liabilities in these
disclosures have been calculated by updating the results of the SORP valuations produced by the Scheme Actuary for inclusion in the Trustee
Report and Accounts. There have been no changes in the valuation methodology adopted for this period’s disclosures compared to the
previous period’s disclosures.
158
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
14 Pension costs (continued)
Amounts included in the balance sheet
Fair value of plan assets
Present value of defined benefit obligation
Net asset/(liability)
2018
£m
49.1
(48.8)
0.3
2017
£m
54.7
(55.1)
(0.4)
2016
£m
54.1
(54.4)
(0.3)
The present value of the scheme liabilities is measured by discounting the best estimate of future cash flows to be paid out by the scheme
using the projected unit credit method. The value calculated in this way is reflected in the net asset/(liability) in the balance sheet as
shown above.
The projected unit credit method is an accrued benefits valuation method in which allowance is made for projected earnings increases.
The accumulated benefit obligation is an alternative actuarial measure of the plan liabilities, whose calculation differs from that under the
projected unit credit method in that it includes no assumption for future earnings increases. In assessing this figure for the purpose of these
disclosures, allowance has been made for future statutory revaluation of benefits up to retirement. At the balance sheet date the accumulated
benefit obligation was £48.8m (2017: £55.1m).
All actuarial gains and losses are recognised in the year in which they occur in the Group statement of comprehensive income.
Reconciliation of the impact of the asset ceiling
We have considered the application of IFRIC14 and deemed it to have no material effect on the IAS19 figures.
Reconciliation of the opening and closing present value of the defined benefit obligation
At 1 January
Current service cost
Past service cost
Interest cost
Actuarial losses due to scheme experience
Actuarial gains due to changes in demographic assumptions
Actuarial (gains)/losses due to changes in financial assumptions
Benefits paid, death in service premiums and expenses
At 31 December
There have been no scheme amendments, curtailments or settlements in the year.
Reconciliation of opening and closing values of the fair value of plan assets
At 1 January
Interest income
Return on plan assets (excluding amounts included in interest income)
Contributions by the Group
Benefits paid, death in service premiums and expenses
At 31 December
The actual return on the plan assets over the year was a loss of £2.0m (2017: gain of £2.3m).
2018
£m
55.1
0.1
0.2
1.3
0.1
(0.4)
(3.0)
(4.6)
48.8
2018
£m
54.7
1.3
(3.3)
1.0
(4.6)
49.1
2017
£m
54.4
0.1
–
1.4
1.6
(1.6)
1.8
(2.6)
55.1
2017
£m
54.1
1.4
0.9
0.9
(2.6)
54.7
Financial statements
Defined benefit costs recognised in the income statement
Current service cost
Past service cost
Defined benefit costs recognised in the income statement
Amounts recognised in other comprehensive income
(Loss)/gain on plan assets (excluding amounts recognised in net interest cost)
Experience losses arising on the defined benefit obligation
Gain from changes in the demographic assumptions underlying the present value of the defined benefit obligation
Gain/(loss) from changes in the financial assumptions underlying the present value of the defined benefit obligation
Total loss recognised in other comprehensive income
Fair value of plan assets
UK equities
Overseas equities
Government bonds
Cash
Other
Insured assets
Total assets
2018
£m
0.4
0.4
2.7
–
11.5
34.1
49.1
159
2017
£m
0.1
–
0.1
2017
£m
0.9
(1.6)
1.6
(1.8)
(0.9)
2016
£m
0.6
0.6
2.6
0.8
11.3
38.2
54.1
2018
£m
0.1
0.2
0.3
2018
£m
(3.3)
(0.1)
0.4
3.0
–
2017
£m
0.7
0.7
2.7
1.0
12.5
37.1
54.7
The £11.5m in the ‘other’ asset class is made up of holdings of £6.9m in equity-linked gilt funds and £4.6m in absolute return funds.
None of the fair values of the assets shown above include any directly held financial instruments of the Group or property occupied by, or other
assets used by, the Group. All of the scheme assets have a quoted market price in an active market with the exception of the Trustee’s bank
account balance and the insured assets. The insured assets have been set equal to the value of the insured liabilities but before allowance
has been made for the impact of equalising benefits for the different effects of GMP for males and females.
It is the policy of the trustees and the Group to review the investment strategy at the time of each funding valuation. The Trustees’ investment
objectives and the processes undertaken to measure and manage the risks inherent in the plan investment strategy are illustrated by the
asset allocation at 31 December 2018.
There are no asset-liability matching strategies currently being used by the plan.
Significant actuarial assumptions
Discount rate
Inflation (RPI)
Salary increases
Allowance for commutation of pension for cash at retirement
2018
%
2.90
3.20
4.70
75% of Post A
Day Pension
2017
%
2.50
3.20
4.70
75% of Post A
Day Pension
2016
%
2.70
3.40
4.90
75% of Post A
Day Pension
160
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
14 Pension costs (continued)
The mortality assumptions adopted at 31 December 2018 are 80% of the standard tables S2PxA, year of birth, no age rating for males
and females, projected using CMI_2017 converging to 1.25% p.a. These imply the following life expectancies:
Life expectancy at age 65
Male retiring in 2018
Female retiring in 2018
Male retiring in 2038
Female retiring in 2038
Years
23.7
25.5
25.0
27.0
Analysis of the sensitivity to the principal assumptions of the present value of the defined benefit obligation
Discount rate
Inflation (RPI)
Salary increases
Rate of mortality
Allowance for commutation of pension for cash at retirement
Change in assumption
Decrease of 0.25% p.a
Increase of 0.25% p.a
Increase of 0.25% p.a
Increase in life expectancy of one year
Members commute an extra 10% of
Post A Day pension on retirement
Change in liabilities
Increase by 3.8%
Increase by 0.1%
Increase by 0.1%
Increase by 4.9%
Decrease by 0.5%
The sensitivities shown above are approximate and each sensitivity considers one change in isolation. The average duration of the defined
benefit obligation at 31 December 2018 was 15 years for the scheme as a whole or 26 years when only considering non-insured members.
The scheme typically exposes the Group to actuarial risks such as investment risk, interest rate risk, salary growth risk, mortality risk
and longevity risk. A decrease in corporate bond yields, a rise in inflation or an increase in life expectancy would result in an increase to
the scheme’s liabilities. This would detrimentally impact the balance sheet position and may give rise to increased charges in the income
statement. This effect would be partially offset by an increase in the value of the scheme’s bond holdings.
The best estimate of contributions to be paid by the Group to the plan for the year commencing 1 January 2019 is £1.0m.
Financial statements
15 Tax charge
Corporation tax
UK corporation tax and income tax in respect of profit for the year
Other adjustments in respect of prior years’ tax
Corporation tax charge
Deferred tax
Origination and reversal of temporary differences
Adjustment for changes in estimates
Deferred tax credit
Tax charge
161
2017
£m
4.0
(0.7)
3.3
(1.2)
(0.3)
(1.5)
1.8
2018
£m
2.9
0.2
3.1
(0.4)
–
(0.4)
2.7
In addition to the tax charge of £2.7m (2017: £1.8m) that passed through the Group income statement, a deferred tax credit of £0.1m (2017:
charge of £0.7m) was recognised in the Group statement of comprehensive income relating to the revaluation of the owner-occupied property
at 25 Savile Row W1.
The effective rate of tax for 2018 is lower (2017: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
Profit before tax
2018
£m
221.6
2017
£m
314.8
Expected tax charge based on the standard rate of corporation tax in the UK of 19.00% (2017: 19.25%)1
Difference between tax and accounting profit on disposals
REIT exempt income
Revaluation surplus attributable to REIT properties
Expenses and fair value adjustments not allowable for tax purposes
Capital allowances
Other differences
Tax charge in respect of profit for the year
Adjustments in respect of prior years’ tax
Tax charge
1 Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2015 (on 26 October 2015) and the Finance Bill 2016 (on 7 September 2016).
42.1
(1.0)
(10.7)
(15.2)
(8.1)
(4.6)
–
2.5
0.2
2.7
60.6
(9.8)
(10.8)
(27.4)
(4.4)
(4.2)
(1.5)
2.5
(0.7)
1.8
These include reductions to the main rate to reduce the rate to 19% from 1 April 2017 and then to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been
measured using the expected enacted tax rate and this is reflected in these financial statements.
162
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
16 Property portfolio
Group
Carrying value
At 1 January 2018
Acquisitions
Capital expenditure
Interest capitalisation
Additions
Disposals
Revaluation
Write-down of trading property
Movement in grossing up of headlease liabilities
At 31 December 2018
At 1 January 2017
Acquisitions
Capital expenditure
Interest capitalisation
Additions
Disposals
Transfers
Revaluation
Reversal of write-down of trading property
At 31 December 2017
Adjustments from fair value to carrying value
At 31 December 2018
Fair value
Revaluation of trading property
Lease incentives and costs included in receivables
Grossing up of headlease liabilities
Carrying value
At 31 December 2017
Fair value
Revaluation of trading property
Lease incentives and costs included in receivables
Grossing up of headlease liabilities
Carrying value
Freehold
£m
Leasehold
£m
Total
investment
property
£m
Owner-
occupied
property
£m
Trading
property
£m
3,867.0
52.1
84.5
5.2
141.8
(0.2)
25.5
–
–
4,034.1
3,959.9
0.8
73.3
4.7
78.8
(298.2)
(8.2)
134.7
–
3,867.0
4,151.4
–
(117.3)
–
4,034.1
3,968.6
–
(101.6)
–
3,867.0
803.7
5.1
75.7
5.1
85.9
–
57.9
–
46.6
994.1
843.9
–
62.7
4.6
67.3
(120.7)
–
13.2
–
803.7
955.0
–
(21.6)
60.7
994.1
808.6
–
(19.0)
14.1
803.7
4,670.7
57.2
160.2
10.3
227.7
(0.2)
83.4
–
46.6
5,028.2
4,803.8
0.8
136.0
9.3
146.1
(418.9)
(8.2)
147.9
–
4,670.7
5,106.4
–
(138.9)
60.7
5,028.2
4,777.2
–
(120.6)
14.1
4,670.7
46.5
–
(0.2)
–
(0.2)
–
0.7
–
–
47.0
34.2
–
2.3
–
2.3
–
8.2
1.8
–
46.5
47.0
–
–
–
47.0
46.5
–
–
–
46.5
25.3
–
10.8
0.4
11.2
–
–
(0.2)
–
36.3
11.7
7.8
4.7
0.1
12.6
–
–
–
1.0
25.3
37.3
(1.0)
–
–
36.3
26.6
(1.3)
–
–
25.3
Total
property
portfolio
£m
4,742.5
57.2
170.8
10.7
238.7
(0.2)
84.1
(0.2)
46.6
5,111.5
4,849.7
8.6
143.0
9.4
161.0
(418.9)
–
149.7
1.0
4,742.5
5,190.7
(1.0)
(138.9)
60.7
5,111.5
4,850.3
(1.3)
(120.6)
14.1
4,742.5
Financial statements
Reconciliation of fair value
Portfolio including the Group’s share of joint ventures
Less: joint ventures
IFRS property portfolio
163
2018
£m
5,217.6
(26.9)
5,190.7
2017
£m
4,897.6
(47.3)
4,850.3
The property portfolio is subject to semi-annual external valuations and was revalued at 31 December 2018 by external valuers on the basis
of fair value in accordance with The RICS Valuation – Professional Standards, which takes account of the properties’ highest and best use.
When considering the highest and best use of a property, the external valuers will consider its existing and potential uses which are physically,
legally and financially viable. Where the highest and best use differs from the existing use, the external valuers will consider the costs and the
likelihood of achieving and implementing this change in arriving at the property valuation.
CBRE Limited valued properties at £5,157.8m (2017: £4,817.5m) and other valuers at £32.9m (2017: £32.8m), giving a combined value of
£5,190.7m (2017: £4,850.3m). Of the properties revalued by CBRE, £47.0m (2017: £46.5m) relating to owner-occupied property was included
within property, plant and equipment and £37.3m (2017: £26.6m) was in relation to trading property.
The total fees, including the fee for this assignment, earned by CBRE (or other companies forming part of the same group of companies
within the UK) from the Group is less than 5.0% of their total UK revenues.
At 31 December 2018, the grossing up of headlease liabilities of £60.7m includes £45.9m for the discounted headlease liabilities in relation
to Soho Place W1 where the Group is now actively on site.
Reconciliation of revaluation surplus
Total revaluation surplus
Less:
Share of joint ventures
Lease incentives and costs
Trading property revaluation surplus/(deficit)
IFRS revaluation surplus
Reported in the:
Revaluation surplus
(Write-down)/reversal of write-down of trading property
Group income statement
Group statement of comprehensive income
2018
£m
100.2
(0.2)
(16.5)
0.4
83.9
83.4
(0.2)
83.2
0.7
83.9
2017
£m
177.1
(4.9)
(20.2)
(1.3)
150.7
147.9
1.0
148.9
1.8
150.7
Valuation process
The valuation reports produced by the external valuers are based on information provided by the Group such as current rents, terms and
conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group’s financial and property
management systems and is subject to the Group’s overall control environment. In addition, the valuation reports are based on assumptions
and valuation models used by the external valuers. The assumptions are typically market related, such as yields and discount rates, and are
based on their professional judgement and market observation. Each property is considered a separate asset class based on the unique
nature, characteristics and risks of the property.
Members of the Group’s Investment team, who report to the executive Director responsible for the valuation process, verify all major inputs to
the external valuation reports, assess the individual property valuation changes from the prior year valuation report and hold discussions with
the external valuers. When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part
of its overall responsibilities.
164
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
16 Property portfolio (continued)
Valuation techniques
The fair value of the property portfolio has been determined using an income capitalisation technique, whereby contracted and market rental
values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the equivalent yields and the fair
market values per square foot derived from comparable recent market transactions on arm’s length terms.
For properties under construction, the fair value is calculated by estimating the fair value of the completed property using the income
capitalisation technique less estimated costs to completion and a risk premium.
These techniques are consistent with the principles in IFRS 13 Fair Value Measurement and use significant unobservable inputs such that
the fair value measurement of each property within the portfolio has been classified as Level 3 in the fair value hierarchy.
There were no transfers between Levels 1 and 2 or between Levels 2 and 3 in the fair value hierarchy during either 2018 or 2017.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount
to a gain of £83.4m (2017: £147.9m) and are presented in the Group income statement in the line item ‘revaluation surplus’. The revaluation
surplus for the owner-occupied property of £0.7m (2017: £1.8m) was included within the revaluation reserve.
All gains and losses recorded in profit or loss in 2018 and 2017 for recurring fair value measurements categorised within Level 3 of the fair value
hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at 31 December 2018 and 31 December
2017, respectively.
Quantitative information about fair value measurement using unobservable inputs (Level 3)
Valuation technique
Fair value (£m)1
Area (‘000 sq ft)
Range of unobservable inputs2:
Gross ERV (per sq ft pa)
Minimum
Maximum
Weighted average
Net initial yield
Minimum
Maximum
Weighted average
Reversionary yield
Minimum
Maximum
Weighted average
True equivalent yield (EPRA basis)
Minimum
Maximum
Weighted average
West End
central
Income
capitalisation
2,713.0
2,551
West End
borders
Income
capitalisation
462.5
494
City
borders
Income
capitalisation
1,948.3
2,018
Provincial
commercial
Income
capitalisation
60.3
347
Provincial
land
Income
capitalisation
33.5
–
Total
5,217.6
5,410
£15
£176
£57
0.0%
5.5%
2.5%
3.0%
10.5%
4.4%
2.3%
6.3%
4.5%
£40
£60
£52
2.4%
4.8%
3.2%
4.8%
6.3%
5.2%
4.9%
5.1%
4.9%
£10
£62
£50
1.4%
5.8%
3.2%
3.4%
5.4%
4.6%
3.6%
5.4%
4.8%
£3
£15
£14
0.0%
13.4%
7.3%
6.4%
16.3%
7.4%
7.5%
16.3%
7.7%
n/a3
n/a3
n/a3
0.0%
10.1%
1.6%
0.0%
9.8%
1.8%
9.1%
11.0%
10.5%
1
Includes the Group’s share of joint ventures.
2 Costs to complete are not deemed a significant unobservable input by virtue of the high percentage that is already fixed.
3 There is no calculation of gross ERV per sq ft pa. The land totals 5,318 acres.
Financial statements
165
Sensitivity of measurement to variations in the significant unobservable inputs
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Group’s
property portfolio, together with the impact of significant movements in these inputs on the fair value measurement, are shown below:
Unobservable input
Gross ERV
Net initial yield
Reversionary yield
True equivalent yield
Impact on fair value measurement
of significant increase in input
Increase
Decrease
Decrease
Decrease
Impact on fair value measurement
of significant decrease in input
Decrease
Increase
Increase
Increase
There are inter-relationships between these inputs as they are partially determined by market conditions. An increase in the reversionary yield
may accompany an increase in gross ERV and would mitigate its impact on the fair value measurement.
A sensitivity analysis was performed to ascertain the impact on the fair value of a 25 basis point shift in true equivalent yield and a £2.50 psf
shift in ERV.
True equivalent yield
+25bp
– 25bp
ERV
+£2.50 psf
– £2.50 psf
Historical cost
Investment property
Owner-occupied property
Trading property
Total property portfolio
West End
central
West End
borders
City
borders
Provincial
commercial
Provincial
land
(5.3%)
5.9%
4.4%
(4.4%)
(4.9%)
5.4%
4.8%
(4.8%)
(5.0%)
5.5%
5.0%
(5.0%)
(3.1%)
3.4%
18.0%
(18.0%)
(2.3%)
2.4%
–
–
2018
£m
2,924.5
19.6
44.2
2,988.3
Total
(5.1%)
5.6%
4.9%
(4.9%)
2017
£m
2,697.0
19.8
33.0
2,749.8
166
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
17 Property, plant and equipment
Group
At 1 January 2018
Additions
Depreciation
Revaluation
At 31 December 2018
At 1 January 2017
Additions
Disposals
Depreciation
Transfers
Revaluation
At 31 December 2017
Net book value
Cost or valuation
Accumulated depreciation
At 31 December 2018
Net book value
Cost or valuation
Accumulated depreciation
At 31 December 2017
Company
At 1 January 2018
Additions
Depreciation
At 31 December 2018
At 1 January 2017
Additions
Disposals
Depreciation
At 31 December 2017
Net book value
Cost or valuation
Accumulated depreciation
At 31 December 2018
Net book value
Cost or valuation
Accumulated depreciation
At 31 December 2017
Owner-
occupied
property
£m
Artwork
£m
Other
£m
46.5
(0.2)
–
0.7
47.0
34.2
2.3
–
–
8.2
1.8
46.5
47.0
–
47.0
46.5
–
46.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.6
–
–
–
1.6
1.5
0.1
–
–
–
–
1.6
1.6
–
1.6
1.6
–
1.6
1.0
–
–
1.0
0.9
0.1
–
–
1.0
1.0
–
1.0
1.0
–
1.0
4.1
1.1
(0.7)
–
4.5
2.4
2.6
(0.2)
(0.7)
–
–
4.1
7.0
(2.5)
4.5
5.9
(1.8)
4.1
4.1
1.0
(0.7)
4.4
2.3
2.7
(0.2)
(0.7)
4.1
6.9
(2.5)
4.4
5.9
(1.8)
4.1
Total
£m
52.2
0.9
(0.7)
0.7
53.1
38.1
5.0
(0.2)
(0.7)
8.2
1.8
52.2
55.6
(2.5)
53.1
54.0
(1.8)
52.2
5.1
1.0
(0.7)
5.4
3.2
2.8
(0.2)
(0.7)
5.1
7.9
(2.5)
5.4
6.9
(1.8)
5.1
The artwork is periodically valued by Bonhams on the basis of fair value using their extensive market knowledge. The latest valuation was
carried out in May 2018 and the Directors consider that there have been no material valuation movements since that date. In accordance
with IFRS 13 Fair Value Measurement, the artwork is deemed to be classified as Level 3.
The historical cost of the artwork in the Group at 31 December 2018 was £1.6m (2017: £1.6m) and £1.0m (2017: £1.0m) in the Company.
See note 16 for the historical cost of owner-occupied property and IFRS 13 Fair Value Measurement disclosures.
Financial statements
18 Investments
Group
The Group has a 50% interest in three joint ventures, Dorrington Derwent Holdings Limited, Primister Limited and Prescot Street Limited
Partnership.
At 1 January
Share of results of joint ventures (see note 9)
Additions
Repayment of shareholder loan
Distributions received
At 31 December
2018
£m
39.7
2.1
0.8
–
(13.5)
29.1
167
2017
£m
36.0
5.0
–
(1.3)
–
39.7
The Group’s share of its investments in joint ventures is represented by the following amounts in the underlying joint venture entities.
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Loans provided to joint ventures
Total investment in joint ventures
Income
Expenses
Profit for the year
2018
2017
Joint ventures
£m
–
59.2
(2.4)
(41.2)
15.6
47.8
(43.6)
4.2
Group share
£m
–
29.6
(1.2)
(20.6)
7.8
21.3
29.1
23.9
(21.8)
2.1
Joint ventures
£m
52.7
44.1
(15.1)
(43.3)
38.4
10.6
(0.6)
10.0
Group share
£m
26.4
22.1
(7.6)
(21.7)
19.2
20.5
39.7
5.3
(0.3)
5.0
In February 2019, Prescot Street GP Limited and Prescot Street Nominees Limited exchanged contracts for the sale of the freehold interest in
9 Prescot Street E1 for £53.9m before costs with completion expected in May 2019. The property has been included in current assets held for
sale as it was being actively marketed for sale as at 31 December 2018.
Company
At 1 January 2017
Additions
Repayment of shareholder loan
Reversal of impairment
At 31 December 2017
Reversal of impairment
At 31 December 2018
Subsidiaries
£m
1,185.4
40.0
–
0.4
1,225.8
0.6
1,226.4
Joint ventures
£m
1.3
–
(1.3)
–
–
–
–
Total
£m
1,186.7
40.0
(1.3)
0.4
1,225.8
0.6
1,226.4
At 31 December 2018, the carrying value of the investment in wholly owned subsidiaries and joint ventures were reviewed in accordance
with IAS 36 Impairment of Assets on both value in use and fair value less costs to sell bases. The Company’s accounting policy is to carry
investments in subsidiary undertakings and joint ventures at the lower of cost and recoverable amount and recognise any impairment,
or reversal thereof, in the income statement.
168
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
19 Other receivables (non-current)
Prepayments and accrued income
Group
2018
£m
123.1
2017
£m
105.2
Company
2018
£m
–
2017
£m
–
Prepayments and accrued income relates to rents recognised in advance as a result of spreading the effect of rent free and reduced rent
periods, capital contributions in lieu of rent free periods and contracted rent uplifts, as well as the initial direct costs of the letting, over the
expected terms of their respective leases. Together with £15.8m (2017: £15.4m), which was included as accrued income within trade and other
receivables (see note 20), these amounts totalled £138.9m at 31 December 2018 (2017: £120.6m).
20 Trade and other receivables
Trade receivables
Amounts owed by subsidiaries
Other receivables
Prepayments
Other taxes
Accrued income
Group trade receivables are split as follows:
less than three months due
between three and six months due
Group
2018
£m
10.7
–
4.1
20.6
–
26.0
61.4
2017
£m
7.1
–
6.8
17.3
4.6
22.2
58.0
Group trade receivables includes a provision for bad debts as follows:
At 1 January and 31 December
The provision for bad debts is split as follows:
less than three months due
None of the amounts included in other receivables are past due and therefore no ageing has been shown.
Company
2018
£m
–
1,845.4
2.4
1.7
0.1
0.2
1,849.8
2018
£m
10.5
0.2
10.7
2018
£m
0.3
2017
£m
–
1,459.9
1.3
0.1
8.2
0.1
1,469.6
2017
£m
7.1
–
7.1
2017
£m
0.3
0.3
0.3
Financial statements
21 Trade and other payables
Trade payables
Amounts owed to subsidiaries
Other payables
Other taxes
Accruals
Deferred income
22 Provisions
At 1 January 2018
Provided in the income statement
Utilised in year
At 31 December 2018
Due within one year
Due after one year
At 1 January 2017
Provided in the income statement
Utilised in year
At 31 December 2017
Due within one year
Due after one year
169
2017
£m
0.4
890.3
0.9
–
10.6
0.1
902.3
Company
£m
0.6
0.2
(0.2)
0.6
0.3
0.3
0.6
0.7
0.2
(0.3)
0.6
0.2
0.4
0.6
Group
2018
£m
1.4
–
17.8
2.5
38.7
42.7
103.1
2017
£m
2.0
–
17.8
–
27.1
39.8
86.7
Company
2018
£m
0.9
837.3
1.3
–
16.8
0.1
856.4
Group
£m
0.6
0.2
(0.2)
0.6
0.3
0.3
0.6
0.7
0.2
(0.3)
0.6
0.2
0.4
0.6
The provisions in both the Group and the Company relate to national insurance that is payable on gains made by employees on the exercise
of share options granted to them. The eventual liability to national insurance is dependent on:
• the market price of the Company’s shares at the date of exercise;
• the number of equity share options that are exercised; and
• the prevailing rate of national insurance at the date of exercise.
170
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Net debt and derivative financial instruments
Current liabilities
1.125% unsecured convertible bonds 2019
Intercompany loan
Non-current liabilities
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Secured bank loans
Intercompany loan
Borrowings
Leasehold liabilities
Derivative financial instruments expiring in greater than one year
Gross debt
Reconciliation to net debt:
Gross debt
Derivative financial instruments
Cash and cash equivalents
Net debt
Group
2018
£m
148.4
–
148.4
–
185.9
29.8
24.8
74.6
74.4
81.9
267.0
27.7
–
766.1
914.5
60.7
3.6
978.8
978.8
(3.6)
(18.3)
956.9
2017
£m
–
–
–
145.6
186.9
29.8
24.8
74.5
74.3
81.7
85.6
27.6
–
730.8
730.8
14.1
7.9
752.8
752.8
(7.9)
(87.0)
657.9
Company
2018
£m
–
148.4
148.4
–
–
29.8
24.8
74.6
74.4
81.9
267.0
–
–
552.5
700.9
–
3.6
704.5
704.5
(3.6)
(17.3)
683.6
2017
£m
–
–
–
–
–
29.8
24.8
74.5
74.3
81.7
85.6
–
145.6
516.3
516.3
–
7.0
523.3
523.3
(7.0)
(85.8)
430.5
1.125% unsecured convertible bonds 2019
In July 2013 the Group issued £150m of convertible bonds. The unsecured instruments pay a coupon of 1.125% until July 2019 or the
conversion date, if earlier. The initial conversion price was set at £33.35 per share but, following the subsequent dividends, the conversion
price has been adjusted to £31.78 per share. In accordance with IAS 32, the equity and debt components of the bonds are accounted for
separately and the fair value of the debt component has been determined using the market interest rate for an equivalent non-convertible
bond, deemed to be 2.67%. As a result, £137.4m was recognised as a liability in the balance sheet on issue and the remainder of the proceeds,
£12.6m, which represent the equity component, was credited to reserves. The difference between the fair value of the liability and the principal
value is being amortised through the income statement from the date of issue. Issue costs of £3.8m were allocated between equity and debt
and the element relating to the debt component is being amortised over the life of the bonds. The issue costs apportioned to equity of £0.3m
have not been amortised. The fair value was determined by the ask-price of £102.38 per £100 as at 31 December 2018 (2017: £107.88 per £100).
The carrying value at 31 December 2018 was £148.4m (2017: £145.6m).
Financial statements
Reconciliation of nominal value to carrying value:
Nominal value
Fair value adjustment on issue allocated to equity
Debt component on issue
Unamortised issue costs
Amortisation of fair value adjustment
Carrying amount included in borrowings
171
£m
150.0
(12.6)
137.4
(0.3)
11.3
148.4
6.5% secured bonds 2026
As a result of the acquisition of London Merchant Securities plc in 2007, the secured bonds 2026 were included at fair value less unamortised
issue costs. This difference between fair value at acquisition and principal value is being amortised through the income statement.
The fair value at 31 December 2018 was determined by the ask-price of £126.90 per £100 (2017: £128.94 per £100). The carrying value
at 31 December 2018 was £185.9m (2017: £186.9m).
3.46% unsecured private placement notes 2028 and 3.57% unsecured private placement notes 2031
In February 2016, the Group arranged unsecured private placement notes, comprising £30m for 12 years and £75m for 15 years.
The funds were drawn on 4 May 2016. The fair values were determined by comparing the discounted future cash flows using the contracted
yields with those of the reference gilts plus the implied margins. The references were a 6% 2028 gilt and a 4.75% 2030 gilt both with an implied
margin which is unchanged since the date of fixing. The carrying values at 31 December 2018 were £29.8m (2017: £29.8m) and £74.6m (2017:
£74.5m), respectively.
4.41% unsecured private placement notes 2029 and 4.68% unsecured private placement notes 2034
In November 2013, the Group arranged unsecured private placement notes, comprising £25m for 15 years and £75m for 20 years.
The funds were drawn on 8 January 2014. The fair values were determined by comparing the discounted future cash flows using the
contracted yields with those of the reference gilts plus the implied margins. The references were a 6% 2028 gilt and a 4.25% 2032 gilt both
with an implied margin which is unchanged since the date of fixing. The carrying values at 31 December 2018 were £24.8m (2017: £24.8m)
and £74.4m (2017: £74.3m), respectively.
3.99% secured loan 2024
In July 2012, the Group arranged a 12¼-year secured fixed rate loan. The loan was drawn on 1 August 2012. The fair value was determined by
comparing the discounted future cash flows using the contracted yield with those of the reference gilt plus an implied margin. The reference
was a 5% 2025 gilt with an implied margin which is unchanged since the date of fixing. The carrying value at 31 December 2018 was £81.9m
(2017: £81.7m).
Bank borrowings
As all main corporate facilities were refinanced or amended in the past few years, the fair values of the Group’s bank loans are deemed to be
approximately the same as their carrying amount, after adjusting for the unamortised arrangement fees.
Undrawn committed bank facilities – maturity profile
Group
At 31 December 2018
At 31 December 2017
Company
At 31 December 2018
At 31 December 2017
< 1 year
£m
1 to 2 years
£m
2 to 3 years
£m
3 to 4 years
£m
4 to 5 years
£m
> 5 years
£m
–
–
–
–
–
–
–
–
–
–
–
–
255.5
–
255.5
–
–
436.0
–
436.0
–
–
–
–
Total
£m
255.5
436.0
255.5
436.0
Intercompany loans
The terms of the intercompany loan in the Company mirror those of the unsecured convertible bonds 2019. As with the bonds, debt and equity
components of the intercompany loan have been accounted for separately, and the fair value of the debt components is identical to that of the
bonds. The carrying value at 31 December 2018 was £148.4m (2017: £145.6m).
172
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Net debt and derivative financial instruments (continued)
Derivative financial instruments
The derivative financial instruments consist of interest rate swaps, the fair values of which represent the net present value of the difference
between the contracted fixed rates and the fixed rates payable if the swaps were to be replaced on 31 December 2018 for the period to the
contracted expiry dates.
The Group has a £70m forward starting interest rate swap effective from 29 March 2019, a £40m forward starting interest rate swap
effective from 15 October 2019, and a £75m forward starting interest rate swap effective from 1 April 2019. These swaps are not included
in the 31 December 2018 figures in the table below, but the financial impact from the effective dates onwards is included in the relevant
tables in this note.
The fair values of the Group’s outstanding interest rate swaps have been estimated using the mid-point of the yield curves prevailing on the
reporting date and represent the net present value of the differences between the contracted rate and the valuation rate when applied to the
projected balances for the period from the reporting date to the contracted expiry dates.
At 31 December 2018
Interest rate swaps
At 31 December 2017
Interest rate swaps
Secured and unsecured debt
Secured
6.5% secured bonds 2026
3.99% secured loan 2024
Secured bank loans
Unsecured
1.125% unsecured convertible bonds 2019
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
Unsecured bank loans
Intercompany loans
Group
Weighted average
interest rate
%
Principal
£m
28.0
0.88
28.0
3.53
Average life
Years
Principal
£m
Company
Weighted average
interest rate
%
Average life
Years
1.2
1.2
Group
2018
£m
185.9
81.9
27.7
295.5
148.4
29.8
24.8
74.6
74.4
267.0
–
619.0
–
–
2017
£m
186.9
81.7
27.6
296.2
145.6
29.8
24.8
74.5
74.3
85.6
–
434.6
–
–
Company
2018
£m
–
81.9
–
81.9
–
29.8
24.8
74.6
74.4
267.0
148.4
619.0
–
–
2017
£m
–
81.7
–
81.7
–
29.8
24.8
74.5
74.3
85.6
145.6
434.6
Borrowings
914.5
730.8
700.9
516.3
At 31 December 2018, the Group’s secured bank loan and the 3.99% secured loan 2024 were secured by a fixed charge over £112.4m
(2017: £122.1m) and £293.3m (2017: £272.3m), respectively, of the Group’s properties. In addition, the secured bonds 2026 were secured by
a floating charge over a number of the Group’s subsidiary companies which contained £668.0m (2017: £592.3m) of the Group’s properties.
At 31 December 2018, the Company’s 3.99% secured loan 2024 was secured by a fixed charge over £293.3m (2017: £272.3m) of the Group’s
properties.
Fixed interest rate and hedged debt
At 31 December 2018 and 2017, the Group’s fixed rate and hedged debt included the unsecured convertible bonds 2019, the secured bonds
2026, a secured loan 2024, the unsecured private placement notes 2028, 2029, 2031 and 2034 and the hedged bank debt.
At 31 December 2018 and 2017, the Company’s fixed rate debt comprised a secured loan 2024, the unsecured private placement notes 2028,
2029, 2031 and 2034, the hedged bank debt and the intercompany loans.
Financial statements
173
Interest rate exposure
After taking into account the various interest rate hedging instruments entered into by the Group and the Company, the interest rate exposure
of the Group’s and Company’s borrowings were:
Floating rate
£m
Hedged
£m
Fixed rate
£m
Borrowings
£m
Weighted average
interest rate1
%
Weighted
average life
Years
Group
At 31 December 2018
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Secured bank loans
At 31 December 2017
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Secured bank loans
Company
At 31 December 2018
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Intercompany loans
At 31 December 2017
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Intercompany loans
–
–
–
–
–
–
–
267.0
–
267.0
–
–
–
–
–
–
–
85.6
–
85.6
–
–
–
–
–
267.0
–
267.0
–
–
–
–
–
85.6
–
85.6
–
–
–
–
–
–
–
–
27.7
27.7
–
–
–
–
–
–
–
–
27.6
27.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
148.4
185.9
29.8
24.8
74.6
74.4
81.9
–
–
619.8
145.6
186.9
29.8
24.8
74.5
74.3
81.7
–
–
617.6
29.8
24.8
74.6
74.4
81.9
–
148.4
433.9
29.8
24.8
74.5
74.3
81.7
–
145.6
430.7
148.4
185.9
29.8
24.8
74.6
74.4
81.9
267.0
27.7
914.5
145.6
186.9
29.8
24.8
74.5
74.3
81.7
85.6
27.6
730.8
29.8
24.8
74.6
74.4
81.9
267.0
148.4
700.9
29.8
24.8
74.5
74.3
81.7
85.6
145.6
516.3
2.67
6.50
3.46
4.41
3.57
4.68
3.99
2.14
2.58
3.68
2.67
6.50
3.46
4.41
3.57
4.68
3.99
1.73
5.24
4.11
3.46
4.41
3.57
4.68
3.99
2.14
2.67
3.03
3.46
4.41
3.57
4.68
3.99
1.73
2.67
3.26
0.6
7.2
9.3
10.0
12.3
15.0
5.8
3.1
3.6
5.9
1.6
8.2
10.3
11.0
13.3
16.0
6.8.
4.1
4.6
7.6
9.3
10.0
12.3
15.0
5.8
3.1
0.6
5.6
10.3
11.0
13.3
16.0
6.8
4.1
1.6
7.5
1 The weighted average interest rates are based on the nominal amounts of the debt facilities.
174
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Net debt and derivative financial instruments (continued)
Contractual undiscounted cash outflows
IFRS 7 Financial Instruments: Disclosure, requires disclosure of the maturity of the Group’s and Company’s remaining contractual financial
liabilities. The tables below show the contractual undiscounted cash outflows arising from the Group’s gross debt.
< 1 year
£m
1 to 2 years
£m
2 to 3 years
£m
3 to 4 years
£m
4 to 5 years
£m
> 5 years
£m
Total
£m
Group
At 31 December 2018
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Secured bank loans
Total on maturity
Leasehold liabilities
Interest on borrowings
Effect of interest rate swaps
Gross loan commitments
At 31 December 2017
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Secured bank loans
Total on maturity
Leasehold liabilities
Interest on borrowings
Effect of interest rate swaps
Gross loan commitments
150.0
–
–
–
–
–
–
–
–
150.0
0.8
31.5
1.6
183.9
–
–
–
–
–
–
–
–
–
–
0.8
28.0
2.5
31.3
–
–
–
–
–
–
–
–
–
–
0.8
30.8
1.2
32.8
150.0
–
–
–
–
–
–
–
–
150.0
0.8
28.3
3.1
182.2
–
–
–
–
–
–
–
–
–
–
0.8
31.1
0.5
32.4
–
–
–
–
–
–
–
–
–
–
0.8
26.8
1.3
28.9
–
–
–
–
–
–
–
269.5
28.0
297.5
52.4
24.4
0.4
374.7
–
–
–
–
–
–
–
–
–
–
0.8
26.9
0.6
28.3
–
–
–
–
–
–
–
–
–
–
0.8
23.0
–
23.8
–
–
–
–
–
–
–
89.0
28.0
117.0
0.8
24.8
0.4
143.0
–
175.0
30.0
25.0
75.0
75.0
83.0
–
–
463.0
194.8
99.4
(0.1)
757.1
–
175.0
30.0
25.0
75.0
75.0
83.0
–
–
463.0
187.9
122.6
(0.1)
773.4
150.0
175.0
30.0
25.0
75.0
75.0
83.0
269.5
28.0
910.5
250.4
240.2
3.6
1,404.7
150.0
175.0
30.0
25.0
75.0
75.0
83.0
89.0
28.0
730.0
191.9
257.4
7.8
1,187.1
Financial statements
Reconciliation to borrowings:
Group
At 31 December 2018
Maturing in:
< 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
> 5 years
At 31 December 2017
Maturing in:
< 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
> 5 years
175
Gross loan
commitments
£m
Interest on
gross debt
£m
Effect of interest
rate swaps
£m
Leasehold
liabilities
£m
Non-cash
amortisation
£m
Borrowings
£m
Adjustments
183.9
32.8
32.4
374.7
23.8
757.1
1,404.7
31.3
182.2
28.9
28.3
143.0
773.4
1,187.1
(31.5)
(30.8)
(31.1)
(24.4)
(23.0)
(99.4)
(240.2)
(28.0)
(28.3)
(26.8)
(26.9)
(24.8)
(122.6)
(257.4)
(1.6)
(1.2)
(0.5)
(0.4)
–
0.1
(3.6)
(2.5)
(3.1)
(1.3)
(0.6)
(0.4)
0.1
(7.8)
(0.8)
(0.8)
(0.8)
(52.4)
(0.8)
(194.8)
(250.4)
(0.8)
(0.8)
(0.8)
(0.8)
(0.8)
(187.9)
(191.9)
(1.6)
–
–
(2.8)
–
8.4
4.0
–
(4.4)
–
–
(3.8)
9.0
0.8
148.4
–
–
294.7
–
471.4
914.5
–
145.6
–
–
113.2
472.0
730.8
176
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Net debt and derivative financial instruments (continued)
Company
At 31 December 2018
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Intercompany loans
Total on maturity
Interest on debt
Effect of interest rate swaps
Gross loan commitments
At 31 December 2017
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Unsecured bank loans
Intercompany loans
Total on maturity
Interest on debt
Effect of interest rate swaps
Gross loan commitments
< 1year
£m
1 to 2 years
£m
2 to 3 years
£m
3 to 4 years
£m
4 to 5 years
£m
> 5 years
£m
Total
£m
–
–
–
–
–
–
150.0
150.0
19.3
1.6
170.9
–
–
–
–
–
–
–
–
16.0
1.7
17.7
–
–
–
–
–
–
–
–
18.6
1.2
19.8
–
–
–
–
–
–
150.0
150.0
16.2
2.9
169.1
–
–
–
–
–
–
–
–
18.9
0.5
19.4
–
–
–
–
–
–
–
–
14.6
1.3
15.9
–
–
–
–
–
269.5
–
269.5
12.4
0.4
282.3
–
–
–
–
–
–
–
–
14.7
0.6
15.3
–
–
–
–
–
–
–
–
11.6
–
11.6
–
–
–
–
–
89.0
–
89.0
12.8
0.4
102.2
30.0
25.0
75.0
75.0
83.0
–
–
288.0
71.0
(0.1)
358.9
30.0
25.0
75.0
75.0
83.0
–
–
288.0
82.8
(0.1)
370.7
30.0
25.0
75.0
75.0
83.0
269.5
150.0
707.5
151.8
3.6
862.9
30.0
25.0
75.0
75.0
83.0
89.0
150.0
527.0
157.1
6.8
690.9
Financial statements
Reconciliation to borrowings:
Company
At 31 December 2018
Maturing in:
< 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
> 5 years
At 31 December 2017
Maturing in:
< 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
> 5 years
177
Gross loan
commitments
£m
Interest on
gross debt
£m
Adjustments
Effect of interest
rate swaps
£m
Non-cash
amortisation
£m
Borrowings
£m
170.9
19.8
19.4
282.3
11.6
358.9
862.9
17.7
169.1
15.9
15.3
102.2
370.7
690.9
(19.3)
(18.6)
(18.9)
(12.4)
(11.6)
(71.0)
(151.8)
(16.0)
(16.2)
(14.6)
(14.7)
(12.8)
(82.8)
(157.1)
(1.6)
(1.2)
(0.5)
(0.4)
–
0.1
(3.6)
(1.7)
(2.9)
(1.3)
(0.6)
(0.4)
0.1
(6.8)
(1.6)
–
–
(2.5)
–
(2.5)
(6.6)
–
(4.4)
–
–
(3.4)
(2.9)
(10.7)
148.4
–
–
267.0
–
285.5
700.9
–
145.6
–
–
85.6
285.1
516.3
Derivative financial instruments cash flows
The following table provides an analysis of the anticipated contractual cash flows for the derivative financial instruments using undiscounted
cash flows. These amounts represent the gross cash flows of the derivative financial instruments and are settled as either a net payment
or receipt.
Group
Maturing in:
< 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
> 5 years
Gross contractual cash flows
Company
Maturing in:
< 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
> 5 years
Gross contractual cash flows
2018
Receivable
£m
2018
Payable
£m
2017
Receivable
£m
2017
Payable
£m
1.2
1.6
1.5
1.4
1.0
1.6
8.3
1.0
1.5
1.5
1.4
1.0
1.6
8.0
(2.8)
(2.8)
(2.0)
(1.8)
(1.0)
(1.5)
(11.9)
(2.6)
(2.7)
(2.0)
(1.8)
(1.0)
(1.5)
(11.6)
0.6
1.4
1.4
1.4
1.4
2.6
8.8
0.4
1.4
1.4
1.4
1.4
2.6
8.6
(3.1)
(4.5)
(2.7)
(2.0)
(1.8)
(2.5)
(16.6)
(2.1)
(4.3)
(2.7)
(2.0)
(1.8)
(2.5)
(15.4)
178
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Net debt and derivative financial instruments (continued)
Financial instruments – risk management
The Group is exposed through its operations to the following financial risks:
• credit risk;
• market risk; and
• liquidity risk.
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. The following describes the
Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information
in respect of these risks is presented throughout these financial statements. Further information on risk as required by IFRS 7 is given on
pages 46 to 57.
There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for
managing those risks or the methods used to measure them from previous years.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, cash at bank,
trade and other payables, floating rate bank loans, fixed rate loans and private placement notes, secured and unsecured bonds and interest
rate swaps.
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining
ultimate responsibility for them, it has delegated the authority to executive management for designing and operating processes that ensure
the effective implementation of the objectives and policies.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s flexibility
and its ability to maximise returns. Further details regarding these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The Group is mainly exposed to credit risk from lease contracts in relation to its property portfolio. It is Group policy to assess
the credit risk of new tenants before entering into such contracts. The Board has established a credit committee which assesses each
new tenant before a new lease is signed. The review includes the latest sets of financial statements, external ratings, when available, and,
in some cases, forecast information and bank and trade references. The covenant strength of each tenant is determined based on this review
and, if appropriate, a deposit or a guarantee is obtained.
As the Group operates predominantly in central London, it is subject to some geographical risk. However, this is mitigated by the wide range
of tenants from a broad spectrum of business sectors.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions,
only independently rated parties with a minimum rating of investment grade are accepted. This risk is also reduced by the short periods that
money is on deposit at any one time. The quantitative disclosures of the credit risk exposure in relation to trade and other receivables which
are neither past due nor impaired are disclosed in note 20.
The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk without
taking account of the value of any collateral obtained.
Financial statements
179
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices.
Market risk arises for the Group from its use of variable interest bearing instruments (interest rate risk).
The Group monitors its interest rate exposure on a regular basis. Sensitivity analysis performed to ascertain the impact on profit or loss and
net assets of a 50 basis point shift in interest rates would result in an increase of £1.3m (2017: £0.3m) or a decrease of £1.3m (2017: £0.3m).
It is currently Group policy that generally between 60% and 85% of external Group borrowings (excluding finance lease payables) are at fixed
rates. Where the Group wishes to vary the amount of external fixed rate debt it holds (subject to it being generally between 60% and 85% of
expected Group borrowings, as noted above), the Group makes use of interest rate derivatives to achieve the desired interest rate profile.
Although the Board accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates
nor eliminates fully cash flow risk associated with variability in interest payments, it considers that it achieves an appropriate balance of
exposure to these risks. At 31 December 2018, the proportion of fixed debt held by the Group was 70% (2017: 88%). During both 2018 and 2017,
the Group’s borrowings at variable rate were denominated in sterling.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. When the Group raises long-term borrowings,
it is generally at fixed rates.
Liquidity risk
Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt
instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.
The Group’s policy is to ensure that it will always have sufficient headroom in its loan facilities to allow it to meet its liabilities when they
become due. To achieve this aim, it seeks to maintain committed facilities to meet the expected requirements. The Group also seeks to reduce
liquidity risk by fixing interest rates (and hence cash flows) on a portion of its long-term borrowings. This is further explained in the ‘market risk’
section above.
Executive management receives rolling three-year projections of cash flow and loan balances on a regular basis as part of the Group’s
forecasting processes. At the balance sheet date, these projections indicated that the Group expected to have sufficient liquid resources
to meet its obligations under all reasonably expected circumstances.
The Group’s loan facilities and other borrowings are spread across a range of banks and financial institutions so as to minimise any potential
concentration of risk. The liquidity risk of the Group is managed centrally by the finance department.
Capital disclosures
The Group’s capital comprises all components of equity (share capital, share premium, other reserves, retained earnings and non-controlling
interest).
The Group’s objectives when maintaining capital are:
• to safeguard the entity’s ability to continue as a going concern so that it can continue to provide above average long-term returns
for shareholders; and
• to provide an above average annualised total return to shareholders.
The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to
it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital
structure, the Group may vary the amount of dividends paid to shareholders subject to the rules imposed by its REIT status. It may also seek
to redeem bonds, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry,
the Group monitors capital on the basis of NAV gearing and loan-to-value ratio. During 2018, the Group’s strategy, which was unchanged
from 2017, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the interest cover ratio,
are defined in the list of definitions on page 206 and are derived in note 40.
180
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
24 Financial assets and liabilities and fair values
Categories of financial assets and liabilities
Fair value through
profit and loss
£m
Loans and
receivables
£m
Amortised
cost
£m
Total
carrying value
£m
Group
Financial assets
Cash and cash equivalents
Other assets – current1
Financial liabilities
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Bank borrowings due after one year
Leasehold liabilities
Derivative financial instruments
Other liabilities – current2
At 31 December 2018
Financial assets
Cash and cash equivalents
Other assets – current1
Financial liabilities
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Bank borrowings due after one year
Leasehold liabilities
Derivative financial instruments
Other liabilities – current2
–
–
–
–
–
–
–
–
–
–
–
–
(3.6)
–
(3.6)
(3.6)
–
–
–
–
–
–
–
–
–
–
–
–
(7.9)
–
(7.9)
18.3
24.9
43.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(148.4)
(185.9)
(29.8)
(24.8)
(74.6)
(74.4)
(81.9)
(294.7)
(60.7)
–
(57.9)
(1,033.1)
18.3
24.9
43.2
(148.4)
(185.9)
(29.8)
(24.8)
(74.6)
(74.4)
(81.9)
(294.7)
(60.7)
(3.6)
(57.9)
(1,036.7)
43.2
(1,033.1)
(993.5)
87.0
20.6
107.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(145.6)
(186.9)
(29.8)
(24.8)
(74.5)
(74.3)
(81.7)
(113.2)
(14.1)
–
(46.9)
(791.8)
87.0
20.6
107.6
(145.6)
(186.9)
(29.8)
(24.8)
(74.5)
(74.3)
(81.7)
(113.2)
(14.1)
(7.9)
(46.9)
(799.7)
At 31 December 2017
(692.1)
In 2018, other assets includes all amounts shown as trade and other receivables in note 20 except lease incentives and costs; sales and social security taxes; and prepayments
of £36.5m (2017: £37.4m) for the Group and £1.8m (2017: £8.3m) for the Company. All amounts are non-interest bearing and are receivable within one year.
In 2018, other liabilities for the Group include all amounts shown as trade and other payables in note 21 except deferred income and sales and social security taxes of £45.2m
(2017: £39.8m) for the Group and of £0.1m (2017: £0.1m) for the Company. All amounts are non-interest bearing and are due within one year.
(791.8)
107.6
(7.9)
1
2
Financial statements
Company
Financial assets
Cash and cash equivalents
Other assets – current1
Financial liabilities
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Bank borrowings due after one year
Intercompany loans
Derivative financial instruments
Other liabilities – current2
At 31 December 2018
Financial assets
Cash and cash equivalents
Other assets – current1
Financial liabilities
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Bank borrowings due after one year
Intercompany loans
Derivative financial instruments
Other liabilities – current2
181
Fair value through
profit and loss
£m
Loans and
receivables
£m
Amortised
cost
£m
Total
carrying value
£m
–
–
–
–
–
–
–
–
–
–
(3.6)
–
(3.6)
17.3
1,848.0
1,865.3
–
–
–
–
–
–
–
–
(837.3)
(837.3)
–
–
–
(29.8)
(24.8)
(74.6)
(74.4)
(81.9)
(267.0)
(148.4)
–
(19.0)
(719.9)
17.3
1,848.0
1,865.3
(29.8)
(24.8)
(74.6)
(74.4)
(81.9)
(267.0)
(148.4)
(3.6)
(856.3)
(1,560.8)
(3.6)
1,028.0
(719.9)
304.5
–
–
–
–
–
–
–
–
–
–
(7.0)
–
(7.0)
85.8
1,461.3
1,547.1
–
–
–
–
–
–
–
–
(890.3)
(890.3)
–
–
–
(29.8)
(24.8)
(74.5)
(74.3)
(81.7)
(85.6)
(145.6)
–
(11.9)
(528.2)
85.8
1,461.3
1,547.1
(29.8)
(24.8)
(74.5)
(74.3)
(81.7)
(85.6)
(145.6)
(7.0)
(902.2)
(1,425.5)
At 31 December 2017
121.6
In 2018, other assets includes all amounts shown as trade and other receivables in note 20 except lease incentives and costs; sales and social security taxes; and prepayments
of £36.5m (2017: £37.4m) for the Group and £1.8m (2017: £8.3m) for the Company. All amounts are non-interest bearing and are receivable within one year.
In 2018, other liabilities for the Group include all amounts shown as trade and other payables in note 21 except deferred income and sales and social security taxes of £45.2m
(2017: £39.8m) for the Group and of £0.1m (2017: £0.1m) for the Company. All amounts are non-interest bearing and are due within one year.
(528.2)
656.8
(7.0)
1
2
Reconciliation of net financial assets and liabilities to gross debt:
Net financial assets and liabilities
Other assets – current
Other liabilities – current
Cash and cash equivalents
Gross debt
Group
2018
£m
(993.5)
(24.9)
57.9
(18.3)
(978.8)
2017
£m
(692.1)
(20.6)
46.9
(87.0)
(752.8)
Company
2018
£m
304.5
(1,848.0)
856.3
(17.3)
(704.5)
2017
£m
121.6
(1,461.3)
902.2
(85.8)
(523.3)
182
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
24 Financial assets and liabilities and fair values (continued)
Fair value measurement
The table below shows the fair values, where applicable, of borrowings and derivative financial instruments held by the Group, together with a
reconciliation to net financial assets and liabilities. Details of inputs and valuation methods used to derive the fair values are shown in note 23.
Group
Company
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
Fair value
hierarchy
At 31 December 2018
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Bank borrowings due after one year
Intercompany loan
Derivative financial instruments
Amounts not fair valued:
Cash and cash equivalents
Other assets – current
Leasehold liabilities
Other liabilities – current
Net financial assets and liabilities
At 31 December 2017
1.125% unsecured convertible bonds 2019
6.5% secured bonds 2026
3.46% unsecured private placement notes 2028
4.41% unsecured private placement notes 2029
3.57% unsecured private placement notes 2031
4.68% unsecured private placement notes 2034
3.99% secured loan 2024
Bank borrowings due after one year
Intercompany loan
Derivative financial instruments
Amounts not fair valued:
Cash and cash equivalents
Other assets – current
Leasehold liabilities
Other liabilities – current
Net financial assets and liabilities
–
–
(30.9)
(29.0)
(76.4)
(90.9)
(87.0)
(269.5)
(152.3)
(3.6)
(739.6)
–
–
(31.0)
(29.3)
(76.4)
(91.8)
(87.9)
(89.0)
(158.3)
(7.0)
(570.7)
Level 1
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 1
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
(152.3)
(222.1)
(30.9)
(29.0)
(76.4)
(90.9)
(87.0)
(297.5)
–
(3.6)
(989.7)
(158.3)
(225.6)
(31.0)
(29.3)
(76.4)
(91.8)
(87.9)
(117.0)
–
(7.9)
(825.2)
(148.4)
(185.9)
(29.8)
(24.8)
(74.6)
(74.4)
(81.9)
(294.7)
–
(3.6)
(918.1)
18.3
24.9
(60.7)
(57.9)
(993.5)
(145.6)
(186.9)
(29.8)
(24.8)
(74.5)
(74.3)
(81.7)
(113.2)
–
(7.9)
(738.7)
87.0
20.6
(14.1)
(46.9)
(692.1)
–
–
(29.8)
(24.8)
(74.6)
(74.4)
(81.9)
(267.0)
(148.4)
(3.6)
(704.5)
17.3
1,848.0
–
(856.3)
304.5
–
–
(29.8)
(24.8)
(74.5)
(74.3)
(81.7)
(85.6)
(145.6)
(7.0)
(523.3)
85.8
1,461.3
–
(902.2)
121.6
There have been no transfers between Level 1 and Level 2 or Level 2 and Level 3 in either 2018 or 2017.
Financial statements
25 Cash flow information
Net debt reconciliation
Group
Borrowings
Leasehold liabilities
Total liabilities from financing activities
Cash and cash equivalents
Net debt
Company
Borrowings
Total liabilities from financing activities
Cash and cash equivalents
Net debt
26 Deferred tax
Group
At 1 January 2018
(Credited)/charged to the income statement
Credited to other comprehensive income
At 31 December 2018
At 1 January 2017
Credited to the income statement
Change in tax rates in the income statement
Charged to other comprehensive income
Change in tax rates in other comprehensive income
At 31 December 2017
Company
At 1 January 2018
At 31 December 2018
At 1 January 2017
Charged to the income statement
Change in tax rates in the income statement
At 31 December 2017
2017
£m
Cash flows
£m
Amortisation
of issue and
arrangement
costs
£m
Fair value
adjustments
£m
Acquisitions
£m
Unwind of
discount
£m
Non-cash changes
730.8
14.1
744.9
(87.0)
657.9
516.3
516.3
(85.8)
430.5
180.5
–
180.5
68.7
249.2
180.5
180.5
68.5
249.0
2.1
–
2.1
–
2.1
1.9
1.9
–
1.9
1.1
–
1.1
–
1.1
2.2
2.2
–
2.2
–
45.7
45.7
–
45.7
–
–
–
–
–
0.9
0.9
–
0.9
–
–
–
–
Revaluation
surplus
£m
Other
£m
4.5
(0.8)
(0.1)
3.6
5.3
(1.0)
(0.5)
0.8
(0.1)
4.5
–
–
–
–
–
–
(2.2)
0.4
–
(1.8)
(2.2)
(0.2)
0.2
–
–
(2.2)
(2.1)
(2.1)
(2.2)
(0.2)
0.3
(2.1)
183
2018
£m
914.5
60.7
975.2
(18.3)
956.9
700.9
700.9
(17.3)
683.6
Total
£m
2.3
(0.4)
(0.1)
1.8
3.1
(1.2)
(0.3)
0.8
(0.1)
2.3
(2.1)
(2.1)
(2.2)
(0.2)
0.3
(2.1)
Deferred tax on the revaluation surplus is calculated on the basis of the chargeable gains that would crystallise on the sale of the property
portfolio at each balance sheet date. The calculation takes account of any available indexation on the historical cost of the properties.
Due to the Group’s REIT status, deferred tax is only provided at each balance sheet date on properties outside the REIT regime.
Deferred tax assets have been recognised in respect of all tax losses and other temporary differences where the Directors believe it is
probable that these assets will be recovered.
184
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
27 Share capital
The movement in the number of 5p ordinary shares in issue is shown in the table below:
Number of shares in issue
At 1 January 2017
Issued as a result of awards vesting under the Group’s Performance Share Plan
Issued as a result of the exercise of share options1
At 31 December 2017
Issued as a result of awards vesting under the Group’s Performance Share Plan
Issued as a result of the exercise of share options1
At 31 December 2018
1 Proceeds from these issues were £0.4m (2017: £0.8m).
Number
111,389,837
51,824
33,160
111,474,821
48,200
16,916
111,539,937
The number of outstanding share options and other share awards granted to the Directors are disclosed in the report of the Remuneration
Committee on pages 116 to 131 and note 13.
28 Reserves
The following describes the nature and purpose of each reserve within shareholders’ equity:
Reserve
Share premium
Description and purpose
Amount subscribed for share capital in excess of nominal value less directly attributable issue costs.
Other reserves:
Merger
Premium on the issue of shares as equity consideration for the acquisition of London Merchant Securities plc (LMS).
Revaluation Revaluation of the owner-occupied property and the associated deferred tax.
Other
Equity portion of the convertible bonds for the Group and intercompany loans for the Company.
Fair value of equity instruments granted but not yet exercised under share-based payments.
Retained earnings
Cumulative net gains and losses recognised in the Group income statement together with other items such as dividends
and share-based payments.
Other reserves
Merger reserve
Revaluation reserve
Equity portion of the convertible bonds
Fair value of equity instruments under share-based payments
Group
2018
£m
910.5
14.6
12.3
6.1
943.5
2017
£m
910.5
13.8
12.3
6.3
942.9
Company
2018
£m
910.5
–
12.3
6.1
928.9
2017
£m
910.5
–
12.3
6.3
929.1
29 Profit for the year attributable to members of Derwent London plc
Profit for the year in the Group income statement includes a profit of £327.6m (2017: £125.7m) generated by the Company. The Company has
taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own income statement in
these financial statements.
Financial statements
30 Dividend
Current year
2018 final dividend1
2018 interim dividend
Distribution of current year profit
Prior year
2017 final dividend
2017 interim dividend
Distribution of prior year profit
Special dividend
2017 special dividend
Distribution of accumulated profit
2016 final dividend
2016 special dividend
Dividends as reported in the
Group statement of changes in equity
Payment date
7 June 2019
19 October 2018
8 June 2018
20 October 2017
8 June 2018
9 June 2017
9 June 2017
Dividend per share
PID
p
Non-PID
p
30.00
19.10
49.10
35.00
17.33
52.33
–
–
32.70
–
16.75
–
16.75
7.40
–
7.40
75.00
75.00
5.80
52.00
Total
p
46.75
19.10
65.85
42.40
17.33
59.73
75.00
75.00
38.50
52.00
2018
£m
–
21.3
21.3
47.3
–
47.3
83.6
83.6
–
–
185
2017
£m
–
–
–
–
19.3
19.3
–
–
42.9
57.9
2018 interim dividend withholding tax
2017 interim dividend withholding tax
2016 interim dividend withholding tax
Dividends paid as reported in the
Group cash flow statement
1 Subject to shareholder approval at the AGM on 17 May 2019.
14 January 2019
14 January 2018
14 January 2017
31 Cash and cash equivalents
Cash at bank
152.2
120.1
(2.3)
2.1
–
–
(2.1)
1.7
152.0
119.7
Group
2018
£m
18.3
2017
£m
87.0
Company
2018
£m
17.3
2017
£m
85.8
32 Capital commitments
Contracts for capital expenditure entered into by the Group at 31 December 2018 and not provided for in the accounts relating to the
construction, development or enhancement of the Group’s investment properties amounted to £147.2m (2017: £253.9m), whilst that relating
to the Group’s trading properties amounted to £8.7m (2017: £13.2m). At 31 December 2018 and 31 December 2017, there were no material
obligations for the purchase, repair or maintenance of investment or trading properties.
33 Contingent liabilities
The Company and its subsidiaries are party to cross guarantees securing certain bank loans. At 31 December 2018 and 31 December 2017,
there was no liability that could arise for the Company from the cross guarantees.
Where the Company enters into financial guarantee contracts and guarantees the indebtedness of other companies within the Group,
the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the
guarantee contract as a contingent liability until such time that it becomes probable that the Company will be required to make a payment
under the guarantee.
186
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
34 Leases
Operating lease receipts
Minimum lease receipts under non-cancellable operating leases to be received:
not later than one year
later than one year and not later than five years
later than five years
Finance lease obligations
Minimum lease payments under finance leases that fall due:
not later than one year
later than one year and not later than five years
later than five years
Future contingent rent payable on finance leases
Future finance charges on finance leases
Present value of finance lease liabilities
Present value of minimum finance lease obligations:
later than one year and not later than five years
later than five years
In accordance with IAS 17 Leases, the minimum lease payments are allocated as follows:
Finance charge
Contingent rent
Total
2018
£m
2017
£m
157.7
503.2
706.9
1,367.8
165.0
545.0
649.6
1,359.6
2018
£m
2017
£m
0.8
54.8
194.8
250.4
(25.1)
(164.6)
60.7
45.9
14.8
60.7
2018
£m
0.7
1.4
2.1
0.8
3.2
187.9
191.9
(19.6)
(158.2)
14.1
0.1
14.0
14.1
2017
£m
1.0
0.7
1.7
The Group has approximately 740 leases granted to its tenants. These vary dependent on the individual tenant and the respective property
and demise but typically are let for a term of five to 20 years, at a market rent with provisions to review to market rent every five years.
Standard lease provisions include service charge payments and recovery of other direct costs. The weighted average lease length of the
leases commencing during 2018 was 7.2 years (2017: 12.2 years). Of these leases, on a weighted average basis, 88% (2017: 97%) included
a rent free or half rent period.
35 Post balance sheet events
In January 2019, £250 million of new unsecured private placement notes were drawn. The issue consists of four tranches with maturities
ranging between 7 and 15 years. The weighted average coupon of the fixed rate notes equates to 2.89% with a weighted average maturity
of 10.8 years.
In February 2019, Prescot Street GP Limited and Prescot Street Nominees Limited, in which the Group holds a 50% interest, exchanged
contracts for the sale of the freehold interest in 9 Prescot Street E1 for £53.9m before costs, with completion expected in May 2019.
The main construction contract for Soho Place W1, one of our next major developments, was signed in February 2019.
Financial statements
36 List of subsidiaries and joint ventures
A full list of subsidiaries and joint ventures as at 31 December 2018 is set out below:
187
Ownership2
Principal activity
Subsidiaries
Asta Commercial Limited
Bargate Quarter Limited
BBR (Commercial) Limited
BBR Property Limited1
Caledonian Properties Limited
Caledonian Property Estates Limited
Caledonian Property Investments Limited
Carlton Construction & Development Company Limited
Central London Commercial Estates Limited
Charlotte Apartments Limited
80 Charlotte Street Limited1
Derwent Asset Management Limited1
Derwent Central Cross Limited1
Derwent Henry Wood Limited1
Derwent London Angel Square Limited1
Derwent London Asta Limited
Derwent London Asta Residential Limited
Derwent London Charlotte Street (Commercial) Limited
Derwent London Charlotte Street Limited1
Derwent London Copyright House Limited1
Derwent London Development Services Limited1
Derwent London Farringdon Limited1
Derwent London Featherstone Limited1
Derwent London Grafton Limited1
Derwent London Holden House Limited1
Derwent London Howland Limited1
Derwent London KSW Limited1
Derwent London Oliver’s Yard Limited1
Derwent London Page Street (Nominees) Limited
Derwent London Page Street Limited1
Derwent London Whitfield Street Limited1
Derwent Valley Central Limited1
Derwent Valley Employee Trust Limited1
Derwent Valley Finance Limited
Derwent Valley Limited
Derwent Valley London Limited1
Derwent Valley Property Developments Limited1
Derwent Valley Property Investments Limited1
Derwent Valley Property Trading Limited
Derwent Valley Railway Company1
Derwent Valley West End Limited1
Kensington Commercial Property Investments Limited
22 Kingsway Limited1
LMS (City Road) Limited
LMS Finance Limited
LMS Offices Limited
London Merchant Securities Limited1
LS Kingsway Limited
The New River Company Limited
West London & Suburban Property Investments Limited
Urbanfirst Limited
Derwent London Capital No. 2 (Jersey) Limited1
Portman Investments (Baker Street) Limited
100%
65%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
55%
Property investment
Investment Company
Property investment
Property trading
Property investment
Property investment
Property investment
Dormant
Property investment
Property investment
Property investment
Property management
Property investment
Property investment
Property investment
Property trading
Dormant
Property investment
Property trading
Property investment
Management services
Property investment
Property investment
Property investment
Property investment
Property investment
Property investment
Property investment
Dormant
Property investment
Property investment
Property investment
Dormant
Finance company
Holding company
Property investment
Property investment
Property investment
Property trading
Dormant
Property investment
Property investment
Dormant
Property investment
Investment Holding
Property investment
Holding company
Dormant
Property investment
Property investment
Investment Holding
Finance company
Property investment
188
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
36 List of subsidiaries and joint ventures (continued)
Joint ventures
Dorrington Derwent Holdings Limited
Dorrington Derwent Investment Limited
Prescot Street GP Limited
Prescot Street Leaseco Limited
Prescot Street Limited Partnership
Prescot Street Nominees Limited
Primister Limited
1
Indicates subsidiary undertakings held directly.
2 All holdings are of ordinary shares.
Ownership2
Principal activity
50%
50%
50%
50%
50%
50%
50%
Holding company
Investment company
Management Company
Property investment
Property investment
Dormant
Property investment
The Company controls 50% of the voting rights of its joint ventures, which are accounted for and disclosed in accordance with IFRS 11 Joint
Arrangements.
The Company’s interest in Portman Investments (Baker Street) Limited is accounted for and disclosed in accordance with IAS 27 Consolidated
and Separate Financial Statements. This gives rise to a non-controlling interest within equity in the Group balance sheet and the separate
disclosure of the non-controlling interest’s share of the Group’s profit for the year in the Group income statement and Group statement of
comprehensive income.
All of the entities above are incorporated and domiciled in England and Wales, with the exception of 22 Kingsway Limited and Derwent London
Capital No. 2 (Jersey) Limited, which are incorporated and domiciled in Jersey. In addition, all the entities are registered at 25 Savile Row,
London, W1S 2ER, with the exception of:
• 22 Kingsway Limited and Derwent London Capital No. 2 (Jersey) Limited, which are registered at 47 Esplanade, St Helier, JE1 0BD,
• Dorrington Derwent Holdings Limited and Dorrington Derwent Investment Limited, which are registered at 16 Hans Road, London, SW3 1RT;
Channel Islands;
and
• Primister Limited, which is registered at Quadrant House, Floor 6, 4 Thomas More Square, London, E1W 1YW.
Financial statements
189
37 Related party disclosure
Details of Directors’ remuneration are given in the report of the Remuneration Committee on pages 116 to 131 and note 11. A full list of
subsidiaries and joint ventures is given in note 36. Other related party transactions are as follows:
Group
The Hon. R.A. Rayne is a Director of LMS Capital plc, an investment company, which had a lease over offices owned by the Group for which
they paid a commercial rent of £0.1m (2017: £0.3m). This lease terminated on 24 March 2018. During the year, the Group also contributed £0.1m
(2017: £0.1m) to LMS Capital plc’s running costs.
There are no outstanding balances owed to the Group with respect to any of the above transactions.
At 31 December 2018, included within other receivables in note 20 is an amount owed by the Portman Estate, the minority owner of one of the
Group’s subsidiaries, of £2.0m (2017: £2.0m).
Company
The Company received interest from and paid interest to some of its subsidiaries during the year. These transactions are summarised below:
Interest income/(expense)
Balance receivable/(payable)
Related party
22 Kingsway Limited
80 Charlotte Street Limited
BBR (Commercial) Limited
BBR Property Limited
Derwent Asset Management Limited
Derwent Central Cross Limited
Derwent Henry Wood Limited
Derwent London Asta Limited
Derwent London Angel Square Limited
Derwent London Capital No. 2 (Jersey) Limited1
Derwent London Charlotte Street (Commercial) Limited
Derwent London Charlotte Street Limited
Derwent London Copyright House Limited
Derwent London Development Services Limited
Derwent London Farringdon Limited
Derwent London Grafton Limited
Derwent London Howland Limited
Derwent London KSW Limited
Derwent London Oliver’s Yard Limited
Derwent London Page Street Limited
Derwent Whitfield Street Limited
Derwent Valley Central Limited
Derwent Valley London Limited
Derwent Valley Property Developments Limited
Derwent Valley Holden House Limited
Derwent Valley Featherstone Limited
Derwent Valley Property Investments Limited
Derwent Valley Property Trading Limited
Derwent Valley Railway Company2
Derwent Valley West End Limited
London Merchant Securities Limited3
2018
£m
–
8.6
(0.1)
(0.2)
–
8.4
2.0
0.7
3.6
(3.9)
–
(0.1)
(0.6)
–
4.5
(1.0)
(1.8)
4.0
5.3
0.3
1.6
(3.0)
10.0
(1.5)
2.5
1.0
(4.1)
0.3
–
0.1
(4.8)
31.8
2017
£m
–
6.9
(0.1)
(0.2)
–
8.5
2.0
0.7
3.6
(3.8)
–
(0.1)
3.1
–
4.5
(1.5)
(1.1)
3.8
2.9
0.5
0.8
(4.4)
7.2
1.5
–
–
(3.7)
0.1
–
0.1
(6.0)
25.3
2018
£m
(33.5)
200.9
(2.5)
(5.8)
(0.5)
193.6
46.5
17.4
82.1
(148.3)
(1.1)
(1.7)
(2.5)
2.4
102.0
(8.3)
(7.3)
93.7
122.4
4.6
41.8
(41.2)
282.7
(141.9)
160.3
36.3
(98.1)
8.0
(0.2)
2.0
(44.1)
859.7
2017
£m
(33.5)
192.0
(2.4)
(5.5)
(0.7)
198.9
46.6
16.4
83.1
(145.5)
(1.0)
(1.6)
(26.3)
–
105.1
(37.3)
(75.6)
88.6
123.0
10.1
33.1
(90.1)
180.4
40.9
–
–
(90.6)
7.3
(0.2)
2.2
(193.4)
424.0
1 The payable balance at 31 December 2018 includes the intercompany loan of £148.4m (2017: £145.6m) included in note 23.
2 Dormant company.
3 Balance owed includes subsidiaries which form part of the LMS sub-group.
The Group has not made any provision for bad or doubtful debts in respect of related party debtors. Intercompany balances are repayable on
demand except the loan from Derwent London Capital No. 2 (Jersey) Limited, the payment and repayment terms of which mirror those of the
convertible bonds.
Interest is charged on the on-demand intercompany balances at an arm’s length basis.
190
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
38 EPRA performance measures
Summary table
EPRA earnings
EPRA net asset value
EPRA triple net asset value
EPRA vacancy rate
EPRA cost ratio (including direct vacancy costs)
EPRA net initial yield
EPRA ‘topped-up’ net initial yield
The definition of these measures can be found on page 205.
Number of shares
For use in basic measures
Dilutive effect of share-based payments
For use in diluted measures
2018
2017
Pence
per share
p
113.07
3,776
3,696
£105.0m
£4,153.1m
£4,042.8m
1.3%
20.8%
3.4%
4.4%
£126.1m
£4,220.8m
£4,131.1m
1.8%
23.3%
3.4%
4.6%
Pence
per share
p
94.23
3,716
3,617
Earnings per share
Weighted average
2018
‘000
111,521
239
111,760
2017
‘000
111,431
267
111,698
Net asset value per share
At 31 December
2018
‘000
111,540
239
111,779
2017
‘000
111,475
295
111,770
The £150m unsecured convertible bonds 2019 (‘2019 bonds’) have a current conversion price of £31.78. The Group recognises the effect of
conversion of the bonds if they are both dilutive and, based on the share price, likely to convert. For the year ended 31 December 2018 and
31 December 2017, the Group did not recognise the dilutive impact of the conversion of the 2019 bonds on its earnings per share (EPS) or net
asset value (NAV) per share measures as, based on the share price at each year end, the bonds were not expected to convert.
The following tables set out reconciliations between the IFRS and EPRA earnings for the year and earnings per share. The adjustments made
between the figures are as follows:
A – Disposal of investment and trading property, and associated tax and non-controlling interest
B – Revaluation movement on investment property and in joint ventures, write-down/(reversal of write-down) of trading property and
associated deferred tax and non-controlling interest
C – Fair value movement and termination costs relating to derivative financial instruments, associated non-controlling interest and the
dilutive effect of convertible bonds
In addition to the EPRA performance measures, underlying performance measures, which exclude certain items considered to be non-recurring,
are used by the Directors to assess the operating performance of the Group. A reconciliation of the EPRA and underlying earnings for the year
to 31 December 2018 is presented below. For the year to 31 December 2017, no adjustments were made to the EPRA earnings to derive the
underlying performance.
Financial statements
Earnings and earnings per share
Year ended 31 December 2018
Net property and other income
Total administrative expenses
Revaluation surplus
Profit on disposal of investment property
Net finance costs
Movement in fair value of derivative financial instruments
Financial derivative termination costs
Share of results of joint ventures
Profit before tax
Tax charge
Profit for the year
Non-controlling interest
Earnings attributable to equity shareholders
Earnings per share
Diluted earnings per share
EPRA earnings attributable to equity shareholders
Net income from grant of access rights
Underlying earnings attributable to equity shareholders
Underlying earnings per share
Year ended 31 December 2017
Net property and other income
Total administrative expenses
Revaluation surplus
Profit on disposal of investment property
Net finance costs
Movement in fair value of derivative financial instruments
Financial derivative termination costs
Share of results of joint ventures
Profit before tax
Tax charge
Profit for the year
Non-controlling interest
Earnings attributable to equity shareholders
Earnings per share
Diluted earnings per share
A
£m
–
–
–
(5.2)
–
–
–
(1.3)
(6.5)
0.3
(6.2)
–
(6.2)
Adjustments
B
£m
0.2
–
(83.4)
–
–
–
–
0.1
(83.1)
(0.7)
(83.8)
(5.5)
(89.3)
A
£m
–
–
–
(50.3)
–
–
–
–
(50.3)
1.1
(49.2)
–
(49.2)
Adjustments
B
£m
(1.0)
–
(147.9)
–
–
–
–
(3.9)
(152.8)
(1.5)
(154.3)
(3.8)
(158.1)
IFRS
£m
185.9
(32.3)
83.4
5.2
(23.5)
4.3
(3.5)
2.1
221.6
(2.7)
218.9
3.4
222.3
199.33p
198.91p
IFRS
£m
164.8
(28.2)
147.9
50.3
(27.1)
9.4
(7.3)
5.0
314.8
(1.8)
313.0
1.0
314.0
281.79p
281.12p
191
EPRA
basis
£m
186.1
(32.3)
–
–
(23.5)
–
–
0.9
131.2
(3.1)
128.1
(2.0)
126.1
113.07p
112.83p
£m
126.1
(15.6)
110.5
99.08p
EPRA
basis
£m
163.8
(28.2)
–
–
(27.1)
–
–
1.1
109.6
(2.2)
107.4
(2.4)
105.0
94.23p
94.00p
C
£m
–
–
–
–
–
(4.3)
3.5
–
(0.8)
–
(0.8)
0.1
(0.7)
C
£m
–
–
–
–
–
(9.4)
7.3
–
(2.1)
–
(2.1)
0.4
(1.7)
192
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
38 EPRA performance measures (continued)
Net asset value and net asset value per share
At 31 December 2018
Net assets attributable to equity shareholders
Adjustment for:
Revaluation of trading properties net of tax
Deferred tax on revaluation surplus
Fair value of derivative financial instruments
Fair value adjustment to secured bonds
Non-controlling interest in respect of the above
EPRA net asset value
Adjustment for:
Mark-to-market of secured bonds 2026
Mark-to-market of secured loan 2024
Mark-to-market of unsecured private placement notes 2029 and 2034
Mark-to-market of unsecured private placement notes 2028 and 2031
Mark-to-market of 1.125% unsecured convertible bonds 2019
Deferred tax on revaluation surplus
Fair value of derivative financial instruments
Unamortised issue and arrangement costs
Non-controlling interest in respect of the above
EPRA triple net asset value
At 31 December 2017
Net assets attributable to equity shareholders
Adjustment for:
Revaluation of trading properties net of tax
Deferred tax on revaluation surplus
Fair value of derivative financial instruments
Fair value adjustment to secured bonds
Non-controlling interest in respect of the above
EPRA net asset value
Adjustment for:
Mark-to-market of secured bonds 2026
Mark-to-market of secured loan 2024
Mark-to-market of unsecured private placement notes 2029 and 2034
Mark-to-market of unsecured private placement notes 2028 and 2031
Mark-to-market of 1.125% unsecured convertible bonds 2019
Deferred tax on revaluation surplus
Fair value of derivative financial instruments
Unamortised issue and arrangement costs
Non-controlling interest in respect of the above
EPRA triple net asset value
£m
Undiluted
p
Diluted
p
4,201.9
3,767
3,759
0.8
3.6
3.6
11.8
(0.9)
4,220.8
(47.1)
(4.0)
(19.9)
(2.3)
(3.6)
(3.6)
(3.6)
(6.5)
0.9
4,131.1
3,784
3,776
3,704
3,696
4,128.3
3,703
3,694
1.0
4.5
7.9
12.9
(1.5)
4,153.1
(50.6)
(4.9)
(21.1)
(2.4)
(11.8)
(4.5)
(7.9)
(8.6)
1.5
4,042.8
3,726
3,716
3,627
3,617
Financial statements
Cost ratio
Administrative expenses
Other property costs
Dilapidation receipts
Other costs
Net service charge costs
Service charge costs recovered through rents but not separately invoiced
Management fees received less estimated profit element
Share of joint ventures’ expenses
EPRA costs (including direct vacancy costs) (A)
Direct vacancy costs
EPRA costs (excluding direct vacancy costs) (B)
Gross rental income
Ground rent
Service charge components of rental income
Share of joint ventures’ rental income less ground rent
Adjusted gross rental income (C)
EPRA cost ratio (including direct vacancy costs) (A/C)
EPRA cost ratio (excluding direct vacancy costs) (B/C)
In addition to the two EPRA cost ratios, the Group has calculated an additional cost ratio based on its property
portfolio fair value to recognise the ‘total return’ nature of the Group’s activities.
Property portfolio at fair value (D)
Portfolio cost ratio (A/D)
The Group has not capitalised any overheads in either 2018 or 2017.
193
2017
£m
28.2
8.4
(0.1)
–
1.9
(0.3)
(2.7)
0.5
35.9
(2.5)
33.4
172.1
(0.7)
(0.3)
1.8
172.9
2018
£m
32.3
9.7
(1.7)
0.4
2.9
(0.3)
(2.9)
0.4
40.8
(4.4)
36.4
175.1
(1.4)
(0.3)
1.7
175.1
23.3%
20.8%
20.8%
19.3%
5,190.7
4,850.3
0.8%
0.7%
194
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
38 EPRA performance measures (continued)
Net initial yield and ‘topped-up’ net initial yield
Property portfolio – wholly owned
Share of joint ventures
Less non-EPRA properties1
Completed property portfolio
Allowance for:
Estimated purchasers’ costs
Estimated costs to complete
EPRA property portfolio valuation (A)
Annualised contracted rental income, net of ground rents
Share of joint ventures
Less non-EPRA properties1
Add outstanding rent reviews
Less estimate of non-recoverable expenses
Current income net of non-recoverable expenses (B)
Contractual rental increases across the portfolio
Less non-EPRA properties1
Contractual rental increases across the EPRA portfolio
‘Topped-up’ net annualised rent (C)
EPRA net initial yield (B/A)
EPRA ‘topped-up’ net initial yield (C/A)
Vacancy rate
Annualised estimated rental value of vacant premises
Portfolio estimated rental value
Less non-EPRA properties1
2018
£m
5,190.7
26.9
(837.1)
4,380.5
297.9
–
4,678.4
158.3
1.2
(0.7)
2.1
(2.8)
(1.4)
158.1
55.3
–
55.3
213.4
3.4%
4.6%
2018
£m
4.1
274.4
(48.1)
226.3
2017
£m
4,850.3
47.3
(608.4)
4,289.2
291.7
0.8
4,581.7
158.6
1.5
(0.8)
1.1
(3.4)
(3.1)
157.0
68.4
(21.8)
46.6
203.6
3.4%
4.4%
2017
£m
2.8
270.1
(50.3)
219.8
EPRA vacancy rate
1.8%
1.3%
1
In accordance with EPRA best practice guidelines, deductions are made for development properties, land and long-dated reversions.
39 Total return
EPRA net asset value on a diluted basis
At end of year
At start of year
Increase
Dividend per share
Increase including dividend
Total return
2018
p
3,776
(3,716)
60
137
197
2017
p
3,716
(3,551)
165
108
273
5.3%
7.7%
Financial statements
40 Gearing and interest cover
NAV gearing
Net debt
Net assets
NAV gearing
Loan-to-value ratio
Net debt
Fair value adjustment of secured bonds
Unamortised issue and arrangement costs
Leasehold liabilities
Drawn debt
Fair value of property portfolio
Loan-to-value ratio
Net interest cover ratio
Net property and other income
Adjustments for:
Other income
Other property income
Surrender premiums received
Write-down/(reversal of write-down) of trading property
Reverse surrender premiums
Adjusted net property income
Finance costs
Adjustments for:
Other finance costs
Amortisation of fair value adjustment to secured bonds
Amortisation of issue and arrangement costs
Finance costs capitalised
Net interest payable
195
2018
£m
956.9
2017
£m
657.9
4,263.4
4,193.2
22.4%
15.7%
2018
£m
956.9
(11.8)
6.5
(60.7)
890.9
2017
£m
657.9
(12.9)
8.6
(14.1)
639.5
5,190.7
4,850.3
17.2%
13.2%
2018
£m
185.9
(2.9)
(17.7)
(3.2)
0.2
0.1
162.4
23.5
(0.2)
1.2
(2.1)
10.7
33.1
2017
£m
164.8
(2.7)
–
(0.1)
(1.0)
0.2
161.2
27.1
(0.1)
1.1
(2.0)
9.4
35.5
Net interest cover ratio
491%
454%
196
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
41 Significant accounting policies
Basis of consolidation
The Group financial statements incorporate the financial statements of Derwent London plc and all of its subsidiaries, together with the
Group’s share of the results of its joint ventures.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is
exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power
over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from
the date that control ceases.
Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. Interests in joint
ventures are accounted for using the equity method of accounting as permitted by IFRS 11 Joint Arrangements, and following the procedures
for this method set out in IAS 28 Investments in Associates and Joint Ventures. The equity method requires the Group’s share of the joint
venture’s post-tax profit or loss for the year to be presented separately in the income statement and the Group’s share of the joint venture’s
net assets to be presented separately in the balance sheet.
Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated
financial statements. Unrealised gains arising from transactions with joint ventures are eliminated to the extent of the Group’s interest in the
joint venture concerned. Unrealised losses are eliminated in the same way, but only to the extent that there is no evidence of impairment.
Gross property income
Gross property income arises from two main sources:
(i) Rental income – This arises from operating leases granted to tenants. An operating lease is a lease other than a finance lease.
A finance lease is one whereby substantially all the risks and rewards of ownership are passed to the lessee.
Rental income is recognised in the Group income statement on a straight-line basis over the term of the lease in accordance with
SIC 15 Operating Leases – Incentives and IAS 17 Leases. This includes the effect of lease incentives given to tenants, which are
normally in the form of rent free or half rent periods or capital contributions in lieu of rent free periods, and the effect of contracted
rent uplifts and payments received from tenants on the grant of leases.
For income from property leased out under a finance lease, a lease receivable asset is recognised in the balance sheet at an
amount equal to the net investment in the lease, as defined in IAS 17 Leases. Minimum lease payments receivable, again defined
in IAS 17, are apportioned between finance income and the reduction of the outstanding lease receivable so as to produce a
constant periodic rate of return on the remaining net investment in the lease. Contingent rents, being the difference between
the rent currently receivable and the minimum lease payments when the net investment in the lease was originally calculated,
are recognised in property income in the years in which they are receivable.
(ii) Surrender premiums – Payments received from tenants to surrender their lease obligations are recognised immediately in the
Group income statement. In circumstances where surrender payments received relate to specific periods, they are deferred and
recognised in those periods.
Other income
Other income consists of commissions and fees arising from the management of the Group’s properties and is recognised in the Group income
statement in accordance with the delivery of service.
Expenses
(i) Lease payments – Where investment properties are held under operating leases, the leasehold interest is classified as if it were
held under a finance lease, which is recognised at its fair value on the balance sheet, within the investment property carrying
value. Upon initial recognition, a corresponding liability is included as a finance lease liability. Minimum lease payments are
apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of
interest on the remaining finance lease liability. Contingent rents payable, being the difference between the rent currently payable
and the minimum lease payments when the lease liability was originally calculated, are charged as expenses within property
expenditure in the years in which they are payable.
(ii) Dilapidations – Dilapidations monies received from tenants in respect of their lease obligations are recognised immediately in the
Group income statement, unless they relate to future capital expenditure. In the latter case, where the costs are considered to be
recoverable they are capitalised as part of the carrying value of the property.
(iii) Reverse surrender premiums – Payments made to tenants to surrender their lease obligations are charged directly to the Group
income statement unless the payment is to enable the probable redevelopment of a property. In the latter case, where the costs
are considered to be recoverable, they are capitalised as part of the carrying value of the property.
(iv) Other property expenditure – Vacant property costs and other property costs are expensed in the year to which they relate, with
the exception of the initial direct costs incurred in negotiating and arranging leases which are, in accordance with IAS 17 Leases,
added to the carrying value of the relevant property and recognised as an expense over the lease term on the same basis as the
lease income.
Financial statements
Employee benefits
(i) Share-based remuneration
197
Equity settled – The Company operates a long-term incentive plan and share option scheme. The fair value of the conditional
awards of shares granted under the long-term incentive plan and the options granted under the share option scheme are
determined at the date of grant. This fair value is then expensed on a straight-line basis over the vesting period, based on an
estimate of the number of shares that will eventually vest. At each reporting date, the non-market based performance criteria
of the long-term incentive plan are reconsidered and the expense is revised as necessary. In respect of the share option scheme,
the fair value of the options granted is calculated using a binomial lattice pricing model.
Under the transitional provisions of IFRS 1, no expense is recognised for options or conditional shares granted on or before
7 November 2002.
(ii) Pensions
(a) Defined contribution plans – Obligations for contributions to defined contribution pension plans are recognised as an expense
in the Group income statement in the period to which they relate.
(b) Defined benefit plans – The Group’s net obligation in respect of defined benefit post-employment plans, including pension
plans, is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return
for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value
of any plan assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have
maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualified actuary using
the projected unit credit method. Any actuarial gain or loss in the period is recognised in full in the Group statement of
comprehensive income.
Business combinations
Business combinations are accounted for under the acquisition method. Any excess of the purchase price of business combinations over the
fair value of the assets, liabilities and contingent liabilities acquired and resulting deferred tax thereon is recognised as goodwill. Any discount
is credited to the Group income statement in the period of acquisition. Goodwill is recognised as an asset and reviewed for impairment.
Any impairment is recognised immediately in the Group income statement and is not subsequently reversed. Any residual goodwill is reviewed
annually for impairment.
Investment property
(i) Valuation – Investment properties are those that are held either to earn rental income or for capital appreciation or both, including
those that are undergoing redevelopment. Investment properties are measured initially at cost, including related transaction
costs. After initial recognition, they are carried in the Group balance sheet at fair value adjusted for the carrying value of leasehold
interests and lease incentive and letting cost receivables. Fair value is the price that would be received to sell an investment
property in an orderly transaction between market participants at the measurement date. The valuation is undertaken by
independent valuers who hold recognised and relevant professional qualifications and have recent experience in the locations
and categories of properties being valued.
Surpluses or deficits resulting from changes in the fair value of investment property are reported in the Group income statement
in the year in which they arise.
(ii) Capital expenditure – Capital expenditure, being costs directly attributable to the redevelopment or refurbishment of an
investment property, up to the point of it being completed for its intended use, are capitalised in the carrying value of that property.
In addition, in accordance with IAS 23 Borrowing Costs, finance costs that are directly attributable to such expenditure are
capitalised using the Group’s average cost of borrowings during each quarter.
(iii) Disposal – Properties are treated as disposed when the Group transfers the significant risks and rewards of ownership to the
buyer. Generally this would occur on completion of contract. On disposal, any gain or loss is calculated as the difference between
the net disposal proceeds and the carrying value at the last year end plus subsequent capitalised expenditure during the year.
Where the net disposal proceeds have yet to be finalised at the balance sheet date, the proceeds recognised reflect the Directors’
best estimate of the amounts expected to be received. Any contingent consideration is recognised at fair value at the balance
sheet date. The fair value is calculated using future discounted cash flows based on expected outcomes with estimated
probabilities taking account of the risk and uncertainty of each input.
(iv) Development – When the Group begins to redevelop an existing investment property for continued use as an investment property
or acquires a property with the subsequent intention of developing as an investment property, the property is classified as an
investment property and is accounted for as such. When the Group begins to redevelop an existing investment property with a view
to sale, the property is transferred to trading properties and held as a current asset. The property is remeasured to fair value as at
the date of transfer with any gain or loss being taken to the income statement. The remeasured amount becomes the deemed cost
at which the property is then carried in trading properties.
Trading property
Trading property relate to property being developed for sale. In accordance with IAS 2 Inventories, they are held at the lower of cost and net
realisable value.
198
Derwent London plc Report & Accounts 2018
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
41 Significant accounting policies (continued)
Property, plant and equipment
(i) Owner-occupied property – Owner-occupied property is stated at its revalued amount, which is determined in the same manner
as investment property. It is depreciated over its remaining useful life (40 years) with the depreciation included in administrative
expenses. On revaluation, any accumulated depreciation is eliminated against the gross carrying amount of the property
concerned, and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the
revalued amount for each property. Any difference between the depreciation charge on the revalued amount and that which would
have been charged under historic cost is transferred, net of any related deferred tax, between the revaluation reserve and retained
earnings as the property is utilised. Surpluses or deficits resulting from changes in the fair value are reported in the Group
statement of comprehensive income. The land element of the property is not depreciated.
(ii) Artwork – Artwork is stated at revalued amounts on the basis of open market value.
(iii) Other – Plant and equipment is depreciated at a rate of between 10% and 25% per annum which is calculated to write off the cost,
less estimated residual value of the individual assets, over their expected useful lives.
Investments
Investments in joint ventures, being those entities over whose activities the Group has joint control, as established by contractual agreement,
are included in the Group’s balance sheet at cost together with the Group’s share of post-acquisition reserves, on a net equity basis.
Investments in subsidiaries and joint ventures are included in the Company’s balance sheet at the lower of cost and recoverable amount.
Any impairment is recognised immediately in the income statement.
Non-current assets held for sale
Non-current assets are classified as held for sale if their carrying value will be recovered through a sale transaction rather than through
continuing use. This condition is regarded as met if the sale is highly probable, the asset is available for immediate sale in its present condition,
being actively marketed and management is committed to the sale which should be expected to qualify for recognition as a completed sale
within one year from the date of classification.
Non-current assets, including related liabilities, classified as held for sale are measured at the lower of carrying value and fair value less
costs of disposal.
Financial assets
(i) Cash and cash equivalents – Cash comprises cash in hand and on-demand deposits less overdrafts. Cash equivalents comprise
short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
(ii) Trade receivables – Trade receivables are recognised and carried at the original transaction value. A provision for impairment is
established where there is objective evidence that the Group will not be able to collect all amounts due according to the original
terms of the receivables concerned.
Financial statements
199
Financial liabilities
(i) Bank loans and fixed rate loans – Bank loans and fixed rate loans are included as financial liabilities on the balance sheets at
the amounts drawn on the particular facilities. Interest payable is expensed as a finance cost in the year to which it relates.
(ii) Non-convertible bonds – These are included as a financial liability on the balance sheet net of the unamortised discount and costs
on issue. The difference between this carrying value and the redemption value is recognised in the Group income statement over
the life of the bond on an effective interest basis. Interest payable to bond holders is expensed in the year to which it relates.
(iii) Convertible bonds – The fair value of the liability component of a convertible bond is determined using the market interest rate
for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on
conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option. This is recognised and
included in shareholders’ equity, net of income tax effects and is not subsequently re-measured. Issue costs are apportioned
between the liability and the equity components of the convertible bonds based on their carrying amounts at the date of issue.
The portion relating to the equity component is charged directly against equity. The issue costs apportioned to the liability are
amortised over the life of the bond. The issue costs apportioned to equity are not amortised.
(iv) Finance lease liabilities – Finance lease liabilities arise for those investment properties held under a leasehold interest and
accounted for as investment property. The liability is initially calculated as the present value of the minimum lease payments,
reducing in subsequent years by the apportionment of payments to the lessor, as described above under the heading for lease
payments.
(v)
Interest rate derivatives – The Group uses derivative financial instruments to manage the interest rate risk associated with the
financing of the Group’s business. No trading in financial instruments is undertaken.
At each reporting date, these interest rate derivatives are measured at fair value, being the estimated amount that the Group would
receive or pay to terminate the agreement at the balance sheet date, taking into account current interest rates and the current
credit rating of the counterparties. The gain or loss at each fair value remeasurement is recognised in the Group income statement
because the Group does not apply hedge accounting.
(vi) Trade payables – Trade payables are recognised and carried at the original transaction value.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the tax computations, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. In respect of
the deferred tax on the revaluation surplus, this is calculated on the basis of the chargeable gains that would crystallise on the sale of the
investment portfolio as at the reporting date. The calculation takes account of available indexation on the historical cost of the properties.
Deferred tax is calculated at the tax rates that are expected to apply in the period, based on Acts substantially enacted at the year end,
when the liability is settled or the asset is realised. Deferred tax is included in profit or loss for the period, except when it relates to items
recognised in other comprehensive income or directly in equity.
Cash flow
Transactions in the cash flow statement under operating, investing and financing activities have been prepared net of value added tax
in order to reflect the true cash inflows and outflows of the Group.
Dividends
Dividends payable on the ordinary share capital are recognised in the year in which they are declared.
200
TEN-YEAR SUMMARY
(UNAUDITED)
Derwent London plc Report & Accounts 2018
Income statement
Gross property income
Net property income and
other income
Profit/(loss) on disposal of
properties and investments
2018
£m
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
2012
£m
2011
£m
2010
£m
2009
£m
196.0
185.9
172.2
164.8
156.0
149.2
152.0
148.6
138.4
136.1
131.6
124.3
124.8
117.0
125.5
117.7
119.4
113.0
123.8
114.8
5.2
50.3
7.5
40.2
30.2
53.5
10.8
36.1
0.9
(16.6)
Profit/(loss) before tax
221.6
314.8
54.5
779.5
753.7
467.9
228.1
233.0
352.8
(34.9)
Earnings and dividend per share
EPRA earnings
EPRA earnings per share (p)
Dividend paid (p)
Distribution of years’ profit (p)
Special dividend paid (p)
Net asset value
Net assets
Net asset value per share
(p) – undiluted
126.1
113.07
136.50
65.85
–
105.0
94.23
107.83
59.73
75.00
85.7
76.99
44.66
52.36
52.00
78.7
71.34
40.60
43.40
–
58.6
57.08
37.40
39.65
–
55.1
53.87
34.50
36.50
–
51.3
50.36
31.85
33.70
–
52.3
51.59
29.70
31.35
–
53.6
52.89
27.60
29.00
–
57.6
57.14
24.50
27.00
–
4,263.4
3,767
4,193.2
3,703
3,999.4
3,530
3,995.4
3,528
3,075.7
2,931
2,370.5
2,248
1,918.0
1,824
1,714.5
1,636
1,494.7
1,432
1,163.9
1,117
EPRA net asset value per share
3,776
3,716
3,551
3,535
2,908
2,264
1,886
1,701
1,474
1,161
(p) – diluted
EPRA triple net asset value
per share (p) – diluted
EPRA total return (%)
Property portfolio
Property portfolio at fair value
Revaluation surplus/(deficit)
Cash flow statement
Cash flow1
Net cash from operating
activities
Acquisitions
Capital expenditure
on properties
Disposals
3,696
3,617
3,450
3,463
2,800
2,222
1,764
1,607
1,425
1,126
5.3
7.7
1.7
23.0
30.1
21.9
12.7
17.4
29.3
(2.9)
5,190.7
84.1
4,850.3
149.7
4,942.7
(42.6)
4,954.5
651.4
4,168.1
671.9
3,353.1
337.5
2,859.6
175.3
2,646.5
172.1
2,426.1
301.7
1,918.4
(81.1)
(245.9)
115.2
57.3
187.5
247.8
83.5
8.5
165.0
19.6
77.7
18.0
213.5
(43.6)
76.0
246.2
116.4
(57.3)
65.6
92.4
113.2
(65.9)
57.5
130.1
108.4
1.9
52.5
99.8
78.6
18.4
47.2
91.6
42.6
(171.6)
46.5
148.0
49.5
139.5
66.4
10.2
94.6
0.3
472.9
224.7
277.2
114.4
149.7
161.0
131.5
8.5
195.5
Gearing and debt
Net debt
NAV gearing (%)
Loan-to-value ratio (%)
Net interest cover ratio (%)
1 Cash flow is the net cash from operating and investing activities less the dividend paid.
956.9
22.4
17.2
491
904.8
22.6
17.7
370
657.9
15.7
13.2
454
911.7
22.8
17.8
362
A list of definitions is provided on page 205.
1,013.3
32.9
24.0
286
949.2
40.0
28.0
279
874.8
45.6
30.0
263
864.5
50.4
32.0
261
887.8
59.4
35.7
286
720.8
61.9
36.4
280
Financial statements
EPRA SUMMARY
(UNAUDITED)
201
EPRA Measure
EPRA Performance Measures
EPRA earnings
EPRA undiluted earnings per
share
EPRA net asset value (NAV)
EPRA diluted NAV per share
EPRA triple NAV
EPRA diluted triple NAV per share
EPRA vacancy rate
EPRA cost ratio (including direct
vacancy costs)
EPRA net initial yield
EPRA ‘topped-up’ net initial yield
Definition
Earnings from operational activities
EPRA earnings divided by the weighted average number of ordinary shares
in issue during the financial year
NAV adjusted to include trading properties and other investment interests
at fair value and to exclude certain items not expected to crystallise in a
long-term investment property business model
EPRA NAV divided by the number of ordinary shares in issue at the financial
year end adjusted to include the effects of potential dilutive shares issuable
under the Group’s share option schemes and the convertible bonds
EPRA NAV adjusted to include the fair values of (i) financial instruments,
(ii) debt and (iii) deferred taxes on revaluations, where applicable
EPRA triple NAV divided by the number of ordinary shares in issue at the
financial year end adjusted to include the effects of potential dilutive shares
issuable under the Group’s share option schemes and the convertible bonds
Estimated rental value (ERV) of immediately available space divided by the
ERV of the EPRA portfolio
Administrative & operating costs (including costs of direct vacancy) divided
by gross rental income
Annualised rental income based on the cash rents passing at the balance
sheet date, less non-recoverable property operating expenses, divided by
the market value of the EPRA property portfolio, increased by estimated
purchasers’ costs
This measure incorporates an adjustment to the EPRA NIY in respect of the
expiration of rent free periods (or other unexpired lease incentives such as
discounted rent periods and stepped rents)
2018
2017
£126.1m
113.07p
£105.0m
94.23p
£4,220.8m
£4,153.1m
3,776p
3,716p
£4,131.1m
£4,042.8m
3,696p
3,617p
1.8%
1.3%
23.3%
20.8%
3.4%
3.4%
4.6%
4.4%
EPRA Sustainability Performance Measures
Environmental Sustainability Performance Measures
Total electricity consumption
Like-for-like total electricity
consumption
Total fuel consumption
Like-for-like total fuel
consumption
Building energy intensity
Total direct greenhouse gas (GHG)
emissions
Total indirect greenhouse gas
(GHG) emissions
Like-for-like total direct
greenhouse gas (GHG) emissions
Like-for-like total indirect
greenhouse gas (GHG) emissions
Greenhouse gas (GHG) intensity
from building energy consumption
Total water consumption
Like-for-like total water
consumption
Building water intensity
Energy use across our total managed portfolio (landlord/common areas)
– annual kWh
Energy use across our like-for-like portfolio (landlord/common areas)
– annual kWh
Energy use across our total managed portfolio (landlord/common areas);
a total of gas, oil and biomass consumption – annual kWh
Energy use across our like-for-like portfolio (landlord/common areas);
a total of gas, oil and biomass consumption – annual kWh
Energy use across our total managed portfolio (landlord/common areas)
– kWh per m2
Total managed portfolio emissions (landlord influenced portfolio
emissions); a total of Scope 1 emissions – annual metric tonnes CO2e
Total managed portfolio emissions (landlord influenced portfolio
emissions); Scope 2 energy-use – annual metric tonnes CO2e
Like-for-like emissions (landlord influenced portfolio emissions, building
related only); Scope 1 energy-use – annual metric tonnes CO2e
Like-for-like emissions (landlord influenced portfolio emissions, building
related only); Scope 2 energy-use – annual metric tonnes CO2e
Intensity (Scopes 1 & 2) per m2/£m turnover/fair market value
(reported in tCO2e/m2) – kg CO2e/m2/year
Water use across our total managed portfolio (excluding retail consumption)
– annual m3
Water use across our like-for-like portfolio (excluding retail consumption)
– annual m3
Water use across our total managed portfolio (excluding retail consumption)
– m3/m2/year
12,302,615
10,107,931
8,811,774
7,666,941
21,995,327
19,100,056
13,879,199
11,199,989
87.21
4,223
3,458
2,657
2,482
0.019
75.25
4,189
3,538
1,957
2,695
0.020
206,190
195,660
154,581
117,236
0.52
0.52
202
EPRA SUMMARY CONTINUED
Derwent London plc Report & Accounts 2018
Definition
EPRA Measure
EPRA Sustainability Performance Measures (continued)
Environmental Sustainability Performance Measures (continued)
Total weight of waste
by disposal route
Like-for-like total weight
of waste by disposal route
Waste generated across our total managed portfolio – annual metric tonnes
and proportion by disposal route
Waste generated across our like-for-like portfolio – annual metric tonnes
and proportion by disposal route
Social Performance Measures
Employee gender diversity
Gender pay ratio
New hires and turnover
Employee health and safety
Asset health and safety
assessments
Asset health and safety
compliance
Employees training
and development
Employee performance
appraisals
Community engagement,
impact assessments and
development programs
Percentage of male and female employees in the organisation’s governance
bodies (committee or boards responsible for the strategic guidance of the
organisation)
Ratio of the basic salary and/or remuneration of men to women. As we
have less than 250 employees we are not obliged by the Equality Act 2010
(Gender Pay Gap Information) Regulations 2017 to disclose our gender pay
gap information.
Total number and rate of new employee hires and employee turnover
during the reporting period
Occupational health and safety performance with relation to direct
employees
Proportion of assets controlled for which health and safety impacts
have been reviewed or assessed for compliance or improvement
Any incidents of non-compliance with regulations and/or voluntary
standards concerning the health and safety impacts of assets assessed
during the reporting period
Average hours of training that the organisation’s employees have
undertaken in the reporting period
Percentage of total employees who received regular performance
and career development reviews during the reporting period
Percentage of assets under operational control that have implemented
local community engagement, impact assessments and/or development
programmes
2018
2017
2,909
1,892
2,535
2,004
See page 103
See page 78
See page 81
See page 80
See page 81
See the EPRA Reporting
section in our 2018 Annual
Sustainability Report
Governance Performance Measures
Composition of the highest
governance body
Process for nominating
and selecting the highest
governance body
Process for managing conflicts
of interest
Number of executive board members, number of independent/non-
executive board members, average tenure of the governance body and
number of independent/non-executive board members with competencies
relating to environmental and social topics
Nomination and selection process for the highest governance body
and its members, and the criteria used to guide the nomination and
selection process
Process for the highest governance body to ensure conflicts of interest
are avoided and managed
See page 88, 89 and 91
See page 101
See page 97
Financial statements
PRINCIPAL PROPERTIES
(UNAUDITED)
203
West End: Central (52%)
Fitzrovia1 (30%)
80 Charlotte Street W1
1-2 Stephen Street & Tottenham Court Walk W1
90 Whitfield Street W1
Holden House, 54-68 Oxford Street W1
Henry Wood House, 3-7 Langham Place W1
Middlesex House, 34-42 Cleveland Street W1
Network Building, 95-100 Tottenham Court Road W1
Charlotte Building, 17 Gresse Street W1
88-94 Tottenham Court Road W1
80-85 Tottenham Court Road W1
60 Whitfield Street W1
43 and 45-51 Whitfield Street W1
Rathbone Studios, 7-10 Rathbone Place W1
1-5 Maple Place and 12-16 Fitzroy Street W1
76-78 Charlotte Street W1
50 Oxford Street W12
Victoria (10%)
Horseferry House, Horseferry Road SW1
Greencoat and Gordon House, Francis Street SW1
1 Page Street SW1
Premier House, 10 Greycoat Place SW1
Francis House, 11 Francis Street SW1
6-8 Greencoat Place SW1
Paddington (5%)
Brunel Building, 2 Canalside Walk W2
Baker Street/Marylebone (3%)
19-35 Baker Street W1
88-110 George Street W1
30 Gloucester Place W1
16-20 Baker Street and 27-33 Robert Adam Street W1
17-39 George Street W1
Mayfair (2%)
25 Savile Row W1
Soho/Covent Garden (2%)
Bush House, South West Wing, Strand WC2
Soho Place W1
Offices (O), Retail/
restaurant (R),
Residential (Re),
Industrial (I),
Leisure (L)
Value banding
£m
Freehold (F),
Leasehold (L)
Approximate
net area
sq ft
200+
200+
100-200
100-200
50-100
50-100
50-100
50-100
50-100
50-100
50-100
25-50
0-25
0-25
0-25
0-25
100-200
100-200
100-200
25-50
25-50
25-50
O/R/Re
O/R/L
O/R/Re
O/R
O/R/L
O
O/R
O
O/R
O/R
O
O
O/R/Re
O
O
O/R
O
O
O
O
O
O
200+
O/R
50-100
25-50
0-25
0-25
25-50
O/R
O/R/Re
O/Re
O/R/Re
O/R/Re
50-100
O/R
25-50
25-50
O
O/R/L
F
F
F
F
L
F
F
L
F
F
F
F
L
F
F
F
F
F
F
F
F
F
L
L
L
L
L
L
F
F
L
380,000
265,000
109,100
90,200
79,900
65,700
64,200
47,200
45,900
44,500
36,200
30,900
23,300
20,300
11,000
6,100
162,700
139,000
127,800
62,000
54,200
32,200
243,000
74,500
44,800
23,600
21,000
21,400
43,000
107,900
–
204
PRINCIPAL PROPERTIES CONTINUED
West End: Borders (9%)
Islington/Camden (9%)
Angel Building, 407 St. John Street EC1
Angel Square EC1
4 & 10 Pentonville Road N1
401 St. John Street EC1
City: Borders (37%)
Clerkenwell (12%)
20 Farringdon Road EC1
88 Rosebery Avenue EC1
Morelands, 5-27 Old Street EC1
The Buckley Building, 49 Clerkenwell Green EC1
Turnmill, 63 Clerkenwell Road EC1
19 Charterhouse Street EC1
5-8 Hardwick Street and 161 Rosebery Avenue EC1
151 Rosebery Avenue EC1
3-4 Hardwick Street EC1
Old Street (11%)
White Collar Factory, Old Street Yard EC1
1 Oliver’s Yard EC1
The Featherstone Building EC1
Shoreditch/Whitechapel (9%)
Tea Building, 56 Shoreditch High Street E1
The White Chapel Building E1
Holborn (5%)
Johnson Building, 77 Hatton Garden EC1
40 Chancery Lane WC2
6-7 St. Cross Street EC1
Provincial (2%)
Scotland (2%)
Strathkelvin Retail Park, Bishopbriggs, Glasgow
Land, Bishopbriggs, Glasgow
Includes North of Oxford Street.
Includes 36-38 and 42-44 Hanway Street W1.
1
2
( ) Percentages weighted by valuation.
Tech Belt (44%)
Derwent London plc Report & Accounts 2018
Offices (O), Retail/
restaurant (R),
Residential (Re),
Industrial (I),
Leisure (L)
Value banding
£m
Freehold (F),
Leasehold (L)
Approximate
net area
sq ft
200+
50-100
50-100
0-25
100-200
50-100
50-100
50-100
50-100
50-100
25-50
0-25
0-25
200+
100-200
0-50
O/R
O
O
O
O/R/L
O
O/R
O/R
O/R
O
O
O
O
O/R/Re
O/R
O/R
200+
200+
O/R/L
O
100-200
100-200
25-50
50-100
25-50
O/R
O/R
O
R/L
–
F
F
F
F
L
F
L
F
F
F
F
F
F
F
F
F
F
F
F
L
F
F
F
261,900
126,200
53,400
12,300
166,300
103,700
89,000
85,100
70,300
63,700
35,000
24,000
12,000
291,400
185,100
–
269,300
272,900
158,100
103,700
33,800
325,500
5,300 acres
Financial statements
LIST OF DEFINITIONS
(UNAUDITED)
205
Building Research Establishment Environmental
Assessment Method (BREEAM)
An environmental impact assessment method for non-domestic
buildings. Performance is measured across a series of ratings:
Good, Very Good, Excellent and Outstanding.
Capital return
The annual valuation movement arising on the Group’s portfolio
expressed as a percentage return on the valuation at the beginning
of the year adjusted for acquisitions and capital expenditure.
Carbon Disclosure Project (CDP)
The CDP is an organisation which works with shareholders and listed
companies to facilitate the disclosure and reporting of climate
change data and information.
Carbon emissions Scopes 1, 2 and 3
Scope 1 – direct emissions;
Scope 2 – indirect emissions; and
Scope 3 – other indirect emissions.
Department for Environment, Food and Rural Affairs
(DEFRA)
The government department responsible for environmental
protection, food production and standards, agriculture, fisheries
and rural communities in the United Kingdom.
Diluted figures
Reported results adjusted to include the effects of potential dilutive
shares issuable under the Group’s share option schemes and the
convertible bonds.
• EPRA earnings
Earnings from operational activities.
• EPRA net asset value
NAV adjusted to include trading properties and other investment
interests at fair value and to exclude certain items not expected
to crystallise in a long-term investment property business model.
• EPRA triple net asset value
EPRA NAV adjusted to include the fair values of (i) financial
instruments, (ii) debt and (iii) deferred taxes on revaluations,
where applicable.
• EPRA cost ratio (including direct vacancy costs)
EPRA costs as a percentage of gross rental income less ground
rent (including share of joint venture gross rental income less
ground rent). EPRA costs include administrative expenses,
other property costs, net service charge costs and the share
of joint ventures’ overheads and operating expenses (net of any
service charge costs), adjusted for service charge costs recovered
through rents and management fees.
• EPRA cost ratio (excluding direct vacancy costs)
Calculated as above, but with an adjustment to exclude direct
vacancy costs.
• EPRA net initial yield (NIY)
Annualised rental income based on the cash rents passing at
the balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the EPRA property
portfolio, increased by estimated purchasers’ costs.
Earnings/earnings per share (EPS)
Earnings represent the profit or loss for the year attributable to
equity shareholders and are divided by the weighted average number
of ordinary shares in issue during the financial year to arrive at
earnings per share.
• EPRA ‘topped-up’ net initial yield
This measure incorporates an adjustment to the EPRA NIY
in respect of the expiration of rent free periods (or other
unexpired lease incentives such as discounted rent periods
and stepped rents).
Energy Performance Certificate (EPC)
An EPC is an asset rating detailing how energy efficient a building is,
rated by carbon dioxide emission on a scale of A-G, where an A rating
is the most energy efficient. They are legally required for any building
that is to be put on the market for sale or rent.
Estimated rental value (ERV)
This is the external valuers’ opinion as to the open market rent which,
on the date of valuation, could reasonably be expected to be obtained
on a new letting or rent review of a property.
European Public Real Estate Association (EPRA)
A not-for-profit association with a membership of Europe’s leading
property companies, investors and consultants which strives to
establish best practices in accounting, reporting and corporate
governance and to provide high-quality information to investors.
EPRA published its latest Best Practices Recommendations in
November 2016. This includes guidelines for the calculation of the
following performance measures which the Group has adopted.
• EPRA vacancy rate
Estimated rental value (ERV) of immediately available space
divided by the ERV of the EPRA portfolio.
In addition, the Group has adopted the following recommendation
for investment property reporting.
• EPRA like-for-like rental income growth
The growth in rental income on properties owned throughout the
current and previous year under review. This growth rate includes
revenue recognition and lease accounting adjustments but
excludes properties held for development in either year and
properties acquired or disposed of in either year.
Fair value adjustment
An accounting adjustment to change the book value of an asset
or liability to its market value.
206
LIST OF DEFINITIONS CONTINUED
Derwent London plc Report & Accounts 2018
Global Real Estate Sustainability Benchmark
(GRESB)
The Global Real Estate Sustainability Benchmark is an initiative
set up to assess the environmental and social performance of
public and private real estate investments and allow investors
to understand their performance.
Global 100 most sustainable companies
The Global 100 Index is a ranking of the world’s most sustainable
corporations. The list is compiled by Toronto-based media and
investment advisory firm Corporate Knights. Each year, the latest
iteration of the index is announced at the World Economic Forum
in Davos, Switzerland.
Ground rent
The rent payable by the Group for its leasehold properties.
Under IFRS, these leases are treated as finance leases and the
cost allocated between interest payable and property outgoings.
MSCI Inc. (MSCI IPD)
MSCI Inc. is a company that produces independent benchmarks of
property returns. The Group measures its performance against both
the Central London Offices Index and the UK All Property Index.
NAV gearing
Net debt divided by net assets.
Net assets per share or net asset value (NAV)
Equity shareholders’ funds divided by the number of ordinary shares
in issue at the balance sheet date.
Net debt
Borrowings plus bank overdraft less cash and cash equivalents.
Net interest cover ratio
Net property income, excluding all non-core items divided by interest
payable on borrowings and non-utilisation fees.
Headroom
This is the amount left to draw under the Group’s loan facilities
(i.e. the total loan facilities less amounts already drawn).
Property income distribution (PID)
Dividends from profits of the Group’s tax-exempt property rental
business under the REIT regulations.
International Energy Agency’s (IEA) Energy
Technology Perspectives (ETP)
The IEA’s ETP 2°C scenario describes an energy system consistent
with an emissions trajectory that recent climate science research
indicates would give an 80% chance of limiting average global
temperature increase to 2°C.
Interest rate swap
A financial instrument where two parties agree to exchange
an interest rate obligation for a predetermined amount of time.
These are generally used by the Group to convert floating rate debt
to fixed rates.
Key Performance Indicators (KPIs)
Activities and behaviours, aligned to both business objectives
and individual goals, against which the performance of the Group
is annually assessed. Performance measured against them is
referenced in the Annual Report.
Leadership in Energy and Environmental Design
(LEED)
LEED is a US based environmental impact assessment method
for buildings. Performance is measured across a series of ratings
– Certified, Silver, Gold and Platinum.
Lease incentives
Any incentive offered to occupiers to enter into a lease. Typically the
incentive will be an initial rent free or half rent period, stepped rents,
or a cash contribution to fit-out or similar costs.
Loan-to-value ratio (LTV)
Drawn debt net of cash divided by the fair value of the property
portfolio. Drawn debt is equal to drawn facilities less cash and
the unamortised equity element of the convertible bonds.
Mark-to-market
The difference between the book value of an asset or liability and
its market value.
Non-PID
Dividends from profits of the Group’s taxable residual business.
Real Estate Investment Trust (REIT)
The UK Real Estate Investment Trust (“REIT”) regime was launched
on 1 January 2007. On 1 July 2007, Derwent London plc elected to
convert to REIT status.
The REIT legislation was introduced to provide a structure which
closely mirrors the tax outcomes of direct ownership in property
and removes tax inequalities between different real estate investors.
It provides a liquid and publicly available vehicle which opens the
property market to a wide range of investors.
A REIT is exempt from corporation tax on qualifying income and gains
of its property rental business providing various conditions are met.
It remains subject to corporation tax on non-exempt income and
gains e.g. interest income, trading activity and development fees.
REITs must distribute at least 90% of the Group’s income profits from
its tax exempt property rental business, by way of dividend, known
as a property income distribution. These distributions can be subject
to withholding tax at 20%.
If the Group distributes profits from the non-tax exempt business,
the distribution will be taxed as an ordinary dividend in the hands
of the investors.
Rent reviews
Rent reviews take place at intervals agreed in the lease (typically
every five years) and their purpose is usually to adjust the rent to
the current market level at the review date. For upwards only rent
reviews, the rent will either remain at the same level or increase
(if market rents are higher) at the review date.
Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations (RIDDORs)
The regulations place a legal duty on employers to report work-
related deaths, major injuries or over-three-day injuries, work-
related diseases and dangerous occurrences (near miss accidents)
to the Health and Safety Executive.
Financial statements
207
Reversion
The reversion is the amount by which ERV is higher than the rent roll
of a property or portfolio. The reversion is derived from contractual
rental increases, rent reviews, lease renewals and the letting of
space that is vacant and available to occupy or under development
or refurbishment.
Weighted average unexpired lease term (WAULT)
The average lease term remaining to first tenant break, or expiry,
across the portfolio weighted by contracted net rental income. In
addition, we quote a WAULT that includes the rent contracted from
the expiry of rent-free periods and uplifts (‘top-ups’), and from
pre-lets.
Yields
Net initial yield
Annualised rental income based on the cash rents passing at
the balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the property, increased
by estimated purchasers’ costs.
Reversionary yield
The anticipated yield, which the net initial yield will rise once the
rent reaches the estimated rental values.
True equivalent yield
The constant capitalisation rate which, if applied to all cash flows
from the portfolio, including current rent, reversions to valuers’
estimated rental value and such items as voids and expenditures,
equates to the valuation having taken into account notional
purchasers’ costs. Rent is assumed to be received quarterly in
advance.
Yield shift
A movement in the yield of a property asset, or like-for-like portfolio,
over a given year. Yield compression is a commonly-used term for
a reduction in yields.
Scrip dividend
Derwent London plc sometimes offers its shareholders the
opportunity to receive dividends in the form of shares instead
of cash. This is known as a scrip dividend.
SKA
SKA is a sustainability rating method developed specifically for
fit-out projects. It sets out a range of good practice criteria and
measures. Performance is measured across a series of ratings
– Bronze, Silver and Gold.
‘Topped-up’ rent
Annualised rents generated by the portfolio plus rent contracted
from expiry of rent free periods and uplifts agreed at the balance
sheet date.
Total property return (TPR)
Total property return is a performance measure calculated by the
MSCI IPD and defined in the MSCI Global Methodology Standards
for Real Estate Investment as ‘the percentage value change plus
net income accrual, relative to the capital employed.’
Total return
The movement in EPRA adjusted net asset value per share on a
diluted basis between the beginning and the end of each financial
year plus the dividend per share paid during the year expressed
as a percentage of the EPRA net asset value per share on a diluted
basis at the beginning of the year.
Total shareholder return (TSR)
The growth in the ordinary share price as quoted on the London
Stock Exchange plus dividends per share received for the year,
expressed as a percentage of the share price at the beginning
of the year.
Transmission and distribution (T&D)
The emissions associated with the transmission and distribution
losses in the grid from the transportation of electricity from its
generation source.
Underlying portfolio
Properties that have been held for the whole of the year
(i.e. excluding any acquisitions or disposals made during the year).
Underlying valuation increase
The valuation increase on the underlying portfolio.
Well to tank (WTT)
The emissions associated with extracting, refining and transporting
raw fuel to the vehicle, asset or process under scrutiny.
208
Communication with
our shareholders
Derwent London plc Report & Accounts 2018
Shareholder enquiries
Enquiries relating to shareholders, such as queries concerning
notification of change of address, dividend payments and lost share
certificates, should be made to the Company’s registrars, Equiniti.
Website
Financial information about the Company, including annual reports,
public announcements and share price data, is available from the
Company’s website at: www.derwentlondon.com
Contact details
Our registrars
Equiniti Limited
Aspect House
Lancing Business Park
Lancing
West Sussex
BN99 6DA
Equiniti general shareholder helpline:
Calling from the UK: 0371 384 2192
Calling from overseas: +44 (0) 121 415 7047
Lines are open 8.30am to 5.30pm, Monday to Friday
(excluding public holidays in England and Wales).
Company secretarial
David Lawler
Company Secretary
Derwent London
25 Savile Row
London
W1S 2ER
United Kingdom
Telephone: +44 (0)20 7659 3000
Email: company.secretary@derwentlondon.com
Investor relations
Quentin Freeman
Head of Investor Relations & Corporate Communications
Derwent London
25 Savile Row
London
W1S 2ER
United Kingdom
Telephone: +44 (0)20 7659 3000
Email: ir@derwentlondon.com
The Company has a share account, management and dealing facility
for all shareholders via Equiniti Limited. This offers shareholders
secure access to their account details held on the share register,
to amend address information and payment instructions directly,
as well as providing a simple and convenient way of buying and
selling the Company’s ordinary shares. For internet services visit:
www.shareview.co.uk
The Shareview Dealing service is also available by telephone on
+44 (0) 3456 037037 between 8.00 am and 4.30 pm, Monday to
Friday (excluding public holidays in England and Wales).
The best way to ensure that dividends are received as quickly as
possible is to instruct the Company’s registrars to pay them directly
into a bank or building society account; tax vouchers are then mailed
to shareholders separately. This method also avoids the risk of
dividend cheques being delayed or lost in the post. Dividend mandate
forms are available from the registrars, either from their website at:
www.shareview.co.uk or by telephone on the Equiniti general
shareholder helpline number.
Advisers
Stockbrokers
Solicitors
Auditor
Registrars
JP Morgan Cazenove
UBS
Slaughter & May LLP
PricewaterhouseCoopers LLP
Equiniti
Financial and dividend calendar – 2019
Our forthcoming financial and dividend calendar for 2019 is
provided below. These dates are provisional and subject to change.
For up-to-date information, refer to the financial calendar on our
corporate website at: www.derwentlondon.com/investors/calendar
Financial calendar
Final results announced
Q1 Business Update
Annual General Meeting
Interim results announced
Q3 Business Update
26 February
9 May
17 May
8 August
7 November
Dividend calendar
Ex-dividend date
Record date
Dividend paid
Final dividend
2 May
3 May
7 June
Interim dividend
12 September
13 September
18 October
AWARDS & RECOGNITION
Derwent London won numerous awards for its achievements and buildings
in 2018, a sample of which are shown below.
EPRA Gold award for Annual Report
EPRA Gold for Annual Sustainability Report
Member since 2003
Global Real Estate Sustainability
Benchmark – 5 star
DISCLOSURE INSIGHT ACTION
Carbon Disclosure Project –
Management B rating
Property Company of the Year
WINNER
RIBA NATIONAL
AWARD
2018
NATIONAL
WINNER
2018
Awards
White Collar Factory & Savile Row
White Collar Factory
Best Annual Report FTSE 250
Strategic Report of the year
Designed and produced by MerchantCantos
www.merchantcantos.com
Printed by Empress Litho Limited
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Derwent London plc
Registered office:
25 Savile Row
London W1S 2ER
T +44 (0)20 7659 3000
www.derwentlondon.com
Registered No. 1819699