Intuit Annual Report 2017

Plain-text annual report

intu properties plc Annual report 2017 The intu difference Welcome to our annual report 2017 Our purpose is to create compelling, joyful experiences that surprise and delight our customers and make them smile. We are a people business and everything we do is guided by our culture and our values. We are passionate about providing people with their perfect shopping experience so that our retailers ﬂourish. And it’s this that powers our business, creating opportunity for our retailers and value for our investors; beneﬁting our communities and driving our long-term success. What’s inside Our difference page 15 Our growth story page 12 1 Growing like-for-like net rental income Our 2018 strategy see page 10 2 Optimising our ﬂagship destinations Governance Chairman’s introduction Board of Directors Executive Committee The Board Viability statement Audit Committee Nomination and Review Committee Directors’ remuneration report Directors’ report Statement of Directors’ responsibilities Financial statements Independent auditors’ report Consolidated income statement Consolidated statement of comprehensive income Balance sheets Statements of changes in equity Statements of cash ﬂows Notes to the ﬁnancial statements 60 62 64 65 70 71 76 78 94 96 98 105 106 107 108 111 112 Overview Highlights of 2017 Our top properties Strategic report Chairman’s statement Chief Executive’s review Our 2018 strategy Our growth story Investment case The intu difference Making the difference Understanding our markets Making customers smile Helping retailers ﬂourish Our ﬂagship destinations The sky’s the limit at intu Lakeside At the heart of communities Our business model Relationships Strategy overview Key performance indicators Focus on risk Principal risks and uncertainties Operating review Financial review Our people Corporate responsibility 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 48 54 57 1 160 163 165 169 170 174 175 177 178 C o n t e n t s Other information Investment and development property Financial covenants Financial information including share of joint ventures Underlying proﬁt statement EPRA performance measures Financial record Glossary Dividends Shareholder information Go online intugroup.co.uk/en/investors/ intu-annual-report-2017/ Operating review page 42 Our people page 54 Corporate responsibility page 57 How are we addressing the risks to our business? page 38 Read about our commitment to governance page 60 The underlying strengths of the intu business were much in evidence in 2017 as shown by our robust overall performance.” Read the Chief Executive’s review page 8 Glossary page 175 Read more content in the annual report Read more content at intugroup.co.uk 2 intu properties plc Annual report 2017 Highlights of 2017 Financial highlights¹ Net rental income2 3 Underlying earnings £460m (2016: £447m) £201m (2016: £200m) Our results show good operational and ﬁnancial performance in the year — increase in net rental income of £13 million includes strong like-for-like recovery in the second half of the year with growth of 2.4 per cent, delivering full year like-for-like growth of 0.5 per cent — growth in the second half of the year taking full year underlying earnings Property revaluation surplus2 3 IFRS proﬁt for the year to £201 million, ahead of 2016 £47m (2016: £64m deﬁcit) Underlying EPS 15.0p (2016: 15.0p) £203m (2016: £172m) Dividend per share 14.0p (2016: 14.0p) NAV per share (diluted, adjusted) Debt to assets ratio 2 3 6 411p (2016: 404p) 45.2% (2016: 43.7%) Market value of investment properties2 3 4 5 IFRS net assets attributable to owners of intu properties plc £10,529m (2016: £9,985m) £5,075m (2016: £4,979m) — increase in Spanish valuations, partially offset by a small fall in UK values, delivers a property revaluation surplus of £47 million — increased proﬁt for the year by £31 million to £203 million primarily from the property revaluation surplus (movement of £111 million against the deﬁcit in 2016), partially offset by one-off £74 million gain on disposal in 2016 — underlying earnings per share in line with 2016 at 15.0 pence with full year dividend unchanged at 14.0 pence — net asset value per share (diluted, adjusted) of 411 pence, an increase of 7 pence, delivering a total ﬁnancial return for the year of 5.2 per cent — substantial cash and available facilities of £833 million on a pro forma basis (31 December 2016: £922 million), reﬂecting the £148 million disposal of 50 per cent of intu Chapelﬁeld, Norwich 1 2 3 Please refer to glossary on page 175 for deﬁnition of terms. Including Group’s share of joint ventures. See other information section for reconciliations between presented ﬁgures and International Financial Reporting Standards (IFRS) ﬁgures. Including intu Chapelﬁeld which is classiﬁed as an asset held for sale. 4 5 Market value of investment properties is based on third party valuations as at 31 December 2017. The scheme document to be issued in connection with the proposed transaction with Hammerson will contain valuation reports in accordance with Rule 29 of the Code. Pro forma for the £148 million disposal of 50 per cent of intu Chapelﬁeld which completed on 31 January 2018. 6 Presentation of information Amounts are presented including the Group’s share of joint ventures. Underlying earnings is used by management to assess the underlying performance of the business and is based on an industry standard comparable measure. It excludes valuation movements, exceptional items and related tax. See ﬁnancial review on page 48 for more details on the presentation of information and alternative performance measures used Highlights of 2017 3 O v e r v i e w Our strategic objectives Optimising asset performance Delivering attractive long-term total property returns from strong, stable income streams — increase in like-for-like net rental income of 0.5 per cent, a third successive year of growth. Former BHS stores substantially relet with excellent lettings to quality retailers such as Next, Primark and Uniqlo — signed 217 long-term leases (2016: 214) – 179 in the UK and 38 in Spain – delivering £38 million of annual rent at an average of 7 per cent above the previous passing rent (2016: 4 per cent) and in line with valuers’ assumptions — rent reviews settled in the year on average 9 per cent above previous passing rent (2016: 8 per cent) — occupancy stable at 96.1 per cent (December 2016: 96.0 per cent) — footfall increased by 0.1 per cent outperforming the national ShopperTrak retail average which fell by 2.8 per cent Delivering UK developments Extending and enhancing our existing locations to deliver superior returns — capital expenditure of £184 million in the year including £63 million on the extension of intu Watford and £58 million on the acquisition of income generating properties which will form part of future capital projects — the £180 million intu Watford extension is on target and on budget to open in October 2018 with pre-lets well advanced — commenced the £72 million Nickelodeon-anchored leisure scheme at intu Lakeside; completed the leisure line-up by signing Hollywood Bowl, Puttshack and Flip Out — near-term committed and pipeline capital expenditure for the next three years of £562 million, with intention to start intu Trafford Centre (Barton Square – £72 million) and intu Broadmarsh, Nottingham (£81 million) projects in 2018 Making the brand count Using our respected brand to create compelling experiences for our customers — unprompted awareness of the intu brand increased to 26 per cent (2016: 22 per cent), with prompted awareness increasing to 71 per cent (2016: 63 per cent) — net promoter score, our measure of customer service, consistent at around 70 throughout the year — intu Experiences, our dedicated promotions business, generated income of £22 million, equivalent to the rental income of our seventh largest centre — intu.co.uk, our premium content publisher and shopping platform, delivered sales for retailers of £9 million, a 50 per cent increase on 2016 — achieved our 2020 target of a 50 per cent intensity reduction in carbon emissions three years ahead of plan Seizing the growth opportunity in Spain Creating a business of scale through acquisitions and development projects — acquired Madrid Xanadú, one of Spain’s top-10 shopping centres, for a headline price of €530 million, and introduced TH Real Estate as a 50 per cent joint venture partner — signed 38 long-term leases delivering £2 million of annual rent at an average of 25 per cent above previous passing rent — occupancy stable at 97 per cent and footfall up 1 per cent, which includes the disruption from the intu Asturias mall redevelopment in the year which has now successfully completed — revaluation surplus of £98 million in Spain from intu Costa del Sol land (£74 million) and existing centres (£24 million) with intu Asturias up 11 per cent and Puerto Venecia up 4 per cent, driven by growth in rental values — at intu Costa del Sol, our proposed 230,000 sq m shopping resort development, approval of the General Plan of Torremolinos was a major step forward. The remaining consents are expected in the coming months 4 intu properties plc Annual report 2017 Our top properties We own and manage some of the best shopping centres, in some of the strongest locations, across the UK and in Spain intu Trafford Centre intu Lakeside intu Lakeside offers its loyal customer base from Essex and the southeast a compelling mix of retail, catering and leisure at the heart of nearly 5 million sq ft of retail space in the wider Lakeside basin. The centre is popular with families – which is why Nickelodeon has chosen intu Lakeside for its ﬁrst theme park in a UK shopping centre. Average dwell time 2.5 hours intu Trafford Centre is the only UK location other than Oxford Street where you can ﬁnd Selfridges, John Lewis, Debenhams and Marks & Spencer in one place. As the prime shopping destination in the northwest, with a catchment of nearly 10 million, it is no wonder it is often the ﬁrst stop for retailers as they expand outside central London. Footfall 30m 1 ** 17 16 15 14 13 12 11 10 9 8 Asset valuation at 31 December 2017 £10.5bn* (2016: £10.0bn) Super-regional centres 65% 2 1. intu Trafford Centre (£2,324m) 2. intu Lakeside (£1,417m) 3. intu Merry Hill (£931m) 4. intu Metrocentre (£929m) 5. intu Braehead (£533m) 6. Cribbs Causeway (£240m) 7 6 5 4 3 Major city centres 29% intu Derby (£458m) 7. 8. Manchester Arndale (£456m) 9. intu Victoria Centre (£356m) 10. St David’s, Cardiff (£346m) 11. intu Watford (£336m) 12. intu Eldon Square (£323m) 13. intu Chapelﬁeld (£307m) 14. intu Milton Keynes (£285m) Spanish centres 6% * Including Group’s share of joint ventures and assets held for sale. ** Other UK properties < £200m (£683m). 15. Madrid Xanadú (£235m) 16. Puerto Venecia, Zaragoza (£231m) 17. intu Asturias (£141m) Market value Size (sq ft 000) Super-regional centres intu Trafford Centre £2,324m 2,018 intu Lakeside intu Merry Hill intu Metrocentre intu Braehead Cribbs Causeway Major city centres £1,417m £931m £929m £533m £240m 1,435 1,671 2,086 1,123 1,075 intu Derby £458m 1,300 Manchester Arndale intu Victoria Centre St David’s, Cardiff intu Watford intu Eldon Square Spanish centres £456m £356m £346m £336m £323m 1,790 976 1,391 728 1,385 Market value Size2 (sq m 000) Madrid Xanadú €265m Puerto Venecia, Zaragoza intu Asturias €260m €159m 120 120 74 1 The amount presented is on the Scottish ITZA basis; the English equivalent is £335. 2 Excludes owner-occupied space. Our top properties 5 O v e r v i e w intu Merry Hill Madrid Xanadú intu Merry Hill is the super-regional shopping centre for the West Midlands, with a loyal customer base. It draws 18 million visits each year and is a key location for retailers. JD Sports, River Island and Topshop have recently upsized, creating ﬂagship stores, with Next following. Delivering our plans to improve the dining and leisure offer will create the intu Trafford Centre of the region. Visit weekly 41% Madrid Xanadú is home to Spain’s only indoor ski slope which, along with all the retailers you would wish for and a 15-screen cinema, is the retail and leisure destination for southwest Madrid. In 2018 the centre will be rebranded intu and the compelling leisure mix will be further enhanced by an aquarium and Nickelodeon theme park. All this will increase its draw to the wider Madrid area. Stores 208 Ownership Number of stores Annual property income Headline rent ITZA ABC1 customers Key tenants £93.7m £450 67% Debenhams, Topshop, Selfridges, John Lewis, Next, Apple, Ted Baker, Victoria’s Secret, Odeon, Legoland Discovery Centre, H&M, Hamleys, Marks & Spencer, Zara, Sea Life 212 £28.9m 100% 100% 100% 90% 100% 33% 100% 48% 100% 50% 93% 60% 227 250 217 307 123 153 254 115 203 140 142 Ownership Number of stores 50% 50% 50% 208 206 144 £53.2m £42.4m £48.1m £28.1m £12.9m £21.3m £19.5m £17.0m £15.8m £16.1m Annual property income €12.7m €12.2m €8.1m £360 £200 £280 £2501 £305 £110 £285 £250 £212 £220 £308 House of Fraser, Debenhams, Marks & Spencer, Topshop, Zara, Primark, Vue, Victoria’s Secret, H&M, Next 69% 48% Marks & Spencer, Debenhams, Primark, Next, Topshop, Asda, Boots, H&M, Odeon 55% House of Fraser, Marks & Spencer, Debenhams, Apple, H&M, Topshop, Zara, Primark, River Island, Odeon 64% Marks & Spencer, Primark, Apple, Next, H&M, Topshop, Hollister, Superdry, Sainsbury’s 80% John Lewis, Marks & Spencer, Apple, Next, Topshop, Timberland, Hobbs, Hugo Boss, H&M, Tesla 46% Marks & Spencer, Debenhams, Sainsbury’s, Next, Boots, Topshop, Cinema de Lux, Zara, H&M Harvey Nichols, Apple, Burberry, Topshop, Next, Ugg, Hugo Boss, Superdry, Zara, Hollister, Victoria’s Secret, Paul Smith 57% 57% John Lewis, House of Fraser, Next, Topshop, River Island, Boots, Urban Outﬁtters, Superdry John Lewis, Debenhams, Marks & Spencer, Apple, Hugo Boss, H&M, River Island, Hamleys, Primark, Victoria’s Secret 71% 81% John Lewis, Marks & Spencer, Apple, Zara, Primark, Next, Lakeland, Lego, H&M, Topshop, New Look 60% John Lewis, Fenwick, Debenhams, Waitrose, Apple, Hollister, Topshop, Boots, River Island, Next Key tenants El Corte Inglés, Zara, Primark, Apple, H&M, Mango, SnowZone, Cinesa, Bricor, Decathlon El Corte Inglés, Primark, Ikea, Apple, Decathlon, Cinesa, H&M, Mediamarkt, Zara, Hollister, Toys R Us Primark, Zara, H&M, Cinesa, Eroski, Mango, Springﬁeld, Fnac, Mediamarkt, Desigual 6 intu properties plc Annual report 2017 Chairman’s statement Our motivated and experienced staff ensure our centres remain vibrant and enticing to both customers and retailers in a fast-changing environment As I come towards the end of my ﬁrst year in the role of Chairman, I have been phenomenally impressed by the business and the people who are the driving force behind its success. Spending more time in our centres and meeting staff, as I have done ﬁrst as a non-executive director and this year as Chairman, has conﬁrmed these impressions. Our vibrant centres are the best in their regions and are continuously changing to meet new customer and retailer needs created by today’s multichannel retail world. This constant evolution is directed by our experienced and ambitious management team whose drive is shaping the shopping centre industry. The last 12 months The last 12 months have been an interesting time in our industry – capital markets have been concerned by perceived headwinds in retail, from Brexit in the UK to structural issues in the US, as well as the impact of online. Yet throughout this period we have outperformed against our operational benchmarks. Our success has come from ensuring our centres are the places where people want to be. Our purpose is to make customers smile, leading to strong footfall, increased dwell time and higher spend, and this, in turn, helps our retailers ﬂourish – resulting in high occupancy and near record levels of lettings and tenant investment. In Spain, we enhanced our platform with the acquisition of Madrid Xanadú and advanced our plans for the world-class intu Costa del Sol shopping resort. In the UK, we continue to see encouraging levels of pre-lets on our exciting pipeline of development projects. The disposal of 50 per cent of intu Chapelﬁeld at a price in line with the December 2016 valuation underwrites our property values as well as recycling capital into our development pipeline. Innovation is engrained in our business, and using our experience and expertise in the shopping centre industry, we continue to deﬁne the future of the shopping mall. intu Accelerate is just one example of this, testing out a range of pioneering ideas for both customers and retailers. Online, our premium content publisher and shopping platform, intu.co.uk, continues to see strong growth with sales through the website increasing by 50 per cent. Corporate responsibility I have always believed that behaving responsibly is fundamental to the best and most sustainable businesses. It is especially vital for a retail property business such as ours where our centres play a pivotal role at the heart of their communities. As a long-term investor in the UK and Spain, we focus on people and placemaking, and ensure our initiatives, measured through key performance indicators, align with the communities we serve. Like-for-like net rental income growth in 2017 +0.5% (2016: +3.6%) Reduction in carbon emissions intensity since 2010 58% Our vibrant centres are continuously changing to meet new customer and retailer needs, all directed by our experienced and ambitious management team whose drive is shaping the shopping centre industry.” John Strachan Chairman Chairman’s statement 7 S t r a t e g i c r e p o r t I am pleased to report that the measure of our community investment, gross value added, remains stable on a like-for- like basis at £4.6 billion this year, and we have reached our 2020 target for a 50 per cent reduction in greenhouse gas emissions three years early. As a long-term business and a major employer in many of the regions where we operate, we have an important role in the future and the wellbeing of our communities. We take our responsibilities seriously, whether that is ensuring we reduce our environmental impact or helping local people by working with a charity to provide prom dresses for students. Recognising the importance of locally created and relevant projects, my Chairman’s prize for 2017 has gone to The Bus Shelter MK, a project to provide short-term accommodation for homeless people in Milton Keynes in a converted double-decker bus. Our people I would like to convey my warmest thanks to my colleagues on the Board and to all our staff for their commitment and creativity. As I said in my introduction, I am remarkably proud of our people, from apprentices to senior managers, who day in and day out deliver the intu difference that sets us apart from the competition. Dividend Your Directors are recommending a ﬁnal dividend of 9.4 pence per share, bringing the total amount paid and payable in respect of 2017 to 14.0 pence, unchanged from the 2016 dividend. A scrip dividend alternative may be offered. Looking to 2018 As David discusses in his Chief Executive’s review, we are refocusing our strategic objectives. They are to deliver growth in like-for-like net rental income, building further on the previous three years of growth, all underpinned by operational excellence. Our development programme, focused on ﬂagship destinations and ﬁnanced through astute capital recycling and allocation, will add further organic growth. The Bus Shelter MK This unique partnership with intu Milton Keynes raised money to convert a bus to provide short-term accommodation for homeless people in Milton Keynes Creating a pan-European portfolio In December we agreed a recommended all-share offer for the company by Hammerson. The boards of Hammerson and intu believe that there is a compelling strategic rationale for the acquisition, which will bring together high-quality retail property portfolios and combined expertise to create a leading European retail REIT with a strong income proﬁle and superior growth prospects. Both boards believe that, following the acquisition, the enlarged group will be better placed to enhance its position in its geographic markets and across its retail formats, with a more efficient and adaptable platform allowing it to respond to fast-changing consumer preferences and retail trends. The transaction is subject to certain approvals and is not expected to complete until late 2018. 8 intu properties plc Annual report 2017 Chief Executive’s review intu focuses solely on regional shopping centres in the UK and Spain Our performance in 2017 The underlying strengths of the intu business were much in evidence in 2017 as we have recorded a robust overall performance, confounding the external gloom and negativity in pre-Brexit UK about retail and retail property, and showing the success of our asset management initiatives and strategic positioning. Our underlying earnings per share were steady at 15.0 pence; we grew like-for-like net rental income by 0.5 per cent, within our original guidance 12 months ago; and net asset value per share, helped by a tremendous performance from the Spanish business, increased from 404 pence to 411 pence. We delivered on each of our four core objectives for 2017: — asset performance was resilient in the UK and buoyant in Spain, with the clear message from key performance indicators, such as lettings, occupancy, footfall and dwell time, that intu is in ﬁne shape — the investment programme in the UK moved on at pace with expenditure in the year of £184 million. The pipeline for the next three years amounts to £562 million, with plenty of opportunity beyond that date. In addition to the £180 million intu Watford extension, opening in 2018, signiﬁcant projects are underway at major centres, such as intu Lakeside, intu Trafford Centre and intu Merry Hill — the awareness and importance of the intu brand has continued to grow. Five years on from launch, we can clearly see the advantages of a strong brand for a shopping centre business such as ours. Among these advantages we would include superior customer service, refreshing changes to the centres’ physical and digital environments and new and innovative sources of revenue — we continued to seize the growth opportunity in Spain. We acquired Madrid Xanadú in the year, a centre full of growth opportunities and an ideal ﬁt for our shopping resort model in Spain, with a Nickelodeon theme park attraction and aquarium under construction, to add to the existing indoor ski slope Outlook and 2018 strategic objectives The environment for the business is likely to remain challenging as the UK continues through the Brexit negotiations. Our shopping centres have not been immune to the UK’s relatively sluggish economic performance. Decision-making about investing in the UK has inevitably been impacted in the pre-Brexit period and domestic consumers have been adapting to ﬂuctuations in their discretionary spending capacity. The 2017 results are, however, a considerable endorsement of the underlying strength of the intu business and our strategic objectives for 2018 build on those we have pursued in the last few years. They are: — growing like-for-like net rental income — optimising our ﬂagship destinations — delivering operational excellence — making smart use of capital Front of mind for investors is the changing mix of online and in-store sales and how that might affect demand for physical space, hence our particular focus on the basic measure of growing like-for-like net rental income. At intu, we are still seeing key retailers taking more space, and investing for the long term in our centres, as they recognise the footfall we deliver and our ability to create more reasons for customers to visit and stay longer. The underlying strengths of the intu business were much in evidence in 2017 as shown by our robust overall performance.” David Fischel Chief Executive Chief Executive’s review 9 S t r a t e g i c r e p o r t Our energies are also concentrated on ensuring all our centres evolve with consumer and retailer needs, so that they deliver sustainable growth. Keeping our centres at the forefront of people’s minds requires continual focus on bringing in new attractions, be it a key retailer or restaurant or a compelling leisure attraction. In addition to delivering our target return hurdles, our projects innovate what we offer our customers and keep us at the leading edge of the shopping centre industry. Nowhere will this be more obvious than at our ground-up scheme in Spain, intu Costa del Sol, where we have the opportunity to create a world- class centre, delivering our signature shopping resort product and showcasing our expertise. Our culture In one way, we are a simple business, with a focus on creating the best shopping centre experience. Our culture is driven by a single-minded purpose to make our customers feel better about life through a visit to one of our centres. Utilising technology The retail industry has been embracing new technology like never before, as retailers increasingly see tech as a catalyst for creating new business opportunities, rather than a threat. Retailers are ﬁnding ingenious ways to shape their technological infrastructures, deﬁne their online presence and drive engagement with customers. At intu, we adapted and changed our business model in 2013 to offer a seamless multichannel proposition. This year we began working with seven tech start-ups as part of intu Accelerate, our incubator programme, which has been trialling a range of new ideas in our shopping centres, from robotic customer services assistants to an online personal shopper service. And while few new shopping centres are being built in the UK, we aim to be on site at intu Costa del Sol in Spain next year to build a groundbreaking shopping resort that takes everything we have been putting into practice over the last few years in the UK to a whole new level. Read more about our innovation on page 23 Operational excellence is a clear differentiator in both the UK and Spain. Our knowledge and insight are important, as is our culture and living our values – bold, creative and genuine – which underpin everything that we do. Our culture is embodied by our brand which has become recognised throughout the shopping centre industry, with intu a byword for fantastic customer service, motivated and enthusiastic staff, expert mall operations and good corporate citizenship. Our skill in this area is recognised by the partners we have brought into the business in the last few years, including CPPIB, LaSalle Investment Management and TH Real Estate. The ability to partner on assets allows us to astutely recycle and allocate capital to deliver superior returns. With over £800 million of cash and committed facilities, our ﬁnancial position is very sound. This is an important part of the intu difference and a cause of our success. We encourage all our employees to look at things differently and creatively, to consider carefully and then act boldly and genuinely. Total ﬁnancial return +5.2% UK near-term development pipeline £562m 10 intu properties plc Annual report 2017 Our 2018 strategy Our results highlight the underlying strength of the intu business based on the strategic objectives we have pursued over the last few years. For 2018, we are enhancing our strategy to build on this strong base Over the last three years, we have focused on four strategic objectives and consistently delivered against these with 2017 being another strong year of results. These objectives have seen us optimising our assets and growing like-for-like net rental income, delivering award-winning developments, building a business in Spain and maximising our operations through our brand. In Spain, we now own three top-10 centres and are on target to begin the construction of intu Costa del Sol. Our challenge is no longer to build a business in Spain – we are now an established national player. Our brand is ﬁve years old and is a recognised market leader with a distinctive approach and clear purpose. Knowing this, and with an eye on the potential challenges facing us in a changing market, we are tilting the emphasis of our objectives to increase our focus on the growth and continuing excellence of our ﬂagship destinations in the UK and Spain. We set out our objectives in more detail below. 1 Growing like-for-like net rental income 2 Optimising our ﬂagship destinations Like-for-like net rental income growth is our key income measure. Given our relatively low cost base and ﬁxed ﬁnance costs, growing our net rental income drives earnings and ultimately dividend and total property return. By delivering a compelling mix of retail, catering and leisure, each of our ﬂagship destinations generally draws footfall of 20 million or more and the average customer stays for over two hours. We use our insight, expertise and innovation to ensure that they are the destinations of choice for our customers. Priorities in 2018 — grow like-for-like net rental income, currently expected to be in the range of 1.5 to 2.5 per cent Priorities in 2018 — ensure the leisure extension at intu Lakeside remains on target — complete the aquarium and Nickelodeon leisure attractions at — deliver new lettings ahead of previous rent and increasing rents Madrid Xanadú through the rent review cycle — reduce vacancy rate year-on-year — commence the redevelopment and repositioning of Barton Square, further improving the tenant mix at intu Trafford Centre — complete the ﬁnal planning consents at intu Costa del Sol Our 2018 strategy 11 1 Growing like-for-like net rental income S t r a t e g i c r e p o r t 4 Making smart use of capital Our customers 2 Optimising our ﬂagship destinations 3 Delivering operational excellence Our strategic focus going forward Our overall business model remains unchanged. Our assets and resources and what we do remain the same but the strategy that delivers sustainable value for our shareholders and stakeholders has been adjusted to better represent today’s opportunities and challenges. Our assets and resources We have unique assets and resources that provide the foundations for our business What we do We apply the intu difference – our specialist knowledge, expertise and market insight – to create the most popular shopping centres by: Our centres National presence with high quality retail and leisure destinations visited by half the UK’s population each year See top properties on page 4 Our employees Professional, empowered and motivated teams that are specialists in their ﬁelds See our people on page 54 Our brand Respected shopping centre brand focused on enriching the customer experience both in centre and online on page 15 Our relationships Enduring, creative and collaborative relationships with retailers, customers, employees, partners and communities See relationships on page 32 p g p making customers smile Our insight and management of centres attract customers more often, for longer mix of retail, leisure and catering alongside our distinctive brand proposition helping retailers ﬂourish Our high-footfall locations, ﬂexibility and strong brand give retailers the conﬁdence that they will trade successfully with intu, which drives rental income and capital growth See understanding our markets on page 18 Our ﬁnancial strength Robust capital structure provides capacity to deliver our objectives from a range of funding sources See ﬁnancial review on page 48 The value we add We deliver sustainable value for our shareholders and stakeholders Our shareholders Strong stable income and capital growth Our customers Compelling experiences Our communities Signiﬁcant economic contribution 5.2% total ﬁnancial return 70 p average net promoter score g nb6.4£ g gross value added Our retailers Environments that help retailers ﬂourish Our people Professional and empowered Our environment Operational and environmental efﬁciency +2.9% outperformance of national footfall benchmark 14/14 all intu centres awarded Investors in People gold standard 58% reduction in carbon intensity since 2010 How our strategy helps us create value From 2015 to 2017, we focused on these strategic objectives to create a competitive advantage and deliver long-term value 1 Optimising asset performance 4 Seizing the growth opportunity in Spain Our customers 2 Delivering UK developments 3 Making the brand count See the strategy overview for more details on how we achieved this in 2017 on page 34. For details of our 2018 strategy see page 10 Underpinned by our culture Behaving responsibly p See more on corporate responsibility on page 57 p g p y l Li i Living our values See more on our culture on page 54 p g See our business model on page 30 i d Being a good employer p op See more on our people on page 54 p g l 3 Delivering operational excellence 4 Making smart use of capital Making customers smile and helping retailers ﬂourish is what we do, and operational excellence is how we measure our success. From a customer’s point of view, this is measured by our brand metrics, including net promoter score and brand recognition. For our retailers, it relates to how many customers we attract and how long they stay in our centres. For our wider communities, it is about being a good corporate citizen. As the leading owner, developer and manager of shopping centres in the UK and Spain, we and our assets are well respected throughout the industry. This means we can access capital and attract partners to increase focus and achieve superior returns at our ﬂagship locations. Priorities in 2018 — ensure we continue to outperform footfall benchmark — enhance brand recognition and consistency of net promoter score — build on digital platform and continue to grow sales through Priorities in 2018 — ensure facilities available for the development pipeline – maintaining loan to value in the 40 to 50 per cent range — continue the recycling of capital to deliver higher returns the website from developments — communicate, and start working towards, our 2030 corporate — deliver ﬁnancing for the intu Costa del Sol development responsibility strategy 12 intu properties plc Annual report 2017 Our growth story We have a strong pipeline of organic growth opportunities for the next decade in the UK and Spain. We are on site with extensions at intu Watford and intu Lakeside and approaching the required level of tenant demand to start several other major projects Near term Over the next three years we will focus on projects with proven tenant demand. With signiﬁcant levels of pre-letting, we are on site at intu Watford and intu Lakeside and expect to start several other near-term projects shortly. intu Watford This leisure-led extension is on site and on track for opening in October 2018. The transformation will be anchored by a nine-screen Cineworld IMAX cinema, 10 restaurants and a Debenhams department store and includes a refurbishment of the existing malls. Pre-lets stand at around two-thirds, by space, with new lettings including Hollywood Bowl and Superdry. intu Lakeside The extension, anchored by a Nickelodeon theme park, will bring additional leisure and catering brands to intu Lakeside, increasing the catchment and dwell times of the centre. Hollywood Bowl, Flip Out and Puttshack complete the leisure attractions, which along with 11 new restaurants will further enhance this family-oriented extension. Overview intu Watford intu Lakeside intu Trafford Centre Active asset management Total committed intu Broadmarsh, Nottingham intu Merry Hill (leisure) intu Milton Keynes (phase 1) Active asset management Total pipeline Total UK Spain Total Total 80 57 72 55 264 81 70 15 132 298 562 397 959 Cost to completion (£m) 2019 2020 3 5 47 5 60 40 – – 45 85 145 157 302 – – – – – 30 70 15 42 157 157 217 374 2018 77 52 25 50 204 11 – – 45 56 260 23 283 Our growth story 13 S t r a t e g i c r e p o r t intu Trafford Centre (Barton Square) The expansion and transformation of Barton Square at intu Trafford Centre will be anchored by Primark and provide a fashion offer for the ﬁrst time at Barton Square. Enclosing the courtyard will enable trading from two levels and add an additional 110,000 sq ft of retail space. intu Broadmarsh The second phase of our Nottingham vision is to redevelop the 500,000 sq ft existing centre to provide a complementary offer to that of intu Victoria Centre. The redevelopment will focus on new brands to the city, with a cinema and restaurant-led upper level and convenience-driven lower level. The Light cinema and Hollywood Bowl will anchor the leisure element of the redevelopment. intu Costa del Sol With ﬁnal planning consents expected shortly and strong demand from retailers, we expect to be on site with this shopping resort development in the next 12 months. intu Costa del Sol will have a high proportion of leisure and will be a must-visit destination for both residents and tourists from the whole of the region. Active asset management Potential beyond 2020 Our active asset management capital expenditure projects offer attractive returns, with stabilised initial yield on costs of 6 to 10 per cent. These projects vary in scale but all focus on improving the customer experience, whether it is retail, catering or leisure. Committed examples include the new Next ﬂagship stores at intu Metrocentre and intu Merry Hill, as well as a new restaurant quarter at Manchester Arndale. In the pipeline we have plans at intu Merry Hill to increase the catering and leisure, embedding its position as one of the UK’s best shopping centres. Beyond 2020, we continue to work on securing the required planning approvals and tenant demand to start £2.5 billion of projects in the UK and Spain which we would expect to deliver stabilised initial yields of around 7 per cent. We have the required planning for extensions to intu Lakeside, intu Victoria Centre, intu Braehead and intu Milton Keynes and are at earlier stages of the approval process for the extension at Cribbs Causeway. These plans aim to enhance local prosperity through job creation in both the construction and operating phase. intu Merry Hill intu Milton Keynes 14 intu properties plc Annual report 2017 Investment case We use our experience, expertise and unique insight to implement our strategy and deliver shareholder returns Experience and expertise — owner, developer and manager of some of the best shopping centres in the UK and Spain — a much-admired and respected brand — providing in centre and online customer experience — talented, motivated and empowered employees focused on delivering exceptional customer experience — robust capital structure with access to a wide range of funding sources See business model on page 30 Unique insight — pureplay-focused shopping centre owner Strategy — dynamic operator at the forefront of an evolving retail environment, understanding the multichannel requirements of retailers — unique insight into customer trends and demands for the perfect shopping and leisure experience — connecting retailer requirements with customer demands to deliver compelling shopping experiences See key market trends on page 18 — combining our expertise and insight — creating compelling experiences for our customers — helping our retailers ﬂourish — operating a responsible and sustainable business, that contributes to our communities See our 2018 strategy on pages 10 and 11 and our 2017 strategy overview on pages 34 and 35 Shareholder returns — long-term total property returns from our high-quality centres, an attractive asset class — strong, stable income streams from long-term lease structures — development potential and capital appreciation The intu difference Making the difference 15 How we make the difference… Building on our success at intu Lakeside page 26 Understanding our markets page 18 Making customers smile page 20 Helping our retailers ﬂourish page 22 16 intu properties plc Annual report 2017 Making the difference With the whole business centred around our customer, we bring together our experience, insight and expertise to create compelling experiences, in centre and online, which deliver real results for our retailers, caterers and leisure operators intu in numbers 400m customer visits in 2017 3 of Spain’s top-10 centres 73 RepTrack reputation score 1/2 of UK population visit an intu centre each year 1m social media followers 70 consistently high net promoter score 26% spontaneous brand awareness £4.6bn total economic contribution in 2017 58% reduction in carbon emission intensity since 2010 100% waste diverted from landﬁll Our purpose is to put a smile on the face of our customers. We want them to be happier after a visit to our centres than when they walked through the door. We know that happy customers mean happy retailers.” David Fischel, Chief Executive Our statistics are impressive but it is what we do with them that really makes the difference Our insight and research programmes help us understand what motivates customers to visit their local intu, stay longer and return more often. We then combine our expertise with our brand to attract the best retailers, the most sought-after brands and exciting immersive experiences to do just that. The intu difference Making the difference 17 We have 20 million sq ft of retail, leisure and catering space in the UK A culture of Driven by our values of bold, creative and genuine we encourage effective experimentation both by individuals and through group initiatives such as intu Accelerate and Green Lab. Employee innovation is captured through our Ideas Funnel and success is recognised and rewarded through Win Your Dream. We are on course to being Spain’s top operator of super-regional shopping centres intu centres development sites 18 intu properties plc Annual report 2017 Understanding our markets As a leading shopping centre operator in the UK, we understand the trends that affect our industry and the impact they will have on customers and retailers Anticipating customers’ changing needs Our customers want to be able to shop when they like through different channels. However, the store is king, and the place shoppers spend the vast majority of their money. They like the ability to see, touch and try on the full range from all key retailers in one location, or as part of a day out, to conﬁrm online research and pick up products bought online. Economic uncertainty For customers there is pressure on disposable income from inﬂation outpacing wage growth, for retailers there are challenges from inﬂation on the cost base and dealing with the structural shift to online. Brexit brings further uncertainty and retailers need to ensure they get their required returns from new stores. Innovation In the same way that retailers innovate for today’s market, innovation in shopping centres delivers better ways of doing things, reducing costs and building a more sustainable business. Examples of how intu is meeting the innovation challenge can be found throughout this document. The power of data The ability to gather and understand data, then act quickly on the conclusions drawn, is critical in today’s world where disruptors look for gaps in the market. Owning our digital infrastructure, and hence owning the data, means we can maximise the power of our data to the beneﬁt of our customers and retailers. Good corporate citizen Behaving responsibly and thinking long term about the environment and local communities around our centres are important in our future planning. Retail tren ds New retail anchors The retailers that attract customers to a centre are changing. Super retailers, such as Primark and Next, are increasing their store size, while the likes of Inditex and H&M are taking additional stores for their portfolios of brands. Customers are drawn to these retailers because they offer their full ranges in our ﬂagship destinations. Market overview Retail is a dynamic industry, and retailers the world over are used to dealing with an ever-changing environment. Right now they are facing economic and structural challenges which are speeding up the rate of change of their online and in-store strategies. The store, and its value, is still integral to these strategies. Retailers are continuing to invest in ﬂagship stores in locations that offer a compelling mix of retail, catering, leisure and experience and deliver high footfall. That is why we continue to be a key landlord for our retailers. The intu difference Understanding our markets 19 Informed by data We have many touchpoints with our customers. Our experience and expertise allow us to critically analyse and interpret what they tell us so we can deliver days out that make them smile. Our data covers the whole customer journey, from customers’ website and digital behaviour before they go to our centres, through to what they thought of their experience while they were there. Our comprehensive data consolidation project is bringing this information together to enhance our understanding of our customers. We take a responsible approach to our data and are using the opportunity afforded by this project to ensure all our data meets General Data Protection Regulations requirements. We are piloting new ways to employ both our own data and that of third parties more effectively. For example, we are testing the use of anonymised information of wiﬁ usage through our digital infrastructure, in order to understand customer ﬂow patterns during busy times, so we can deploy teams more swiftly. By segmenting our customer data according to demographics, shopping habits and location we can tailor the mix of retail, leisure and great offers, and ensure our facilities meet their expectations, so everyone has a compelling experience every time they come. Annual sources of data include: 26m website visits 873,000 social media interactions 20,000 Tell intu feedback questionnaires 9m in centre wiﬁ connections 2.7m email subscribers 720,000 gift cards 2,000 customer Shopper View panel International Despite the challenging headwinds facing retailers, the UK is still an attractive market for international retailers who focus their expansion plans on high footfall, experience-based locations. Demand is truly global, with Victoria’s Secret from the US, Australian accessories brand Lovisa and Polish cosmetics store Inglot all expanding. Brands As direct access to new customers becomes harder, brands are considering different routes, with shopping centres an attractive option as they offer high levels of footfall and long dwell times. Global brands such as Nespresso, Mercedes and Tesla are following this route and we are having conversations with fast-moving consumer goods companies. Leisure From trampolining and minigolf to skiing and aquariums, brands such as Puttshack, Flip Out and Gravity are increasingly taking space in our ﬂagship centres, to reach the leisure-hungry customer. Leisure and experience play a key role in what people decide to do with their free time and they want to enjoy such attractions at a place convenient to them. 20 intu properties plc Annual report 2017 Making customers smile Bringing joy to our customers and making them smile helps retailers ﬂourish and creates new business opportunities for us, driving returns for our shareholders The customer at the heart of everything we do Creating the intu brand in 2013 was a bold move, putting the customer at the heart of everything we do for all our staff. Our commitment to this strategy over the last ﬁve years has paid off with the success of the brand evident throughout the business. Our reputation, awareness and consideration scores are now the highest in the industry. The brand works equally well in Spain. Since we launched the brand at intu Asturias there has been a 135 per cent rise in net promoter score (NPS). We will be rebranding both Puerto Venecia and Madrid Xanadú in 2018 to repeat that success. Using experiences to drive brand choice Research helps us understand what makes our customers smile, and we use what we discover to create unique experiences to do just that. Three big campaigns in 2017, described below, delighted millions of customers while generating international PR that built brand awareness both in the UK and around the world. This publicity helps us become the top choice when customers think about where they want to spend their shopping and leisure time. Discovering money turns out to be one of the most joyful surprises. Cue our spring release of hundreds of origami birds worth £10 each around our centres. Our customers love ice cream – so during the school summer holidays, we created and unveiled the world’s smallest ice cream van, giving out free ice cream to shoppers, to their great delight. Using science we researched what made the happiest Christmas song – and then had one written which was performed at our centres to help get our customers into the Christmas mood. Brand awareness 71%prompted 26%spontaneous 37%consideration The intu difference Making customers smile 21 Events with a difference Events with a difference are a key element of our brand promise – they provide compelling experiences for customers and attract people from further who stay longer. As well as collaborating with some of the biggest names in entertainment, from Sony Pictures to Playmobil and Nickelodeon, we run a biennial touring exhibition. We kicked off in 2014 hosting the world-renowned Elephant Parade for its ﬁrst ever national touring event. In 2016 it was the Big Birdhouse Tour with the RSPB and the 2018 tour will embrace biodiversity. Our strategy is not just about big set pieces – every centre has an events programme designed around its retailers and audiences to celebrate local, national and international events. Events with a Spanish twist: Dancers at Puerto Venecia’s summer ‘Baila’ Nickelodeon All Stars One of our star turns in 2017 was the Easter campaign with the Nickelodeon All Stars. The intu tour by the PAW Patrol crew gave us a national proﬁle through the Nickelodeon channel and brought fantastic activities for 25,000 children – making intu the ﬁrst choice for families during the school holiday period. © 2018 Spin Master. All Rights Reserved. © 2018 Viacom International Inc. All Rights Reserved. Joy jar goes digital We have loved lighting up children’s faces with an unexpected treat from our joy jar. So now we are taking our random acts of kindness concept online, with the digital joy jar pilot at intu Lakeside. Aimed at the grown-ups this time, we use social media monitoring tool Local Measure in a geofenced area to spot people who are sharing their celebrations online. If they opted in, we can reply to their message with a positive response, offering them an intu treat. The pilot has created such surprise and delight that we are rolling the scheme out across all our centres in 2018. 22 22 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Helping retailers ﬂourish Unique model helps retailers ﬂourish Our leasing-experiential-digital (LED) model ensures that retailers working in partnership with intu can reach their true potential across all intu channels. Leasing – an integral part of successful retailing remains the store. In taking space with us retailers know that they are in safe hands – our centres are continuously improving and developing, always destinations where customers want to be. Experiential – our tailor-made promotional services model is designed to help retailers and brands reach their true potential. In centre, this can include pop-up space on the mall, promotional events and digital media advertising, all with the aim of delivering improved recognition and ultimately increased sales. Digital – with a transactional website that has an annual digital audience of 26 million, we can help retailers meet their multichannel aspirations. From volume sales through our online shop and dedicated emails to our engaged ‘shopper’ community, along with brand awareness through strong editorial content across our online and social media, we actively support our retailers’ growth. Not only have we redeﬁned the customer experience, we are redeﬁning the tenant experience too. Through our LED model, we offer a multichannel approach that truly supports their retail strategies. Jo Malone The perfumier tried a pop-up store at intu Lakeside in the run-up to Christmas 2017. With gold package LED support, they enjoyed such good results they have signed a 10-year lease. Three The mobile operator’s sponsorship of our student nights gave them access to 120,000 students across 11 intu centres – and a 149 per cent rise in SIM-only sales. Gourmet Burger Kitchen Working with Gourmet Burger Kitchen we developed a multichannel campaign to increase awareness and drive sales. The campaign reached 350,000 people and received 17,000 clickthroughs, driving over 5,000 customers into their restaurants. The intu difference the intu difference Helping retailers ﬂourish 23 23 Digital success Back in 2013 we introduced our new affiliate website, intu.co.uk, enabling retailers to promote their products to our digital audience. It is now one of the country’s leading affiliate websites, used by over 500 retailers and generating £9 million in sales from 5.7 million visits. Its latest functionality uses AI-powered visual search to enable shoppers to pick an item and then instantly be shown similar products from across all our retailers. Shop Insider, our digital magazine, creates content around topical shopping behaviours and rising social trends, that helps the reader eat, shop and save. In 2017 Shop Insider had 1.4 million readers and our inhouse editorial team were commissioned to produce content on behalf of 37 retailers and brands, including John Lewis, MAC, Debenhams and Marks & Spencer. Retailers can also get access to our one million social media followers through bespoke paid-for social content. Just as retailers are choosing our shopping centres to promote their brands, they are now realising the beneﬁts of using digital content to build their brands. And it has given us an edge with pureplays too – digital brands such as Boohoo and ASOS are some of intu.co.uk’s most proliﬁc clients. 1.8m Shop insider page views £9m retailer sales 5m clicks to retailers’ websites New collaborations As we build our presence in Spain, we and our tenants are beneﬁting from opportunities across both the UK and Spain. We have seen enhanced collaboration for UK-based retailers in our Spanish centres with the likes of Five Guys and Quiz taking some of their ﬁrst spaces in Spain at intu centres and many discussions starting for intu Costa del Sol. For Spanish companies looking to grow in the UK, we have enhanced our relationships. Grupo Parques Reunidos, the Spanish entertainment operator, is launching its ﬁrst venture in the UK, with a Nickelodeon theme park at intu Lakeside. It is also constructing one at Madrid Xanadú. Improving our business every day At intu, if we can ﬁnd a way of doing things better we will, and when it comes to supporting our tenants, we harness our thirst for innovation to drive cost efficiencies and make their lives easier. Insurance charges have been trimmed by up to 20 per cent, thanks to our proactive approach to reducing risk. We continue to cut waste costs while assuring our tenants that their waste is being treated to the highest environmental standards. Our energy procurement strategy buys ahead, providing greater cost certainty to our tenants. This is business as usual at intu, as is our constant search for new ways to run our business, supporting exciting start-up businesses that offer signiﬁcant technological and process innovation in property and retail. Our work with Invida to design and implement an entirely new cloud-based software platform to support lifecycle management will revolutionise the facilities management industry. We are also supporting start-up enModus, whose groundbreaking communications technology, Wattwave, can transform any industrial, commercial or retail property into a smart building, simply by connecting all devices to the cloud via the existing power line. intu Accelerate Through intu Accelerate we worked with some of the smartest minds to answer some of the questions facing the retail and leisure industry today. We chose y. We chose across seven start-ups who ran live trials across ate our business to test and demonstrate e the the potential of their ideas to shape the future of retail. Four of the best were: ere: botsandus – intelligent and friendly robot ly robot rs around assistants (right) to guide customers around and help retailers promote their stores ores GoInStore – live videos to promote retailers’ e retailers’ products to online customers Infraspeak – efficient building management using predictive sensors, sors, user-friendly apps and powerful software ftware WoraPay – a multiretailer app allowing customers to order ahead to beat the queues 24 intu properties plc Annual report 2017 What are our ﬂagship destinations? Our ﬂagship destinations are the shopping centres where retailers aspire to be, both now and in the future. They offer them consistently high footfall combined with a long dwell time and we know the longer people stay, the more they spend. This is why they have their biggest and best stores in these locations and have the conﬁdence to invest in these stores for the long term. s As retail evolves, the demand for space n in ﬂagship destinations increases. These locations offer a compelling mix of retail, o catering and leisure for customers and i deliver consistently high footfall for retailers t a n i t s e d p i h s g a ﬂ r u O And it is a constant evolution. We have a masterplan for every centre and the expertise and insight to ensure these ﬂagship centres remain at the forefront of both retailers’ and customers’ minds for years to come. Trends change and new disruptors emerge, but we are always working to improve our offering so we remain at the cutting edge of shopping and leisure. For the shopper, they offer a mix of retail, catering and leisure – a day-out destination where they can shop, eat and be entertained. Customers are willing to spend time travelling to these destinations and once there they know they will have easy access to all the best stores offering the retailers’ full ranges plus a wide variety of leisure to keep everyone happy for the day. Their locations out-of-town, with at least 10,000 free car parking spaces, provide an appealing variety of leisure – whether it is an aquarium, an indoor ski slope, zip wires, trampoline parks or theme parks such as Legoland Discovery Centre or Nickelodeon, or the already successful cinemas and bowling – there is something for everyone. Leading the way with leisure The ﬁrst… …aquarium in a UK …aquarium in shopping centre at shopping cen intu Trafford C intu Trafford Centre …indoor ski slope in a Spanish mall at Madrid Xanadú …Nickelodeon in a UK shopping centre at intu Lakeside …shopping resort concept at Puerto Venecia The intu difference Our ﬂagship destinations 25 The numbers Our UK ﬂagship destinations: have nearly half the UK’s population living within a 70-minute drive time 70 minutes transact around 2 per cent of the UK’s in-store non-food sales 2% have footfall of over 20 million each, with an average dwell time of over two hours 2 hours x30 and loyal customers who visit on average 30 times a year Spanish shopping resorts In Spain, our ﬂagship destinations are shopping resorts. As we compete for people’s free time, we want to provide something for every member of the family, offering variety and surprise. Puerto Venecia was the ﬁrst in its class and epitomises the shopping resort concept. Madrid Xanadú will join the club with the opening of the aquarium and Nickelodeon theme park and our of intu Costa del Sol development of intu Costa del Sol will take the design esign to the next level. vel. intu Costa del Sol In 2018, we expect to have the ﬁnal planning consents and required pre-lets to start the development of intu Costa del Sol, near Málaga. Even now, pre-construction, it is being talked about as a world-class centre. The site is ideally located to draw residents and holidaymakers from the whole Costa del Sol region. The design ticks all the boxes of a ﬂagship destination, and more. This shopping resort will deliver our signature product and showcase our expertise, taking the best of our existing centres plus adding the extra qualities that will deﬁne leading centres over the coming years. 26 intu properties plc Annual report 2017 The sky’s the limit There is always something new to see at intu Lakeside from the latest retailers to the best leisure attractions around thanks to a masterplan that, combined with our expertise, keeps the centre at the cutting edge of customers’ expectations intu Lakeside was state of the art when we built it in 1990, one of the ﬁrst out-of-town shopping centres in the UK, and it remains one of the top retail destinations in the country with 20 million visits a year and over 250 shops and restaurants, delivering retail sales of over £0.5 billion a year and dwell time which has risen to nearly 2.5 hours. It’s no wonder it stays so popular – as a company we take a long-term approach, always looking 10, 20 years into the future to make sure our centres remain ahead of our customers’ and tenants’ expectations. Over the years we have made astute land acquisition decisions that now give us many options for expanding the range of attractions to drive dwell time and frequency. Above all, our talented people know how to make the shopping experience special. We have a knowledgeable local team, supported by experienced national experts, who use their understanding of the shopping centre environment in general, and our customers in particular, to create an iconic destination, lauded by celebrities and locals alike – thousands of social media mentions each month show just how much intu Lakeside means to its shoppers. What keeps pulling them in is the great retail mix, with the top brands ﬁghting for space to do business with some of the country’s most loyal shoppers. We keep intu Lakeside at the top of its game – great quality design, attention to detail and a constant eye on where we can improve the customer’s experience means a relentless roll-call of new projects that bring in more retailers, customers and rental income. We created the Boardwalk in 2007 to allow lakeside eating, which opened fully let. Recently we enhanced it by creating a year-round external dining environment. In 2014 we redeveloped the food court to create a dynamic dining experience that appealed to aspirational brands and customers. Our most recent completed project is the hotel which opened in 2017. Sited overlooking the lake, the Thurrock Lakeside Travelodge is one of the best performing hotels in the Travelodge portfolio. Our £72 million leisure extension, now on site, will make intu Lakeside one of the biggest leisure attractions in the southeast, with the ﬁrst Nickelodeon theme park in a shopping centre in the UK and a host of other leisure names including Hollywood Bowl, Flip Out trampolining, Puttshack minigolf and leading food brands already signed up. We expect the 175,000 sq ft extension to open fully let in spring 2019. Our 100 per cent ownership means we have lots of options to continue to drive value to the southeast’s pre-eminent retail and leisure destination. We already have planning permission for 400,000 sq ft of retail space and are looking at developing our leisure offer further to attract the younger demographic that is moving into the Thames Gateway area – Europe’s largest regeneration project which will bring many more jobs and homes to the area over the next few years. Zipwires and hot air balloons are in the planning stages. Up, up and away intu Lakeside! intu Lakeside highlights Annual sales £568m Total sq ft of retail, leisure and catering space 1.4m Annual footfall 20m Economic contribution £379m The intu difference intu Lakeside 27 Building on our success intu Lakeside never stands still. Like all our ﬂagship destinations, we ﬁnd many new ways to refresh and reinvigorate customers’ shopping experience 1990: opening of ﬁrst out-of-town shopping centre in the southeast Mid-90s: intu Lakeside fully reaches its extensive catchment and becomes an iconic destination 2007: development of Boardwalk opens up the lake to diners 2014: new food court creates aspirational new dining experience 2017: Travelodge hotel opens on the shore of the lake But we are not ﬁnished there… As the importance of leisure to our customers grows we are bringing lots of top new attractions 2019: the new leisure extension heralds the arrival of the Nickelodeon theme park, Puttshack minigolf, Flip Out trampolining and great restaurants Blue sky thinking: new leisure ideas will keep future generations enthralled A 21st-century tenant mix The evolving tenant mix at intu Lakeside tells the story of the changing face of shopping centres. Over the last ﬁve years we have seen a 10 per cent increase in the number of leisure and catering outlets as a proportion of stores, as we meet customers’ growing expectations for experiences. We can see the beneﬁts of satisfying this demand through increase in dwell times by eight per cent (and we know that the longer customers stay the more they spend). The space devoted to leisure and catering will double when the leisure extension opens in 2019. GoInStore goes live GoInStore, one of our intu Accelerate start-ups, predicts live video is going to be the next big thing in omnichannel retail. We offered them intu Lakeside’s charming and knowledgeable personal stylist Carlene Noel to create content for a pilot series of real-time videos that would showcase the centre’s retailers and attract customers via our Shop Insider channel. Over ﬁve days she worked with many of our stores at intu Lakeside such as Toni & Guy, Debenhams and MAC, to introduce customers to new ranges and brands. The results were impressive – 30 per cent of viewers started shopping through our website, 12.5 per cent booked a stylist and the average viewing time was nearly six times the usual dwell on our site. “Live video proved to be a great way to enhance the shopping experience,” says Carlene. 28 intu properties plc Annual report 2017 Making merry We are putting our stamp on intu Merry Hill – creating a thriving shopping and leisure destination and working with local people to put the centre at the heart of the local community We have owned our newest ﬂagship destination, intu Merry Hill, for just three years. In that time we have refreshed the mall, attracted new brands, enabled £15 million of retailer investment and upgraded Next to the 75,000 sq ft site recently vacated by Sainsbury’s. Over the next few years we are going to spend £100 million enhancing the shopping centre’s leisure and retail mix. This investment will contribute even more to the £369 million gross value we currently add to the local community, through employment, business rates, capital investment and charitable donations. As a business we believe in doing what we can to improve local social issues, and we prioritise good community engagement because it beneﬁts local people, staff and ultimately is good for our shopping centre by bringing in new customers. Over the last year we have: — employed a community manager to strengthen local relationships — launched the Re-Beat Campaign to raise over £8,500 to place 10 accessible deﬁbrillators in Dudley and train over 1,000 people within the community in their use — taken part in intu’s national campaign to make our centres autism-friendly and provided assisted shopping guides — worked with local charity the Beacon Centre to train over 60 intu staff in blind awareness and offered assisted shopping sessions to make intu Merry Hill accessible to more people — helped local young people develop the skills they need to ﬁnd work, run a Jobs Fair with Dudley South MP Mike Wood, taken part in Retail Matters Week and supported Young Enterprise — raised £8,000 through all our Christmas activity for local cancer charity, the White House, and volunteered 60 hours of staff time — employed local charity, Go Green, to sort cans collected through the Every Can Counts recycling campaign The intu difference At the heart of communities 29 intu Merry Hill highlights 18m annual footfall £484m annual turnover 33% rise in zone A rents since 2014 8,248 local people employed £105k community contributions 1,987 donated hours £22m business rates paid by intu and our tenants £369m value to local economy One Planet Living Last year we created the Green Lab to incubate and roll out sustainable initiatives across the business. We have worked with Bioregional to explore ways of applying their One Planet Living framework within the redevelopment of intu Broadmarsh. These include introducing nature into the design, offering healthy food and sustainable travel options during construction and redesigning unused external space to increase the health and wellbeing potential at the development. The intu Merry Hill Green Gym® is the ﬁfth in the portfolio but the ﬁrst to be sited on intu land, on the UNESCO-endorsed Saltwells nature reserve. It aims to encourage people to improve both their health and the environment, and has attracted 70 volunteers since it began in 2016. 70volunteers Welcoming the community in Spain Our Spanish centres each have a permanent space dedicated solely for the use of local charities, the ‘Espacio Solidario’. In 2017 our Spanish centres collaborated with 52 charitable projects covering everything from environmental issues to cancer information. The Caritas charity used the Puerto Venecia space over the year to collect clothes for recycling, collecting 40 tonnes of clothes and raising €77,466. The total value of our charitable support in Spain, from all sources, came to €310,000 for the year. 30 intu properties plc Annual report 2017 Our business model Our business model is focused on creating shopping centres that are loved by customers and where retailers ﬂourish. This builds a long-term business that delivers value for our shareholders and stakeholders Our assets and resources We have unique assets and resources that provide the foundations for our business What we do We apply the intu difference – our specialist knowledge, expertise and market insight – to create the most popular shopping centres by: Our centres National presence with high quality retail and leisure destinations visited by half the UK’s population each year See top properties on page 4 Our employees Professional, empowered and motivated teams that are specialists in their ﬁelds See our people on page 54 Our brand Respected shopping centre brand focused on enriching the customer experience both in centre and online See the intu difference on page 15 Our relationships Enduring, creative and collaborative relationships with retailers, customers, employees, partners and communities See relationships on page 32 Our ﬁnancial strength Robust capital structure provides capacity to deliver our objectives from a range of funding sources See ﬁnancial review on page 48 making customers smile Our insight and management of centres attract customers more often, for longer and from further away by offering the right mix of retail, leisure and catering alongside our distinctive brand proposition helping retailers ﬂourish Our high-footfall locations, ﬂexibility and strong brand give retailers the conﬁdence that they will trade successfully with intu, which drives rental income and capital growth See helping retailers ﬂourish on page 22 The value we add We deliver sustainable value for our shareholders and stakeholders Our shareholders Strong stable income and capital growth Our customers Compelling experiences Our communities Signiﬁcant economic contribution 5.2% total ﬁnancial return 70 p average net promoter score g £4.6bn g gross value added Our retailers Environments that help retailers ﬂourish Our people Professional and empowered Our environment Operational and environmental efﬁciency +2.9% outperformance of national footfall benchmark 14/14 all intu centres awarded Investors in People gold standard 58% reduction in carbon intensity since 2010 Our business model 31 S t r a t e g i c r e p o r t How our strategy helps us create value From 2015 to 2017, we focused on these strategic objectives to create a competitive advantage and deliver long-term value 1 Optimising asset performance 4 Seizing the growth opportunity in Spain Our customers 2 Delivering UK developments 3 Making the brand count For more details on how we achieved this in 2017 see the strategy overview on page 34. For details of our 2018 strategy see page 10 Underpinned by our culture Behaving responsibly p See more on corporate responsibility on page 57 p g p y d Being a good employer B i p p See more on our people on page 54 p g l l Li i Living our values See more on our culture on page 54 p g 32 intu properties plc Annual report 2017 Relationships People are what make us tick. Our relationships and reputation with our stakeholders are important to the overall sustainable success of our business We maintain close relationships with our stakeholders, checking in with them regularly to ﬁnd out what we are doing well, what we can do better, and where their needs have changed. Every two years our materiality process takes a formal sounding of the issues around our business that are most relevant to them. In 2017 we introduced a reputation management framework into the business to enable us to measure how we are perceived by our stakeholders robustly and to ensure that our strategy reﬂects their needs and perceptions. We have a large number of stakeholders but we initially focused on ﬁve primary groups: customers, tenants, employees, local and national government and investors. Working with Reputation Institute we identiﬁed areas of most concern or interest to each of these ﬁve groups and then used existing data sets to see how intu was perceived. Combined with the 2017 RepTrak UK survey this resulted in a reputation score across a number of core competencies. We also benchmarked ourselves against not only our property peers but also relevant leisure and retail brands in the FTSE 100 and 250. introducing a net promoter score system similar to Tell intu, to measure key points along the relationship chain with tenants, such as leases or shopﬁtting. Working with our stakeholders Customers Our customers are at the heart of everything we do, so we listen to them carefully to keep our centres continually evolving and meeting their requirements. Our net promoter score, which we assess from Tell intu and is consistently high at 70, shows where we are succeeding and where we could make improvements. This year we continued our research into the customer journey which aims to enhance customer experience in our centres. Our brand tracker measures awareness, advocacy and consideration of our brand by customers – spontaneous awareness was 26 per cent at the end of 2017. We heard from 20,000 shoppers through our Tell intu customer feedback programme and our Shopper View research panel of 2,000 customers participated in 22 projects. Retailers Good relationships with our retailers are essential to understanding their retail requirements and helping them ﬂourish. As a result of this initial work, in 2018 we are undertaking bespoke qualitative research with our tenants and will be We build our relationships through open communication across the business. As well as day-to-day contact we hold regular client reviews with customer relationship managers. We attend a wide range of industry conferences and we host regular Merchants Association meetings with tenants during the year to discuss local plans and issues. Investors We deliver long-term value to our investors through strong, stable income streams and capital appreciation. This ensures we have the ability to move the business forward. Understanding the requirements and concerns of both existing and potential investors is key. This year we conducted 390 meetings with investment institutions, including away days to see our centres in action in the UK and Spain. We hosted regular investor visits to our centres to show how we are meeting our objectives and attended investor conferences in the UK and internationally. We took analysts and investors to Madrid Xanadú, to show them the quality of our Spanish portfolio and to reveal our latest plans for intu Costa del Sol. We also engaged in environmental, social and governance indices which show high performance year-on-year. Relationships 33 S t r a t e g i c r e p o r t Suppliers We rely on our suppliers to help our business run smoothly, from day-to-day operations through to the construction of major developments. We have open, transparent and long-term relationships with suppliers to ensure they maintain the same high standards we set ourselves. For example, our relationship with Trinity Fire & Security goes back ﬁve years. Not only does it give us peace of mind that our crucial ﬁre alarm systems function correctly, but knowing our centres so well enables them to proactively initiate ideas that keep us innovative. Local and national government Enduring relationships with local authorities, town centre management and MPs is vital to our sustainability as a long-term business. Our centres are at the heart of many of the towns and cities in which we operate and where we play a vital community role. In some the local authority is our investment partner. Each year we host an annual parliamentary dinner for MPs in whose constituencies our centres lie, to discuss issues of local importance. We are working closely with the Minister of State for Disabled People, Health and Work to champion accessibility in retail and our CR Manager is co-chairing a retail accessibility forum with the Minister. Centre managers are empowered to engage with their local MPs and councillors and to actively participate in local Business Improvement Districts and town centre partnerships. For example, intu Chapelﬁeld’s general manager is the vice-president of the Chamber of Commerce, putting us at the heart of local business and community activity. We also work with local authorities to progress our development pipeline. Our people Our employees are the experts behind the success of the business. In centres, they are the face of intu and delivering our brand promise is central to making both customers and retailers happy. Our commitment to employee engagement is the key to our motivated workforce and was central to achieving Investors in People gold award for all 14 of our centres. This year we engaged with our employees using many channels such as our intranet, staff presentations, brieﬁngs and employee consultation forums. Our Win Your Dream reward and recognition programme entered its third year. Local communities intu centres are at the heart of the communities where they are located. Good community engagement beneﬁts our customers and local people, and ultimately is good for our business. This year intu staff volunteered 28,000 hours to help local community groups. We held over 1,300 community activities in our centres. We engaged with nearly 900 charities and reached over 3,600 people through our various community employment and other schemes. In total, we donated £1.9 million in community support through time, space and money. The value of long-term relationships Good long-term relationships are essential to our development programme, ensuring projects run smoothly with planners, suppliers and residents. Over the last 10 years we have worked closely with Watford Borough Council to bring the intu Watford extension to fruition and create a scheme that enhances Watford town centre and will beneﬁt residents for years to come. We have worked with our construction partner Laing O’Rourke previously, and they are well-versed in what we expect of them in their role as an intu supplier. 34 intu properties plc Annual report 2017 Strategy overview Our four strategic objectives were the means by which we put our business model into action effectively in 2017 1 Optimising asset performance 2 Delivering UK developments We achieved this by — making our locations the most desirable for shopping and socialising — astutely managing the assets to take advantage of new trends We achieved this by — delivering the required planning approvals — generating the level of demand to commence a project that and occupiers delivers our required returns — building long-term partnerships with local authorities — having the funding to progress the pipeline and communities Progress in 2017 — delivered growth in like-for-like net rental income — improved rental levels on new leases and rent reviews — upsized key retailers such as Next, Primark and River Island as well as introducing exciting new names to our centres, including Paul Smith and Inglot Progress in 2017 — on target and on budget with the major extension at intu Watford — commenced the Nickelodeon-anchored leisure extension at intu Lakeside — signed Primark to anchor the transformational redevelopment of Barton Square at intu Trafford Centre — achieved planning approval for the retail and leisure extension at intu Milton Keynes Managing risk — property market — operations — brand KPIs we use to measure our success — optimising asset performance encompasses our whole business and as such is measured by all KPIs Key stakeholders we engage Customers, retailers, suppliers KPIs we use to measure our success — shareholder return — total ﬁnancial return — prime property assets — GVA Managing risk — property market — ﬁnancing — developments and acquisitions — brand Key stakeholders we engage Customers, investors, suppliers, local and national government Link to our 2018 objectives — growing like-for-like net rental income — delivering operational excellence — optimising our ﬂagship destinations Link to our 2018 objectives — optimising our ﬂagship destinations — making smart use of capital For more information on: our 2018 priorities, see pages 10 and 11 KPIs, see pages 36 and 37 risk, see pages 38 to 39 Strategy overview 35 S t r a t e g i c r e p o r t 3 Making the brand count 4 Seizing the growth opportunity in Spain We achieved this by — offering a distinctive customer signature experience in all our centres — having a multichannel offering for retailers and customers — delivering continued world class service to retailers and shoppers — ensuring we are a good corporate citizen We achieved this by — building a platform of the best centres in Spain through acquisition and development — delivering the same brand experiences in Spain as in the UK — moving the development options forward to a point where we can consider exercising them and commencing development Progress in 2017 — increased sales generated through the website to £9 million — achieved our 2020 target of a 50 per cent intensity reduction Progress in 2017 — acquired Madrid Xanadú, a top-10 shopping centre in Spain — achieved key planning approval at intu Costa del Sol and advanced in carbon emissions three years early remaining consents — ensured high levels of customer service, with consistently — improved tenant mix, at increased rental levels, at all centres strong net promoter scores Managing risk — property market — operations — brand KPIs we use to measure our success — footfall — like-for-like net rental income — shareholder return — income performance — GVA Key stakeholders we engage Customers, retailers, suppliers KPIs we use to measure our success — footfall — like-for-like net rental income — shareholder return — total ﬁnancial return — income performance — prime property assets Managing risk — property market — ﬁnancing — developments and acquisitions — brand Key stakeholders we engage Customers, retailers, our people, local and national government Link to our 2018 objectives — delivering operational excellence Link to our 2018 objectives — growing like-for-like net rental income — delivering operational excellence — optimising our ﬂagship destinations 36 intu properties plc Annual report 2017 Key performance indicators We measure progress against strategic objectives using the following ﬁnancial and non-ﬁnancial performance measures Key to strategic objectives 1 Optimising asset performance 2 Delivering UK developments 3 Making the brand count 4 Seizing the growth opportunity in Spain Footfall (%) 2 1 0 -1 -2 -3 -4 -5 Why is this important? Footfall is an important measure of a centre’s popularity with customers. Retailers use this measure as a key part of their decision-making process on where to locate their stores. How is this measured? Footfall numbers across intu’s centres are captured using a combination of person or car counting cameras located at speciﬁc entrance and exit points within the centre. How have we performed? Footfall increased in the year, driven by our retail, catering and leisure offerings, together with our customer-focused events, and outperformed the ShopperTrak measure of UK national retail footfall. Strategic objective 1 3 4 +0.1% -2.8% 2013 2014 2015 2016 2017 intu ShopperTrak Occupancy (%) 100 98 96 94 92 90 Why is this important? Attracting and retaining the right mix of retail, catering and leisure operators will enhance our centres’ appeal and trading environment. How is this measured? The passing rent of let and under-offer units expressed as a percentage of the passing rent of let and under-offer units plus the ERV of unlet units. How have we performed? Occupancy remained stable during the year at 96 per cent and remains above the IPD (retail) monthly index benchmark ﬁgure. Strategic objective 1 96% 95% 2013 2014 2015 2016 2017 intu IPD (retail) Like-for-like net rental income (%) -1.9% -3.2% +1.8% +3.6% +0.5% 4 2 0 -2 -4 Why is this important? Measures the organic growth in income generated from our centres in the year. How is this measured? Year-on-year movement in net rental income with the impact of acquisitions, developments and disposals removed. How have we performed? Like-for-like net rental income grew in 2017, reﬂecting better rental values from strong retailer demand and rent reviews. The growth includes the negative impact of 1.4 per cent from the former BHS stores which are now substantially relet. 2013 2014 2015 2016 2017 Shareholder return (%) 30 20 10 0 -10 -20 -30 Why is this important? Combines share price movement and dividends to produce a direct measure of the change in shareholder value in the year. How is this measured? Uses the movement in share price during the year plus dividends paid in the year. How have we performed? The Group showed a negative shareholder return in 2017 compared to an overall rise in the REIT sector mainly driven by negative sentiment to retail in the year. 12% -5% 2013 2014 2015 2016 2017 intu FTSE REIT index Strategic objective 1 3 4 Strategic objective 1 2 3 4 Key performance indicators 37 Total ﬁnancial return (%) +0.8% +13.5% +10.2% +3.4% +5.2% 15 10 5 0 Why is this important? This is a measure of the movement in the underlying value of assets and liabilities underpinning the value of a share plus the dividend paid to shareholders. How is this measured? The movement in adjusted net asset value per share plus dividends paid in the year as a percentage of the opening adjusted net asset value per share. How have we performed? Total ﬁnancial return improved in the year, primarily driven by a revaluation surplus, against a deﬁcit in 2016. Dividends remained unchanged. S t r a t e g i c r e p o r t Strategic objective 1 2 4 2013 2014 2015 2016 2017 Underlying earnings per share (pence) 13.7p 13.3p 14.2p 15.0p 15.0p 15 10 5 0 How is this measured? Underlying earnings exclude property and derivative valuation movements, exceptional items and related tax. Why is this important? Underlying earnings per share is based on the underlying income generated in the year which gives an indication of the extent to which dividend payments are supported by underlying operations. How have we performed? Underlying earnings per share remained stable, reﬂecting the like-for-like net rental income movement, together with the positive impact of the acquisition of Madrid Xanadú, offset by higher ﬁnance costs and administrative expenses. 2013 2014 2015 2016 2017 Prime property assets (%) 9 6 3 0 -3 -6 -9 Why is this important? Measures the capital return on the Group’s property assets and compares this with the IPD index, a recognised industry benchmark. +1.5% -0.4% How is this measured? The valuation gain or loss in the year expressed as a percentage of the book value pre-valuation assessed on a like-for-like basis for the Group’s investment property. How have we performed? Following seven years of outperforming the IPD benchmark, this year reﬂected the correction of the overly severe reduction in the IPD benchmark in 2016 following the EU referendum vote. 2013 2014 2015 2016 2017 intu IPD monthly index (retail) GVA of community investment (£bn) 3.1 3.5 4.2 4.9 4.6 5 4 3 2 1 0 2013 2014 2015 2016 2017 Greenhouse gas emissions intensity (CO2e kg/m2) 120 85 84 73 56 48 90 60 30 0 2013 2014 2015 2016 2017 Why is this important? Shopping centres create wealth and employment for their local communities. Gross value added (GVA) measures the economic contribution of intu to local communities in the UK. How is this measured? GVA is calculated on a range of different activities and types of economic output of our UK assets, including: investment expenditure, intu operational jobs, tenant jobs and tax contributions. This data is independently assured. How have we performed? GVA has decreased by £0.3 billion predominantly as a result of the disposal of intu Bromley. On a like-for-like centre basis, GVA remained broadly stable. Why is this important? Measures our operational efficiency and performance of our existing assets. It also measures performance against our carbon intensity reduction target of 50 per cent by 2020 against the 2010 baseline. How is this measured? Greenhouse gas equivalents are calculated to work out the greenhouse gas intensity of the energy we use. These include the direct and indirect emissions of our directly managed UK centres. How have we performed? Since 2010 we have reduced emissions by 58 per cent, meeting our target of a 50 per cent reduction by 2020, three years early. Strategic objective 1 3 4 Strategic objective 1 2 4 Strategic objective 1 2 3 Strategic objective 1 38 intu properties plc Annual report 2017 Focus on risk The effective assessment and management of risk is key to the delivery of the Group’s strategy intu’s Board has responsibility for establishing the Group’s appetite for risk based on the balance of potential risks and returns in achieving its strategic objectives, and has overall responsibility for identifying and managing risk. Risk management is embedded in our culture, with all employees aware of the role they play. Risk appetite An assessment of the Group’s risk appetite in 2017 showed that this remained broadly unchanged and is set in the context of our focus on one sector – quality shopping centres. As experts in this sector we are able to mitigate the risk involved in growing the business by acquisition, development, our active asset management strategy and brand focus. This focus on our core strengths is balanced by a more cautious approach to risk in other areas. In ﬁnancing we set a target Group debt to assets ratio of 40-50 per cent and require interest cover of more than 160 per cent, giving us signiﬁcant headroom against our loan covenants to ensure that we are in a strong position in the event of any substantial falls in property values. We continue to look to minimise interest rate risk with a policy of hedging at least 75 per cent of the exposure and seek to reﬁnance debt early to reduce risk. This does not, however, prevent us looking at innovative debt structures that provide the Group with diverse funding options. The Group also relies on insurances to mitigate against other ﬁnancial risks. Risk management process intu’s Board has overall responsibility for risk management. The effectiveness of the risk management system is monitored and reviewed by the Audit Committee and through periodic external review. All recommendations made within the 2015 external review have been implemented. Our ongoing assessment of risk is underpinned by a formal risk review process conducted for each area and every level of the business including each centre, each department, internal committee and the executive team. These reviews provide an opportunity to identify risks and assess them for impact and likelihood. The assessment also includes how quickly the risks would impact our business and for how long. The risk registers created through this process are subject to at least an annual review, facilitated by the risk and assurance department. Operational management is responsible for managing the risks and for updating the risk registers. The Audit Committee oversees the risk management process, with the Director k Risk management framework Ri k t f Board — ensure that risk is managed across the business — deﬁne the Group’s appetite for risk — with the Executive Committee, assess the Group’s principal risks — establish ‘tone at the top’ to drive risk culture across the business y t i l i b i s n o p s e r g n i t r o p e r d n a g n i r o t i n o M Audit Committee — monitor and review the effectiveness of the Group’s risk management system and risk culture — oversee and challenge the Group’s overall approach to monitoring areas of risk Risk and assurance department Executive Committee — lead the development of risk management for intu — collate outputs of risk management exercises including risk registers for presentation to Audit Committee, Executive Committee and Board — identify and communicate emerging risks for the business — input into Board’s process for setting risk appetite — with the Board, assess the Group’s principal risks — endorse ‘tone at the top’ set by the Board — implement strategy in line with the Group’s risk appetite — lead operational management’s approach to risk Operational management — create an environment where risk management is embraced — communicate the responsibility of risk management to all employees — implement and maintain risk management processes — produce and maintain risk registers including identiﬁcation of risks, mitigating controls and actions required Employees — active in the day-to-day management of risk — give feedback to operational management on day-to-day risk management I m p l e m e n t a t i o n a n d c o m p l i a n c e r e s p o n s i b i l i t y Focus on risk 39 S t r a t e g i c r e p o r t of Risk and Assurance reporting directly to the Audit Committee Chairman, ensuring independence and objectivity. There are four risk updates per year. Principal risks and uncertainties Fully integrated and thorough risk analysis underpins the ability to achieve our strategic objectives. The Board and Executive Committee have undertaken a robust assessment of the principal risks we face, including those that would impact the business model, future performance, solvency and liquidity. This assessment is not limited to purely ﬁnancial metrics but spans the whole business model, including environmental, social and employee matters, respect for human rights and anti-corruption and anti-bribery matters. We have identiﬁed principal risks and uncertainties under ﬁve key headings: property market; operations; ﬁnancing; developments and acquisitions; and brand. These are discussed in detail on the following pages. A principal risk is one which has the potential to signiﬁcantly affect our strategic objectives, ﬁnancial position or future performance and includes both internal and external factors. We monitor movements in likelihood and severity such that the risks are appropriately managed in line with the Group’s risk appetite. The risk proﬁle for 2017 has remained broadly in line with 2016 with no signiﬁcant new principal risks identiﬁed nor substantial changes in existing principal risks. Where the likelihood for certain risks has increased additional risk mitigation strategies have been put in place. We have also assessed the impact of the proposed transaction with Hammerson on our principal risks. The main impact from the UK’s decision to exit the EU on the risks that the Group faces is the potential negative impact on the macro-economic environment as a result of the continuing uncertainty around transitional and post-Brexit arrangements. Speciﬁcally, the risks we face are affected by any changes in sentiment in the investment and occupier markets in which we operate, in our ability to execute our recycling and investment plans and in broader consumer conﬁdence and expenditure. Risk proﬁle Risk proﬁle Change in level of risk Increased Remained the same t c a p m I 8 3 1 5 2 6 7 9 4 Likelihood 1 Property market – macro-economic 2 Property market – retail environment 3 Operations – health and safety 4 Operations – cybersecurity 5 Operations – terrorism 6 7 8 9 Financing – availability of funds Developments and acquisitions – developments Developments and acquisitions – acquisitions Brand – integrity of the brand Active insurance management We have been using the brand to improve our Group-wide purchasing of insurance, bringing together external insurance partners (brokers, insurers, solicitors and loss adjusters) each year to present a business update and show how we manage new risks and reduce the overall risk proﬁle. This gives our insurance family a greater insight into our processes, behaviour and culture. They are able to identify the scope of cover that intu actually requires, and the risk that intu are able to transfer. The beneﬁts go beyond ﬁnancial savings to improved coverage terms and funding to allow intu to trial risk reduction initiatives and roll out new programmes. Recent funded trials include a virtual assistant to provide safety messaging to customers; more security cameras and yellow comb plates for escalators to improve safety. By implementing risk-reducing controls, we show that a safe and secure environment can lead to lower claims, reduce premium rates and provide increased risk management funding. 40 intu properties plc Annual report 2017 Principal risks and uncertainties Risk and impact Mitigation Change 2017 commentary Strategic objectives affected Property market 1 Macro-economic Weakness in the macro- economic environment could undermine rental income levels and property values, reducing return on investment and covenant headroom — focus on high-quality shopping centres together with their upgrading — covenant headroom monitored and stress-tested — make representation on key policies, for example business rates — company-wide marketing events across centres to attract footfall — use our respected brand to attract and retain aspirational retailers — continued geographic diversiﬁcation by increasing Spanish presence 2 Retail environment Failure to react to changes in the retail environment could undermine intu’s ability to attract customers and tenants — active management of tenant mix including letting of former BHS units — regular monitoring of tenant strength and diversity — upgrading assets to meet market demand — Tell intu customer feedback programme helps identify changes in customer preferences — work closely with retailers — digital strategy that embraces technology and digital customer engagement. This enables intu to engage in and support multichannel retailing, and to take the opportunities offered by ecommerce Operations 3 Health and safety Accidents or system failure leading to ﬁnancial and/or reputational loss — strong business process and procedures, including compliance with OHSAS 18001, supported by regular training and exercises — annual audits of operational standards carried out internally and by external consultants — culture of visitor, staff and contractor safety — crisis management and business continuity plans in place and tested — retailer liaison and brieﬁngs — appropriate levels of insurance — staff succession planning and development in place to ensure continued delivery of world class service — health and safety managers or coordinators in all centres 4 Cybersecurity Loss of data and information or failure of key systems resulting in ﬁnancial and/ or reputational loss — data and cybersecurity strategies — regular testing programme and cyber scenario exercise and benchmarking — appropriate levels of insurance — crisis management and business continuity plans in place 5 Terrorism Terrorist incident at an intu centre or another major shopping centre resulting in loss of consumer conﬁdence with consequent impact on lettings and rental growth and tested — Data Committee and Data Protection Officer in place — monitoring of regulatory environment and best practice — cybersecurity assessment performed by external consultancy and full action plan in place (programme of works) — managing of supply chain and service providers who hold intu data — strong business processes and procedures, supported by regular training and exercises, designed to adapt and respond to changes in risk levels — extraordinary pre-planned operational responses to changes in national threat level — annual audits of operational standards carried out internally and by external agencies — culture of visitor, staff and contractor safety — crisis management and business continuity plans in place and tested with involvement of multiple external agencies — retailer liaison and brieﬁngs — appropriate levels of insurance — strong relationships and frequent liaison with police, NaCTSO and other agencies — NaCTSO approved to train staff in counter-terrorism awareness programme — internal head of security appointed 1 2 3 4 Likelihood of macro-economic weakness continues to be a risk with political uncertainty in the UK and Brexit arrangements not yet detailed, which has increased investor caution with lower transaction volumes in the year — like-for-like property values broadly holding up, but under pressure at the lower end of the market — substantial covenant headroom — no signiﬁcant near-term debt maturities and average unexpired term of 6.6 years — long-term lease structures with average unexpired term of 7.5 years — €517m acquisition of Madrid Xanadú and subsequent 50 per cent sale to joint venture partner at the same price — sale of 50 per cent interest in intu Chapelﬁeld at £148m, ahead of the December 2016 valuation Likelihood and severity of potential impact was monitored closely in 2017 with intu’s strategy continuing to deliver solid footfall numbers and occupancy — signiﬁcant progress on planning and pre-letting of near-term pipeline with a focus on leisure — continuing digital investment to improve relevance as shopping habits change — occupancy remains strong at 96 per cent — footfall growth continues to beat the benchmark — on site with the £72m intu Lakeside leisure extension 1 3 Likelihood of potential impact has not changed signiﬁcantly during 2017, however severity impacted by new enforcement structure — retained OHSAS 18001, demonstrating consistent health and safety management process and procedures across the portfolio — work continuing towards achieving additional accreditations with focus on ISO 14001 — gold award from RoSPA — full review undertaken of each centre’s ﬁre strategy and building speciﬁcations post-Grenfell has provided appropriate assurance across the portfolio Likelihood has increased with greater reliance on operational and third party systems and data, and with the number of recent high-proﬁle hacks. Severity of potential impact has reduced by signiﬁcant development of tools and controls. Hacking attempts have not resulted in data loss or major operational impacts — ongoing Group-wide cybersecurity project with investment in tools, consultancy and staff to mitigate impact of threats from evolving cybersecurity landscape — implementing updated GDPR policies and procedures Overall likelihood and severity of potential impact unchanged. In May 2017 we enacted our operational plan for the period of increased threat level. The threat level was subsequently reduced to the prior threat level — there have been ﬁve terrorist-related incidents in the UK in 2017 — national threat level remains at Severe — major multi-agency security exercises held at all ﬁve super-regional intu shopping centres — operating procedures in place for the introduction of further security measures if required Principal risks and uncertainties 41 S t r a t e g i c r e p o r t Risk and impact Mitigation Change 2017 commentary Strategic objectives affected Financing 6 Availability of funds Reduced availability of funds could limit liquidity, leading to restriction of investing and operating activities and/or increase in funding cost — funding strategy regularly reported to the Board with current and projected funding position — effective treasury management aimed at balancing the length of the debt maturity proﬁle and diversiﬁcation of sources of ﬁnance — consideration of ﬁnancing plans including potential for recycling of capital before commitment to transactions and developments — strong relationships with lenders, shareholders and partners — focus on high-quality shopping centres 2 4 Macro-economic events during 2017, and the uncertainty caused by them, mean the increased risk of reduced availability remains. However, severity of potential impact unchanged from 2016. Regular reﬁnancing activity continuing to evidence the availability of funding — new €263m loan to ﬁnance acquisition of Madrid Xanadú — introduction of joint venture partner into Madrid Xanadú — £140m reﬁnancing of intu Milton Keynes — £488m reﬁnancing of intu Merry Hill — £250m additional ﬁnancing on intu Trafford Centre Developments and acquisitions 2 4 7 Developments Developments fail to create shareholder value — Capital Projects Committee reviews detailed appraisals before and monitors progress during signiﬁcant projects — ﬁxed price construction contracts for developments Likelihood and severity of potential impact have remained unchanged in 2017 as the Group has progressed work on its development pipeline agreed with clear apportionment of risk — signiﬁcant levels of pre-lets exchanged prior to scheme development 8 Acquisitions Acquisitions fail to create shareholder value — research and third party due diligence undertaken for transactions — local partner, advisors and experienced staff in Spain with specialist market knowledge — where appropriate, investment risk reduced through ﬁnancing and joint venture investments Brand 9 Integrity of the brand The integrity of the brand is damaged leading to ﬁnancial and/or reputational loss — intellectual property protection — strong guidelines for use of brand — strong underlying operational controls and crisis management procedures — ongoing training programme and reward and recognition schemes designed to embed brand values and culture throughout the organisation — traditional and digital media monitoring and analysis — Tell intu and Shopper View customer feedback programmes — at intu Watford works are on schedule to hit all key milestones — onsite with intu Lakeside leisure development — detailed appraisal work and signiﬁcant pre-lets ahead of starting major development projects — key anchor letting to Primark secured prior to proposed start on site in 2018 at Barton Square for intu Trafford Centre transformation Likelihood and severity of potential impact have remained unchanged in 2017 — substantial due diligence process undertaken before acquisition of Madrid Xanadú 1 2 3 4 Likelihood and severity of potential impact unchanged in 2017 — continuing media interest in intu and our commentary and opinions on the business and wider landscape — ongoing development of brand in Spain — net promoter score consistently high at around 70 in 2017 Key to strategic objectives Change in level of risk 1 Optimising asset performance Increased 2 Delivering UK developments Remained the same 3 Making the brand count 4 Seizing the growth opportunity in Spain 42 intu properties plc Annual report 2017 Operating review Our operating review analyses how we have performed in the year against our strategy UK investment market Prime shopping centres continue to attract interest from both international and domestic investors. While activity was limited in 2017, good levels of demand remain for quality assets in the UK’s liquid and transparent market for large shopping centres. A ﬂight to quality has ensured prime yields on assets with simple ownership structures remain stable as investors look at the quality and longevity of income streams coupled with rental growth potential in a market where new supply, by way of development, remains low. Against this, the depth of investor demand for secondary assets has diminished. Optimising asset performance We focus on creating vibrant environments where customers and retailers want to be. This increases the value of our centres and provides strong, stable income streams and positive operating metrics. These elements ensure we deliver attractive long-term total property returns. The table below shows the main components of the £47.3 million revaluation surplus: — UK super-regional centres and major city centres: stable values recognising the continuing attraction of this asset class which remains key to retailers’ requirements. The small overall deﬁcits relate to investment on the existing intu Watford centre and tenant repositioning at intu Merry Hill not yet reﬂected in rental values Valuation Market value Like-for-like 31 December 2017 £m 31 December 2016 £m Surplus/ (deﬁcit) £m Surplus/ (deﬁcit) % UK super-regional centres UK major city centres Spanish centres Acquisition: Madrid Xanadú Spanish developments Other 6,373.7 2,559.3 371.6 9,304.6 235.2 212.8 470.1 intu Chapelﬁeld (asset held for sale at 31 December 2017) Total 10,222.7 306.5 10,529.2 6,315.8 2,544.3 331.0 9,191.1 – 76.7 419.2 9,687.0 297.7 9,984.7 (17.7) (15.0) 22.4 (10.3) 1.7 74.5 (28.2) 37.7 9.6 47.3 (0.3) (0.6) 6.4 (0.1) 0.7 53.8 (5.1) 0.4 3.3 0.5 — Spanish centres: strong rental growth and continued strong demand for top-quality Spanish centres has driven valuations up at both intu Asturias and Puerto Venecia — Spanish developments: with most of the planning requirements in place at intu Costa del Sol, the ﬁrst independent valuation of the site, which was previously carried at cost, delivered a £74 million surplus over cost — other: represents valuation movements on assets valued below £200 million each The weighted average nominal equivalent yield at 31 December 2017 remained stable at 5.03 per cent, an increase of one basis point in the year. On a like-for-like basis, ERV increased by 1.0 per cent in the year, compared with the IPD index which indicated a 0.4 per cent increase. The overall quality of our portfolio is illustrated by our long-term outperformance of the IPD capital growth monthly retail index, as shown in the chart below. Total Property Return 130 125 120 115 110 105 100 2009 2011 2013 2015 2017 intu IPD monthly retail index Operating review 43 Group like-for-like net rental income Rent reviews, improved letting and turnover income Capital investment Vacancy impact Units closed for redevelopment and/or repositioning Other letting activity (eg bad debt; surrender premiums) Increase in like-for-like net rental income S t r a t e g i c r e p o r t 2017 +2.2% +0.4% -0.4% -1.4% -0.3% +0.5% 2016 +2.3% +0.8% +1.7% -0.6% -0.6% +3.6% Rent from lettings and rent reviews delivered 2.2 per cent rental growth. Against previous passing rent, lettings were on average up 7 per cent and rent reviews up 9 per cent. This growth was partially offset by the 1.4 per cent impact of units closed for redevelopment and/or repositioning, mainly from the former BHS stores which are now substantially relet with excellent lettings to quality retailers such as Next, Primark and Uniqlo. These were not income producing in 2017, but will come back on stream in 2018. As previously stated, we expect to deliver medium term like-for-like net rental income growth of 2 to 3 per cent per annum, over the next three to ﬁve years, and in 2018 we expect this to be in the range of 1.5 to 2.5 per cent, subject to no material tenant failures. UK operating metrics Occupancy – of which, occupied by tenants trading in administration Leasing activity – number, new rent – new rent relative to previous passing rent Footfall Retailer sales (like-for-like centres) Rent to estimated sales (exc. anchors and major space users) 2017 2016 96.1% 0.6% 179, £35m +6% +0.1% -2.1% 12.1% 96.0% 0.5% 187, £35m +4% +1.3% +0.2% 12.2% Occupancy is 96.1 per cent, in line with 31 December 2016 and 30 June 2017. This is equivalent to 97.0 per cent on the industry standard EPRA calculation (December 2016: 97.0 per cent). We agreed 179 long-term leases in the year, amounting to £35 million annual rent, at an average of 6 per cent above previous passing rent (like-for-like units) and in line with valuers’ assumptions. Retailers continue to focus on increasing their space in prime, high footfall retail destinations. Signiﬁcant activity in the year includes: — new retail anchors, in the shape of key fashion brands, upsizing to optimise their offering and conﬁguration. This includes Primark, Next and River Island upsizing at intu Merry Hill, as well as Inditex and H&M expanding their brand portfolios with Stradivarius at St David’s and Monki at Manchester Arndale — international brands’ ongoing recognition of the attraction of intu’s destination shopping centres. Victoria’s Secret, the US lingerie brand, and Lovisa, an Australian accessories store, have both added three stores. Colette, the Australian handbag retailer, has opened its second UK store at Manchester Arndale and Inglot, a Polish cosmetics brand, opened its ﬁrst store outside London at intu Eldon Square — brands recognising the beneﬁt of stores as part of their customer acquisition, with Paul Smith opening their ﬁrst store in Manchester at Manchester Arndale and Tesla continuing their roll-out of stores at intu Milton Keynes — leisure operators continuing to grow in ﬂagship destinations with Puttshack, Flip Out and Hollywood Bowl joining Nickelodeon at the intu Lakeside leisure extension and Gravity at the refurbished Soar at intu Braehead UK consumer market Uncertainty regarding the ﬁnal terms of the UK’s exit from the EU is creating a mixed picture on the state of the UK consumer. Unemployment continues at record low levels which should in turn drive growth in personal income. However, the increase in inﬂation from the weakening of sterling after the EU referendum vote is causing prices to rise faster than wages at the moment which impacts consumers’ disposable income. The Asda benchmark index of household disposable income has remained level since December 2016. Looking further ahead, the Bank of England’s forecasts suggest that wage growth will overtake inﬂation as we go into 2018. Consumer conﬁdence, as measured by GfK, has reduced slightly in 2017, reﬂecting the negative sentiment on the expectations for the economy, although consumers’ view on their personal ﬁnance situation over the next 12 months is stable. These mixed messages have not had a material effect on total non-food retail spending, which remained unchanged in 2017 against the previous year (British Retail Consortium total non-food retail index), although, with the continued growth in online, in-store sales were down by around 2 per cent in the year. International brands such as Victoria’s Secret and Tesla are attracted to intu’s high footfall centres 44 intu properties plc Annual report 2017 Operating review continued Like-for-like net rental income growth +0.5% Footfall growth +0.1%ShopperTrak benchmark -2.8% 259 shops opened or reﬁtted in our UK centres in 2017 (2016: 225 stores), around 9 per cent of our 2,800 units. Tenants have invested around £89 million in these stores, a signiﬁcant demonstration of their commitment to our centres. units), leaving 7 per cent realisable from other lease expiries and rent reviews. The weighted average unexpired lease term is 7.5 years (31 December 2016: 7.7 years) illustrating the longevity of our income streams. We settled 218 rent reviews in the year for new rents totalling £47 million, an average uplift of 9 per cent on the previous rents. Footfall improved by 0.1 per cent in the year, signiﬁcantly outperforming the ShopperTrak measure of UK national retail footfall which was down by 2.8 per cent, highlighting the attraction of our compelling destinations against the wider market. Estimated retailer sales in our centres were down 2.1 per cent predominantly driven by some clothing retailers who had a challenging year in 2017. In-store sales ﬁgures take no account of the beneﬁt of the store to retailers’ online sales and are further impacted by returns of online sales. The ratio of rents to estimated sales for standard units remained stable in the year at 12.1 per cent. Catering and leisure units now comprise over 500 of our overall 2,800 leases and have increased steadily in recent years in a growing market. Reﬂecting changing customer preferences, over the last ﬁve years, this market has increased to around 13 per cent of total rental income. Over the same period, we have seen a reduction in rental income from fashion outlets to around 25 per cent. The difference between annual property income (see glossary) of £462 million and ERV of £544 million represents £37 million from vacant and development units and reversion of £45 million, 8 per cent, from rent reviews and lease expiry. Of the 8 per cent reversion, 1 per cent is only realisable on expiry of leases with over 10 years remaining (eg anchor Delivering UK developments In 2017, we invested £184 million in the UK. This included £63 million on the intu Watford extension, £58 million on the acquisition of additional properties (all currently income-generating) which will be integral to future development projects, £12 million on the leisure extension at intu Lakeside and £51 million on other active asset management projects, including the new Travelodge hotel at intu Lakeside and the Next ﬂagship store at intu Metrocentre. Near-term pipeline Looking ahead, we are progressing our near-term pipeline of £562 million over the next three years, reinforcing our existing assets and delivering value- enhancing returns. Our development team continues to progress these projects on budget and on time, with major developments on site at intu Watford and intu Lakeside and soon to start at intu Trafford Centre (Barton Square) and intu Broadmarsh, Nottingham. We are committed to investing £264 million, most of which is on key ongoing projects: — at intu Watford we remain on target with our £180 million extension expected to open in October 2018. The development has topped out, with the feature roof now installed and anchor tenants due to start ﬁtting out in the next few months. The 380,000 sq ft project, anchored by Debenhams and Cineworld, is two-thirds let by space with Superdry and Hollywood Bowl exchanged in the year. The Operating review 45 S t r a t e g i c r e p o r t cost to completion of this project is £80 million, and as previously stated, the project is expected to deliver a return on cost of 6 to 7 per cent, including 1 to 2 per cent from the existing centre — at intu Lakeside we have commenced construction of the £72 million leisure extension, with £57 million of cost remaining to completion. This 175,000 sq ft project is expected to deliver a return on cost of 6.5 per cent and has the four leisure attractions Nickelodeon, Flip Out, Puttshack and Hollywood Bowl exchanged — at intu Trafford Centre, we have signed Primark to anchor the expansion and transformation of Barton Square. The £72 million project will enclose the courtyard, enhance interiors, allow trading from two levels and provide a fashion offer for the ﬁrst time at Barton Square. We are progressing the procurement of the construction works and expect the project, delivering a return of 6 to 7 per cent, to be completed by mid-2019 — active asset management projects total £55 million and include the Halle Place restaurant redevelopment at Manchester Arndale, the creation of ﬂagship stores for Next at intu Metrocentre and intu Merry Hill and the redevelopment of former BHS units for Uniqlo and Primark at Manchester Arndale and intu Merry Hill respectively. Hill respectively. These projects are expected to deli expected to deliver a range of returns between 6 and 1 between 6 and 10 per cent dependent on the nature of on the nature of the individual project Our pipeline of plan Our pipeline of planned projects amounts to £298 million, wit to £298 million, with a focus on extension and redevelopment and redevelopments: — at intu Broadma — at intu Broadmarsh we have a planned redevelopment redevelopment which is expected to cost £81 million cost £81 million and deliver a stabilised initial yield of aro initial yield of around 7 per cent. We have signed We have signed The Light cinema and Hollywood and Hollywood Bowl to anchor the scheme and we scheme and we would expect to have the required leve the required level of pre-lets and completed deta completed detailed design to enable us to commit to us to commit to this by the second half of 2018 of 2018 — at intu Merry Hil — at intu Merry Hill we are planning to increase the cate increase the catering and leisure to bring it in line wi bring it in line with other super-regional centres. In total, centres. In total, we expect to invest around £100 million, of which £70 million will be spent in the period to 2020, delivering a return at a similar level to that of the leisure extension at intu Lakeside — at intu Milton Keynes we expect to invest £15 million commencing phase one of the redevelopment of under-utilised space — other active asset management projects are smaller in nature, across all centres and at various stages of feasibility. We have the ﬂexibility to start these projects when we have the required level of pre-lets and expect them to deliver similar returns to those that we have committed to Future opportunities Beyond 2020, we continue to work on securing the required planning approvals and tenant demand to start £1.4 billion of further projects which we would expect to deliver stabilised initial yields of around 7 per cent. We have planning approvals for extensions to intu Braehead, intu Lakeside, intu Victoria Centre and intu Milton Keynes and are at earlier stages of the planning process for the extension of Cribbs Causeway. Making the brand count The intu brand has positioned us well, as the role of the shopping centre operator has changed, to ensure our centres remain relevant for both customers and retailers. The unprompted awareness of the intu brand increased to 26 per cent, a threefold increase since 2015 when we started monitoring, highlighting its increasing recognition and value. Additionally, our prompted awareness has increased to 71 per cent in 2017, from 63 per cent in 2016. The combination of our national presence, attractive digital offering and in-house experiences team offers retailers and brands promotional opportunities, which in turn gives us a multidisciplinary opportunity to help retailers ﬂourish within our centres. The importance of identifying new ideas and services emerging in the UK retail market cannot be underestimated. In 2017 we launched intu Accelerate, an incubator for these technologies and services, identifying start-ups to pilot Funding We will fund our near-term pipeline from cash and available facilities and from recycling capital to deliver superior returns. Cash and available facilities at 31 December 2017 were £833 million on a pro forma basis including the £148 million disposal of 50 per cent of intu Chapelﬁeld. Further recycling potential lies in the introduction of partners into some of our centres, although this would have a short-term negative earnings impact until the proceeds are reinvested. In addition, we expect to raise ﬁnance on near-term projects, such as the intu Watford extension, as they complete, to fund future opportunities. Our affiliate website drives £9 million of retailer sales 46 intu properties plc Annual report 2017 Operating review continued Our cutting-edge network Our converged Cisco network across our centres gives us a co-ordinated, managed and increasingly secure technical platform that beneﬁts customers, tenants and staff. This robust, high-bandwidth backbone enables us to implement an array of new technologies quickly and securely, more cheaply and with a lower carbon footprint. For instance, as well as free customer wiﬁ, we have been able to install large screens at ﬂagship centres, with programming from our central production studio. Having the network in place also enables us to experiment with new ideas. The network facilitates predictive maintenance and standardisation of key building management and security systems, which in turn allow economies of scale and interoperability between centres. new concepts in centre and online, including what is believed to be Europe’s ﬁrst customer services robot in a shopping centre. Customer service Putting the customer ﬁrst is embedded in our culture. Our net promoter score, a measure of customer service, ran consistently high throughout the year averaging 70 and demonstrating our in-centre operational excellence. intu Experiences Curation of the customer experience is a key element of our role in managing shopping centres. Our in-house team, intu Experiences, which generated income of £22 million, is crucial in delivering immersive brand partnerships, mall commercialisation and advertising which is complementary to the asset strategy of each centre and meets our quality standards. An example of this end-to-end control is the large format digital screen we have introduced to each of our out-of-town centres, providing new income streams from global brands. We own all these screens and, in many instances, produce the content in-house – an area of growth for us. Similarly, choosing the brands we work with promotionally is important in delivering the right messages. Through the Easter holidays we furthered our collaboration with Nick Jr., Nickelodeon’s pre-school television channel, adding augmented reality functionality to our in-centre app to deliver a new family experience to our customers. intu Digital Our attractive digital offering through our premium content publisher and shopping platform, intu.co.uk, continued to grow strongly and delivered online sales for retailers of £9 million in the year, an increase of 50 per cent against 2016. We continue to develop the site, with image recognition to assist product search added in 2017. Shop Insider, the premium content section of the site, saw traffic up nearly 200 per cent in the year to 1.5 million visits, leading to a 50 per cent increase in visits to the shopping pages. This highlights the power of quality content to drive both physical and digital sales, as shoppers continue to be ever more considered in their purchases, researching heavily online before planned visits. Key to this growth is our online marketing expertise with over two million individuals on our active marketing database and a social media audience of over one million. Seizing the growth opportunity in Spain Our Spanish strategy has been to create a business of scale through acquisitions and our pipeline of development projects, concentrating on the top-10 key catchments, where we now own and manage three of Spain’s top-10 shopping centres, with the acquisition of Madrid Xanadú in 2017 (see Acquisitions and disposals). In addition, we have three development sites with the most advanced project being intu Costa del Sol, near Málaga. Operational performance The occupancy of our Spanish centres is 97 per cent. We agreed 38 long-term lettings in the year, amounting to over £2 million annual rent, at an average of 25 per cent above previous passing rent (like-for-like units). New names to our centres included Quiz, Levis, Pandora, Alcott and Xiaomi. Footfall increased by 1.0 per cent in the year and this includes the disruption in the ﬁrst half of 2017 from the redevelopment work at intu Asturias where we developed a previously underutilised area to Operating review 47 S t r a t e g i c r e p o r t Acquisitions and disposals In line with our strategy, we continue to recycle capital to focus on our ﬂagship destinations where we have the opportunity to deliver superior returns. Acquisitions In March 2017, we acquired Madrid Xanadú, one of Spain’s top-10 shopping centres, for an agreed headline price of €530 million. The centre has many of the key retailers, including El Corte Inglés, all the Inditex fascias, Primark and Apple, along with a strong leisure offering of Spain’s only indoor ski slope, cinema, bowling and soon-to-open aquarium and Nickelodeon theme park. Footfall is 13 million, with a potential catchment of four million people living within a 30-minute drive time. Over the medium term, we see good reversionary potential, with further growth opportunities from key asset management initiatives which will enhance the centre’s status as a truly regional retail and leisure resort, drawing visitors from a wider catchment. In July 2017, we formed a joint venture with TH Real Estate for them to take ownership of 50 per cent of Madrid Xanadú based on the original acquisition price. Disposals In November 2017, we announced the formation of a joint venture with LaSalle Investment Management for them to take ownership of 50 per cent of intu Chapelﬁeld, Norwich for a net consideration of £148 million, in line with the December 2016 valuation. The transaction completed in January 2018. introduce a supermarket and new retail units. This opened in July with a strong uplift in footfall. We have increased the value of the centres owned throughout the year with growth in rental values being the main driver. Our share of Puerto Venecia, Zaragoza was valued at £231 million, an increase of 4 per cent, and our share of intu Asturias increased by 11 per cent, to £141 million. In 2018, we plan to roll out the intu brand to Puerto Venecia and Madrid Xanadú. Near-term pipeline Our Spanish development pipeline through to the end of 2020 amounts to £397 million. We have active asset management projects of £57 million through to the end of 2020 across all three centres with a focus on enhancing the resort content of each centre. Our world-class project at intu Costa del Sol will create a shopping resort of around 230,000 sq m. In 2017, the approval of the General Plan of Torremolinos was a major step forward, with the remaining consents expected in the coming months. We have very strong interest from tenants and would anticipate being on site in the next 12 months. The land, with planning mostly approved, was independently valued at the end of 2017, delivering a surplus of £74 million. The total cost to completion of the development is expected to be around £600 million (£340 million through to 2020), excluding the land, and deliver a stabilised initial yield of around 7 per cent. We expect to fund the project through bank and other ﬁnance, and introduce a partner at a later stage. Future opportunities We continue to develop plans at the two other sites in Valencia and Vigo, having decided not to progress with our development option in Palma. At this point, intu Valencia, where we have renewed support from the regional government, is the most likely to follow intu Costa del Sol. Spanish market The Spanish economy is still one of Europe’s fastest growing economies and this should continue in 2018 with its GDP growth expected to be one of the highest of the major European economies. For the consumer, unemployment is at its lowest level for several years and consumer conﬁdence at its highest. This in turn beneﬁts retail sales which are further enhanced by record levels of tourists which have increased by 20 per cent over the last two years. The investment market remains strong with continuing investor conﬁdence in Spanish real estate supported by an economy that is growing. With banks willing to lend against Spanish assets, the weight of money in the market looking to invest in quality assets has continued to strengthen the market. Partly due to the lack of development in recent years, prime regional shopping centres are scarce which is reﬂected in good demand. Continued evolution of intu Asturias with the remodelled food court and new lower level 48 intu properties plc Annual report 2017 Financial review Our results for the year show growth in net rental income and underlying earnings, with net asset value per share stable Overview We have recorded underlying earnings of £201.0 million for the year ended 31 December 2017, slightly higher than the £200.0 million recorded in 2016. This reﬂects 0.5 per cent growth in like-for-like net rental income as well as the impact of 2017 and 2016 acquisitions and disposals. Underlying earnings per share of 15.0 pence is unchanged from 2016. Proﬁt for the year attributable to owners of intu properties plc of £216.7 million has increased by £34.0 million, driven by a surplus on property revaluations of £47.3 million (2016: deﬁcit of £63.8 million), as well as the change in fair value of ﬁnancial instruments, a surplus of £23.0 million (2016: charge of £16.9 million), partially offset by 2016 gains of £74.1 million on the sale of our interest in Equity One and £34.6 million on the acquisition of the remaining 50 per cent of intu Merry Hill. NAV per share of 411 pence has increased 7 pence from 2016, which when taking account of the dividend paid in the period of 14.0 pence delivers a total ﬁnancial return for the year of 5.2 per cent. NAV per share includes a timing impact within retained earnings of 4 pence in relation to our Spanish development partner Eurofund’s expected future interest in the share capital of the intu Costa del Sol development company. The positive impact on retained earnings is expected to reverse, once these arrangements are concluded, with the Eurofund interest to be included in non-controlling interests during 2018. In this event NAV per share would be 407 pence. Presentation of information We account for our interests in joint ventures using the equity method as required by IFRS 11 Joint Arrangements. This means that the income statement and the balance sheet include single lines for the Group’s total share of post-tax proﬁt and the net investment in joint ventures respectively. Management review and monitor performance as well as determine the strategy of the business primarily on a proportionately consolidated basis. This includes the Group’s share of joint ventures on an individual line-by-line basis rather than a post-tax proﬁt or net investment basis. The ﬁgures and commentary presented are consistent with our management approach as we believe this provides a more meaningful analysis of the Group’s performance. The other information section provides reconciliations of the income statement and balance sheet between the two bases. Alternative performance measures are also used to assess the Group’s performance. The signiﬁcant measures are summarised as follows: Alternative performance measure used Like-for-like amounts Rationale Like-for-like amounts are presented as they indicate operating performance as distinct from the impact of acquisitions or disposals. In respect of property, the like-for-like measure relates to property which has been owned throughout both periods without signiﬁcant capital expenditure in either period, so that income can be compared on a like-for-like basis. For the purposes of comparison of capital values, this will also include assets owned at the previous reporting period end but not throughout the prior period. Further analysis is presented in the other information section and in the operating review. Net asset value (NAV) (diluted, adjusted) NAV (diluted, adjusted) is presented as it is considered to be a key measure of the Group’s performance. The key difference from EPRA NAV, an industry standard comparable measure, is the exclusion of interest rate swaps not currently used for economic hedges of debt as, in our view, this better allows management to review and monitor the Group’s performance. A reconciliation of NAV (diluted, adjusted) to NAV attributable to owners of intu properties plc is provided in note 13(a) as well as on page 51 and to EPRA NAV within the other information section. Underlying earnings Underlying earnings is presented as it is considered to be a key measure of the Group’s recurring income performance and an indication of the extent to which dividend payments are supported by underlying operations (see underlying proﬁt statement in the other information section). It excludes property and derivative valuation movements, exceptional items and related tax. The key difference from EPRA earnings, an industry standard comparable measure, relates to adjustments in respect of exceptional items where EPRA is prescriptive about the adjustments that can be made. A reconciliation of underlying earnings to proﬁt for the year attributable to owners of intu properties plc is provided in note 12(c) as well as on page 49 and to EPRA earnings within the other information section. Financial review 49 S t r a t e g i c r e p o r t In March we continued to increase our presence in Spain and strengthen our quality portfolio, acquiring 100 per cent of Madrid Xanadú for €517.3 million (£453.9 million). As part of this we arranged a €263 million loan facility, with a 2022 maturity. In July we disposed of 50 per cent of Madrid Xanadú to TH Real Estate based on the original acquisition price, retaining a 50 per cent interest. Further, in November we announced the formation of a joint venture with LaSalle Investment Management (acting on behalf of Greater Manchester Pension Fund and West Yorkshire Pension Fund) for them to take ownership of 50 per cent of intu Chapelﬁeld for initial net proceeds of £148.0 million. This transaction has now completed following the receipt of EU merger approval in January 2018. As a result, in accordance with IFRS, the net assets of intu Chapelﬁeld have been classiﬁed as held for sale at 31 December 2017 in the balance sheet. Our ﬁnancing metrics remain strong mainly due to our continued reﬁnancing activity. During the year we reﬁnanced over £1.1 billion of debt, including the reﬁnancing of intu Milton Keynes and intu Merry Hill, securing ﬁnancing on Madrid Xanadú and additional ﬁnancing on intu Trafford Centre. Our interest cover ratio of 1.94x is broadly unchanged in the year (31 December 2016: 1.97x) with satisfactory headroom above our target minimum level of 1.60x. At 31 December 2017, pro forma for the 50 per cent part disposal of intu Chapelﬁeld for initial net proceeds of £148.0 million, our debt to assets ratio has increased to 45.2 per cent (31 December 2016: 43.7 per cent), remaining below our target maximum level of 50 per cent. Also on a pro forma basis, we had cash and available facilities of £833.1 million (31 December 2016: £922.3 million) which have decreased in the year due to the acquisition and part disposal of Madrid Xanadú as well as buying back and cancelling £139.6 million of the £300 million 2.5 per cent convertible bonds, maturing Autumn 2018, partially offset by the net proceeds from the part disposal of intu Chapelﬁeld. Income statement Underlying earnings (£m) 200 175 150 125 100 Underlying earnings increased to £201.0 million from £200.0 million at 31 December 2016. The key movements are shown in the chart to the right. Underlying earnings per share is consistent with prior year at 15.0 pence. Net rental income increased £13.0 million in 2017 to £460.0 million due to the acquisition of Madrid Xanadú in March 2017, the acquisition of the remaining 50 per cent of intu Merry Hill in June 2016 and 0.5 per cent growth in like-for-like net rental income, partially offset by the impact of the disposal of intu Bromley in December 2016. Like-for-like net rental income increased by £2.1 million, 0.5 per cent, driven by rental growth from new lettings and rent reviews, partially offset by the impact of the redevelopment and reletting of the former BHS units which were fully income producing in the ﬁrst half of 2016 (see operating review). Administration expenses increased by £3.0 million in 2017 to £41.6 million, primarily due to increased headcount in Spain partially offset by a cost reduction programme in the second half of the year from which we will beneﬁt in 2018. Income statement summary Underlying earnings Adjusted for: Revaluation of investment and development property Gain on acquisition of businesses Loss on disposal of subsidiaries (Loss)/gain on sale of other investments Administration expenses – exceptional Exceptional ﬁnance costs Change in fair value of ﬁnancial instruments Tax on the above Share of joint ventures’ items Share of associates’ items Non-controlling interests in respect of the above Proﬁt for the year attributable to owners of intu properties plc 200.0 +2.1 +10.9 -9.6 -3.0 +0.6 201.0 r e h t O 7 1 0 2 6 1 0 2 s t s o c e c n a n ﬁ t e N s e s n e p x e n o i t a r t s i n m d A i e k i l - r o f - e k i l – e m o c n i l a t n e r t e N s t n e m p o l e v e d / s l a s o p s i d / s n o i t i s i u q c a – e m o c n i l a t n e r t e N 2017 2016 Share of joint ventures £m Group including share of joint ventures £m Group including share of joint ventures £m n/a 201.0 200.0 16.5 – – (0.3) (0.7) – 1.0 1.3 (17.2) – (0.6) 47.3 – (1.8) (0.3) (6.6) (33.0) 23.0 (22.7) – 0.4 9.4 (63.8) 34.6 (0.3) 74.1 (2.9) (32.9) (16.9) (16.5) – 1.1 6.2 Group £m 201.0 30.8 – (1.8) – (5.9) (33.0) 22.0 (24.0) 17.2 0.4 10.0 216.7 n/a 216.7 182.7 Underlying earnings per share (pence) 15.0p n/a 15.0p 15.0p 50 intu properties plc Annual report 2017 Financial review continued Net rental income margin Gross rental income Head rent payable Net service charge expense and void rates Bad debt and lease incentive write-offs Property operating expense Net rental income Net rental income margin EPRA cost ratio (excluding direct vacancy costs) Net ﬁnance costs have increased by £9.6 million in 2017 to £222.5 million primarily due to the increase in net external debt for the acquisition of Madrid Xanadú and capital expenditure in the year. As discussed in the overview, proﬁt attributable to owners of intu properties plc is £216.7 million, an increase from the £182.7 million reported for the year ended 31 December 2016. Our investment in joint ventures contributed £35.5 million to the proﬁt of the Group (2016: £32.1 million) including £18.3 million to underlying earnings (2016: £19.8 million) and a gain on property valuations of £15.9 million (2016: £14.2 million). As detailed in the table above, our net rental income margin has reduced to 87.5 per cent primarily due to higher void costs from the former BHS units. Property operating expenses largely comprise car park operating costs and the Group’s contribution to shopping centre marketing programmes. Our ratio of total costs to income, as calculated in accordance with EPRA guidelines, remains low at 15.1 per cent (see other information section). Year ended 31 December 2017 £m 546.2 (20.5) 525.7 (29.1) (3.2) (33.4) 460.0 87.5% 15.1% Year ended 31 December 2016 £m 532.6 (25.4) 507.2 (26.0) (2.5) (31.7) 447.0 88.1% 15.0% Balance sheet The Group’s net assets attributable to shareholders have increased by £96.2 million to £5,075.0 million at 31 December 2017, while net assets (diluted, adjusted) have increased by £85.0 million to £5,522.7 million at 31 December 2017. NAV per share (diluted, adjusted) at 31 December 2017 has increased 7 pence from the prior year to 411 pence, the key movements are shown in the chart to the right. This was driven principally by the revaluation surplus in the year of 4 pence and the timing impact within retained earnings of 4 pence in relation to our Spanish development partner Eurofund’s expected future interest in the share capital of the intu Costa del Sol development company. The positive impact on retained earnings is expected to reverse, once these arrangements are concluded, with the Eurofund interest to be included in non-controlling interests during 2018. In this event NAV per share would be 407 pence. Investment and development property has increased by £248.0 million primarily due to capital expenditure of £246.7 million, the impact of the acquisition and subsequent 50 per cent disposal of Madrid Xanadú of £225.3 million and a surplus on revaluation of £47.3 million, partially offset by the £302.0 million transfer of intu Chapelﬁeld to assets held for sale. Our net investment in joint ventures is £735.5 million at 31 December 2017 (31 December 2016: £587.6 million), which includes the Group’s share of net assets, on an equity accounted basis, of £452.6 million (31 December 2016: £355.4 million) and loans to joint ventures of £282.9 million (31 December 2016: £232.2 million). The movement in the year primarily reﬂects the addition of Madrid Xanadú from 31 July, when 50 per cent was sold to TH Real Estate, which is accounted for as a joint venture rather than as a 100 per cent owned subsidiary. Investments in associates of £64.8 million represent our interests in India, which comprise a 32 per cent interest in Prozone (£45.1 million), a shopping centre developer listed on the Indian stock market, and a direct interest in Empire (£19.7 million). Prozone and Empire own and operate shopping centres in Coimbatore and Aurangabad, with Coimbatore recently opened in 2017. Net external debt of £4,835.5 million has increased by £471.4 million primarily from funding our acquisition of Madrid Xanadú as well as capital expenditure in the year. Cash including the Group’s share of joint ventures has reduced slightly by £13.4 million to £278.2 million and gross debt has increased by £458.0 million to £5,113.7 million. Derivative ﬁnancial instruments comprise the fair value of the Group’s interest rate swaps. The net liability at 31 December Net asset value per share (pence) 450 404 +15 -14 +4 +4 -3 +1 411 300 150 0 6 1 0 2 c e D 1 3 i s g n n r a e g n y l r e d n U i i d a p d n e d v D i i 7 1 0 2 c e D 1 3 s t s o c l a n o i t p e c x E e g n a h c x e n g i e r o F n o i t a u l a v e r y t r e p o r P g n m i i t t n e m p o l e v e d n i a p S Balance sheet summary Investment and development property Investment in joint ventures Assets and associated liabilities classiﬁed as held for sale Investment in associates and other investments Net external debt Derivative ﬁnancial instruments Other assets and liabilities Net assets Non-controlling interest Attributable to shareholders Fair value of derivative ﬁnancial instruments Other adjustments Effect of dilution Net assets (diluted, adjusted) 2017 2016 Share of joint ventures £m Group including share of joint ventures £m Group including share of joint ventures £m 1,013.1 (735.5) 10,192.5 – 9,944.5 – – – (249.9) (2.3) (22.2) 3.2 (3.2) n/a 2.3 (2.3) – n/a 302.9 81.6 (4,835.5) (349.8) (259.3) 5,132.4 (57.4) 5,075.0 349.8 97.9 – 5,522.7 – 80.7 (4,364.1) (380.0) (234.7) 5,046.4 (67.6) 4,978.8 380.0 76.3 2.6 5,437.7 Group balance sheet £m 9,179.4 735.5 302.9 81.6 (4,585.6) (347.5) (237.1) 5,129.2 (54.2) 5,075.0 347.5 100.2 – 5,522.7 NAV per share (diluted, adjusted) (pence) 411p n/a 411p 404p 2017 is £349.8 million, a decrease of £30.2 million from 2016, primarily due to cash payments in the year and the increases in sterling swap rates, with the ﬁve-year and 10-year rates increasing by 17bps and 4bps respectively. Cash payments in the year totalled £47.1 million, £26.1 million of which has been classiﬁed as an exceptional ﬁnance cost as it relates to payments in respect of unallocated interest rate swaps. The balance of the payments has been included as underlying ﬁnance costs as it relates to ongoing interest rate swaps used to hedge debt. As previously detailed, we have a number of interest rate swaps, entered into some years ago, which are unallocated due to a change in lenders’ practice. At 31 December 2017 these interest rate swaps have a market value liability of £235.4 million (31 December 2016: £253.2 million). It is estimated that we will be required to make cash payments on these interest rate swaps of around £28.5 million in 2018, reducing to around £19 million per annum in 2021. Assets and associated liabilities classiﬁed as held for sale of £302.9 million relate to intu Chapelﬁeld. Financial review 51 S t r a t e g i c r e p o r t The non-controlling interest at 31 December 2017 relates primarily to our partner’s 40 per cent stake in intu Metrocentre. We are exposed to foreign exchange movements on our overseas investments. At 31 December 2017 the exposure is 10.6 per cent of net assets attributable to shareholders. Once the Eurofund expected future interest in the share capital of the intu Costa del Sol development company concludes, we expect this to reduce to 9.7 per cent, below the Group’s policy of a maximum of 10 per cent. Cash ﬂow During 2017 cash and cash equivalents decreased by £26.6 million. Cash ﬂows from operating activities of £140.9 million is £9.5 million higher than 2016, primarily due to the acquisitions in the year. Cash ﬂows from investing activities reﬂect the net cash outﬂow for our acquisition and then subsequent 50 per cent part disposal of Madrid Xanadú as well as cash outﬂow related to capital expenditure during the year. Cash ﬂows from ﬁnancing activities include net debt drawdowns of £539.2 million primarily to fund our acquisition of Madrid Xanadú as well as development spend. We paid cash dividends during the year of £188.0 million. Cash ﬂow summary Group cash ﬂow as reported Cash ﬂows from operating activities Cash ﬂows from investing activities Cash ﬂows from ﬁnancing activities Foreign currency movements Net decrease in Group cash and cash equivalents Year ended 31 December 2017 £m Year ended 31 December 2016 £m 140.9 (518.1) 350.2 0.4 (26.6) 131.4 (243.4) 88.7 1.4 (21.9) intu Chapelﬁeld A joint-venture partner was introduced in line with the December 2016 valuation 52 intu properties plc Annual report 2017 Financial review continued Financing Debt structure We have carried out signiﬁcant reﬁnancing activity in recent years which has resulted in diversiﬁed sources of funding, including secured bonds plus syndicated bank debt secured on individual or pools of assets, with limited or no recourse from the borrowing entities to other Group companies outside of these arrangements. Our corporate- level debt remains limited to the Revolving Credit Facility (RCF) as well as the £375 million 2.875 per cent convertible bonds 2022 and £160.4 million outstanding in respect of the 2.5 per cent convertible bonds 2018. During 2017 we undertook the following ﬁnancing activities: — agreed a new £140 million facility secured against intu Milton Keynes, replacing the previous £125 million loan, maturing in 2019 — agreed a €263 million (£231 million) facility in connection with the acquisition of Madrid Xanadú, maturing in 2022; intu’s share is €131.5 million — agreed a new £488 million facility secured on intu Merry Hill, replacing the previous £500 million short- term facility put in place in 2016 on acquisition of the remaining 50 per cent, maturing in 2024 intu Merry Hill We reﬁnanced intu Merry Hill in the year, with a new £488 million debt facility. Debt maturity (£m) 1,000 183.6 286.9 87.9 792.7 774.0 958.3 602.7 26.5 28.3 261.6 843.2 231.1 800 600 400 200 0 2018* 2019 2020 2021 2022 2023 2024 2025 2026 2027 2033+ 2028- 2032 * 2018 includes £160 million convertible bond which at current level is now expected to be paid in cash. — agreed a £250 million loan secured on intu Trafford Centre, maturing in 2022 — purchased and subsequently cancelled £139.6 million of the £300 million 2.5 per cent convertible bonds 2018. £160.4 million of these convertible bonds remain outstanding at 31 December 2017 Since the year end, we have agreed a new £74 million facility secured on our interest in intu Chapelﬁeld, maturing in 2023. The chart above illustrates that we have no major reﬁnancing requirement due until 2021. On a pro forma basis, our debt to assets ratio has increased to 45.2 per cent since 31 December 2016 due to the acquisition and part disposal of Madrid Xanadú and remains below our target maximum level of 50 per cent. Our weighted average debt maturity has decreased to 6.6 years and the weighted average cost of debt has decreased slightly to 4.2 per cent (excluding the RCF). Interest cover of 1.94x is broadly unchanged in the year and remains above our targeted minimum level of 1.60x. We use interest rate swaps to ﬁx interest obligations, reducing any cash ﬂow volatility caused by changes in interest rates. The proportion of debt with interest rate protection on a pro forma basis has increased in the year to 95 per cent within our policy range of between 75 per cent and 100 per cent. Debt measures Debt to assets Interest cover Weighted average debt maturity Weighted average cost of gross debt Proportion of gross debt with interest rate protection Cash and available facilities 1 Pro forma for the £148 million disposal of 50 per cent part of intu Chapelﬁeld. 2 Pro forma for the reﬁnancing of intu Milton Keynes, completed February 2017. 31 December 2017 45.2%1 1.94x 6.6 years 4.2% 95% £833.1m1 31 December 2016 43.7% 1.97x 7.1 years2 4.3% 88% £922.3m Covenants Full details of the debt ﬁnancial covenants are included in the other information section of this report. We are in compliance with all of our covenants and regularly stress test them for changes in capital values and income. A 25 per cent fall in property values and a 10 per cent reduction in income would only require a £6 million equity cure. Capital commitments We have an aggregate commitment to capital projects of £267.6 million at 31 December 2017 (31 December 2016: £257.0 million). In addition to the committed expenditure, we have an identiﬁed uncommitted pipeline of active management projects, major extensions and developments that may become committed over the next three years (see operating review). Other information Tax policy position The Group has tax exempt status in the UK (REIT) and for certain investments in Spain (SOCIMI) which provide exemption from corporation tax on rental income and gains arising on property sales, with tax instead being paid at shareholder level. See glossary for further information on REITs and SOCIMIs. The Group’s principle of good governance extends to our responsible approach to tax. We look to minimise the level of tax risk and at all times seek to comply fully with our regulatory and other tax obligations and to act in a way which upholds intu’s reputation as a responsible corporate citizen by regularly carrying out risk reviews, seeking pre-clearance from HMRC in complex areas and actively engaging in discussions regarding proposed changes in the taxation system that might affect the Group. It remains important to our stakeholders that our approach to tax is aligned to the long- term values and strategy of the Group. Financial review 53 S t r a t e g i c r e p o r t We have published ‘intu’s Approach to Tax’ in respect of the year ending 31 December 2017 on the Group’s website intugroup.co.uk which provides further information about the Group’s tax strategy. We pay tax directly on overseas earnings, any UK non-property income under the REIT rules, business rates and transaction taxes such as stamp duty land tax. In the year ended 31 December 2017 the total of such payments to tax authorities was £28.5 million (2016: £20.6 million), of which £26.0 million (2016: £20.0 million) was in the UK and £2.5 million (2016: £0.6 million) in Spain. In addition, we also collect VAT, employment taxes and withholding tax on dividends for HMRC and the Spanish tax authorities. Business rates, principally paid by tenants, in respect of the Group’s UK properties amounted to around £280.6 million in 2017 (2016: £292.2 million). Dividends The Directors are recommending a ﬁnal dividend of 9.4 pence per share bringing the amount paid and payable in respect of 2017 to 14.0 pence, unchanged from 2016. A scrip dividend alternative may be offered. Details of the apportionment between the PID and non-PID elements per share will be conﬁrmed in due course. At 31 December 2017, the Company has distributable reserves of £977 million, sufficient to cover around ﬁve years of dividends at the 2017 level. The Company typically pays dividends which are covered by the current year earnings of the Group and does not anticipate that the Group’s level of distributable reserves will create any restrictions on this approach in the foreseeable future. Matthew Roberts Chief Financial Officer 22 February 2018 Madrid Xanadú In March we increased intu’s presence in Spain with the acquisition of a centre in the capital 54 intu properties plc Annual report 2017 Our people We are proud of our employees’ commitment to our vision and purpose – creating compelling and joyful experiences for customers and helping retailers ﬂourish Highlights of the year — all our centres achieve the Investors in People gold award — our ﬁrst apprentices take up permanent roles in intu — pensions auto-enrolment successfully implemented for intu Retail Services — our consolidated staff data system, iTrent, extended to intu Retail Services Our culture Our purpose is simple – to create compelling, joyful experiences that surprise and delight our customers and make them smile. This is the key to achieving our commercial focus – running the most popular shopping centres in the UK and Spain. It is an intentionally simple focus that can be understood and delivered by everyone in the organisation. Our culture permeates our business. Everyone, regardless of role or seniority, goes through the same brand immersion to understand our purpose and our values. Our values – bold, creative, genuine – encourage us all to behave in the right way and do the right thing: for our customers, our retailers, the environment and society. Our people understand if they apply our values in their work they will help create a successful and responsible business. Our culture drives our business. From our apprentices to our senior asset managers our employees are vital to fulﬁlling our purpose. Our people are talented individuals, and our culture enables them to be bold, creative and genuine in their work to make shopping at intu a joyful experience for our 35 million visitors and thousands of retailers. In return, we aim to be a great employer, promoting diversity and inclusion, treating our employees fairly and enabling them to grow professionally and personally. A united and successful team We employ 2,589 staff: 2,467 employed in 17 locations across the UK, in 16 centres and our head office in London, 39 in our Madrid office and now 83 at Madrid Xanadú. Of the UK staff, 2,036 are directly employed by our in-house facilities company, intu Retail Services. This year we have extended the uniﬁed employee database and payroll system, iTrent, to bring all our intu Retail Services and intu Management Services employees together under a single system for the ﬁrst time. We have strong recruitment processes to recruit the best people, and a system that gives employees career progression so we can ﬁll roles internally. This year 54 staff were recruited from within and 375 externally. Many of these were to new roles as we adapt to changing markets. We are the ﬁrst shopping centre landlord to be able to boast the gold Investors in People award across our UK portfolio. The award recognises our commitment to our people and their role in our business. Diverse and inclusive Diversity is important to us – as a people business with over 400 million customer visits a year our workforce should both reﬂect and understand our customers and the communities around our centres. We have at least 27 different nationalities and the ethnic background of our staff is close to that of the country as a whole. We maintained our position in the top 20 per cent of FTSE 250 and 350 companies for the number of women at board, senior and executive management levels – with over 30 per cent of female staff at this level (FTSE Women Leaders, Hampton-Alexander Review 2017). We continued to work with the Mentoring Foundation, to enhance the opportunities for women to reach executive roles. In order to attract a diverse range of candidates, we are part of an industry initiative, Pathways to Property, to provide work experience for school students from less traditional backgrounds We are signed up to the National Equality Standard (NES). Having completed the initial assessment process we have a plan in place to meet the standard by 2019. Our people 55 Gender pay gap We welcome the new gender pay gap legislation and increased pay transparency that will result. The gender pay gap compares the average pay for men and women in our business. If there are more men than women in senior positions, as is currently the case at intu, this results in the overall average of the pay of men being higher than that of women. The gender pay gap is different to equal pay, which takes into account the nature of a role and its seniority. We regularly review the pay across the organisation with the aim of ensuring that the pay of men and women is the same for equivalent roles and seniority. Our median pay and bonus gaps are signiﬁcantly smaller than the national picture with a slightly higher proportion of women than men receiving bonuses. Our higher mean bonus gap is largely due to the current signiﬁcantly higher proportion of men in the most senior positions. S t r a t e g i c r e p o r t Pay gap Difference between the average pay of men and women Bonus gap Difference between the average bonus paid to men and women Proportion of women receiving a bonus Proportion of men receiving a bonus Median Mean 2.6% 7.8% 0.0% 51.5% 84.7% 84.5% The chart below shows the gender pay gap for different groups of employees within the business. In a number of areas we have a negative gender pay gap, which means that the average pay of women is higher than that of men. Super regionals Larger city centres Smaller city centres Total employees 1,145 Total employees 568 Total employees 282 Overall gender pay gap (based on mean hourly rate) –9.90% –1.61% 39% 61% 35% 65% +4.39% 34% 66% Regional centre directors, general managers, senior asset managers Asset managers, marketing managers, operations managers, centre-based management roles Supervisory, admin, front line delivery roles (including technicians) –1.48% –8.63% –8.63% +9.99% –8.63% +3.08% –7.97% –3.14% +12.10% –8.63% –9.10% –3.16% Female employees Male employees Read more at intugroup.co.uk A good job Part of being a great employer is treating our staff members fairly and paying them properly. All our staff over 18 who have completed their probation are paid above the National Living Wage, even staff not strictly covered by regulation. We ended all zero-hour contracts in 2016. We are committed to ending the gender pay gap and we comply fully with the Equality Act Gender Pay Gap Information regulations as they come into force. See infographic above. Talent development Our learning and development team run a programme of internal and external training for the whole business. Customer Journey training helps centre teams enhance the customer experience of intu. Steps to Success training, for security, customer and environmental services teams, ensures the services they provide are consistent and legally compliant. These programmes keep us at the forefront of being a master operator and enable us to deliver our world class service. 56 intu properties plc Annual report 2017 Our people continued Age proﬁle Under 35 35 – 55 Over 55 32% 47% 21% UK gender proﬁle Female 1,017 (2016: 1,048) Male 1,450 (2016: 1,507) UK gender proﬁle senior managers Female 10 (2016: 12) Male 31 (2016: 30) We have expanded our webinar-based training for management development and continued our Leadership Development programme to develop individuals. This year eight candidates completed a 12-month development journey to cultivate their leadership skills. intu was the ﬁrst major property company to have a national apprenticeship scheme, now in its third year. The pilot group have completed their training and all six gained permanent jobs within the business. The second cohort of 14 has moved into their second year and nine new recruits will begin their training in 2018. Rewarding excellence Since 2016 we have been piloting performance management schemes that connect more closely to our business strategy, linking performance, strategy and reward. We are now rolling these out across the business and have recruited a rewards manager to benchmark staff, harmonise terms and conditions and develop more tailored incentive and recognition schemes. above and beyond. In 2017, its third year, around a thousand employees were rewarded for making people smile. This year’s winner was Joseph Mifsud, an Orient Support Assistant at intu Trafford Centre. Employee engagement Ensuring our staff understand our business and know how they can contribute to intu’s success continues to be crucial to our progress. It has been integral to our success so far and was part of our promise to our staff when we rebranded to intu. We use a range of channels to communicate with staff: our intranet Mint, employee magazine Chorus, insight, strategy presentation, twice-yearly results presentations and staff brieﬁngs. Each location has its own staff forum. Since November 2012 we have run an annual employee survey with consistently high employee engagement scores (in the region of 750). The 2017 staff survey has been postponed until spring 2018 to allow us to consider the information the survey has supplied, combined with information from all our other sources, such as Investors in People, NES, customer surveys, Tell intu and other insight, to put really meaningful actions in place. We continue to encourage staff to achieve their personal and professional goals and to take part in our corporate responsibility, community support and sustainability programmes. More than one in ﬁve took advantage of the working days intu makes available for volunteering activity, double last year’s number. Our plans for 2018 — build on the intu culture in the UK and Spain through stronger performance management and staff engagement — focus on equality, diversity and inclusion, including further progress to reduce the gender pay gap — enhance the talent pipeline through graduate, management and leadership development schemes — greater alignment of intu Retail Services terms and conditions and processes — mitigate the risk of employee Our employee reward and recognition programme Win Your Dream celebrates employees across intu who have gone uncertainty leading to short-term skill gaps during the proposed corporate transaction The graduates Senior development managers Oliver Hunt and Simon Crouch started as graduates at intu. “From the beginning we were given real projects and were rewarded for our hard work and commitment,” says Simon. “My early work covered activities from planning to procurement, from purchasing an interest to selling a centre,” says Oliver. They are now managing multimillion pound development projects and mentoring the next generation of graduates. “Retail has always been a dynamic sector,” says Simon. “Working at intu gives us a real opportunity to help shape the future of shopping.” Human rights At intu we respect the dignity, liberty and equality of everyone we work with. We are committed to implementing the UN guiding principles on business and human rights. We only work with people who choose to work freely and we respect their rights to equal opportunities and freedom of association. We work with our suppliers, retailers and associated companies to ensure they meet acceptable standards of human dignity in their own sourcing policies. We will continue to evaluate the pay and conditions of all our employees, to ensure all staff earn above the National Living Wage, and enjoy fair working conditions. Fair treatment of people who work for intu or our suppliers is a key focus of our corporate responsibility approach. Modern Slavery Act This year we worked to implement the requirements of the Modern Slavery Act, including a new policy on Modern Slavery and Human Rights and communications to our suppliers on their responsibilities. Read more at intugroup.co.uk Corporate responsibility 57 Corporate responsibility Making a meaningful difference is important to us. We work with our stakeholders to create shared beneﬁt through economic value generation, community investment and sustainable use of resources S t r a t e g i c r e p o r t to market factors, including China’s ban on the importing of waste for recycling, our recycling rate has fallen by 11 per cent to 63 per cent. Recycling rates will continue to fall until new markets are found as there is insufficient provision in the UK to handle the quantity we produce. Last year we set up the Green Lab, our sustainability innovation group, to drive forward a range of sustainability initiatives across the business. Following the introduction of renewable energy generation and food waste trials last year, this year we have focused on working with sustainability consultants, Bioregional, to test new innovations that can be rolled out across the business. We are trialling some of these ideas on the upcoming intu Broadmarsh redevelopment. Next year we plan to explore further innovations in our operations. Our strong and open relationships with our stakeholders means we have delivered real and lasting change in our communities. This year our wide-ranging community investment – which focuses on skills and employment, health and wellbeing, and social inclusion – beneﬁted 3,645 people. Feedback showed 71 per cent of responders reported experiencing a positive change in their quality of life. Jobs in our centres continue to form a signiﬁcant proportion of the UK’s retail sector employment – we are responsible for about 3 per cent of all jobs in the sector. The majority of these are locally employed, meaning the wealth we create is captured locally. This year we are reporting on our sustainability performance in Spain in our CR report and plan to include our Spanish assets in our future commitments. Read more on our performance in the UK and Spain in our 2017 CR report Our culture of behaving responsibly underpins our approach to CR. We work with our stakeholders to address social and environmental issues that deliver value beyond immediate ﬁnancial return. We focus on delivering positive change in our communities and on operating with minimum impact on the environment. Good relationships and partnerships are integral to everything we do. Operational review We have had a successful year in both our work with communities and our efforts to reduce our environmental impact, having met many of our 2020 environmental targets three years early. We have surpassed our ambitious target of a 50 per cent reduction in carbon intensity by 2020 based on our 2010 levels. Using a mix of technology and behaviour change interventions we are proud this year to have reached a total carbon reduction of 58 per cent from 2010 emissions. This has saved 144,000 tonnes of carbon and reduced our energy costs by £25 million. We also maintained our ‘zero waste to landﬁll’ status for the second year, meaning we diverted 28,000 tonnes of waste from landﬁll and saved £2.4 million in associated landﬁll costs. However, due Accessible intu This year we held the ﬁrst mass Autism Quiet Hours with the National Autistic Society. On 2 October, we dimmed our lights, turned down the music and welcomed autistic customers to enjoy our centres in a quieter environment. We were delighted that every retailer also got involved. Each centre is now creating their own regular quiet hours for their customers. We are delivering additional support for the wide range of disabilities our customers may live with. We launched a personal shopping service for blind customers at intu Braehead and intu Merry Hill. intu staff volunteers accompany customers with visual impairments around our centres to assist them in their shopping. Not only that, many of our customers and staff volunteers have struck up friendships, making the visit not just about getting those special purchases but also a social visit too. Read more in our 2017 CR report 58 intu properties plc Annual report 2017 Corporate responsibility continued Making a meaningful difference: our contributions in 2017 Economic value we generate £4.6 billion GVA We are investing in the future We contribute to the local and national economy £1.9bn UK development pipeline over10 years £281m business rates paid by intu and our tenants Our centres directly support a £1.8bn wage bill per annum Recognised by: Community Environment Our commitments — support relevant community initiatives — extend employability programmes to all centres by 2025 Our 2020 targets — 50% reduction in carbon emissions — 99% of waste diverted from landﬁll by 2020 — 75% of waste generated recycled Donations Positive change 2,000 £1.9m donated 1,500 1,000 500 0 Value of time In-kind Cash Facilitated £703,885 £512,884 £523,750 £178,853 Number of beneﬁciaries measured: 2,278 Change in behaviour Change in skills Change in quality of life Employee engagement Employee engagement in our responsibility programmes contributes to the development, engagement and wellbeing of our staff 28,000hrs given to the community by intu staff 58% reduction in carbon emissions TCO2e since 2010 100% waste diverted from landﬁll (2016: 100%) 80 number of EV charging points Waste disposal at directly managed centres Water use at directly managed centres 32 24 16 8 0 tonnes 2013 2014 2015 2016 2017 Waste recycled (tonnes) Waste to landﬁll (tonnes) Waste to energy (tonnes) Waste to energy (tonnes) 100 450,000 410,000 370,000 330,000 290,000 250,000 90 80 70 60 % 1,500 1,200 900 600 300 0 m3 2013 2014 2015 2016 2017 m3/m Absolute water consumption (m3) Water intensity m3/million customers Corporate responsibility 59 S t r a t e g i c r e p o r t Meeting our carbon targets ahead of time We have achieved our 2020 carbon targets three years ahead of schedule, through a groundbreaking programme to install LED lightbulbs throughout our centres. In 2012 we set ourselves the target of reducing our carbon footprint by 50 per cent, from our 2010 footprint. Lighting accounts for up to 50 per cent of energy use in retail spaces so this was identiﬁed as the most signiﬁcant aspect to tackle. We installed over 60,000 energy-efficient bulbs in several phases, achieving savings in one phase before moving onto the next. We also introduced a new energy management system (ISO 50001) and appointed energy champions at each centre. We will now set ambitious new energy- saving targets and have begun to trial onsite renewables at intu Chapelﬁeld which we plan to roll out to other centres. 60,000+ LED lightbulbs installed at our centres 144,000 TCO2e tonnes of carbon saved £25m saved on our energy bills Strategic review As we near the end of our current set of 2020 targets, we are now ﬁnalising our 2030 strategy. We are using the opportunity to think about how we take forward our sustainability and make sure it integrates with our strategic objectives. As part of this analysis, and following the review of our material issues last year, we have considered how long-term future trends, consumer trends and the key UN Sustainable Development Goals (SDGs) will affect our business and scope the big issues intu needs to focus on to deliver long-term value. Green Gyms – celebrating a 10-year relationship Green Gyms® are conservation projects with a difference. There is strong emphasis on health and ﬁtness, meaning volunteers improve both their health and the environment. This year we celebrated a decade of partnership with The Conservation Volunteers (TCV). Together, we have worked with local authorities and communities to set up 10 Green Gyms near our centres. Over our 10-year partnership we have delivered real social and environmental change. We have welcomed over 1,000 volunteers from the community, in addition to the intu staff who have given over 80,000 hours (3,000 days) to establish and maintain them – making everyone happier (attendees report a 21 per cent increase in happiness). We have also seen marked increases in biodiversity; kingﬁshers have been observed returning to the intu Merry Hill Green Gym. This all leads to a £4 social return on every £1 invested in Green Gyms. Read more in our 2017 CR report We have identiﬁed the SDGs where we can make the biggest difference: decent work and economic growth, sustainable cities and communities and partnerships for goals. We know we can make the biggest difference by creating economic inclusion in our communities through our employment and skills programmes, futureprooﬁng our assets using One Planet Principles and using our relationships to mobilise and encourage participation from all stakeholders in our communities. We recognise we are not immune to what is happening in the wider world and understanding how the world is likely to change over the next 10–30 years means we can prepare ourselves to take advantage of further growth opportunities and mitigate risks to our business. We will combine our knowledge of what works with our understanding of sustainable future needs to create a 2030 strategy that builds on the successes we have delivered through our 2020 strategy. Materiality Through our materiality process, stakeholders identiﬁed the core issues they consider most important for intu in coming years. Read more about our materiality process online External benchmarking Providing clear and accurate performance data for benchmarking against our peers is critical for providing investors with information on our long-term risk assessment and management, operational performance and added value. It also provides us with valuable information to help us respond to emerging trends and review our own practices. Our performance in the Dow Jones Sustainability Index, for example, demonstrates we are leading in social integration and regeneration, being in the 93rd percentile; and our performance in the GRESB shows that we are leaders in our environmental and social disclosures. 60 60 intu properties plc Annual report 2017 Governance Effectiveness and evaluation As Chairman, it is my role to provide leadership to ensure the operation of an effective Board. The Board consists of nine directors, including myself. The directors bring a wide range of skills and perspectives to the Board’s deliberations, as described on the following pages. In relation to gender diversity we have three female Board members (33 per cent), which meets the Lord Davies’ 2020 target of 33 per cent. As highlighted in the Nomination and Review Committee’s report on page 76, the Board considers that broader aspects of diversity, rather than purely gender, are key to stimulating constructive debate. During 2017 we conducted an externally facilitated Board performance evaluation and the ﬁndings provided a further opportunity to continue to enhance the Board’s contributions through improved communication and best practice. John Strachan Chairman 22 February 2018 Dear shareholder Throughout the year we have continued to ensure that our governance structures at Board, Committee, subsidiary and joint venture levels continue to be appropriate and support our business and culture in an ever-changing regulatory environment. In the next few pages we provide details of our Board members, the role of the Board and its performance and oversight. We also provide the information on our governance framework which we consider is appropriate for a UK premium-listed company. 2017 governance highlights Succession planning It has been an exceptionally active year for the Nomination and Review Committee with signiﬁcant changes to the Board’s composition. Patrick Burgess retired from the Board following the annual general meeting (AGM) in May 2017 after nearly nine years as Chairman. Andrew Huntley, Non-Executive Director and Senior Independent Director (SID), also retired from the Board in May 2017. In accordance with the process established by the Board, Andrew Huntley chaired a Nomination and Review sub-committee to oversee the search for a new Chairman. The sub-committee comprised Andrew Huntley, Adèle Anderson and Steven Underwood. Korn Ferry Whitehead Mann was engaged to assist with the search. The independent non-executive directors also contributed to the process, all being entitled to attend Nomination and Review Committee meetings when Board succession matters were being discussed. Compliance with the April 2016 UK Corporate Governance Code (‘the Code’) The following governance pages explain how the Company applies the main principles of the Code, issued by the Financial Reporting Council (FRC), and how it meets other relevant governance requirements including provisions of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority. Both documents are publicly available on the FRC website (frc.org.uk). The Board considers that the Company complied in full with the provisions of the Code during the year. Governance 61 G o v e r n a n c e It was fantastic to meet John and David and talk with them about the future of the centre.” Kyra Massey Customer Service Team Leader, intu Merry Hill Board in action Centre teams around the country played host to a series of visits from the Chairman and Chief Executive as part of the Chairman’s induction. As part of the visits, which each lasted half a day, John Strachan and David Fischel were given a centre tour by the general manager. They then spent time meeting staff from all areas of the centre team over a cup of tea and a bite to eat with centres bringing a local twist such as eccles cakes at intu Trafford Centre. They met and spoke to hundreds of staff from housekeeping teams to security, customer services to business support and technical services to car park hosts and gardeners. Topics were varied as staff quizzed John and David on company plans and policies, corporate responsibility, and their views on the economy and Brexit as well as more personal questions such as which sports teams they supported and their all-time favourite ﬁlms. But it wasn’t all one way – John and David found it invaluable to learn more about the ﬁner details of people’s jobs, discuss any staff concerns and importantly to hear a host of new ideas that the staff had about keeping intu at the forefront of the retail and leisure market. 62 intu properties plc Annual report 2017 Board of Directors Chairman, Deputy Chairman and Executive Directors Non-Executive Directors John Strachan Chairman Age 67 John Whittaker Deputy Chairman Age 75 Appointed to the Board: 7 October 2015 and as Chairman on 3 May 2017 Career: John was Global Head of Retail Services and Chairman of the Retail Board at Cushman & Wakeﬁeld until 2015. John’s career commenced at Healey & Baker in 1972 Skills and experience: John brings a wealth of experience from the retail property sector, an international perspective and extensive knowledge of the Spanish retail property market. He is known for his creative and entrepreneurial approach to developing new business opportunities. He is a fellow of the Royal Institution of Chartered Surveyors (RICS) Other appointments: Advisory Board member of True Private Equity; Vice-Chairman European Board of the International Council of Shopping Centres Appointed to the Board: 28 January 2011 Career: John is the Chairman of the Peel Group which he founded in 1971 and developed into a leading UK infrastructure, transport and real estate enterprise Skills and experience: John is a highly regarded real estate investor, and has overseen the growth of the Peel Group across many sectors such as land, real estate, ports, airports, renewable energy and media. John is an experienced property developer and business leader, illustrated by projects such as The Trafford Centre, MediacityUK and Liverpool2. His appointment to the Board followed the acquisition by intu of The Trafford Centre from the Peel Group Other appointments: Chairman of the Peel Group Adèle Anderson Chairman of the Audit Committee Senior Independent Director Age 52 Appointed to the Board: 22 February 2013, Audit Committee Chairman from 1 August 2013 and Senior Independent Director on 3 May 2017 Career: Adèle commenced her career at KPMG where she became a partner and held senior roles including Chief Financial Officer. She is currently Audit Committee Chairman at easyJet plc and Spire Healthcare Group plc and an Audit Committee member at the Wellcome Trust Skills and experience: Adèle graduated from Kent University and is a qualiﬁed ACA. She has gained extensive ﬁnancial and signiﬁcant Audit Committee experience throughout her career Other appointments: Audit Committee Chairman at easyJet plc and Spire Healthcare Group plc and Audit Committee member at the Wellcome Trust David Fischel Chief Executive Age 59 Appointed to the Board: Appointed Finance Director in 1988, Managing Director in 1992 and Chief Executive in March 2001 Career: David qualiﬁed as a chartered accountant in 1983 at Touche Ross & Co before joining intu in 1985 Skills and experience: During his 32-year career with intu, David has gained signiﬁcant executive experience in numerous aspects of the shopping centre industry including shopping centre acquisitions and developments Other appointments: Non-Executive Director of Prozone Intu Properties Limited Matthew Roberts Chief Financial Officer Age 54 Appointed to the Board: 3 June 2010 Career: Matthew qualiﬁed as a chartered accountant in 1989 and was previously the Finance Director of Debenhams plc from 1996 to 2003, and Chief Financial Officer of Gala (subsequently Gala Coral Group) from 2004 to 2008 Skills and experience: Matthew was part of the team which acquired The Trafford Centre, Manchester, in the UK’s largest ever single property transaction. He led the establishment of intu’s Secured Group Structure and further transactions which have raised over £5 billion of leverage. In January 2016 Matthew also assumed responsibility for intu’s centre-based operations Other appointments: Non-Executive Director and Audit Committee Chairman of Marston’s PLC Richard Gordon Age 59 Appointed to the Board: 7 May 2010 Career: Richard previously served as a Non-Executive Director of Capital Shopping Centres PLC between 1996 and 2006 and was appointed as an alternate Director in respect of Graeme Gordon’s directorship of the Group in 2001. He also served on the boards of a number of companies within the Liberty Life group and various companies within the commercial and residential real estate sector Skills and experience: In addition to representing Gordon Family interests on the Board, Richard also has signiﬁcant real estate experience having been involved with several commercial and residential real estate companies, mainly in South Africa Board of Directors 63 G o v e r n a n c e Rakhi Goss-Custard Age 43 Appointed to the Board: 7 October 2015 Career: Rakhi’s early career included roles at TomTom, content management provider Article27 and 11 years at Amazon until 2014, where she held a number of key roles including responsibility for the Amazon UK Media category Skills and experience: Rakhi has an up-to-date perspective on retail and consumer trends, as well as deep insight and knowledge of the digital environment. Rakhi has a BA in Marketing & Communications from the University of Pennsylvania Other appointments: Non-Executive Director of Rightmove plc, Be Heard Group plc, Kingﬁsher plc and Schroders plc Lady Patten Chairman of the Remuneration Committee Age 64 Appointed to the Board: 22 September 2011 Career: Louise began her career at Citibank, working mainly in retail ﬁnancial services until she joined global strategy advisers Bain & Company Inc in 1993 where since 1997 she has been a Senior Advisor Skills and experience: Louise has extensive board level experience at a number of retail and property companies including as Chairman of Brixton plc and interim Chairman of Somerﬁeld plc, and non-executive roles at Marks & Spencer plc, GUS plc, Hilton Group plc, Harveys Furnishings plc and Control Risks Group Other appointments: Non-Executive Director and Interim Chairman at Abcam plc and Non-Executive Director of Arthur J. Gallagher Holdings (UK) Limited and Arthur J. Gallagher Insurance Brokers Limited Andrew Strang Age 65 Appointed to the Board: 8 July 2009 Career: Andrew started his career with Richard Ellis 40 years ago. He served as Managing Director of Threadneedle Property Investments Limited for 17 years until January 2008 and Chairman of Hermes Real Estate Investment Management from 2009 to 2011. He was a Director of the British Property Federation from 1994 to 2013. Andrew served as a Director of the Pollen Estate Trustee Company Limited from August 2014 to January 2016. He is a current member of the Norges Bank Real Estate Management Advisory Board and a member of the Investment and Governance Committees at AEW UK Skills and experience: Andrew is a chartered surveyor and has substantially focused on property investment throughout his career Other appointments: Non-Executive Director of Capital & Counties Properties plc Structure of the Board and independence Board structure Gender split 1 Chairman 2 Executives Non-Executives 6 Men Women Board independence (excluding Chairman) Length of tenure of Directors 2 Executives 4 Non-Executives Non Independents 2 0 – 3 years 3 – 6 years 6 – 9 years 9+ years Board relevant sector experience (percentage of Board) Property 78% Digital 11% Retail 78% Financial 33% Governance 22% 6 3 2 2 4 1 Key to Committees Audit Committee Executive Committee Remuneration Committee Nomination and Review Corporate Responsibility Committee Committee Capital Projects Committee 64 intu properties plc Annual report 2017 Executive Committee Martin Breeden Development Director Joined the Group in 2002 and was appointed Group Development Director in January 2016. Martin has direct responsibility for intu’s development programme across the UK and intu’s Spanish business. Martin has over 25 years’ experience in the retail property industry. He is a fellow of the RICS and a member of the advisory panel of Revo Hugh Ford General Counsel and Group Treasurer Joined the Group as General Counsel in 2003. Appointed General Counsel and Group Treasurer in April 2015. Previously he was General Manager Legal at Virgin Atlantic Airways, and before that a commercial lawyer with British Airways plc. He qualiﬁed as a solicitor in 1992 with Freshﬁelds Barbara Gibbes Director of Finance Joined the Group as Director of Finance in January 2017 from Domino’s Pizza Group Plc where she was Group Financial Controller. Previously she held other senior ﬁnance roles and was a Director at Deloitte. She qualiﬁed as a chartered accountant in 2000 Susan Marsden Group Company Secretary Joined the Group as Company Secretary in 2000. A fellow of the Institute of Chartered Secretaries and Administrators, Susan began her career at the London Stock Exchange, and was Company Secretary of two FTSE real estate sector companies before joining intu Gordon McKinnon Operations Director Joined the Group in January 2011 and was appointed Operations Director in November 2013. He spent 20 years in various roles with Marks & Spencer before taking up an assignment with Manchester Millennium Limited, the taskforce rebuilding Manchester city centre following the 1996 IRA bomb. He was appointed Director of Operations at The Trafford Centre in 2004 Trevor Pereira Digital and Commercial Director Joined the Group in 2007 as Commercial Director. He was subsequently appointed Group Digital and Commercial Director, responsible for digital activities, commercialisation, marketing and customer experience. He previously worked for airport group BAA plc for 21 years, latterly as Retail and Commercial Director for Heathrow Airport Dushyant Sangar Corporate Development Director Joined the Group in 2010 and appointed Corporate Development Director in 2014. He has been closely involved in all of the Group’s major acquisitions in the UK and Spain. He previously worked for MGPA, a real estate private equity investment advisory business and for UBS. He is a Non-Executive Director of Prozone Intu Properties Limited Julian Wilkinson Asset Management Director Joined the Group in 2011 and was appointed Asset Management Director in January 2016. Julian has responsibility for optimising the performance of intu’s shopping centres. He has held similar positions at director level over the last 25 years on behalf of both retailers and landlords and is a fellow of the RICS Senior management team Biographies of the senior management team are available on our website at: intugroup.co.uk/en/about-us/our-people/ The Board The role of the Board and its committees The Board 65 The Board Led by the Chairman, the Board takes primary responsibility for deﬁning the Group’s strategic objectives, risk appetite and control environment; monitoring delivery of strategy by the Executive Directors; and shaping the resourcing, culture and values by which the wider business delivers targeted performance. G o v e r n a n c e Corporate Responsibility Committee Chairman John Strachan Members Adèle Anderson, David Fischel, Alexander Nicoll, Helen Drury, Jennifer Sandars Key responsibilities Oversees the management of the Group’s CR activities Audit Committee Chairman Adèle Anderson Members Rakhi Goss-Custard, Andrew Strang Key responsibilities Monitors the integrity of ﬁnancial statements, internal controls and risk management process and reviews the effectiveness of the internal and external auditors Remuneration Committee Chairman Louise Patten Members Adèle Anderson, Rakhi Goss-Custard Key responsibilities Sets remuneration policy for the Executive Directors and the Chairman and recommends and monitors the level and structure of remuneration for senior management Nomination and Review Committee Chairman John Strachan Members* Adèle Anderson, Rakhi Goss-Custard, Louise Patten, Andrew Strang, Steven Underwood Key responsibilities Ensures the Board comprises people with an appropriate balance of skills, knowledge and experience * all independent non-executive directors are invited to attend when discussing Board succession See page 57 for more information See page 71 for more information See page 78 for more information See page 76 for more information Capital Projects Committee Chairman John Strachan Members Martin Breeden, Raymond Fine, David Fischel, Matthew Roberts, John Whittaker Key responsibilities Reviews new projects and expenditure in detail and makes recommendations to the Board on certain projects, as appropriate. Has no power to approve proposals or authorise expenditure The Capital Projects Committee is not a formal Committee of the Board Executive Committee Chairman David Fischel Members Matthew Roberts, Martin Breeden, Hugh Ford, Barbara Gibbes, Susan Marsden, Gordon McKinnon, Trevor Pereira, Dushyant Sangar, Julian Wilkinson Key responsibilities Considers investment proposals, reviews progress on projects and project expenditure in detail and receives updates on other business matters. Has delegated authority, within limits, to authorise initiatives and expenditure The Executive Committee is not a formal Committee of the Board Key strategic matters discussed in 2017 Optimising asset performance — review and approval of the Group’s strategic plan — approval of reﬁnancings and restructure of Secured Group Structure — acquisition of Madrid Xanadú shopping centre and subsequent joint venture creation with TH Real Estate — creation of 50/50 joint venture for intu Chapelﬁeld Delivering UK developments — management and oversight of the Group’s capital investment programme — considered recommendations from Capital Projects Committee — development pipeline of £1.9 billion Other key matters discussed — continuing monitoring of risk modelling and analysis, including cybersecurity risk and the impact of the UK’s EU referendum vote — repurchase of £139.6 million in aggregate principal amount of £300 million 2.5 per cent convertible bonds due 2018 issued by subsidiary — succession-planning for the Board — continued oversight of strategic and operational delivery — recommended all-share offer by Hammerson Making the brand count — supported the development of the Group’s digital strategy — company-wide national marketing events across all centres — regular Corporate Responsibility Committee meetings Seizing the growth opportunity in Spain — the Group’s Spanish strategy and discussion of potential acquisitions and development — monitoring performance of Spanish assets — development plans for intu Costa del Sol Areas of focus in 2018 — continuing monitoring of risk modelling and analysis — monitoring and progression of corporate objectives for 2018 — continuing oversight of strategic and operational delivery, including the Hammerson transaction 66 intu properties plc Annual report 2017 The Board continued — internal policies, procedures and controls (including risk management arrangements, delegated authority limits and a related parties protocol) which are regularly reported on, reviewed and updated by the Board and relevant committees — internal processes which are communicated to all staff and are available at all times on the Group’s intranet Each aspect is routinely reviewed by the Board and updated to satisfy the needs of the business. The Board has continued to review its governance framework and has adjusted, where necessary, the roles, structure and accountabilities of senior management to reﬂect the demands of the business. During the year, the Group’s anti-bribery and corruption training and controls were reviewed and enhanced, including the launch of a dedicated e-learning compliance platform and a new online gifts and hospitality tool. Furthermore, in response to the introduction of the Criminal Finances Act 2017, the Group undertook a risk assessment of whether it has reasonable procedures in place to prevent the criminal facilitation of tax evasion with further training and monitoring being planned for implementation during 2018. Leadership The Board and its governance framework The Board is responsible for setting intu’s strategic aims and then monitoring management’s performance against those aims as well as setting the strategic framework within which those aims can be achieved. The business model described on pages 30 and 31 illustrates the key value creation and operational drivers for intu’s strategy and the means by which the Board ultimately delivers long-term growth and sustainable returns for shareholders and debt investors. Appropriate and effective corporate governance is taken seriously at intu and is intrinsic to all aspects of the Board’s activities. Consequently, governance is interwoven into the activities of management, who are accountable to the Board, and all employees, who are in turn accountable to management. This is reinforced by the established coherent governance framework which underpins the culture and workings of the Group with clearly deﬁned responsibilities and accountabilities, consisting of: — Board committees to enable the Board to operate effectively and give full consideration to key matters (as shown in the diagram on page 65) — delegated authority limits, which apply at all levels of the business and are incorporated into all operational procedures ensuring matters are dealt with at the appropriate level Board culture The Chairman is directly accountable for the culture of the Board, which is deﬁned by: — highly experienced and knowledgeable directors, with a wide range of skills and diverse perspectives who act conﬁdently and are true to themselves — a conservative, measured approach to business, allied with a willingness to take considered risks through insightful investment to achieve strategic goals — the relationships between individual directors and the senior executives, which encourage beneﬁcial debate and open discussion of views The Board’s culture permeates throughout the Group’s operations and is enshrined within intu’s values, which encourage staff to be bold, creative and genuine. Further information on intu’s culture and values can be found on page 54 Our approach to CR CR underpins the strategic aims of our business, creating a long-term and sustainable business that brings value to all our stakeholders. The Board fully supports the Group’s approach to CR with the Chairman of the Board chairing the Board CR Committee. The Board CR Committee’s members also include the Chief Executive and the Chairman of the Audit Committee. Further details of our CR activities can be found in the 2017 CR report The Board 67 G o v e r n a n c e Roles and responsibilities Role Chairman John Strachan Chief Executive David Fischel Chief Financial Officer Matthew Roberts Independent Non-Executive Directors* Adèle Anderson Rakhi Goss-Custard Louise Patten Andrew Strang Senior Independent Director Adèle Anderson Non-Independent Non-Executive Directors Richard Gordon John Whittaker Alternate Directors Steven Underwood Raymond Fine Responsibilities Leading the Board, setting agendas, achieving clarity of decision-making, ensuring effectiveness in all aspects of the Board’s remit, driving the culture of accountability and openness and ensuring effective two-way communication with shareholders and between non-executive directors and senior management Delivery of Group strategy, primary accountability for day-to-day operational management, implementation of policies and strategies developed by the Board, modelling and setting the Company’s culture and developing the abilities and skills of the Group’s personnel to their maximum potential Managing the Group’s funding strategy, ﬁnancing, reporting and investor programme, encompassing leadership of the ﬁnance function. From January 2016 also responsible for intu’s centre-based operations Bringing an external and independent view to the Board’s discussions, objectively scrutinising the performance of management, providing rigorous and constructive challenge to executive management when appropriate, ensuring ﬁnancial controls and risk management are robust, determining appropriate levels of remuneration for management. Independent Non-Executive Directors are entitled to attend any committee meeting if they wish, without the responsibility of full membership Providing advice, additional support and experience to the Chairman as required. Available to act as an intermediary for the other directors if necessary. Leads the appraisal of the Chairman’s performance annually in conjunction with the other non-executive directors and is available as an additional point of contact to shareholders intu has representatives of two major shareholders appointed as non-executive directors – the Deputy Chairman John Whittaker and Richard Gordon. Direct shareholder Board representation, with appropriate management of conﬂicts, ensures that key strategic, operational and governance decision-making is more closely aligned with the interests of the direct shareholder groups they represent and other institutional and retail investors generally. In this respect the Group surpasses the expectations of the Stewardship Code The representative directors also contribute strongly to the Board’s culture and personality, adding insight and constructive challenge from their varied commercial backgrounds, their experience and expertise In accordance with the Company’s Articles of Association, John Whittaker and Richard Gordon have appointed Steven Underwood and Raymond Fine respectively as their alternates. The Board has generally invited the alternates to attend Board meetings * The Board reviews the independence of its non-executive directors on an annual basis. With the exception of John Whittaker and Richard Gordon, the Board has concluded that all non-executive directors are independent. Biographical details of each director are set out on pages 62 and 63 68 intu properties plc Annual report 2017 The Board continued Effectiveness Balance and composition The Nomination and Review Committee regularly reviews the composition of the Board to ensure that it operates efficiently and has access to a broad range of knowledge and viewpoints. The Board determined that new candidates for the role of non-executive director should have sector-relevant qualiﬁcations and experience – notably in property, retail, ﬁnance or digital, to ensure that these key areas are well-represented – while also having regard to wider business knowledge and diverse backgrounds which can be beneﬁcial to the Group. The appropriate balance of skills, independence, experience and knowledge does not in itself ensure the efficient operation of a board. To this end, the Chairman’s style and leadership of the Board are essential to creating an environment where the Non-Executive Directors are able to draw on their own experience to constructively challenge the views of the executive management. The Chairman facilitates this by drawing on the Non-Executive Directors’ range of experiences to provide insight and alternative perspectives and has invited all independent Non-Executive Directors to attend any committee, irrespective of whether they are formally a member of such committee. Board meetings Board agendas are shaped to create time for strategic discussion and debate with time allocated to routine matters being closely managed. Board attendance table 20171 John Strachan Patrick Burgess4 John Whittaker David Fischel Matthew Roberts Andrew Huntley4 Adèle Anderson Richard Gordon Rakhi Goss-Custard Louise Patten Andrew Strang Board 4/43 2/23 4/4 4/4 4/4 2/2 4/4 4/4 4/4 4/4 4/4 Audit 2/25 – – 4/43 4/4 – 4/43 – 4/4 – 4/4 Nomination & Review 1/23 – –2 2/25 – – 2/2 – 2/2 2/2 2/2 Remuneration 3/35 1/1 – 4/45 – 1/1 4/4 – 2/2 4/43 – 1 2 Scheduled meetings only, excludes Board away day, Spanish centre visit, Board and Committee update conference calls and ad hoc meetings. Steven Underwood, Alternate Director to John Whittaker, was appointed to the Nomination and Review Committee on 3 May 2017. 3 Board or Committee chairman. 4 Patrick Burgess and Andrew Huntley stepped down from the Board following the 3 May 2017 annual general meeting. 5 Attends meetings in a non-voting capacity. At each scheduled Board meeting, the Executive Directors provide updates on their key areas of responsibility. In addition, the Chairmen of the Audit, Remuneration and Nomination and Review Committees give updates on the workings of and progress made by those Committees, highlighting any areas requiring escalation to, or consideration by, the full Board. Other matters for discussion are added to the agenda for scheduled Board meetings, or discussed at additionally convened Board meetings, as required. The balance of the Board is illustrated on page 63. review. Each director has demonstrated that he or she has sufficient time to devote to their present role at intu. Time commitment and external activities Non-executive directors are appointed for a three-year term and their continuing service thereafter is subject to review by the Board. All directors are submitted for annual re-election by shareholders. Their annual time commitment varies with speciﬁed minimum requirements within the terms of their appointment and is assessed as part of each director’s annual Conﬂicts of interest The Board has adopted a formal procedure under which directors must notify the Chairman of the Board of any potential conﬂicts. The Chairman then decides whether a conﬂict exists and recommends its authorisation by the Board where appropriate. In certain circumstances, the conﬂicted director may be required to recuse themselves from the Board’s discussions on a matter in which he or she is conﬂicted. Directors must also notify the Chairman when they take on any additional responsibilities or external appointments, and it is their responsibility to ensure that such appointments will not prevent them from meeting the time commitments discussed above. The Board 69 G o v e r n a n c e Relations with shareholders We place considerable emphasis on maintaining an open and frank dialogue with investors. Our programme of investor relations activities involves members of the Executive Committee (including, on occasion, the Chairman) and the Head of Investor Relations. We seek to develop existing and potential investors’ understanding of intu’s business strategy, operations, performance and investment case. This provides the Board and Executive Committee with an insight into the differing views of intu’s institutional and other signiﬁcant investors as well as those of retail shareholders. Key activities in 2017 included: — results meetings and update calls: an average of 50 institutions attended each announcement — road show meetings: following results announcements we conducted around 200 meetings in the UK, South Africa, US and Europe — investor conferences: we attended nine real estate conferences organised by investment banks, meeting 110 institutions — site visits: toured Madrid Xanadú and intu Lakeside with 30 investors and 15 sell-side analysts — interaction with sell-side analysts: engaged with analysts from around 20 institutions to ensure the insight of their research was accurate 390investor interactions in 2017 Communication Directors are kept fully informed of progress on key matters, including operational and ﬁnancial performance, between formal meetings. This is achieved by way of either scheduled conference calls or less formal update meetings in months where there is no formal Board meeting scheduled. Ad hoc meetings and working visits to centres are also regularly arranged to support the Chairman’s policy of open communication. The Chairmen of the Audit Committee and Remuneration Committee communicate regularly and directly with relevant staff and external advisors, including but not limited to the Director of Risk and Assurance, the Company Secretary and Deloitte LLP, who act as the Remuneration Committee’s consultants. The Chairman of the Board and Company Secretary ensure that all directors are provided with accurate and timely information to facilitate informed discussion at Board meetings. Board oversight of risk management The effective assessment and management of risk is key to the delivery of the Group’s strategy. The setting of the Group’s risk appetite by the Board provides the framework within which the Group’s risk management process operates. The Board has overall responsibility for risk management and the Audit Committee monitors and reviews the effectiveness of the risk management process ensuring that the appropriate governance and challenge around risk is embedded throughout the business. The Group’s risk management process is set out in more detail on pages 38 and 39, and the Group’s principal risks are discussed on pages 40 and 41. As part of the Governance Framework all recommendations to the Board must include speciﬁc consideration of potential risks to ensure this aspect is given due consideration while still permitting the Board to act decisively. Many of the risks to which the Group is exposed have remained broadly in line with 2016 with the exception of cybersecurity, which saw an increase in likelihood but the severity of its potential impact has reduced. No signiﬁcant new risks were identiﬁed. Principal risks and uncertainties are discussed in further detail on pages 40 and 41 Appropriate and effective corporate governance is taken seriously at intu and is intrinsic to all aspects of the Board’s activities.” 70 intu properties plc Annual report 2017 Viability statement Principal risks are set out in detail on pages 40 and 41, and the relevant risks for assessing viability have been identiﬁed as: — macro-economic; speciﬁcally impact on rental income levels, property values and covenant headroom (Risk 1) — retail environment; speciﬁcally impact on occupancy and pipeline (Risk 2) — terrorism; speciﬁcally negative impact on lettings and rental growth (Risk 5) — availability of funds; speciﬁcally impact on liquidity (Risk 6) The Directors also consider the impact on the Group’s ﬁnancial position of changes in key input assumptions including asset values, income and reﬁnancing after mitigation strategies including property sales not included in the plan. Key assumptions and sensitivities addressed include: — ability to recycle capital as planned — reﬁnancing of debt; £2.1 billion (around 42 per cent) of the Group’s debt is due for repayment in the next ﬁve years — falls in the value of investment property of up to 25 per cent — falls in income of up to 10 per cent In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than that required in adopting the going concern basis of accounting. Based on the result of this analysis, 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 next ﬁve calendar years. This period is considered appropriate because of the combination of the following factors: — the Group’s strategic plan covers 10 years, with a greater degree of detail and rigour applied to the ﬁrst ﬁve years — the Group’s weighted average unexpired lease term, which at 31 December 2017 was 7.5 years — the Group’s weighted average debt maturity, which at 31 December 2017 was 6.6 years — the term of the Group’s Revolving Credit Facility, which currently extends to 2021 The strategic plan incorporates the Group’s strategic objectives and considers the impact of the principal risks. The plan considers net rental income, cash ﬂows, development expenditure, potential corporate transactions including the recycling of capital and reﬁnancing plans over the 10-year period. It highlights the impact of the relevant principal risks on key metrics such as debt to assets ratio, underlying earnings per share and ﬁnancial headroom and also models the impact of potential corporate transactions. Audit Committee Audit Committee 71 G o v e r n a n c e Areas of focus in 2017 — developments — international operations — culture — completion of audit tender process Members in 2017 Chairman Adèle Anderson (Independent Non-Executive Director) Members Rakhi Goss-Custard (Independent Non-Executive Director) Andrew Strang (Independent Non-Executive Director) For members’ other Board appointments, skills and experience see Board of Directors on pages 62 and 63 Areas of focus in 2018 — ﬁnancial information and risk management in relation to potential business combination — developments — property valuations — procurement — cybersecurity — culture Dear shareholder As the Chairman of the Audit Committee it is my role to present to you the Audit Committee report for 2017. The Audit Committee has this year continued to focus on risk management, speciﬁcally in relation to our developments in the UK and our expanding operations in Spain, as well as continued to receive twice-yearly reviews of cyber risks. The Audit Committee also conducted a review of the Group’s culture and concluded the audit tender process. The Group’s approach to risk management is described in detail on pages 38 and 39 and the principal risks are detailed on pages 40 and 41. The EU Audit Regulation (537/2014) and Audit Directive (2014/56/EU) became applicable from 17 June 2016 and must be implemented in the UK from that date. These limit the length of tenure an audit ﬁrm can serve, and put in place requirements for the audit tender process as detailed below. PricewaterhouseCoopers (PwC) has been intu’s audit ﬁrm for more than 20 years and a tender process was commenced in 2016 and concluded in 2017. Since the conclusion of this process the proposed combination with Hammerson has been announced, and consequently it has been decided to defer the appointment of a new auditor until the outcome of this approach is clear. Under the applicable transitional rules PwC is able to act as intu’s auditor until 2020. Following our annual review of auditor quality and independence (see page 73 for more detail), we have recommended that PwC be reappointed for the 2018 audit. Responsibilities The Audit Committee’s key responsibilities are to monitor and review: — the integrity of the ﬁnancial statements, including a review of the signiﬁcant ﬁnancial reporting judgements and accounting policies — the effectiveness of the Group’s internal control and risk management — the effectiveness of the internal audit function, including the work programme undertaken by the function — the Group’s policy on and approach to whistleblowing — the Group’s overall approach to monitoring areas of risk — the Company’s relationship with the external auditor, including its independence Main activities during the year The Audit Committee considered the following key matters in 2017: — valuation of the Group’s investment and development property, including the ﬁrst external valuation of the land at intu Costa del Sol — the Group’s culture — the Group’s cybersecurity plans — accounting treatment of the most signiﬁcant transactions including the acquisition and subsequent disposal of a 50 per cent interest in Madrid Xanadú, the 50 per cent disposal of intu Chapelﬁeld, completed 31 January 2018, and the future equity interest of Eurofund in the intu Costa del Sol development — the 2017 internal audit plan and audit charter — the viability statement — compliance with the Criminal Finances Act, including the Group’s approach to prevention of the facilitation of tax evasion 72 intu properties plc Annual report 2017 Audit Committee continued Key ﬁnancial reporting and signiﬁcant judgements During the year the Audit Committee discussed the planning, progress and ﬁnal conclusions of the external audit process. The audit plan was reviewed and approved at the July 2017 Audit Committee meeting. The signiﬁcant risk areas identiﬁed were: investment and development property valuations; signiﬁcant transactions during the year; revenue recognition; and management override of controls. International Standards on Auditing (UK) identify these latter two risks as signiﬁcant for all companies. These issues were discussed by the Audit Committee following ﬁnalisation of the audit. The Audit Committee takes into account the views of the external auditor in understanding and assessing whether suitable accounting policies have been adopted, whether management has made appropriate estimates and judgements and whether disclosures are balanced and fair. The main issues discussed by the Audit Committee in the year are detailed in the table below. Issue Action taken Valuation of investment and development property For the interim results at 30 June 2017 the Audit Committee carried out a review of the investment property valuations. The full Board carried out a review of the 31 December 2017 valuations included in this report. Due to the overall importance of the valuations to the Group’s results, the relevant Audit Committee meeting included a presentation from and discussion with Knight Frank as part of the valuation process and the relevant Board meeting included a presentation from Cushman & Wakeﬁeld. The Audit Committee review included discussion with management and the external auditor of the key assumptions and results of the valuation process undertaken by the independent third party valuers. This review also included understanding which general factors had inﬂuenced the valuers in concluding on appropriate yields to use in the valuations. This involved factors affecting both the investment and occupier markets and recent comparable market transactions. Particular emphasis was given to understanding the factors that had resulted in individual property valuations being either signiﬁcantly above or below the average movement in the Group’s valuations. The Audit Committee speciﬁcally considered the appropriateness of the special assumption that the development land at intu Costa del Sol is valued as if all planning consents are in place at the balance sheet date, and the sensitivity of this valuation to projected income and cost assumptions. Presentation of information Operating through joint ventures is a core part of intu’s strategy. Management both review and monitor the Going concern business, including the Group’s share of joint ventures, on an individual line basis not on a post-tax proﬁt or net investment basis. The ﬁgures and commentary presented in the strategic report have therefore been presented consistently with this management approach. Reconciliations between the management and statutory bases are provided in the other information section on pages 165 to 168. The Committee has reviewed the prominence given to both statutory information and information on a management basis, and concluded that the approach adopted provides the most useful analysis of the results for the year. The Company’s ‘going concern’ review, which is based on 18-month cash ﬂow projections with particular focus on the next 12 months, was discussed with management. The projections cover the major trading cash ﬂows, being rental income and interest expense, and capital expenditure plans in the context of the latest debt maturity proﬁle. Stress tests of the projections were considered, covering reductions in the value of the Group’s properties, a fall in income as well as the inability to execute the capital recycling transactions, and what impact such changes may have on both the Group’s liquidity and its ability to meet the ﬁnancial covenants on its debt facilities. The discussion and analysis also considered what actions were available to the Group to mitigate the impact of such reductions on the cash ﬂow projections. Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board has assessed the prospects of the Company over a longer period than that required in adopting the going concern basis of accounting. The viability statement is included on page 70 and sets out the conclusion of that assessment. The same stress tests as outlined in the Going concern section above were conducted on the projections underpinning the viability assessment. The Audit Committee assessed the viability position and reported its recommendations to the Board. Fair, balanced and understandable At the request of the Board, the Audit Committee considered whether the 2017 annual report was fair, balanced and understandable and whether it provided the necessary information for shareholders to assess intu’s performance, business model, position and strategy. As part of its considerations the Audit Committee took into account the preparation process detailed below which, together with opinions of key executives and the external auditor, has been designed to assist the Audit Committee in reaching its view: — at an early stage, a matrix is produced identifying key themes and the sections in which those themes should be reﬂected — individual sections of the annual report are drafted by appropriate senior management with regular review meetings to ensure consistency across the whole document — a veriﬁcation process is undertaken to ensure that information contained is appropriately supported and factually accurate — detailed reviews of drafts of the annual report are undertaken by members of the Executive Committee and other senior management — drafts are discussed with the Group’s legal advisors and brokers — a ﬁnal draft is reviewed by the Audit Committee and discussed with senior management prior to consideration by the Board As a result of its considerations the Audit Committee is satisﬁed that, taken as a whole, the annual report is fair, balanced and understandable and has recommended it as such to the Board. Audit Committee 73 G o v e r n a n c e External auditor The Audit Committee has assessed the effectiveness of the external auditor, PwC, in line with the approach set out in the Financial Reporting Council’s Audit Quality Practice Aid. In carrying out the evaluation the Audit Committee has held discussions without the auditor, asked the auditor to explain the risks to audit quality that they have identiﬁed and their ﬁrm-wide controls relied upon, enquired about the ﬁndings from internal and external inspections of their audit, challenged the auditor’s strategy and plan and discussed the outputs of the audit with the auditor. This included direct meetings, review of reporting issued by the external auditor and review of independent reports: — senior ﬁnance staff reviewed the detailed execution of the 2016 audit plan with the engagement team and incorporated any ﬁndings into the 2017 plan — the Chair of the Audit Committee and the Chief Financial Officer each met privately with a senior partner of PwC unrelated to the engagement to review the performance of the ﬁrm — the Audit Committee reviewed the audit plan provided by PwC, including the risks identiﬁed and its approach to these The Company has complied with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 and in doing so has applied the transitional provisions related to the audit tender process. The tender process commenced during 2016 and concluded during the ﬁrst half of 2017 with Deloitte being selected for appointment for the year ending 31 December 2018. The tender process was conducted in line with the requirements of EU Audit Regulation (537/2014) and Audit Directive (2014/56/ EU) (‘the regulations’) which became applicable to the Group on 1 January 2017. Since the conclusion of this process intu has become the offeree in a takeover approach, and consequently it has been decided to defer the appointment of a new auditor until the outcome of this approach is clear. Under the applicable transitional rules PwC is able to act as intu’s auditor until 2020. A resolution to reappoint PwC for the 2018 audit will be proposed at the 2018 annual general meeting. The Audit Committee will continue to review the effectiveness and independence of the external auditor each year. Non-audit services On 1 January 2017 the Group implemented the FRC’s Ethical Standard for Auditors which imposes restrictions on certain non-audit services. A number of non-audit services are prohibited and others require approval by the Audit Committee. There is an overall fee limit of 70 per cent of the average of audit fees charged in the past three years, and hence the fee limit comes into force for the ﬁnancial year to 31 December 2020. The Audit Committee has sole authority to contract for non-audit services with the external auditor subject to observing certain guidelines including: — the Audit Committee must consider whether the proposed arrangements will maintain audit independence — the external auditor must satisfy the Company that it is acting independently The table below summarises the fees paid to the auditor over the last three years. The three-year average ratio of non-audit fees to audit fees is 8 per cent. Audit fees Non-audit fees Total fees paid to auditor Ratio of non-audit fees to audit fees 2017 £000 789 49 838 6% 2016 £000 705 48 753 7% 2015 £000 628 96 724 15% 74 intu properties plc Annual report 2017 Audit Committee continued Risk management and internal control The Board has overall responsibility to oversee the Group’s system of internal control and to keep its effectiveness under review, as well as to determine the nature and extent of the risks it is willing to take in achieving its strategic objectives based on the balance of potential risks and reward. The Group’s approach to risk management is described in detail on pages 38 and 39 and the principal risks are detailed on pages 40 and 41. The Audit Committee oversees the Board’s annual review of the effectiveness of the risk management and internal control systems. During this review the Board has not identiﬁed nor been made aware of any failing or weakness which it has determined to be signiﬁcant. The key elements taken into account in this review include: — the Group’s internal audit function’s work during the year (see right) — the Group’s risk management process — the Group’s controls over its ﬁnancial reporting process including: the comprehensive system for reporting results to the Board for review and consideration; the review process underlying the production of the consolidated ﬁnancial statements; and the experience and quality of the team involved in the ﬁnancial reporting processes In the context of the Group’s approach to risk management the Audit Committee commissioned a report on company culture. This consisted of consideration of key trends from the employee survey conducted in the second half of 2016, and a Group-wide review of culture, including workshops and questionnaires with staff across all levels at head office and at the centres. The results from this review helped the Audit Committee contextualise risks and risk management practices. The actions arising have been put on hold until after the completion of the potential business combination with Hammerson. Internal audit The Group has a risk and internal audit function which reports to the Audit Committee. The risk and internal audit function reviews internal controls and reports to the Audit Committee on whether such controls are in place and are being operated effectively. The function covers intu properties plc and its subsidiaries and joint ventures. The risk and internal audit function has a rolling programme of reviews ensuring that all centres, functions and areas of the business are reviewed regularly. The most signiﬁcant areas covered in 2017 included shopping centre health checks, business continuity, insurance, procurement and supply chain and culture. Additionally, annual assurance activities were performed, including a review of the assurance map and executive expenses. Committee membership The Audit Committee members have been selected to provide the wide range of ﬁnancial and commercial expertise necessary to fulﬁl the Committee’s duties and responsibilities. The Board is satisﬁed that the Audit Committee has recent and relevant ﬁnancial experience for the purposes of the UK Corporate Governance Code. Additionally, in accordance with the 2016 Corporate Governance Code the Board has determined that the current composition of the Audit Committee as a whole has competence relevant to the sector in which the Company operates. For full detail of the members’ experience and skills please see Directors’ biographies on pages 62 and 63. Audit Committee 75 G o v e r n a n c e There were 10 whistleblowing incidents relating to the intu Group during 2017. These included: — reported breach of health and safety procedures, following investigation of which one individual was dismissed and the other subject to disciplinary action — reported security concerns within one centre, following which a thorough review took place and remedial action was taken — two connected claims of professional misconduct, which resulted in disciplinary action — one claim of professional misconduct which is still being investigated — concern over the roadworthiness of a centre vehicle, which was proved to be without foundation — two grievances which were deemed not to be whistleblowing incidents — two further disclosures which, upon investigation, could not be substantiated Audit Committee effectiveness As part of the Board evaluation process, the Audit Committee reviewed its own effectiveness and this conﬁrmed that the Committee remained effective at meeting its objectives. Adèle Anderson Chairman of the Audit Committee 22 February 2018 The Audit Committee regularly reviews the effectiveness of the risk and internal audit function and in particular ensures that the function remains sufficiently independent of the wider business to ensure it can carry out its work effectively. An independent review of the risk and internal audit function is carried out every ﬁve years and was last performed at the end of 2013. An external review of the Group’s risk management process was carried out at the end of 2015 as discussed in the focus on risk section on pages 38 and 39. The key recommendations have all been implemented. Whistleblowing policy The Audit Committee is responsible for overseeing the Group’s whistleblowing policy and procedures, under which employees can raise concerns about possible improprieties (whether ﬁnancial or otherwise) within the Group on a conﬁdential basis. During the year the Audit Committee reviewed and strengthened the policy and procedures and a whistleblowing committee was established with set terms of reference, with key representatives from HR, Operations and Finance, which reports regularly to the Audit Committee. All whistleblowing incidents are reported to this whistleblowing committee which fully investigates each event and agrees any remedial action such as procedures being reviewed and improved where appropriate. 76 intu properties plc Annual report 2017 Nomination and Review Committee Highlights of 2017 — Chairman succession-planning — Externally facilitated Board evaluation Members in 2017 Chairman Patrick Burgess (until 3 May 2017) (Chairman of the Board) John Strachan (from 3 May 2017) (Chairman of the Board) Members Andrew Huntley (until 3 May 2017) (Independent Non-Executive Director) Adèle Anderson (from 3 May 2017) (Independent Non-Executive Director) Rakhi Goss-Custard (from 3 May 2017) (Independent Non-Executive Director) Andrew Strang (from 3 May 2017) (Independent Non-Executive Director) Louise Patten (Independent Non-Executive Director) Steven Underwood (from 3 May 2017) (Alternate Director for John Whittaker) Areas of focus in 2018 — continue refreshing of Board composition in line with succession plans — continuation of process to ensure smooth succession of the Chairman Dear shareholder 2017 continued to be an important and busy year for the Nomination and Review Committee. Having taken over the role of the Chairman in early May, I am committed to maintaining the high standards of the Nomination and Review Committee and ensuring that we continue to follow a robust process and best governance practice whenever key decisions are taken, in particular relating to new appointments and when considering the composition of the Board. Responsibilities and how they were discharged in 2017 The principal role of the Nomination and Review Committee is to evaluate the skills available on the Board and to determine when appointments and retirements are appropriate. In addition to its key responsibilities set out above, the Committee is also responsible for carrying out the annual performance evaluation of the Board, its committees and individual directors, as well as making recommendations on appointments to the Board, including the induction programme for newly appointed directors, and on succession planning. Those non-executive directors who have served on the Board for six years or more have been subject to a particularly rigorous review. The Committee carried out a formal Board performance evaluation process, by way of a questionnaire. The outcome of the review is summarised opposite. The Committee met twice in 2017 with its main focus on the composition of the Board and succession-planning, in particular in relation to the succession of the Chairman, and in relation to the role of Senior Independent Director. Statement on diversity policy The Nomination and Review Committee, and the Board, have always recognised the importance of boardroom diversity, providing a wide range of perspectives, and the Committee’s policy is to seek to ensure that a range of suitable candidates is taken into account when drawing up longlists and shortlists. The priority of the Committee is to ensure that the Group continues to have the most effective Board possible and all appointments to the Board are made on merit against objective criteria. A description of intu’s company-wide approach to diversity can be found on pages 54 to 56. Board composition The Committee’s discussions regarding the composition of the Board continue to be framed by the Company’s previously stated goal of reducing the overall size of the Board. Accordingly, two non- executive directors, Patrick Burgess and Andrew Huntley, retired from the Board and were not replaced. The Committee is satisﬁed that the balance of skills, knowledge and experience on the Board and its committees continues to be appropriate. The Board is supportive of Lord Davies’ aspirational target of 33 per cent female Board representation by 2020 and is pleased to conﬁrm that the Board’s female representation now stands at 33 per cent. Further information regarding our diversity policy is set out above. Succession-planning A sub-committee was established, chaired by Andrew Huntley, to carry out the search for a new Chairman to succeed Patrick Burgess who retired from the Board in May 2017. Appropriate input was provided by independent executive search ﬁrm Korn Ferry Whitehead Mann. Korn Ferry Whitehead Mann had no other connection with the Company other than providing input into the Board’s succession-planning. I was pleased to Nomination and Review Committee 77 G o v e r n a n c e Performance evaluation Every year, the Board conducts a performance evaluation of the performance of the Board and its committees. In addition, the Chairman reviews the performance of each director and the Senior Independent Director oversees the review of the Chairman’s performance. The areas identiﬁed for attention during 2017 were as shown in the table below: Areas identiﬁed for attention Action taken Board succession-planning As outlined on page 60 the Committee oversaw the process Nomination and Review Committee Board Committees for the succession of the Chairman and the Senior Independent Director Board succession remains a standard agenda item Board Committees’ terms of reference are reviewed annually and all independent non-executive directors continue to have a standing invitation to attend any committee meeting if they so wish, irrespective of their formal membership 2017 performance evaluation This involved an external independent facilitator, Lintstock, engaging with the Chairman and Company Secretary to set the context for the evaluation and tailor surveys for all directors to the speciﬁc circumstances of intu. Lintstock is a specialist corporate governance consultancy and has no commercial dealings with the Group, other than for the provision of corporate governance services to the Board. The anonymity of all respondents was ensured throughout the process in order to promote the open and frank exchange of views. As a result of the analysis, among other things the Board agreed that it should continue to devote attention to succession-planning, consider the balance between presentation and discussion at meetings and continue to spend more time discussing strategic topics. Induction for new directors There is a comprehensive induction programme for new directors which is tailored by the Chairman, in consultation with the Chief Executive and Company Secretary, depending on the type of appointment. The programme ordinarily includes meetings with Board members, senior management and external advisors, as well as a high-level review of all current projects, Board strategy and an in-depth review of the Group’s assets. Additional elements are added to the programme as needed following discussion between the Chairman and the individual director. Where required, the Company Secretary provides guidance and facilitates the provision of training on directors’ duties under the Companies Act 2006 and on legal, regulatory and governance matters with which the Company, Board and individual directors must comply. accept the appointment as Chairman of the Board with effect from 3 May 2017. Andrew Huntley also retired from the Board on 3 May 2017. The Committee was pleased to appoint Adèle Anderson as Senior Independent Director, succeeding Andrew Huntley. Talent, training and development Talent development is a key focus of the Committee and a comprehensive talent and leadership programme, including succession-planning, has been implemented for senior management across the Group. The Committee receives regular update reports regarding progress and remains conﬁdent in the future potential of the Group’s most promising executives and staff. As Chairman, with the assistance of the Nomination and Review Committee, I regularly consider the need for directors to update and expand their skills and knowledge. Training is provided for non-executive directors in the form of presentations at Board meetings, attendance at relevant seminars and courses. The Board also recognises the need for directors to keep up-to-date with relevant legislative and regulatory developments as well as changes to corporate governance best practice and investor expectations. The Company Secretary reports to each Board meeting on these matters, drawing attention to any issues of particular relevance. Re-election of directors All directors will submit themselves for re-election at the forthcoming annual general meeting in May 2018. John Strachan Chairman 22 February 2018 78 intu properties plc Annual report 2017 Directors’ remuneration report Dear shareholder I am pleased to present intu’s 2017 Directors’ remuneration report to you, which has been prepared by the Remuneration Committee and approved by the Board. Results and context of remuneration This has been another year of good results, against a backdrop of headwinds to the retail property market, including the impact of Brexit and the internet. Operationally, we out-performed against our benchmarks and made strong progress against our strategic objectives. In particular in 2017 we increased like-for-like net rental income and achieved good growth across our Spanish assets. Remuneration policy Our Directors’ remuneration policy was approved by shareholders at the 2017 annual general meeting, and we were delighted to receive 99.5 per cent support from our shareholders. A summary of the remuneration policy is presented at the end of this report. Alignment with long-term success The Committee believes that our remuneration philosophy and incentive policy is aligned with the long-term success of the Company. Our long-term incentive plan has time horizons extending to ﬁve years, and 50 per cent of our annual bonus is deferred into shares. Performance pay is linked to: — out-performance of total shareholder return (TSR) against our peers — delivering absolute total return (NAV per share growth plus dividends) for our shareholders — annual EPS performance — achievement of our strategic initiatives that will build value for the longer term Both Executive Directors are required to build up a shareholding in intu shares worth 200 per cent of salary. Key areas of focus and decisions in 2017 and for 2018 The Remuneration Committee made a number of decisions regarding the application of our policy in 2017 and for 2018. Key decisions included the following: — the Chief Executive’s and Chief Financial Officer’s salaries will be increased by two per cent to £617,916 and £487,713, respectively. This increase is lower than the average increase for other staff in the business — fees for our Chairman will remain unchanged at £275,000 per annum — the annual bonus awarded to the Executive Directors for the year ended 31 December 2017 was 72 per cent of salary representing 60 per cent of maximum opportunity, based on EPS performance in the year and the achievement of key strategic objectives — the ﬁnal tranche of the 2013 PSP award, the second tranche of the 2014 PSP award and the ﬁrst tranche of 2015 PSP award are due to vest at 19, 36 and 13 per cent, respectively, reﬂecting intu’s absolute total return (NAV per share growth plus dividends) performance over a three, four and ﬁve year period — for 2018, no changes have been made to the performance measurement framework for the annual bonus and performance share plan — PSP awards of 250 per cent of salary were made to each of the Executive Directors. These will only vest subject to the achievement of stretching TSR and absolute total return performance conditions, over three, four and ﬁve years and would be subject to performance and time pro-rating on the successful acquisition of intu by Hammerson In light of the recommended all-share offer by Hammerson to acquire intu, the Remuneration Committee also considered the remuneration implications arising from the acquisition, including the Members and meetings in 2017 Remuneration Committee (6 meetings) A B 6 6 6 6 Louise Patten (Chairman) (Independent Non-Executive Director) Adèle Anderson (Independent Non-Executive Director) Rakhi Goss-Custard (appointed 3 May 2017) (Independent Non-Executive Director) Andrew Huntley (retired 3 May 2017) (Independent Non- Executive Director) A= Maximum number of meetings eligible to attend B= Number of meetings actually attended 1 5 1 4 The Committee normally invites the Chairman of the Board, the Chief Executive, the Company Secretary and the HR director to attend the scheduled meetings. The Chairman of the Board, the Chief Executive, the Company Secretary and HR director attended the four scheduled meetings held in 2017. A further two unscheduled meetings were also held. No individual was present when his or her remuneration was being determined. Remuneration governance aligned features Malus provisions for both the annual bonus and PSP Clawback provisions for both the annual bonus and PSP Performance period extending to five years for a proportion of PSP Full retrospective disclosure of annual bonus financial targets including minimum and maximum target range Shareholding requirement of 200 per cent of salary Directors’ remuneration report Directors’ remuneration report 79 G o v e r n a n c e treatment of outstanding awards granted under the intu share plans to Executive Directors. Details of the impact on Executive Director remuneration are set out on page 85. The agreed approach includes performance and time pro-rating for PSP awards. Our employees The Committee oversees any signiﬁcant changes to the remuneration policy for all intu employees. intu also operates a number of share plans so that all of our employees may have the opportunity to share in intu’s success: — In 2016, we introduced the intu Retail Services Sharesave Plan, which is another HMRC plan, and provides employees with the opportunity to purchase shares at a discount following an initial savings period. We continue to consider ways in which all intu employees are aligned with the success of the company. Shareholder annual general meeting The annual remuneration report will be put to an advisory shareholder vote at our 2018 AGM and we look forward to receiving your views and support. — For a number of years now we have operated an HMRC share incentive plan (SIP), under which employees may participate in a ‘partnership’ share plan Louise Patten Chairman of the Remuneration Committee 22 February 2018 Compliance statement This is the Directors’ remuneration report of the Company which has been produced pursuant to, and in accordance with, the Listing Rules, section 420 of the Companies Act 2006 and Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended 2013). The Company also complies with the requirements of the UK Corporate Governance Code. This report contains both auditable and non-auditable information. The information subject to audit is set out in the Directors’ remuneration report, in sections marked with §. Overview of Executive Director remuneration An overview of the key remuneration elements in place for Executive Directors in 2018 is set out below. Key elements Timing of payout Summary of policy for 2018 2018 2019 2020 2021 2022 Salary Pension and beneﬁts Annual bonus Long-term incentives Shareholding requirement — Salaries for 2018 are: – David Fischel, Chief Executive: £617,916 – Matthew Roberts, Chief Financial Officer: £487,713 — Executive Director increases were below average increases to staff across the business — The Company operates a deﬁned contribution pension or salary supplement, where the contribution is 24 per cent of salary. The Chief Executive receives an additional six per cent in recognition of the beneﬁt foregone on the closure of the deﬁned beneﬁt scheme — Beneﬁts include a car allowance (up to £18,000), private medical insurance, life assurance and long-term sickness insurance — Maximum opportunity of 120 per cent of salary — 50 per cent of the award earned will be deferred into intu shares, which vest over two and three years subject to continued employment — For 2018, performance is based two-thirds on EPS and one-third on strategic and operational objectives. This is the same framework which applied for 2017 — Normal maximum grant size of 250 per cent of salary in 2018 — Three, four and ﬁve year performance periods — For 2018, the awards will be based 50 per cent on TSR relative to the top ﬁve UK listed REITs, and 50 per cent based on absolute total return (NAV per share growth plus dividends). Targets unchanged from 2017 — Executive Directors must build up a holding with a value equivalent to 200 per cent of salary 80 intu properties plc Annual report 2017 Directors’ remuneration report continued Annual remuneration report This report sets out how the Directors’ remuneration policy of the Company has been applied in the year, and how the Remuneration Committee intends to apply the policy going forward. In accordance with section 439 of the Companies Act 2006, an advisory shareholder resolution to approve this report will be proposed at the 2018 annual general meeting of the Company. Subsections marked with § have been audited in accordance with the relevant statutory requirements. Key responsibilities The principal role of the Remuneration Committee is to determine and then agree with the Board the framework and policy for the remuneration of the Chief Executive, the Chief Financial Officer, the Chairman of the Board and such other members of the executive management as it is tasked to consider. Key principles of remuneration policy The Company’s remuneration policy aims to attract, motivate and retain high-calibre executives by rewarding them appropriately with competitive compensation and beneﬁt packages. The policy seeks to align the interests of Executive Directors with the performance of the Company and the interests of its shareholders. Our incentive arrangements are designed to reward performance on our key performance indicators. Our aim is to focus management on delivering sustainable long-term performance and support the retention of critical talent. Total remuneration in 2017 § The table below sets out the total remuneration received by each Director for the year to 31 December 2017. Salary or fees £000 Beneﬁts £000 Annual bonus (cash and deferred shares) £000 Long-term incentive £000 Pension £000 Total remuneration £000 Director 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Executive David Fischel Matthew Roberts Chairman Patrick Burgess (retired 3 May 2017) John Strachan (appointed Chairman 3 May 2017) Independent Non–Executive Adèle Anderson Andrew Huntley (retired 3 May 2017) Louise Patten Andrew Strang Rakhi Goss–Custard Other Non–Executive Richard Gordon John Whittaker1 Total 601 474 141 203 92 29 79 67 71 582 459 410 64 82 84 79 64 64 59 – 59 – 1,816 1,947 23 22 21 19 436 344 671 535 253 196 366 282 180 114 174 1,493 1,814 110 1,150 1,405 3 1 – – – – – – – 49 8 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 144 204 418 64 92 29 79 67 71 82 84 79 64 64 – – 48 – – – – 780 1,206 – – 449 – – 648 – – 294 – – 59 – 284 3,388 59 – 4,133 1. John Whittaker did not receive any remuneration in 2017 or 2016 in connection with his position as Deputy Chairman and Non-Executive Director of the Company. A management fee of £213,310 was paid to Peel Management Limited for the provision by Peel of management and advisory services, as further described on page 155. The ﬁgures in the table have been calculated as follows: — Base salary: amount earned for the year. — Beneﬁts: the taxable value of annual beneﬁts received in the year. The main beneﬁts are life assurance, long-term sickness insurance, private healthcare, company car cash allowance and occasional use of company ﬂat and for 2017, compensation for a change in life assurance beneﬁt. The value of the company car cash allowance is £18,000. The 2016 ﬁgure for David Fischel has been restated by an amount of £2,000 to reﬂect a change in HMRC’s valuation of certain beneﬁts. — Pension: the value of the Company’s contribution during the year (30 per cent salary supplement in lieu of contributions for the Chief Executive and 24 per cent SIPP contribution, part taken as a salary supplement in lieu of SIPP contributions, for the Chief Financial Officer). — Annual bonus (cash and deferred): the value at grant of the annual incentive payable for performance over 2017 and 2016 respectively. — Performance share plan: awards shown under 2017 comprise awards made in 2013, 2014 and 2015, which have one third subject to three-, four- and ﬁve-year performance periods. The amount shown is the amount due to vest in respect of the ﬁrst tranche of the 2015 award, with a three-year performance period to 31 December 2017; the second tranche of the 2014 award, with a four-year performance period to 31 December 2017; and the ﬁnal tranche of the 2013 award, with a ﬁve-year performance period to 2017. Amounts are calculated using a three-month average share price of £2.219. Further information regarding the vesting can be found on page 83. Performance share plan awards shown under 2016 comprise the ﬁrst tranche of awards made in 2014, and the second tranche of awards made in 2013. In line with the regulatory requirements, these amounts have been restated from the ﬁgures disclosed last year to reﬂect the actual vesting and share price on the date of vesting in May 2017. For 2016, the amounts also include the value of dividends accrued during the performance period on the awards vesting, which amounted to £33,470. Directors’ remuneration report 81 G o v e r n a n c e Performance out-turns and incentives Annual bonus § The maximum award for both the Chief Executive and Chief Financial Officer in 2017 was 120 per cent of salary, of which 50 per cent is deferred for two and three years. This will remain unchanged for 2018. Annual bonus payments are based on pre-determined performance measures. Given the commercial sensitivity, the Remuneration Committee provides retrospective disclosure of targets. Two-thirds is based on adjusted EPS performance in the year, split evenly between performance versus budget and prior year ﬁgures. The overall structure ensures that the maximum EPS related bonus is only achievable if management outperform against both the Board’s expectations for the year and if there is an increase in EPS on the prior year. The remaining third is based on achievement of strategic and operational objectives against a scorecard of measures. The Remuneration Committee considers the objectives carefully each year to align with intu’s strategic objectives, and the objectives include quantitatively assessed ﬁnancial and operational measures and milestones. For 2018, the strategic objectives will include objectives in the following key areas: — performance of assets, including net rental income — digital and the customer experience — implementation of strategic priorities, including the Hammerson transaction In the event that the recommended all-share offer by Hammerson to acquire intu completes in the year as expected, the bonus framework would apply on a part-year basis. Annual bonus – 2017 out-turn § Performance against the targets for the 2017 short-term incentive arrangements is given below. As in previous years, full retrospective disclosure of ﬁnancial targets is provided. Performance element Weighting Threshold Target Maximum Adjusted EPS vs. budget Adjusted EPS vs. prior year 33% 33% 13.5p 100% 14.2p 102.5% 14.9p 105% Target 2017 performance 15p 100% Out-turn (% max element) 100% 0% Scorecard of strategic and operational measures Total 33% See details of scorecard performance David Fischel Matthew Roberts 80% 60% 80% 60% The strategic objectives in the annual bonus are a key part of the remuneration framework for incentivising and rewarding achievements and milestones which are the foundation for value creation in the future. The Committee follows a rigorous process in the setting and monitoring of scorecard objectives and then exercises judgement in assessing performance in the key areas selected. This includes determination of objectives by reference to the approved Board strategy, quarterly reviews of quantitative and qualitative data, and an end of year full review with supporting evidence, to ensure a robust assessment of performance against the objectives. 82 intu properties plc Annual report 2017 Directors’ remuneration report continued For 2017, the Remuneration Committee determined that the strategic objective setting be simpliﬁed and included three headline objectives, reﬂecting the Board’s strategic priorities. For 2017, the scorecard weightings and out-turns were as follows: Headline objectives Weighting Speciﬁc objectives under each area of focus Scorecard Summary achievement against objectives Optimising performance of existing assets 33.3% Growing net rental income — Increased like-for-like net rental income for 2017, in line with investor guidance — Increased gross life-for-like rental income (1%) Optimisation of existing assets — Completion of new lettings successfully offsetting the closure of BHS stores On-target achievement Ensuring intu is alert to the changing retail and digital market place 33.3% Customer experience and branding — Pro-active response to the changing retail market place with expansion of leasing strategy to include pop-ups, non-traditional tenants, big box retailers and additional brands — Development of centres to meet changing customer demand, including leisure extensions at intu Watford and intu Lakeside, early ICT input for incorporation of key operational technology backbone, and resort approach for intu Costa del Sol — Net promoter score maintained at levels consistent with prior years — Strengthening of brand awareness, in both unprompted and prompted metrics — Growth of intu Experiences, with delivery of above target net income — Sustainability metrics – early achievement of 2020 target for reduction in greenhouse gas emissions Digital — Continued growth of digital business, with strong sales performance in our online shopping platform — Development of social media proﬁle and restructuring of Facebook utilisation — Introduction of intu Accelerate, trialling a range of new innovative technology led solutions — Progress against GDPR objectives in advance of 2018 implementation Upper quartile achievement Strategic options and corporate delivery 33.3% Strategic options — Review and identiﬁcation of strategic options for intu Strategic options implementation — Progression of all-share offer by Hammerson to acquire intu including: — Leadership through the transition period — Actions prioritising shareholder value focus through discussions Corporate delivery — Progression of pipeline, with all current projects on time and budget — Successful acquisition of Madrid Xanadú — Advancement of planning and pre-lets for intu Costa del Sol, with the development of this ﬂagship intu centre expected to commence in 2018 — Maintenance of strong ﬁnancial ﬂexibility throughout the year — Disposal of 50 per cent of intu Chapelﬁeld in line with December 2016 valuation, recycling capital into the development pipeline — Delivery in Q3 2017 of measures to achieve signiﬁcant reductions to our costs — Evolution of our reward and recognition programme Win Your Dream, recognising outstanding demonstration of the intu brand promise — Increased staff engagement via ‘Toolbox’ talks, employee consultation forums and publications Maximum achievement The resulting total short-term incentive payout for the Executive Directors in respect of 2017 was 72 per cent of salary (60 per cent of maximum opportunity). Directors’ remuneration report Directors’ remuneration report 83 Deferral into shares 50 per cent of the 2017 short-term incentive for both David Fischel and Matthew Roberts was deferred into shares of the Company. Executive directors must remain in employment with the Company for a period of two years (half of award) and three years (half of award) after the date of award before such shares are released. Deferred bonus awards granted in the year § The table below summarises the deferred bonus awards granted during the year. These awards were made in March 2017 in respect of the 2016 bonus. G o v e r n a n c e Individual David Fischel Matthew Roberts Type of interest Deferred bonus award * Face value calculated using a ﬁve day average share price prior to date of grant of £2.85. Face value of 2017 award* £ 336,000 268,000 Long-term incentives § Awards with performance periods ending in the year – Performance Share Plan (PSP) The LTIP awards shown in the single ﬁgure relate to awards due to vest in 2018. These relate to the ﬁrst, second and ﬁnal tranche of the 2015, 2014 and 2013 PSP awards, respectively. The following table summarises vesting under these awards. Award Tranche 2015 PSP award First tranche 2014 PSP award Second tranche 2013 PSP award Final tranche Performance period Three years to 31 December 2017 Four years to 31 December 2017 Five years to 31 December 2017 The performance condition for the above awards were as follows: TSR ranking Vesting of TSR portion (% of max) Absolute Total Return (per annum) Vesting of Absolute Total Return portion (% of max) Total vesting (% of max) 6th 6th 6th Nil Nil Nil 6.1% 26.5% 13.2% 8.5% 72.7% 36.4% 6.7% 38.4% 19.2% — half of awards vest by reference to TSR relative to the top-ﬁve UK-listed REITs with 25 per cent minimum vesting for TSR in line with the third-ranked company; vesting of 60 per cent for TSR in line with the second-ranked company; full vesting for TSR in line with the top-ranked company; and straight line vesting between points, proportionate to TSR achieved. This portion is also subject to a committee-operated discretionary assessment of underlying ﬁnancial performance — half of the awards vest by reference to Absolute Total Return (NAV growth per share plus dividends) with 25 per cent minimum vesting for 6 per cent per annum; full vesting for 10 per cent per annum; straight-line vesting in between. Awards lapse for growth of less than 6 per cent per annum PSP Awards granted during the year § The table below summarises PSP awards granted during the year, in March 2017: Individual Type of interest £ % of salary Face value of 2017 award* David Fischel Matthew Roberts PSP** (nil cost options) 1,467,000 1,158,000 250% 250% % vesting at threshold Performance period end 3 years 4 years 5 years 31 December 2019 31 December 2019 31 December 2020 31 December 2020 31 December 2021 31 December 2021 25% 25% * Face value calculated using a ﬁve day average share price prior to date of grant of £2.85. ** Vesting of awards is based 50 per cent on relative TSR and 50 per cent on Absolute Total Return (NAV growth per share plus dividends) performance, with targets equivalent to the 2018 award. 84 intu properties plc Annual report 2017 Directors’ remuneration report continued Awards for 2018 Awards for 2018 will be 250 per cent of salary. Awards under the plan vest one-third after each of three, four and ﬁve years. A summary of the applicable targets are as follows: Absolute Total Return (NAV growth per share plus dividends) (50% of award) Total Shareholder Return relative to top-ﬁve UK-listed REITs (50% of award) Minimum vesting (25% of element vesting) 6 per cent per annum Full vesting (100% of element vesting) 10 per cent per annum Straight line vesting between points TSR in line with the third-ranked company TSR in line with the top-ranked company Straight line vesting between points, proportionate to TSR achieved, with 60% vesting for TSR in line with the second-ranked company. Subject to a Committee-operated discretionary assessment of underlying ﬁnancial performance During the year, consideration was given to whether to introduce a further holding period under the performance share plan. The Committee believes that the current performance period of three, four and ﬁve years, combined with clawback provisions of one year following vesting, already provides strong alignment between the Executive Directors and shareholders, although this position will be kept under review. Malus and clawback Shares awarded under the deferred bonus plan and the performance share plan are subject to malus provisions. The Committee may apply malus at its discretion in circumstances including (but not limited to): — a material misstatement of the Company’s audited ﬁnancial results — a material failure of risk management by the Company, any Group company or business unit — a material breach of any applicable health and safety or environmental regulations by the Company, any Group company or business unit — serious reputational damage to the Company, any Group company or business unit — serious misconduct of the individual The annual bonus and the performance share plan are also subject to clawback provisions. The Committee may at its discretion seek to apply clawback in circumstances of: — a material misstatement of the Company’s audited ﬁnancial results where the individual is responsible or accountable (and where Executive Directors would always be deemed to have management responsibility) — serious misconduct of the individual Clawback provisions may be applied up to two years following the determination of the annual incentive and up to one further year following vesting for awards under the performance share plan. Taking into account the three, four and ﬁve year vesting timescales, this means that performance share plan awards may be reclaimed for up to four, ﬁve and six years, respectively, from the date of award. Other share scheme information The Company operates a share incentive plan (SIP) for all eligible employees, including Executive Directors, who may receive up to £3,600 worth of shares as part of their annual bonus arrangements. As part of the SIP arrangements, the Company offers eligible employees the opportunity to participate in a ‘partnership’ share scheme, the terms of which are governed by HM Revenue & Customs (HMRC) regulations. In 2016, intu implemented a HMRC approved Sharesave Plan (the intu Retail Services Sharesave Plan), offering a potential savings contract of up to £500 a month for a period of three to ﬁve years. Participants are granted an option to acquire ordinary shares in intu using the proceeds of their saving contract. The exercise price is set at the time of invitation to apply for the plan, with a discount of 10% of the market value. The Company operates an employee share ownership plan (ESOP) which has in the past used funds provided to purchase shares required under the annual bonus scheme. Directors’ remuneration report Directors’ remuneration report 85 G o v e r n a n c e Impact of recommended all-share offer by Hammerson to acquire intu on Executive Director remuneration On 6 December 2017, the recommended all-share offer by Hammerson to acquire intu was announced. In line with the remuneration policy, awards granted under the Performance Share Plan will be subject to both pro-rating and an assessment of performance. Deferred shares relating to prior bonuses will vest in full. A signiﬁcant portion of the performance share awards are not expected to vest. David Fischel and Matthew Roberts will be treated as having been served notice of termination on the effective date of the transaction. For a two month period they will be on garden leave but available as required to effect an orderly handover. Following this they will receive a payment of salary and beneﬁts in lieu of the balance of their notice period, in accordance with the remuneration policy and their contractual terms. Season ticket loan All employees of the Group are entitled to an interest-free travel season ticket loan which is repaid over the year via deductions from salary. Neither David Fischel nor Matthew Roberts received a season ticket or other loan from the Group during 2017. Chief Executive pay increase in relation to all employees The table below sets out details of the percentage change in salary, beneﬁts and annual bonus for Chief Executive and the average for all of intu’s staff. Chief Executive All employees Percentage change in remuneration from 31 December 2016 to 31 December 2017 Percentage change in base salary Percentage change in beneﬁts Percentage change in annual bonus 3% 5% 10% 33% (35%) (3%) Shareholding and share interests § Executive Directors must build up over time a holding of intu shares with a value equivalent to 200 per cent of salary. The Remuneration Committee reviews shareholdings against the requirement on an annual basis to ensure they are met within an appropriate timeframe. The graph below illustrates the shareholdings of the Executive Directors as a percentage of salary. Note that only actual holdings count towards the shareholding requirements. Shares subject to deferral and/or performance conditions have also been shown for reference. Shareholding of intu ordinary shares as at 31 December 2017 (% of salary)* David Fischel Matthew Roberts 0 % of salary 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 Actual shareholding Deferred shares Unexercised share options (vested) Shares subject to performance conditions Shareholding requirement * Value of shareholding calculated based on 12 month average share price to 31 December 2017. As shown above David Fischel fulﬁls his shareholding requirement. Matthew Roberts has yet to meet his requirement, which was increased to 200 per cent of salary last year. 86 intu properties plc Annual report 2017 Directors’ remuneration report continued The table below sets out the Executive Directors’ interests in shares as at 31 December 2017. Number of shares owned (including connected persons) Conditional shares not subject to performance conditions Unvested awards Vested awards Held in own name Held in SIP trust for > 5 years Deferred shares Held in SIP trust for < 5 years PSP subject to performance conditions1 Options subject to performance conditions Unexercised unapproved options2 Unexercised approved options Options exercised in the year Executive David Fischel 1,155,030 Matthew Roberts 341,992 10,465 2,823 252,519 199,565 10,573 1,901,189 9,623 1,489,431 – – 1,382,972 481,387 12,906 11,203 – – 1. 2013 performance share plan awards held as ﬁxed-value zero-cost options and jointly owned shares. 2. Held as jointly owned shares. The outstanding options represent the unexercised element of the jointly owned shares portion of the 2009 and 2010 unapproved options. 3. No changes in the interests of Directors have occurred between 31 December 2017 and 22 February 2018. Vested 2009 ESOS awards Awards of market value share options, with an exercise price of 232.41 pence. These awards became exercisable on 28 February 2013 and may be exercised until 28 May 2019. 2010 ESOS awards Awards of market value share options, with an exercise price of 267.75 pence. These awards became exercisable on 26 May 2013 and may be exercised until 26 May 2020. Unvested 2013 PSP (third tranche) Awards of performance shares, granted on 21 May 2013. Vesting is based on TSR (relative to the top ﬁve UK-listed REITs) and Absolute Total Return performance (ranging from 6 per cent per annum to 10 per cent per annum), in three equal tranches over three, four and ﬁve years. Any awards that vest may be exercised until 21 May 2023. 2014 PSP award (second and third tranche) Awards of performance shares, granted on 12 May 2014. Vesting is based on TSR (relative to the top ﬁve UK-listed REITs) and Absolute Total Return performance (ranging from 6 per cent per annum to 10 per cent per annum), in three equal tranches over three, four and ﬁve years. Any awards that vest may be exercised until 12 May 2024. 2015 PSP 2016 PSP 2017 PSP Awards of performance shares, granted on 11 March 2015. Vesting is based on TSR (relative to the top ﬁve UK-listed REITs) and Absolute Total Return performance (ranging from 6 per cent per annum to 10 per cent per annum), in three equal tranches over three, four and ﬁve years. Any awards that vest may be exercised until 11 March 2025. Awards of performance shares, granted on 7 March 2016. Vesting is based on TSR (relative to the top ﬁve UK-listed REITs) and Absolute Total Return performance (ranging from 6 per cent per annum to 10 per cent per annum), in three equal tranches over three, four and ﬁve years. Any awards that vest may be exercised until 7 March 2026. Awards of performance shares, granted on 10 March 2017. Vesting is based on TSR (relative to the top ﬁve UK-listed REITs) and Absolute Total Return performance (ranging from 6 per cent per annum to 10 per cent per annum), in three equal tranches over three, four and ﬁve years. Any awards that vest may be exercised until 10 March 2027. Directors’ remuneration report Directors’ remuneration report 87 Nine-year TSR chart The following graph shows the TSR for intu properties plc over the nine-year period ended 31 December 2017, compared with our closest comparator group for this purpose, the FTSE 350 Real Estate. TSR is deﬁned as share price growth plus reinvested dividends. G o v e r n a n c e Nine-year Total Shareholder Return (TSR) performance 250 250 200 200 150 150 100 100 50 50 0 0 1 Jan 2009 31 Dec 2009 31 Dec 2010 31 Dec 2011 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 intu properties plc FTSE 350 Real Estate UK real estate is a cyclical sector. Since 2009, a key driver for growth in value within the UK real estate market has been exposure to central London properties. As a result of the demerger of Capital & Counties from Liberty International (now intu properties plc) in 2010, intu’s portfolio does not include properties in central London and intu has therefore not beneﬁted from the uplift experienced by those property companies with exposure to London. However, given the cyclical nature of the property sector, we would not expect this trend to endure over the long-term cycle. For additional context, the following two charts have been provided to show intu’s absolute total return (NAV growth plus dividends) and total property return (capital value growth adjusted for capex and net income expressed as a percentage of capital employed) over the same period. intu’s total property return is shown relative to the IPD monthly retail index. These two charts have been provided as growth in these metrics supports the delivery of long-term returns to our shareholders. Absolute Total Return 170 160 150 140 130 120 110 100 90 2009 2010 2011 2012 2013 2014 2015 2016 2017 88 intu properties plc Annual report 2017 Directors’ remuneration report continued Total Property Return 130 125 120 115 110 105 100 2009 2010 2011 2012 2013 2014 2015 2016 2017 intu IPD monthly retail index Chief Executive remuneration history The table below sets out historical details of Chief Executive pay. CEO single ﬁgure of total remuneration Annual bonus payout (% maximum) Long-term incentive plan vesting in year (% maximum) 2009 2010 2011 2012 2013 2014 2015 2016 2017 £1,044k 50% £1,350k 100% £1,275k 83% £1,810k 70% £1,081k 55% £1,154k 65% £1,653k 95.3% £1,814k 95.3% £1,493k 60.0% 0% 0% 0% 100% 0% 0% 37.6% 36.4% 23.0% Shareholder context The table below shows the advisory vote on the 2016 Annual remuneration report (including the Committee Chairman’s statement) and the binding vote on the Directors’ remuneration policy at the 2017 AGM. It is the Committee’s policy to consult with major shareholders prior to any major changes, and to maintain an ongoing dialogue on executive remuneration matters. 2016 Annual Remuneration Report (2017 AGM) Directors’ Remuneration Policy (2017 AGM) For 99.6% 99.5% Against Abstentions 0.4% 0.5% 1.1m 0.8m Additional disclosures Other directorships Executive Directors are not generally encouraged to hold external directorships unless the Chairman of the Board determines that such appointment is in the Group’s interest and does not cause any conﬂict of interest. Where such appointments are approved and held, it is a matter for the Chairman to agree whether fees paid in respect of the appointment are retained by the individual or paid to the Company. During 2017, David Fischel’s principal external appointment was with Prozone Intu Properties Limited. Prozone Intu Properties Limited is an Indian shopping centre owner and developer in which intu has a 33 per cent interest. David Fischel also holds an external appointment as a Non-Executive Director of Marlowe Investments (Kent) Limited, a UK private company which relates to his family affairs, does not require any signiﬁcant time commitment and does not conﬂict in any way with his role as Chief Executive of intu. During 2017, David Fischel did not receive a fee in respect of his appointment as a Non-Executive Director of Prozone Intu Properties Limited. He received and retained a fee of £5,000 in respect of his non-executive directorship of Marlowe Investments (Kent) Limited. Directors’ remuneration report Directors’ remuneration report 89 G o v e r n a n c e During 2017, Matthew Roberts was appointed as a Non-Executive Director of Marston’s PLC. He received and retained a fee of £50,000 per annum in respect of this role. With effect from 23 January 2018, he was appointed Chairman of the Audit Committee of Marston’s PLC for which he will receive an additional fee of £7,000 per annum. Payments to former Directors § A life presidency fee of £150,000 per annum (2016: £150,000) was paid to Sir Donald Gordon, the Group’s Life President and former Chairman who founded the Company in 1980. The life presidency fee was agreed by the Board at the time of his retirement in June 2005 in recognition of his outstanding contribution to the Group. The payment is payable for the remainder of Sir Donald’s life and is secured by deed. Departure of Chairman § Patrick Burgess retired as Chairman on 3 May 2017. He received fees and beneﬁts in respect of the services performed as Chairman up to and including 3 May 2017. No additional payments were made. Payments for loss of office § There were no payments for loss of office made to any Director in the year. Alternate Directors § Steven Underwood and Raymond Fine serve as Alternate Directors to John Whittaker and Richard Gordon respectively. Neither Steven Underwood nor Raymond Fine received any fees in 2017 in respect of their services as Alternate Directors. Raymond Fine received a fee of £173,189 in respect of consultancy services provided to the Company in connection with South African tax and shareholder issues, liaison with the Gordon Family and other related matters. Raymond Fine also had use of a company ﬂat, the beneﬁt of which, following a recent HMRC review, is estimated at £39,000 in respect of 2017. Service contracts Executive Directors and the Chairman have rolling service contracts which are terminable on 12 months’ notice on either side. All non-executive directors have been appointed under letters of appointment on ﬁxed terms of two or three years, subject to renewal thereafter. Richard Gordon is deemed to have served for more than nine years and is now subject to a one-year term. All are subject to annual re-election by shareholders. David Fischel Matthew Roberts John Strachan (appointed Chairman 3 May 2017) Patrick Burgess (retired 3 May 2017) Adèle Anderson Richard Gordon Andrew Huntley (retired 3 May 2017) Rakhi Goss-Custard Louise Patten Andrew Strang John Whittaker Notice period 12 months 12 months 12 months – Contract term expires 2019 AGM 2018 AGM – 2019 AGM 2020 AGM 2018 AGM 2020 AGM 90 intu properties plc Annual report 2017 Directors’ remuneration report continued Distribution statement The table below shows the percentage change in underlying earnings, dividends, and total employee compensation spend from the ﬁnancial year ended 31 December 2016 to the ﬁnancial year ended 31 December 2017. Underlying earnings (£m) £200m 200 £201m +0.5% Dividend paid (£m) 200 £183m £188m +2.7%* Total employee pay expenditure (£m) +9.4% 100 160 120 80 40 0 2016 2017 160 120 80 40 0 * £83.2m £91.0m 75 50 25 0 2016 2017 Increase due to dividend per share of 14.0p (2016: 13.7p). 2016 2017 The average number of staff employed by the Group during the ﬁnancial year to 31 December 2017 was 2,603 (2016: 2,550). Chairman and Non-Executive Director fees for 2018 § The Chairman receives a fee of £275,000 per annum. The basic non-executive director fee is £59,000 per annum. The Senior Independent Director receives an additional fee of £10,000 per annum. Committee Chairmen receive £15,000 per annum, and Committee members receive £5,000 per annum. Fees were last increased in April 2015 and will remain unchanged in 2018. Additional fees may be paid to Non-Executive Directors on a per diem basis to reﬂect increased time commitment in certain limited circumstances, which will apply for time spent on the Hammerson transaction. John Whittaker does not receive a fee in respect of his position as Deputy Chairman and Non-Executive Director. The Board has authorised the payment of a management fee of £215,000 per annum to Peel Management Limited for the provision by Peel of a Non-Executive Director and an Alternate Director and other management and advisory services, together with reasonable costs and out-of-pocket expenses. This payment is disclosed in the related party transactions note on page 155. Remuneration Committee membership in 2017 The principal responsibilities of the Committee, which take full account of the recommendations contained within the Code, include: — determining the remuneration policy for the Company’s Executive Directors and senior executives — determining individual remuneration packages for the Chairman of the Board, Executive Directors and senior executives — setting appropriately stretching and achievable targets for the Company’s incentive schemes in order to motivate executives to deliver high levels of performance in the interests of our shareholders, customers and employees — overseeing any signiﬁcant changes to remuneration policy for the wider employee population The full duties and responsibilities of the Committee are set out in its terms of reference which are available on the Company’s website, intu.co.uk. The Remuneration Committee currently comprises three independent Non- Executive Directors. Throughout the year the Committee consisted of Louise Patten and Adèle Anderson. Andrew Huntley retired on 3 May 2017 and Rakhi Goss- Custard was appointed to the Committee on 3 May 2017. The Chairman of the Board, Chief Executive, Company Secretary, HR Director and on occasion Chief Financial Officer are invited to attend Committee meetings to contribute to the Committee in its deliberations. However, no individual is present when his or her remuneration is being determined. The Remuneration Committee met a total of 6 times in 2017. A summary of attendance is set out on page 78. Advisers to the Committee Deloitte LLP was appointed as the Committee’s independent remuneration adviser in October 2013, following a competitive tender process. During the year, Deloitte provided advice on remuneration governance developments, corporate reporting and investor engagement, market data and other remuneration matters that materially assisted the Committee. Directors’ remuneration report Directors’ remuneration report 91 Representatives from Deloitte also attended Committee meetings during the year. The fees paid to Deloitte in respect of this work in 2017 totalled £83,950. During the year Deloitte also provided to the Group tax compliance and advisory services, share scheme advice and ﬁnancial advisory planning services in relation to the UK-based properties. Deloitte is a founding member of the Remuneration Consultants Group, and adheres to its code of conduct. Deloitte was appointed directly by the Committee and the Committee is satisﬁed that the advice received was objective and independent. The Committee also makes use of various published surveys to help determine appropriate remuneration levels. On behalf of the Board Louise Patten Chairman of the Remuneration Committee 22 February 2018 G o v e r n a n c e Policy table extract from the Directors’ remuneration policy approved by shareholders on 3 May 2017 A full copy of our Directors’ remuneration policy, binding for three years from May 2017, is included in the 2016 annual report (starting on page 88), which can be found on the Company’s website, at intugroup.co.uk/en/investors/intu-annual-report-2016/. The Directors’ remuneration policy was approved by 99.5 per cent of shareholders at the 2017 annual general meeting. Element and link to strategy Operation Maximum potential value Performance metrics Executive Directors Base salary To provide an appropriately competitive level of base pay to attract and retain talent. None. Base salary increases may be applied, taking into account the factors considered as part of the annual review. There is no maximum increase or opportunity. For new appointments salaries may be set at a lower level. In such cases, there may be scope for higher than usual salary increases in the ﬁrst three years as the individual progresses in the role. Reviewed annually. Salary levels take account of: — Size and nature of the responsibilities of each role — Market pay levels for the role — Increases for the rest of the Group — The executive’s experience — Changes to the size and complexity of the Group — Implications for total remuneration — Overall affordability — Individual and Company performance The Committee may award an out-of-cycle increase if it considers it appropriate. Pension To help provide for an appropriate retirement beneﬁt. The Company operates an approved deﬁned contribution pension arrangement. Company pension contribution (or cash alternative) is up to 24 per cent of base salary. None. Other beneﬁts To provide an appropriately competitive level of beneﬁts. A cash alternative may be offered in certain circumstances, for example where HMRC statutory limits have been reached. The Chief Executive receives an additional 6 per cent of salary in recognition of the additional value of the beneﬁt foregone on the closure of the deﬁned beneﬁt scheme. This amount was actuarially determined to be cost-neutral to the Company. Beneﬁts include a car allowance, private medical insurance, life assurance and long-term sickness insurance. Other beneﬁts may be provided if the Committee considers it appropriate. In the event that an Executive Director is required by the Group to relocate, beneﬁts may include, but are not limited to, relocation allowance and housing allowance. Car allowance of up to £18,000 per annum. None. The cost of insurance beneﬁts may vary from year to year depending on the individual’s circumstances. There is no overall maximum beneﬁt value but the Committee aims to ensure that the total value of beneﬁts remains proportionate. 92 intu properties plc Annual report 2017 Directors’ remuneration report continued Element and link to strategy Operation Maximum potential value Performance metrics Executive Directors (continued) Short-term incentive To align annual reward with annual performance and to support retention and alignment with shareholders’ interests through signiﬁcant deferral of bonus into shares. Long-term incentives To reward good long-term decisions which help grow the value of intu over a three to ﬁve-year horizon and support the retention of critical executives. Maximum annual opportunity of 120 per cent of salary. intu operates a short-term incentive arrangement with a maximum individual opportunity. A proportion of any earned bonus is normally deferred in intu shares, vesting over two years and three years, subject to continued employment. The Committee awards dividend equivalents in respect of dividends over the deferral period which may assume reinvestment on a cumulative basis. The Committee has discretion to apply malus to unvested deferred bonus awards in certain circumstances and annual bonus payments may be subject to clawback. intu operates a PSP, which was approved by shareholders at the 2013 AGM. Normal maximum grant size of 250 per cent of salary per annum. In exceptional circumstances opportunity of up to 375 per cent of salary. The intention is that this ﬂexibility would only be contemplated in recruitment circumstances. Grants are made to eligible employees at the discretion of the Committee. Awards can be made as performance shares, nil-cost options or jointly owned equity, and vest one-third, one-third, one-third after three, four and ﬁve years respectively. The Committee awards dividend equivalents in respect of dividends over the vesting period, which may assume reinvestment on a cumulative basis. The Committee has discretion to apply malus and clawback to awards in certain circumstances. Executives’ performance is measured relative to targets in key ﬁnancial, operational and strategic objectives in the year. The measures selected and their weightings vary each year according to the strategic priorities, however at least two thirds will be based on Group ﬁnancial measures or quantitative reported key performance indicators. Entry award level for ﬁnancial measures is normally between 0 and 25 per cent of maximum. Long-term incentive performance conditions are reviewed on an annual basis, and are chosen to be aligned with the long-term success of the business. The intention is that measures will be one or more of TSR, total return/NAV growth, EPS growth, relative total property return or return on capital. For 2017, awards will be based — 50 per cent on relative TSR — 50 per cent on total return (NAV growth plus dividends) If the Committee considers that the level of vesting based on the extent to which the performance conditions have been satisﬁed is not a fair reﬂection of underlying ﬁnancial performance, the Committee may adjust the level of vesting (upwards or downwards) accordingly. For the current performance measures this applies to the TSR portion only. Entry vesting is 25 per cent of maximum. All employee share plans To align interests of employees with intu’s performance. Executive Directors may participate in HMRC approved share incentive plans on the same basis as all employees. Participants can contribute up to the relevant HMRC limit. None. Legacy share awards Payments can also be made to Executive Directors under the legacy share option plan and equivalent jointly owned equity arrangements, which were the predecessor arrangements to the current PSP and were approved by shareholders in 1999. Under this plan, market value share option grants were made, with vesting based on EPS growth. It is not intended that this plan will be used to grant any future awards to the Executive Directors. Directors’ remuneration report 93 G o v e r n a n c e Element and link to strategy Operation Performance metrics Non-Executive Directors Fees To remunerate Non-Executive Directors. Independent Non-Executive Directors The Chairman’s fees are determined by the Remuneration Committee. None. The Non-Executive Directors’ fees are determined by the Board. The level of fees takes into account the time commitment, responsibilities, market levels and the skills and experience required. Non-Executive Directors normally receive a basic fee and an additional fee for speciﬁc Board responsibilities, including membership and chairmanship of committees. The Chairman is entitled to receive certain beneﬁts in addition to fees. Additional fees may be paid to Non-Executive Directors on a per diem basis to reﬂect increased time commitment in certain limited circumstances. Expenses incurred in the performance of non-executive duties for the Company may be reimbursed or paid for directly by the Company, as appropriate, including any tax due on the expenses. Non-Executive Directors do not currently receive any beneﬁts however these may be provided in the future if in the view of the Board this was considered appropriate. Other Non-Executive Directors In addition to the above, in certain circumstances Non-Executive Directors (other than those deemed to be independent) may receive a fee in relation to consultancy services (including Alternate Directors). Such fees may be provided directly to the Director or, in certain circumstances, paid to a third party company under a consultancy services agreement. Such agreements may provide for the payment of an annual fee and reimbursement of expenses. Such an agreement is currently in place with the Peel Group for the provision of Non-Executive Director services (including Alternative Director services). None. 94 intu properties plc Annual report 2017 Directors’ report The Directors present their annual report and the audited ﬁnancial statements of the Group and Company for the year ended 31 December 2017. Pages 2 to 95 inclusive of this annual report comprise the Directors’ report that has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that report will be subject to the limitations and restrictions provided by such law. Use of ﬁnancial Instruments The ﬁnancial review on pages 48 to 53, accounting policies on pages 112 to 116 and note 28 on pages 137 to 143 contain information on the use of ﬁnancial instruments. Dividends The Directors declared an interim ordinary dividend of 4.6 pence (2016: 4.6 pence) per share on 27 July 2017, which was paid on 21 November 2017, and have recommended a ﬁnal dividend for 2017 of 9.4 pence per share (2016: 9.4 pence). Share capital and control of the Company Details of the Company’s share capital including changes during the year in the issued share capital and details of the rights attaching to the Company’s ordinary shares are set out in note 30 on pages 144 and 145. No shareholder holds securities carrying special rights with regard to control of the Company. Shares held by the Company’s employee share ownership plan rank pari passu with the shares in issue and have no special rights, but voting rights and rights of acceptance of any offer relating to the shares rest with the plan’s Trustee and are not exercisable by the employees. There are no restrictions on voting rights or any arrangements by which, with the Company’s co-operation, ﬁnancial rights are held by a person other than the shareholder, or any agreements between shareholders known to the Company which may result in restrictions on the transfer of shares or on voting rights. amended and restated on 19 February 2010, 18 November 2011 and 30 October 2014) between, among others, the Company and HSBC Bank PLC (as ‘Agent’) on a change of control, if directed by a lender, the Agent may by notice to the Company cancel the commitment of that lender and declare the participation of that lender in all outstanding loans, together with accrued interest and all other amounts accrued and owing to that lender under the ﬁnance documents, immediately due and payable. Under the terms and conditions of (i) £160.4 million of 2.5 per cent Guaranteed Convertible Bonds issued on 4 October 2012 by Intu (Jersey) Limited and (ii) £375 million of 2.875 per cent Guaranteed Convertible Bonds issued on 1 November 2016 by Intu (Jersey) 2 Limited, each of which are guaranteed by the Company, on a change of control of the Company bondholders would have a right for a limited period of 60 days to exercise their exchange rights at an enhanced exchange price (ie lower than the prevailing exchange price). In addition, bondholders would become entitled for a limited period of 60 days to require the relevant issue to redeem their bonds at their principal amount, together with accrued and unpaid interest. Under a £351.75 million term facility agreement dated 19 March 2013 (as amended and restated on 19 June 2015) between, among others, Intu (SGS) Finco Limited (‘SGS Finco’) and HSBC Bank plc (as ‘Facility Agent’), on a change of control of the Company, if directed by a lender, the Facility Agent may by notice to SGS Finco declare all outstanding loans of that lender, together with accrued interest and all other amounts accrued and owing to that lender under the ﬁnance documents, immediately due and payable. The Company is not party to any other signiﬁcant agreements that would take effect, alter or terminate following a change of control of the Company. Under a £600 million revolving-facility agreement dated 25 February 2009 (as The Company does not have any speciﬁc agreements with any Executive Director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company share schemes may cause options and awards outstanding under such schemes to vest on a takeover. Further details can be found in the Directors’ remuneration report on page 85. The terms of appointment of the non-executive directors currently provide that in the event of change of control, these directors will be compensated for any additional time commitment in certain limited circumstances, to be calculated on a per diem basis. Internal control The statement on corporate governance on pages 60 to 95 includes the Board’s assessment following a review of internal controls and consideration of the FRC Guidance on risk management, internal control and related ﬁnancial and business reporting. Directors The Directors of intu who held office during the year were as follows: Chairman Patrick Burgess1 John Strachan2 Deputy Chairman John Whittaker3 Executive David Fischel Matthew Roberts Non-Executive Adèle Anderson Richard Gordon3 Andrew Huntley1 Rakhi Goss-Custard Louise Patten Andrew Strang 1 Patrick Burgess and Andrew Huntley stepped down on 3 May 2017. 2 John Strachan was appointed Chairman on 3 May 2017. 3 John Whittaker and Richard Gordon have appointed Steven Underwood and Raymond Fine respectively as their alternates under the terms of the Company’s Articles of Association. Pursuant to the Articles of Association of the Company, the Company has indemniﬁed the Directors to the full extent allowed by law. The Company maintains directors’ and officers’ insurance which is reviewed annually. Additional information relating to the Directors can be found in note 43 on pages 158 and 159 on Directors’ interests, in the governance section on pages 60 to 77, and in the Directors’ remuneration report on pages 78 to 93. Directors’ remuneration report 95 G o v e r n a n c e The powers of the Directors are determined by UK legislation and the Articles of Association of the Company, together with any speciﬁc authorities that may be given to the Directors by shareholders from time to time, such as the power to allot shares and the power to make market purchases of the Company’s shares which are described in note 30 on page 145. Articles of Association The rules governing the appointment and replacement of Directors are contained in the Company’s Articles of Association. Changes to the Articles of Association must be approved by shareholders in accordance with the legislation in force from time to time. Substantial shareholdings The table at the foot of the page shows the holdings of major shareholders in accordance with the Disclosure Guidance and Transparency Rules of the FCA at 31 December 2017 and 20 February 2018. Employees intu actively encourages employee involvement and consultation and places emphasis on keeping its employees informed of the Group’s activities and ﬁnancial performance by such means as employee brieﬁngs and publication to all staff of relevant information and corporate announcements. Details of the intu all-employee survey are provided in the Our people section on pages 54 to 56. The annual bonus plan arrangements help develop employees’ interest in the Company’s performance; full details of these arrangements are given in the Directors’ remuneration report on pages 78 to 93. Note 40 on pages 156 to 158 contains details of conditional awards of shares under the annual bonus scheme and bonus shares currently outstanding. intu operates a non-discriminatory employment policy and full and fair consideration is given to applications for employment from people with disabilities or other protected characteristics under the Equality Act where they have the appropriate skills and abilities, and to the continued employment of staff who become disabled. intu encourages the continuous development and training of its employees and the provision of equal opportunities for the training and career development of disabled employees and those with protected characteristics. Further information relating to employees is given on pages 54 to 56 and in note 7 on page 118. The Group provides retirement beneﬁts for the majority of its employees. Details of the Group pension arrangements are set out in note 41 on page 158. The environment We have an independent corporate responsibility (CR) strategy and details of our policies and the Group’s aims alongside the latest full version of our annual CR report are to be found on the Company’s website. An overview of the Group’s CR activity, which includes disclosures relating to greenhouse gas emissions, is on pages 57 to 59, and a summary booklet is also available for download from the website or on request from the Company Secretary’s office. The Company recognises the importance Shareholder The Peel Group Coronation Asset Management (Pty) Limited The family interests of Sir Donald Gordon Public Investment Corporation Black Rock, Inc. At 31 December 2017 At 20 February 2018 Number of shares notiﬁed % interest in share capital Number of shares notiﬁed % interest in share capital 368,635,097 27.21 368,635,097 27.21 276,688,604 20.42 278,891,219 20.58 110,336,261 82,471,068 69,702,816 8.20 6.09 5.14 110,336,261 82,471,068 68,566,906 8.20 6.09 5.06 of minimising the adverse impact on the environment of its operations and the obligation to carefully manage energy and water consumption and waste recycling. The Company strives continuously to improve its environmental performance. The environmental management system and associated environmental policy and guide are regularly reviewed to ensure that the Company maintains its commitment to environmental matters. Additional disclosures For the purpose of LR 9.8.4CR, the only information required to be disclosed by LR 9.8.4R relates to sub-section (1) thereof (interest capitalised) where the amount is £4.9 million (2016: £2.1 million) (see note 9). All other sub-sections of LR 9.8.4R are not applicable. Directors’ disclosure of information to the auditors So far as the Directors are aware, there is no relevant audit information of which the auditors are unaware and each Director has taken all reasonable steps to make himself or herself aware of any relevant audit information and to establish that the auditors are aware of that information. Auditors The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution seeking to reappoint them will be proposed at the forthcoming annual general meeting. Annual general meeting The notice convening the 2018 annual general meeting of the Company will be published separately and will be available on the Company’s website and distributed to those shareholders who have elected to receive hard copies of shareholder information. By order of the Board Susan Marsden Company Secretary 22 February 2018 96 intu properties plc Annual report 2017 Statement of Directors’ responsibilities The Directors are responsible for preparing the annual report, the Directors’ remuneration report 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’s) as adopted by the European Union. Under company law the Directors must not approve the ﬁnancial statements unless they are satisﬁed that they give a true and fair view of the state of affairs of the Group and the Company and of the proﬁt or loss of the Group and Company for that period. In preparing these ﬁnancial statements, the Directors are required to: (a) select suitable accounting policies and then apply them consistently (b) make judgements and accounting estimates that are reasonable and prudent (c) 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 (d) 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 Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group ﬁnancial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. The Directors consider that the annual report and ﬁnancial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s position and performance, business model and strategy. Each of the Directors, whose names and functions are listed in the governance section on pages 62 and 63 conﬁrm that, to the best of their knowledge: (a) the Group ﬁnancial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt of the Group (b) 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 Signed on behalf of the Board on 22 February 2018 David Fischel Chief Executive Matthew Roberts Chief Financial Officer 97 Financial statements Independent auditors’ report Consolidated income statement 98 105 Consolidated statement of comprehensive income 106 Balance sheets Statements of changes in equity Statements of cash ﬂows Notes to the ﬁnancial statements 107 108 111 112 i F n a n c i a l s t a t e m e n t s 98 98 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Independent auditors’ report to the members of intu properties plc Report on the audit of the financial statements Opinion In our opinion, intu properties plc’s Group financial statements and Company financial statements (the “financial statements”): —(cid:3)give a true and fair view of the state of the Group's and of the Company's affairs as at 31 December 2017 and of the Group's profit and the Group's and the Company's cash flows for the year then ended; —(cid:3)have been properly prepared in accordance with 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 —(cid:3)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 Annual Report, which comprise: the Group and Company balance sheets as at 31 December 2017; the Group consolidated income statement and consolidated statement of comprehensive income, the Group and Company statements of cash flows, and the Group and Company 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 8 to the financial statements, we have provided no non-audit services to the Group or the Company in the period from 1 January 2017 to 31 December 2017. Our audit approach Context During the year to 31 December 2017, there have been no significant changes to business operations, investment property market yields, or to accounting standards relevant to the Group. On 6 December 2017, Hammerson plc made an all-share offer to acquire the entire share capital of the Company. The most significant transactional activity was in relation to the acquisition and subsequent disposal of a 50% interest in Madrid Xanadú and the agreement to dispose of a 50% interest in intu Chapelfield. Our audit approach is largely consistent with the prior year. Overview (cid:3) Materiality Audit scope Key audit matters —(cid:3)Overall Group materiality: £107.9m (2016: £103.6m), based on 1% of Total Assets. —(cid:3)Overall Company materiality: £38.8m (2016: £39.2m), based on 1% of Total Assets. —(cid:3)The Group and Company financial statements are produced by the Group’s central finance department using a single, consolidated general ledger, and the whole business was subject to the same audit scope. —(cid:3)Valuation of investment and development property. —(cid:3)intu Costa del Sol development property. —(cid:3)Acquisition of Madrid Xanadú and subsequent 50% disposal. —(cid:3)intu Chapelfield – Held for sale (50% disposal). 99 99 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 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. 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. We designed audit procedures at Group 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 and the UK tax legislation as applicable to a REIT. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with the regulators, enquiries of management, and review of internal audit reports in so far as they related to the financial statements. 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.p 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. Key audit matter Valuation of Investment and Development Property Refer to page 71 (Audit committee report), pages 114 to 115 (Accounting policies), page 112 (significant use of estimates and assumptions) and note 14 to the financial statements. 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 a material change, warrants specific audit focus in this area. The Group’s Investment and Development Properties are shopping centres and development projects and comprise the majority of the assets in the Group balance sheet, their carrying value amounting to £9.18 billion. The valuation of the Group’s property portfolio is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental revenues for that particular property. Moreover, in 2017 there were relatively few relevant UK shopping centre transactions against which to compare yield assessments. The valuations were carried out by third party valuers, CBRE, Knight Frank, Cushman & Wakefield and Jones Lang LaSalle (the “Valuers”). The Valuers were engaged by the Directors, and performed their work in accordance with the Royal Institution of Chartered Surveyors (“RICS”) Valuation – Global Standards 2017. The Valuers used by the Group are well-known firms, with considerable experience of the market in which the Group operates. Investment Property – In determining a property’s valuation the Valuers take into account property specific current information such as the current tenancy agreements and rental income attached to the asset. They then apply other assumptions such as yield and current (cid:3) (cid:3) How our audit addressed the key audit matter Assessing the Valuers’ expertise and objectivity We assessed the Valuers’ qualifications and expertise and read their terms of engagement with the Group to determine whether there were any matters that might have affected their objectivity or may have imposed scope limitations upon their work. We also considered other engagements which might exist between the Group and the Valuers. We found no evidence to suggest that the objectivity of any Valuer in their performance of the valuations was compromised. Data provided to the Valuers – Investment Property We carried out procedures, on a sample basis, to test whether property specific current information supplied to the Valuers by management reflected the underlying property records held by the Group and which have been tested during our audit. Assumptions and estimates used by the Valuers – Investment Property We read the valuation reports for all properties and attended meetings with each of the Valuers. Our testing also involved the use of our internal real estate valuation experts who are qualified chartered surveyors. We confirmed that the valuation approach for each property was in accordance with RICS and suitable for use in determining the carrying value in the Group balance sheet. Our work focused on the largest properties in the portfolio and those properties where the assumptions used and/or year-on-year capital value movement suggested a possible outlier versus market data for the shopping centre sector. We compared the investment yields used by the Valuers to an estimated range of expected yields, determined via reference to published benchmarks. Whilst there was little directly 100 100 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Independent auditors’ report to the members of intu properties plc continued Key audit matter market rent, which are influenced by prevailing market yields and comparable market transactions, to arrive at the final valuation. Due to the unique nature of each shopping centre, the assumptions to be applied are determined having regard to the individual property characteristics at a granular, unit-by-unit level, as well as considering the qualities of the shopping centre as a whole. Development Property – Development properties 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 including a market based profit margin providing a return on development risk). intu Costa del Sol development Refer to page 71 (Audit committee report), pages 114 to 115 (Accounting policies), page 112 (significant use of estimates and assumptions) and note 14 to the financial statements. Land at Costa del Sol (‘the project’), which was previously held at cost as a close approximation of fair value, has been valued at 31 December 2017 on a development appraisal basis using an assumption of obtaining final planning permissions for the project. Further, upon achievement of planning permission, intu’s development partner, Eurofund, is due an allocation of equity as a consideration for services provided in relation to this development project. This has now been recognised as an equity settled share-based payment crediting equity of the Group. On settlement of the transaction, the credit to equity is expected to be transferred to non-controlling interests. Acquisition of Madrid Xanadú and subsequent 50% disposal Refer to page 71 (Audit committee report), pages 113 and 116 (Accounting policies), page 112 (significant areas of judgement) and notes 16, 33 and 34 to the financial statements. On 10 March 2017, intu acquired the Madrid Xanadú shopping centre from Ivanhoe Cambridge Inc. The acquisition was accounted for as a business combination. How our audit addressed the key audit matter comparable transactional based evidence, the disposals of 50% interests in intu Chapelfield and Madrid Xanadú, which transacted at amounts close to prior valuations, provided support for the investment yields being used. We also considered the reasonableness of other assumptions that are not so readily comparable to published benchmarks, such as Estimated Rental Value, void rates and rent-free periods. Finally, we evaluated year-on-year movements in capital value with reference to published benchmarks. Where assumptions were outside the expected range or were otherwise deemed unusual, and/or there were unexpected movements, we undertook further investigations and, when necessary, held further discussions with the Valuers. It was evident from our interaction with management and the Valuers and our review of the valuation reports that close attention had been paid to each property’s individual characteristics at a granular, unit-by- unit level, as well as considering the overall quality, geographic location and desirability of the asset as a whole. Development Property In 2017, the principal development property was intu Costa del Sol. In relation to this property the Group used external expert reports to assist them in arriving at estimated rental cashflows (used for income capitalisation) and construction costs assumptions for the development appraisal. We carried out procedures, on a sample basis, to test whether this property specific information supplied to the Valuers by the Group was reasonable and in line with the external expert reports. We also considered the reasonableness of market assumptions such as investment yields and market based profit margin, involving our internal real estate valuation experts. Overall findings Our procedures indicated that the estimates and assumptions used were appropriate in the context of the Group’s investment and development property portfolio and reflected recent market transactions and the market circumstances as at year end. In respect of the assumption in relation to the receipt of the final planning permission, we reviewed the approved general planning permission as well as legal advice obtained by the Group, which sets out the status of planning permissions. Based on this legal advice, discussions held with management and the Valuers, we concur that planning status is now sufficiently advanced for a development appraisal valuation methodology to be appropriate. In respect of the equity allocation, we reviewed supporting evidence setting out arrangements with Eurofund. As it will be settled in equity of a subsidiary of the Group it is deemed appropriate that the transaction is treated as an equity settled share-based transaction under IFRS 2, ‘Share-based payments’. Given the Group currently owns 100% of the equity of the subsidiary, it is appropriate to not recognise non-controlling interests in the current financial year. With respect to the acquisition, we inspected the purchase agreements and assessed whether the classification as a business combination and treatment of the various aspects of the transaction were in accordance with IFRS 3 ‘Business Combinations’. We carried out procedures to assess the fair value of the consideration and of the assets and liabilities being acquired, the most significant being the investment property – for which we reviewed the Valuers’ report valuing the property on the date of acquisition involving our internal real estate valuation experts. 101 101 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Key audit matter On 26 May 2017, intu exchanged contracts with TH Real Estate, on behalf of its European Cities Fund, to form a 50/50 joint venture in relation to Madrid Xanadú. On 31 July 2017, following receipt of the regulatory approvals, the transaction completed. intu Chapelfield – Held for sale (50% disposal) Refer to page 71 (Audit committee report), page 116 (Accounting policies), page 112 (significant areas of judgement) and note 35 to the financial statements. In November 2017, intu announced the disposal of a 50% interest in intu Chapelfield creating a joint venture with LaSalle Investment Management (on behalf of Greater Manchester Pension Fund and West Yorkshire Pension Fund – ‘the purchaser’). As at 31 December 2017, contracts had been exchanged, but the completion of the transaction was subject to EU merger clearance. The assets and liabilities relating to intu Chapelfield have therefore been classified as ‘Held for sale’. How our audit addressed the key audit matter With respect to the disposal, we read the sale and purchase agreement and other documents related to the sale to determine whether it was appropriate to account for Madrid Xanadú as a joint venture. No issues arose from these procedures – the shareholders’ agreement grants each party an equal number of board members all with equal voting rights and, because all decisions about the relevant activities of the business require the consent of both parties, Madrid Xanadú was deemed to be subject to joint control. We also considered the financial statement disclosures in respect of the initial acquisition and the subsequent part disposal and concluded that they are in accordance with applicable accounting standards (IFRS 3 ‘Business combinations’ and IFRS 12 ‘Disclosure of interests in other entities’). We have inspected the agreement entered into with the purchaser and note the completion was subject to the necessary EU merger clearance which has subsequently been received on 11 January 2018. The classification of 100% of the disposal group as ‘Held for sale’ in the 31 December 2017 Group Balance Sheet is consistent with the requirements of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. We determined that there were no key audit matters applicable to the Company to communicate in our report. 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. 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. Although the Group has some interests in shopping centre operations outside the UK and the Group is structured as two operating segments, it operates a single reporting process with a centralised accounting function, therefore the whole business was subject to the same audit scope. The Group and Company financial statements are produced using numbers which are maintained on a single, consolidated trial balance, by the Group’s finance department. The majority of the underlying accounting records are maintained on the Group’s single general ledger. For Manchester Arndale, Cribbs Causeway, Centaurus Retail Park and St David’s, Cardiff rental income and property expense numbers are submitted quarterly by external property managers to the Group’s finance department, who then review and enter the numbers onto the Group’s general ledger. We perform tests of controls over the review of the quarterly submissions and entry onto the Group’s general ledger, and tests of details over the numbers within those submissions. Quarterly submissions are also submitted to the Group’s finance department for intu Asturias, Puerto Venecia and Madrid Xanadú, by the intu Spain finance team. We carry out controls testing over these submissions in the same manner as for the UK submissions as above. We instructed the PwC Spain audit team to perform specified substantive procedures on the submission packs prepared by intu Spain, and held regular discussions with PwC Spain throughout the planning and execution phases of the audit. We assessed the findings of the work performed by them in order to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. 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. 102 102 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Independent auditors’ report to the members of intu properties plc continued Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Materiality level £107.9m (2016: £103.6m). £9.8m (2016: £9.7m). £38.8m (2016: £39.2m). Overall materiality Specific materiality Overall materiality Group financial statements Company financial statements How we determined it 1% of Total Assets. Rationale for benchmark applied In arriving at this judgement we have had regard to the carrying value of the Group’s assets, acknowledging that the primary measurement attribute of the Group is the carrying value of investment property. This represents a consistent year-on-year basis for determining materiality. 5% of Underlying Earnings Before Tax and Associates. We have applied this lower materiality to line items that make up underlying earnings before tax and associates, plus other finance costs, on the basis that they merit more detailed audit work than the overall materiality level would require, given heightened focus from users of the accounts. We have used underlying earnings before tax and associates as a more consistent benchmark, which is not impacted by valuation movements. 1% of Total Assets. In arriving at this judgement we have had regard to the carrying value of the Company’s assets, acknowledging that the primary measurement attribute of the Company is the carrying value of its investment in subsidiaries. This represents a consistent year-on-year basis for determining materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £10.8 million (Group audit) (2016: £10.3 million) and £3.8m (Company audit) (2016: £3.9m) 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: Reporting obligation Outcome 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 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. 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. We have nothing to report. 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. With respect to the Strategic Report, Directors’ Report and Corporate Governance Statement, 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). 103 103 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 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 2017 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) Corporate Governance Statement In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages 60 to 96) about internal controls and risk management systems in relation to financial reporting processes and about share capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA (“DTR”) 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 this information. (CA06) In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages 60 to 96) with respect to the Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06) We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. (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: —(cid:3)The Directors’ confirmation on pages 38 and 39 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. —(cid:3)The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. —(cid:3)The Directors’ explanation on page 70 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) Other Code Provisions We have nothing to report in respect of our responsibility to report when: —(cid:3)The statement given by the Directors, on page 96, 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. —(cid:3)The section of the Annual Report on pages 71 to 75 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. —(cid:3)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 104 104 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Independent auditors’ report to the members of intu properties plc continued 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 96, 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. 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: —(cid:3)we have not received all the information and explanations we require for our audit; or —(cid:3)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 —(cid:3)certain disclosures of Directors’ remuneration specified by law are not made; or —(cid:3)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 On its formation, we were appointed as auditors of Liberty International plc (the Company's predecessor) for the year ended 31 December 1999 and subsequent financial periods. Our predecessor firm were auditors of the pre-existing Group, prior to group restructurings and renamings, for the period ended 31 December 1980 and subsequent financial periods. Considering this, the period of total uninterrupted engagement with the Group is at least 37 years, covering the period ended 31 December 1980 to the year ended 31 December 2017. Ranjan Sriskandan (Senior Statutory Auditor) For and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 22 February 2018 Consolidated income statement for the year ended 31 December 2017 (cid:3) Revenue Net rental income Net other income Revaluation of investment and development property Gain on acquisition of businesses Loss on disposal of subsidiaries Gain on sale of other investments Administration expenses – ongoing Administration expenses – exceptional Operating profit Finance costs Finance income Other finance costs Change in fair value of financial instruments Net finance costs Profit before tax, joint ventures and associates Share of post-tax profit of joint ventures Share of post-tax profit of associates Profit before tax Current tax Deferred tax Taxation Profit for the year Attributable to: Owners of intu properties plc Non-controlling interests Basic earnings per share Diluted earnings per share i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 105 105 2016 £m 594.3 406.1 0.6 (78.0) 34.6 (0.3) 74.1 (37.8) (2.5) 396.8 (202.9) 14.9 (37.9) (16.3) (242.2) 154.6 32.1 1.6 188.3 – (16.5) (16.5) 171.8 182.7 (10.9) 171.8 13.7p 11.2p Notes 3 3 14 33 4 19 5 6 9 9 9 9 9 16 18 10 10 10 12 12 2017 £m 616.0 423.4 3.0 30.8 – (1.8) – (40.9) (5.9) 408.6 (213.9) 12.6 (38.9) 22.0 (218.2) 190.4 35.5 1.3 227.2 0.1 (24.0) (23.9) 203.3 216.7 (13.4) 203.3 16.1p 15.0p Details of underlying earnings are presented in the underlying profit statement on page 169. Underlying earnings per share are shown in note 12(c). 106 106 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Consolidated statement of comprehensive income for the year ended 31 December 2017 (cid:3) Profit for the year Other comprehensive income Items that may be reclassified subsequently to the income statement: Revaluation of other investments Exchange differences Tax relating to components of other comprehensive income Total items that may be reclassified subsequently to the income statement Transferred to the income statement: On sale of other investments Tax on sale of other investments Total transferred to the income statement Other comprehensive income/(loss) for the year Total comprehensive income for the year Attributable to: Owners of intu properties plc Non-controlling interests Notes 19 10 19 10 2017 £m 203.3 (0.2) 16.9 0.1 16.8 – – – 16.8 220.1 233.5 (13.4) 220.1 2016 £m 171.8 0.4 31.6 (0.2) 31.8 (77.0) 16.7 (60.3) (28.5) 143.3 154.2 (10.9) 143.3 Balance sheets at 31 December 2017 (cid:3) Non-current assets Investment and development property Plant and equipment Investment in Group companies Investment in joint ventures Investment in associates Other investments Goodwill Derivative financial instruments Trade and other receivables Current assets Assets classified as held for sale Trade and other receivables Cash and cash equivalents Total assets Current liabilities Liabilities associated with assets classified as held for sale Trade and other payables Current tax liabilities Borrowings Derivative financial instruments Non-current liabilities Borrowings Derivative financial instruments Deferred tax liabilities Other payables Total liabilities Net assets Equity Share capital Share premium Treasury shares Other reserves Retained earnings Attributable to owners of intu properties plc Non-controlling interests Total equity Notes 14 15 16 18 19 22 20 35 20 21 35 23 24 22 24 22 29 30 30 31 32 107 107 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Group 2017 £m 9,179.4 12.2 – 735.5 64.8 16.8 4.0 0.3 102.5 Group 2016 £m Company 2017 £m Company 2016 £m 9,212.1 7.6 – 587.6 65.2 15.5 4.0 – 99.1 – 10.4 2,892.3 – – 6.0 2,820.9 – – – – – – – – – – – 10,115.5 9,991.1 2,902.7 2,826.9 – 1,095.0 0.9 1,095.9 3,922.8 – (704.7) (0.3) – – 309.1 141.9 228.0 679.0 – 123.4 254.7 378.1 – 980.2 0.8 981.0 10,794.5 10,369.2 3,883.7 (6.2) (288.5) (0.1) (186.7) (8.0) (489.5) – (281.0) (0.3) (142.4) (37.0) (460.7) – (573.7) – – (4.9) (578.6) (705.0) (4,811.1) (4,520.2) (233.8) (339.8) (23.7) (1.2) (340.7) – (1.2) (5,175.8) (4,862.1) (5,665.3) (5,322.8) (28.3) – – (262.1) (840.7) (10.0) (14.4) – – (24.4) (729.4) 5,129.2 5,046.4 3,043.0 3,193.4 677.5 1,327.4 (39.1) 361.1 2,748.1 5,075.0 54.2 5,129.2 677.5 1,327.4 (40.8) 344.3 2,670.4 4,978.8 67.6 5,046.4 677.5 1,327.4 (39.1) 61.4 1,015.8 3,043.0 – 3,043.0 677.5 1,327.4 (40.8) 61.4 1,167.9 3,193.4 – 3,193.4 A profit of £36.3 million is recorded in the financial statements of the Company in respect of the year (2016: loss of £67.1 million). No income statement or statement of comprehensive income is presented for the Company as permitted by Section 408 of the Companies Act 2006. These consolidated financial statements have been approved for issue by the Board of Directors on 22 February 2018. David Fischel Chief Executive Matthew Roberts Chief Financial Officer The notes on pages 112 to 159 form part of these consolidated financial statements. 108 108 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Statements of changes in equity for the year ended 31 December 2017 Group At 1 January 2017 Profit/(loss) for the year Other comprehensive income: Revaluation of other investments (note 19) Exchange differences Tax relating to components of other comprehensive income (note 10) Total comprehensive income for the year Dividends (note 11) Share-based payments (note 40) Other share related transaction (note 40) Acquisition of treasury shares Disposal of treasury shares Attributable to owners of intu properties plc Share capital £m Share premium £m Treasury shares £m Other reserves £m Retained earnings £m Non- controlling interests £m Total £m Total equity £m 677.5 1,327.4 (40.8) 344.3 2,670.4 4,978.8 67.6 5,046.4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (1.3) 3.0 1.7 – 216.7 216.7 (13.4) 203.3 (0.2) 16.9 0.1 16.8 – – – – – – – – – (0.2) 16.9 0.1 – – – (0.2) 16.9 0.1 216.7 233.5 (13.4) 220.1 (187.9) (187.9) 2.3 49.4 – (2.8) 2.3 49.4 (1.3) 0.2 (139.0) (137.3) – – – – – – (187.9) 2.3 49.4 (1.3) 0.2 (137.3) At 31 December 2017 677.5 1,327.4 (39.1) 361.1 2,748.1 5,075.0 54.2 5,129.2 109 109 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Attributable to owners of intu properties plc Share capital £m Share premium £m Treasury shares £m Other reserves £m Retained earnings £m Non- controlling interests £m Total £m Total equity £m 672.3 1,303.1 (43.3) 372.8 2,671.5 4,976.4 78.5 5,054.9 Group At 1 January 2016 Profit/(loss) for the year Other comprehensive income: Revaluation of other investments (note 19) Exchange differences Tax relating to components of other comprehensive income (note 10) Transferred to income statement on sale of other investments Total comprehensive income for the year – – – – – – – – – – – – Ordinary shares issued (note 30) 5.2 24.3 Dividends (note 11) Share-based payments (note 40) Acquisition of treasury shares Disposal of treasury shares – – – – – – – – 5.2 24.3 – – – – – – – – – (0.7) 3.2 2.5 – 182.7 182.7 (10.9) 171.8 0.4 31.6 16.5 (77.0) (28.5) – – – – – – – – – – 182.7 – 0.4 31.6 16.5 (77.0) 154.2 29.5 (182.5) (182.5) 1.9 – (3.2) 1.9 (0.7) – (183.8) (151.8) – – – – (10.9) – – – – – – 0.4 31.6 16.5 (77.0) 143.3 29.5 (182.5) 1.9 (0.7) – (151.8) At 31 December 2016 677.5 1,327.4 (40.8) 344.3 2,670.4 4,978.8 67.6 5,046.4 110 110 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Statements of changes in equity continued for the year ended 31 December 2017 Company At 1 January 2017 Profit for the year Total comprehensive income for the year Dividends (note 11) Share-based payments (note 40) Acquisition of treasury shares Disposal of treasury shares Attributable to owners of intu properties plc Share capital £m Share premium £m Treasury shares £m Other reserves £m Retained earnings £m Total equity £m 677.5 1,327.4 (40.8) 61.4 1,167.9 3,193.4 – – – – – – – – – – – – – – – – – – (1.3) 3.0 1.7 – – – – – – – 36.3 36.3 36.3 36.3 (187.9) (187.9) 2.3 – (2.8) 2.3 (1.3) 0.2 (188.4) (186.7) At 31 December 2017 677.5 1,327.4 (39.1) 61.4 1,015.8 3,043.0 Company At 1 January 2016 Loss for the year Total comprehensive loss for the year Ordinary shares issued (note 30) Dividends (note 11) Share-based payments (note 40) Acquisition of treasury shares Disposal of treasury shares Attributable to owners of intu properties plc Share capital £m Share premium £m Treasury shares £m Other reserves £m Retained earnings £m Total equity £m 672.3 1,303.1 (43.3) 61.4 1,418.8 3,412.3 – – 5.2 – – – – – – 24.3 – – – – 5.2 24.3 – – – – – (0.7) 3.2 2.5 – – – – – – – – (67.1) (67.1) – (67.1) (67.1) 29.5 (182.5) (182.5) 1.9 – (3.2) 1.9 (0.7) – (183.8) (151.8) At 31 December 2016 677.5 1,327.4 (40.8) 61.4 1,167.9 3,193.4 111 111 Statements of cash flows for the year ended 31 December 2017 Cash generated from operations Interest paid Interest received Taxation Cash flows from operating activities Cash flows from investing activities Purchase and development of property, plant and equipment Sale of property Acquisition of businesses net of cash acquired Cash transferred to assets classified as held for sale Sale of other investments Additions to other investments Additions to investment in subsidiaries Disposal of subsidiaries net of cash sold Investment of capital in joint ventures Loan advances to joint ventures Loan repayments by joint ventures Distributions from joint ventures Cash flows from investing activities Cash flows from financing activities Issue of ordinary shares Acquisition of treasury shares Sale of treasury shares Cash transferred from/(to) restricted accounts Borrowings drawn Borrowings repaid Equity dividends paid Cash flows from financing activities Effects of exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Notes 37 33 35 19 19 15 34 16 16 16 16 21 21 Group 2017 £m 365.6 (232.4) 7.6 0.1 Group 2016 £m 355.9 (233.0) 8.5 – Company 2017 £m 2.2 (22.8) – – Company 2016 £m 556.0 (20.8) – – 140.9 131.4 (20.6) 535.2 (189.5) 3.7 (446.7) (0.5) – (1.5) – 104.1 (0.7) (3.0) 14.8 1.2 (120.9) – (405.5) – 201.9 (14.1) – 80.5 – (1.2) 12.7 3.2 (6.9) (3.4) – – – – – – – – – – (4.4) (24.4) – – – – – – – – – – (518.1) (243.4) (11.3) (27.8) – (1.3) 0.2 0.1 1,199.2 (660.0) (188.0) 350.2 0.4 (26.6) 251.7 225.1 0.3 (0.7) – (0.8) 962.9 (720.4) (152.6) 88.7 1.4 (21.9) 273.6 251.7 – (1.3) 0.2 – 220.9 – (188.0) 31.8 – (0.1) 0.9 0.8 0.3 (0.7) – – – (353.8) (152.6) (506.8) – 0.6 0.3 0.9 112 112 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements 1 Accounting convention and basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), interpretations issued by the International Financial Reporting Standards Interpretations Committee and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of property, available-for-sale investments and certain other assets and liabilities that have been measured at fair value. A summary of the significant accounting policies applied is set out in note 2. These accounting policies are consistent with those applied in the last annual financial statements, as amended when relevant to reflect the adoption of new standards, amendments and interpretations which became effective in the year. These amendments have resulted in changes to financial statement disclosures. A number of standards and amendments to standards have been issued but are not yet effective for the current year. The most significant of these are set out below: —(cid:3)IFRS 9 Financial Instruments (effective from 1 January 2018) – The standard applies to classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting. The Group has completed its impact assessment of the standard in which the main areas of impact have been identified as impairment provisioning in respect of trade receivables and other financial assets as well as the accounting treatment on the derecognition of other investments. The impairment provisioning approach has been refined in accordance with the new accounting standard to reflect the expected collection of trade receivables; however, no material quantitative differences have been identified from the impairment provisioning in accordance with the previous accounting standard. In respect of other investments, the Group will make an irrevocable election to recognise movements in other investments through other comprehensive income, consistent with current accounting treatment. Under IFRS 9 on sale of other investments, any cumulative gains or losses are not reclassified to the income statement, but are transferred from other comprehensive income to retained earnings. No other changes to existing accounting treatments are required —(cid:3)IFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018) – The standard is applicable to service charge income and facilities management income, but excludes lease rental income arising from contracts with the Group's tenants. The Group has completed its impact assessment of the standard and assessed all significant revenue streams from which there were no changes to existing accounting treatments. The Group will continue to assess new transactions as they arise or as immaterial revenue streams become material —(cid:3)IFRS 16 Leases (effective 1 January 2019) – This standard does not significantly affect the current accounting for rental income earned. The Group holds a number of small operating leases as lessee which are affected by this standard; however, these are not material to the financial statements – significant estimates and judgements The preparation of financial statements in conformity with the Group’s accounting policies requires management to make judgements and use estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these judgements and estimates are based on management’s best knowledge of the amount, event or action, the actual result ultimately may differ from those judgements and estimates. – significant use of estimates and assumptions Valuation of investment and development property – See investment and development property accounting policy in note 2 as well as note 14 for details on estimates and assumptions used in the valuation process and sensitivities. Valuation of derivative financial instruments – See derivative financial instruments accounting policy in note 2 as well as note 28 for details on sensitivities of estimates and assumptions used. – significant areas of judgement Accounting for acquisitions – Management uses significant judgement to determine whether an acquisition of property should be accounted for as an asset acquisition or a business combination. See business combinations accounting policy in note 2 as well as further detail on judgements made in note 33. Assessing control over joint arrangements – Management uses significant judgement to assess control of joint arrangements (eg part disposals of subsidiaries). See basis of consolidation in note 2 as well as further detail on judgements made in note 34. Non-current assets and disposal groups held for sale – Management uses significant judgement to determine whether an asset in the process of being disposed of (including part disposals) should be classified as an asset held for sale. See assets held for sale accounting policy in note 2 as well as further detail on judgements made in note 35. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report on pages 6 to 59. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review on pages 48 to 53. In addition, note 28 includes the Group’s risk management objectives, details of its financial instruments and hedging activities, its exposure to liquidity risk and details of its capital structure. 113 113 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 1 Accounting convention and basis of preparation (continued) The Group prepares regular forecasts and projections which include sensitivity analysis taking into account a number of downside risks to the forecast including reasonably possible changes in trading performance and asset values and assesses the potential impact of these on the Group’s liquidity position and available resources. In preparing the most recent projections, factors taken into account include £278.2 million of cash (including the Group’s share of cash in joint ventures of £50.2 million) and £406.9 million of undrawn facilities at 31 December 2017. The Group’s weighted-average debt maturity of 6.6 years and the relatively long-term and stable nature of the cash flows receivable under tenant leases were also factored into the forecasts. After reviewing the most recent projections and the sensitivity analysis, the Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing the Group’s financial statements. 2 Accounting policies – Group and Company Basis of consolidation The consolidated financial information includes the Company and its subsidiaries and their interests in joint arrangements and associates. All intra-group transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. – subsidiaries A subsidiary is an entity which the Company controls. Control exists when the Company is exposed, 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 investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. The Company’s investment in Group companies is carried at cost less accumulated impairment losses. – joint arrangements A joint arrangement is an arrangement over which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement where decisions about the relevant activities require the unanimous consent of the parties sharing joint control. A joint operation is a joint arrangement where the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. The Group’s interest in a joint operation is accounted for by consolidating the Group’s share of the assets, liabilities, income and expenses on a line-by-line basis. A joint venture is a joint arrangement where the parties that have joint control of the arrangement have rights to the net assets of the arrangement. The Group’s interest in a joint venture is accounted for using the equity method as described below. – associates An associate is an entity over which the Company, either directly or indirectly, is in a position to exercise significant influence. Significant influence is the power to participate in the financial and operating policies of the entity but is not control or joint control of those policies. The Group’s interest in an associate is accounted for using the equity method as described below. – the equity method Under the equity method of accounting, interests in joint ventures and associates are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. Loan balances relating to long-term funding from Group companies to joint ventures and associates are presented on the face of the balance sheet as part of the investment. – non-controlling interest A non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to the Company. Non- controlling interests are presented within equity, separately from the amounts attributable to owners of the Company. Profit or loss and each component of other comprehensive income is attributed to owners of the Company and to non- controlling interests in the appropriate proportions. Foreign currencies Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which it operates. The consolidated financial statements are presented in pounds sterling, which is the Group’s presentational currency. The assets and liabilities of foreign entities are translated into pounds sterling at the rate of exchange ruling at the reporting date and their income statement and cash flows are translated at the average rate for the period. Exchange differences arising are recorded in other comprehensive income. At entity level, transactions in currencies other than an entity’s functional currency are recorded at the exchange rate prevailing at the transaction dates. Foreign exchange gains and losses resulting from settlement of these transactions and from retranslation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement except if they relate to hedging of net investments in a foreign operation or for loans to foreign subsidiary entities considered to be part of the net investment in those entities, in which case these amounts are recorded in other comprehensive income. 114 114 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 2 Accounting policies – Group and Company (continued) Revenue recognition The Group recognises revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Group. Rental income receivable is recognised on a straight-line basis over the term of the lease. Contingent rents, being those lease payments that are dependent on unknown future events, the most significant being incremental rents linked to tenant revenues or increases arising on rent reviews, are recorded as income in the periods in which they are earned. In respect of rents linked to tenant revenues, where information is not available, management uses estimates based on knowledge of the tenant and past data. Rent reviews are recognised as income from the date of the rent review, based on management’s estimates. Estimates are derived from knowledge of market rents for comparable properties determined on an individual property basis and updated for progress of negotiations. Directly attributable lease incentives are recognised within rental income on the same basis as the underlying lease income. Service charge income, facilities management income and management fees are recognised on an accruals basis in line with the service being provided. Dividend income Dividend income is recognised when the right to receive payment has been established. Share-based payments The cost of granting share options and other share-based remuneration is recognised through the income statement with reference to the fair value of the equity instrument, assessed at the date of grant. This cost is charged to the income statement over the vesting period of the awards. All awards are accounted for as equity settled with the credit entry being taken directly to equity. For awards with non-market related criteria, the charge is reversed if it is expected that the performance criteria will not be met. For share options an option pricing model is used applying assumptions around expected yields, forfeiture rates, exercise price and volatility. Where the share awards have non-market related performance criteria the Group has used the Black- Scholes option valuation model to establish the relevant fair values. Where the share awards have a market-related performance criteria the Group has used the Monte Carlo simulation valuation model to establish the relevant fair values. Investments held in the Company’s own shares in connection with employee share plans and other share-based payment arrangements are accounted for as treasury shares. For more detail see treasury shares accounting policy. Interest income Interest income is accrued on a time basis by reference to the principal outstanding and the effective interest rate. Exceptional items Exceptional items are those items that in the Directors’ view are required to be separately disclosed by virtue of their size, nature or incidence. Underlying earnings is considered to be a key measure in understanding the Group’s financial performance, and excludes exceptional items. Underlying earnings are explained further in the financial review on page 48 and reconciled in note 12(c). Taxation Current tax is the expected tax payable on the taxable income for the year and any adjustment in respect of prior years. It is calculated using rates applicable at the balance sheet date. Deferred tax is provided using the balance sheet liability method providing for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the amounts used for tax purposes. Temporary differences are not provided on: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will not reverse in the foreseeable future. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised only to the extent that management believe it is probable that future taxable profit will be available against which the temporary differences can be utilised. Tax is included in the income statement except when it relates to items recognised directly in other comprehensive income or equity, in which case the related tax is also recognised directly in other comprehensive income or equity. Investment and development property Investment and development property is owned or leased by the Group and held for long-term rental income and capital appreciation. The Group has elected to use the fair value model. Properties are initially recognised at cost and subsequently revalued at the balance sheet date to fair value as determined by professionally qualified external valuers on the basis of market value with the exception of certain development land where an assessment of fair value may be made internally. External valuations are received for significant development land once required planning permissions are obtained. Valuations conform with the Royal Institution of Chartered Surveyors (RICS) Valuation – Global Standards 2017. The main estimates and assumptions underlying the valuations are described in note 14. 115 115 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 2 Accounting policies – Group and Company (continued) Properties held under leases are stated gross of the recognised finance lease liability. The cost of investment and development property includes capitalised interest and other directly attributable outgoings incurred during development. Interest is capitalised on the basis of the average interest rate on the relevant debt outstanding. Interest ceases to be capitalised on the date of practical completion. Gains or losses arising from changes in the fair value of investment and development property are recognised in the income statement. Depreciation is not provided in respect of investment and development property. Gains or losses arising on the sale of investment and development property are recognised when the significant risks and rewards of ownership have been transferred to the buyer. The gain or loss recognised is the proceeds received less the carrying value of the property and costs directly associated with the sale. Leases Leases are classified as a finance or operating lease according to the substance of the transaction. A lease that transfers substantially all the risks and rewards of ownership to the lessee is classified as a finance lease. All other leases are normally classified as operating leases. – Group as lessee Leases of investment property are accounted for as finance leases and recognised as an asset and an obligation to pay future minimum lease payments. The investment property asset is included in the balance sheet at fair value, gross of the recognised finance lease liability. Contingent rents are recognised as they accrue. Other finance lease assets are capitalised at the lower of the fair value of the leased asset or the present value of the minimum lease payments and depreciated over the shorter of the lease term and the useful life of the asset. Lease payments are allocated between the liability and finance charges so as to achieve a constant financing rate. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term. – Group as lessor Investment properties are leased to tenants under operating leases, with rental income being recognised on a straight-line basis over the lease term. For more detail see the revenue recognition accounting policy. Goodwill Goodwill arising on business combinations is carried at cost less accumulated impairment losses. Goodwill is assessed for impairment on an annual basis. Plant and equipment Plant and equipment consists of vehicles, fixtures, fittings and other equipment. Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is charged to the income statement on a straight- line basis over an asset’s estimated useful life up to a maximum of five years. Other investments Available-for-sale investments, being investments intended to be held for an indefinite period, are initially and subsequently measured at fair value. For listed investments, fair value is the current bid market value at the reporting date. For unlisted investments where there is no active market, fair value is assessed using an appropriate methodology. Gains or losses arising from changes in fair value are included in other comprehensive income, except to the extent that losses are considered to represent a permanent impairment, in which case they are recognised in the income statement. Upon disposal, accumulated fair value adjustments are reclassified from other comprehensive income to the income statement. Impairment of assets The Group’s assets are reviewed at each balance sheet date to determine whether events or changes in circumstances exist that indicate that their carrying amount may not be recoverable. If such an indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. An impairment loss is recognised in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. At each balance sheet date the Group reviews whether there is any indication that an impairment loss recognised in previous periods may have decreased. If such an indication exists the asset’s recoverable amount is estimated. An impairment loss recognised in prior periods is reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount. In this case the asset’s carrying amount is increased to its recoverable amount but not exceeding the carrying amount that would have been determined had no impairment loss been recognised. The reversal of an impairment loss is recognised in the income statement. No impairment reversals are permitted to be recognised on goodwill. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost. The Directors exercise judgement as to the collectability of trade receivables and determine if it is appropriate to impair these assets. Factors such as days past due, credit status of the counterparty and historical evidence of collection are considered. 116 116 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 2 Accounting policies – Group and Company (continued) Cash and cash equivalents Cash and cash equivalents comprise cash in hand, deposits with banks, whether restricted or unrestricted, and other short-term liquid investments with original maturities of three months or less. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost. Pensions The costs of defined contribution schemes and contributions to personal plans are charged to the income statement in the year in which they are incurred. The Group has no defined benefit schemes. Borrowings Borrowings are recognised initially at their net proceeds on issue and subsequently carried at amortised cost with any transaction costs, premiums or discounts recognised over the contractual life using the effective interest method. This excludes certain financial instruments such as convertible bonds as detailed in note 26. In the event of early repayment, all unamortised transaction costs are recognised immediately in the income statement. Convertible bonds Convertible bonds are assessed on issue, as to whether they should be classified as a financial liability, as equity or as a compound financial instrument with both debt and equity components. This assessment is based on the terms of the bond and in accordance with IAS 32 Financial Instruments Presentation. Each bond is assessed separately and the detailed accounting treatment of each is given in note 26. Derivative financial instruments The Group uses derivative financial instruments to manage exposure to interest rate risk. They are initially recognised on the trade date at fair value and subsequently re-measured at fair value. In assessing fair value the Group uses its judgement to select suitable valuation techniques and make assumptions which are mainly based on market conditions existing at the balance sheet date. The fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for similar instruments at the measurement date. These values are tested for reasonableness based upon broker or counterparty quotes. Amounts paid under interest rate swaps, both on obligations as they fall due and on early settlement, are recognised in the income statement as finance costs. Fair value movements on revaluation of derivative financial instruments are shown in the income statement through changes in fair value of financial instruments. The Group does not currently apply hedge accounting to its interest rate swaps. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to owners, this is the date of payment. In the case of final dividends, this is when declared by shareholders at the annual general meeting. Treasury shares Investments held in the Company’s own shares are deducted from equity at cost. Where such shares are subsequently sold, any consideration received is recognised directly in equity. Current/non-current classification Current assets include assets held primarily for trading purposes, cash and cash equivalents, and assets expected to be realised in, or intended for sale or consumption within one year of the reporting date. All other assets are classified as non- current assets. Current liabilities include liabilities held primarily for trading purposes, associated with assets held for sale and expected to be settled within one year from the reporting date. All other liabilities are classified as non-current liabilities. Business combinations Business combinations are accounted for in accordance with IFRS 3 Business Combinations using the acquisition method of accounting. The consideration for the acquisition of a subsidiary is the total of the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Costs associated with the acquisition are expensed as incurred. Identifiable assets and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Goodwill arising on an acquisition is the excess of the consideration over the fair value of the identifiable assets and liabilities acquired. Where the fair value of the identifiable assets and liabilities acquired exceeds the consideration this difference is recognised in the income statement at the date of the acquisition. Non-current assets and disposal groups held for sale Non-current assets and corresponding disposal groups are classified as held for sale when their carrying amount is to be recovered principally through a sale which is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell. Assets and liabilities are separately grouped and presented on single lines in the balance sheet. 117 117 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 3 Segmental reporting Operating segments are determined based on the strategic and operational management of the Group. The Group is primarily a shopping centre-focused business and has two reportable operating segments being the UK and Spain. Although certain areas of business performance are reviewed and monitored on a centre-by-centre basis, the operating segments are consistent with the strategic and operational management of the Group by the Executive Committee (the chief operating decision makers of the Group). As mentioned in the financial review, management review and monitor the business primarily on a proportionately consolidated basis. As such, the segmental analysis has been prepared on a proportionately consolidated basis. The key driver of underlying earnings which is used to measure performance is net rental income. An analysis of net rental income is provided below: Rent receivable Service charge income Facilities management income from joint ventures Revenue Rent payable Service charge costs Facilities management costs recharged to joint ventures Other non-recoverable costs Net rental income Profit for the year Group including share of joint ventures UK £m 513.5 109.7 2.8 626.0 (20.5) (128.1) (2.8) (43.4) 431.2 140.4 Spain £m 32.7 8.1 – 40.8 – (8.8) – (3.2) 28.8 63.5 Total £m 546.2 117.8 2.8 666.8 (20.5) (136.9) (2.8) (46.6) 460.0 203.9 Less share of joint ventures £m 2017 Group total £m (42.8) (8.7) 0.7 (50.8) 1.0 9.6 (0.7) 4.3 (36.6) (0.6)1 503.4 109.1 3.5 616.0 (19.5) (127.3) (3.5) (42.3) 423.4 203.3 1 The adjustment to profit for the year relates to the profit attributable to non-controlling interests within the Group’s investment in joint ventures. Rent receivable Service charge income Facilities management income from joint ventures Revenue Rent payable Service charge costs Facilities management costs recharged to joint ventures Other non-recoverable costs Net rental income Profit for the year Group including share of joint ventures Spain £m 15.9 3.5 – 19.4 – (3.7) – (1.8) 13.9 21.1 Total £m 532.6 111.1 5.1 648.8 (25.4) (127.2) (5.1) (44.1) 447.0 171.8 UK £m 516.7 107.6 5.1 629.4 (25.4) (123.5) (5.1) (42.3) 433.1 150.7 Less share of joint ventures £m 2016 Group total £m (48.1) (9.5) 3.1 (54.5) 1.1 10.6 (3.1) 5.0 (40.9) – 484.5 101.6 8.2 594.3 (24.3) (116.6) (8.2) (39.1) 406.1 171.8 There were no significant transactions within net rental income between operating segments. The Group’s geographical analysis of non-current assets is presented below. This represents where the Group’s assets reside and, where relevant, where revenues are generated. In the case of investments this reflects where the investee is located. UK Spain India 2017 £m 2016 £m 9,484.1 9,648.6 565.5 65.9 276.7 65.8 10,115.5 9,991.1 118 118 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 3 Segmental reporting (continued) An analysis of investment and development property, capital expenditure and revaluation surplus/(deficit) is presented below: UK Spain Group including share of joint ventures Less share of joint ventures Group Investment and development property Capital expenditure Revaluation surplus/(deficit) 2017 £m 9,373.8 818.7 10,192.5 (1,013.1) 9,179.4 2016 £m 9,537.5 407.0 9,944.5 (732.4) 9,212.1 2017 £m 184.1 62.6 246.7 (7.3) 239.4 2016 £m 92.5 22.3 114.8 (1.2) 113.6 2017 £m (51.2) 98.5 47.3 (16.5) 30.8 2016 £m (97.4) 33.6 (63.8) (14.2) (78.0) 4 Loss on disposal of subsidiaries The loss on disposal of subsidiaries of £1.8 million includes a loss in respect of the final net asset value adjustment of intu Bromley of £0.8 million as well as a loss in respect of the disposal of Madrid Xanadú to a joint venture of £1.0 million (see note 34). The 2016 loss of £0.3 million related to the disposal of intu Bromley (see note 34). 5 Administration expenses – exceptional Exceptional administration expenses (see note 2 for definition of exceptional items) in the year totalled £5.9 million (2016: £2.5 million) and relate principally to corporate transactions, being the acquisition of Madrid Xanadú as well as costs associated with the recommended all-share offer made by Hammerson plc in 2017. The 2016 costs related to the acquisition of the remaining 50 per cent of intu Merry Hill. These costs have been classified as exceptional based on their incidence. 6 Operating profit Operating profit is arrived at after charging: Staff costs (note 7) Depreciation Remuneration paid to the Company’s auditors (note 8) 7 Employees’ information Wages and salaries Social security costs Pension costs (note 41) Share-based payments (note 40) 2017 £m 91.0 2.9 0.8 Group 2017 £m 76.5 7.8 4.4 2.3 91.0 2016 £m 83.2 2.2 0.8 Group 2016 £m 71.1 6.6 3.6 1.9 83.2 At 31 December 2017 the number of persons employed by the Group was 2,589 (2016: 2,578). The Company had no employees during the year (2016: none). The monthly average number of persons employed by the Group during the year is provided below: Head office Shopping centres 2017 Number 432 2,171 2,603 2016 Number 379 2,171 2,550 8 Auditors’ remuneration Fees payable to the Company’s auditors and their associates for: The audit of the Company’s annual financial statements Other services to the Group – audit of the Company’s subsidiaries Fees related to the audit of the Company and its subsidiaries Audit-related assurance services1 Total fees for audit and audit-related services Total fees i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 119 119 2016 £000 266 439 705 48 753 753 2017 £000 351 438 789 49 838 838 1 Relates to review of the interim report of the Group, and interim reviews of certain subsidiary undertakings. Fees payable to PricewaterhouseCoopers LLP (PwC) and its associates for services to the Company are not required to be disclosed separately as they are included on a consolidated basis. Fees payable by the Group’s joint ventures in respect of 2017 were £114,000 (Group’s share), all of which relates to audit and audit-related services (2016: £151,000, of which £89,000 related to audit and audit-related services and £62,000 related to other assurance services). The Group also used accounting firms other than PwC for a number of assignments. 9 Net finance costs On bank loans and overdrafts On convertible bonds (note 26) On obligations under finance leases Finance costs1 Finance income Amortisation of Metrocentre compound financial instrument Payments on unallocated interest rate swaps and other costs2 Foreign currency movements2 Other finance costs (Gain)/loss on derivative financial instruments Loss/(gain) on convertible bonds designated as at fair value through profit or loss (note 26) Change in fair value of financial instruments3 Net finance costs 2017 £m 192.0 17.5 4.4 213.9 (12.6) 5.9 34.6 (1.6) 38.9 (28.3) 6.3 (22.0) 218.2 2016 £m 189.2 9.3 4.4 202.9 (14.9) 5.9 34.7 (2.7) 37.9 47.2 (30.9) 16.3 242.2 1 Finance costs of £4.9 million were capitalised in the year ended 31 December 2017 (2016: £2.1 million). 2 Amounts totalling £33.0 million in the year ended 31 December 2017 (2016: £32.0 million) are treated as exceptional items, as defined in note 2, due to their nature and are therefore excluded from underlying earnings (see note 12(c)). These finance costs include payments on unallocated interest rate swaps, foreign currency movements and other fees. 3 Included within the change in fair value of derivative financial instruments are gains totalling £47.1 million (2016: £41.8 million) resulting from the payment of obligations under derivative financial instruments during the year. Of these £26.1 million related to unallocated swaps (2016: £27.1 million). 120 120 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 10 Taxation Taxation for the year: Overseas taxation Overseas taxation – adjustment in respect of prior years UK taxation – adjustment in respect of prior years Current tax Deferred tax: On investment and development property On other investments On derivative financial instruments On other temporary differences Deferred tax Total tax charge 2017 £m 0.2 (0.1) (0.2) (0.1) 24.8 – – (0.8) 24.0 23.9 2016 £m 0.1 – (0.1) – – (2.3) 16.4 2.4 16.5 16.5 Tax relating to components of other comprehensive income of £0.1 million (2016: £16.5 million) relates entirely to deferred tax in respect of other investments. The tax charge for 2017 and 2016 is lower than the standard rate of corporation tax in the UK. The differences are explained below: Profit before tax, joint ventures and associates Profit before tax multiplied by the standard rate in the UK of 19.25% (2016: 20%) Exempt property rental profits and revaluations Additions and disposals of property and investments Prior year corporation tax items Non-deductible and other items Overseas taxation Unprovided deferred tax Total tax charge Details of deferred tax balances are given in note 29. 11 Dividends Ordinary shares: Prior year final dividend paid of 9.4 pence per share (2016: 9.1 pence per share) Interim dividend paid of 4.6 pence per share (2016: 4.6 pence per share) Dividends paid Proposed final dividend of 9.4 pence per share 2017 £m 190.4 36.7 (32.8) 3.9 6.2 (0.3) 2.8 4.3 7.0 23.9 2017 £m 126.2 61.7 187.9 127.4 2016 £m 154.6 30.9 (20.1) 10.8 (6.8) (0.1) 0.5 (0.6) 12.7 16.5 2016 £m 121.1 61.4 182.5 In 2016, the Company offered shareholders the option to receive ordinary shares instead of cash for the 2016 interim dividend of 4.6 pence under the Scrip Dividend Scheme. As a result of elections made by shareholders 10,268,341 new ordinary shares of 50 pence each were issued on 22 November 2016 in lieu of dividends otherwise payable. This resulted in £29.2 million of cash being retained in the business. Details of the shares in issue and dividends waived are given in notes 30 and 31 respectively. As a REIT, dividends are declared and paid in accordance with REIT legislation. See glossary for further information as well as the financial review on page 53 for information on distributable reserves. 121 121 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 12 Earnings per share (a) Earnings per share Basic and diluted earnings per share as calculated in accordance with IAS 33 Earnings Per Share. 2017 2016 Shares million Pence per share Earnings £m Shares million Pence per share Earnings £m 216.7 Profit for the year attributable to owners of intu properties plc Basic earnings per share1 216.7 1,343.2 16.1p 182.7 182.7 1,333.5 13.7p Dilutive convertible bonds, share options and share awards (1.9) 84.4 (21.6) 107.9 Diluted earnings per share 214.8 1,427.6 15.0p 161.1 1,441.4 11.2p 1 The weighted average number of shares used has been adjusted to remove shares held in the Employee Share Ownership Plan (ESOP). (b) Headline earnings per share Headline earnings per share has been calculated and presented as required by the Johannesburg Stock Exchange listing requirements. Basic earnings Adjusted for: Gross £m 2017 Net1 £m 216.7 Gross £m 2016 Net1 £m 182.7 Revaluation of investment and development property (note 14) (30.8) (16.1) 78.0 71.8 Gain on acquisition of businesses (note 33) Loss on disposal of subsidiaries (note 4) Gain on sale of other investments (note 19) Share of joint ventures’ items Share of associates’ items Headline earnings Dilution2 Diluted headline earnings Weighted average number of shares (million) Dilution2 Diluted weighted average number of shares (million) Headline earnings per share (pence) Diluted headline earnings per share (pence) 1 Net of tax and non-controlling interests. – 1.8 – – 1.8 – (15.9) (17.2) (1.1) (1.1) 184.1 (1.9) 182.2 1,343.2 84.4 1,427.6 13.7p 12.8p (34.6) (34.6) 0.3 (74.1) (14.2) (1.1) 0.3 (74.1) (14.2) (1.1) 130.8 (21.6) 109.2 1,333.5 107.9 1,441.4 9.8p 7.6p 2 The dilution impact is required to be included as calculated in note 12(a) even where this is not dilutive for headline earnings per share. 122 122 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 12 Earnings per share (continued) (c) Underlying earnings per share Underlying earnings per share is a non-GAAP measure but has been presented as it is considered to be a key measure of the Group’s recurring performance and an indication of the extent to which dividend payments are supported by underlying operations (see underlying profit statement on page 169). It excludes property and derivative movements, exceptional items and related tax. The key difference from EPRA earnings, an industry standard comparable measure, relates to adjustments in respect of exceptional items where EPRA is prescriptive about the adjustments that can be made. Underlying earnings is defined as an alternative performance measure in the financial review on page 48. A reconciliation to EPRA earnings per share is provided within the other information section. Basic earnings per share (per note 12(a)) 216.7 1,343.2 16.1p 182.7 1,333.5 13.7p 2017 2016 Earnings £m Shares million Pence per share Earnings £m Shares million Pence per share Adjusted for: Revaluation of investment and development property (note 14) (30.8) Gain on acquisition of businesses (note 33) Loss on disposal of subsidiaries (note 4) Gain on sale of other investments (note 19) Administration expenses – exceptional (note 5) Exceptional finance costs (note 9) Change in fair value of financial instruments (note 9) Tax on the above Share of joint ventures’ items Share of associates’ items Non-controlling interests in respect of the above Underlying earnings per share Dilutive convertible bonds, share options and share awards – 1.8 – 5.9 33.0 (22.0) 24.0 (17.2) (0.4) (10.0) 201.0 1,343.2 6.7 84.4 (2.3)p – 0.1p 78.0 (34.6) 0.3 – (74.1) 0.4p 2.5p (1.6)p 1.8p (1.3)p – (0.7)p 15.0p 2.5 32.0 16.3 16.5 (12.3) (1.1) (6.2) 200.0 1,333.5 9.3 107.9 5.9p (2.6)p – (5.6)p 0.2p 2.4p 1.2p 1.3p (0.9)p (0.1)p (0.5)p 15.0p Underlying, diluted earnings per share 207.7 1,427.6 14.5p 209.3 1,441.4 14.5p 13 Net asset value per share (a) NAV per share (diluted, adjusted) NAV per share (diluted, adjusted) is a non-GAAP measure but has been presented as it is considered to be a key measure of the Group’s performance. The key difference from EPRA NAV per share, an industry standard comparable measure, is the exclusion of interest rate swaps not currently used for economic hedges of debt as, in our view, this better allows management to review and monitor the Group’s performance. NAV (diluted, adjusted) is defined as an alternative performance measure in the financial review on page 48. A reconciliation to EPRA NAV per share is provided within the other information section. Net assets £m Shares million 2017 NAV per share pence Net assets £m Shares million 2016 NAV per share pence NAV per share attributable to owners of intu properties plc1 5,075.0 1,343.4 378p 4,978.8 1,343.0 371p Dilutive convertible bonds, share options and awards – 1.8 2.6 3.5 Diluted NAV per share Adjusted for: 5,075.0 1,345.2 377p 4,981.4 1,346.5 370p Fair value of derivative financial instruments Deferred tax on investment and development property and other investments Share of joint ventures’ items Non-controlling interest recoverable balance not recognised 347.5 23.7 5.2 71.3 26p 377.7 2p 1p 5p 0.1 7.2 71.3 28p – 1p 5p NAV per share (diluted, adjusted) 5,522.7 1,345.2 411p 5,437.7 1,346.5 404p 1 The number of shares used has been adjusted to remove shares held in the ESOP. 123 123 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 13 Net asset value per share (continued) (b) NNNAV per share (diluted, adjusted) NNNAV per share (diluted, adjusted) is a non-GAAP measure but has been included as it is considered to be an industry standard comparable measure and is equal to EPRA NNNAV per share presented in the other information section. NAV per share (diluted, adjusted) Fair value of derivative financial instruments Excess of fair value of borrowings over carrying value Deferred tax on investment and development property and other investments Share of joint ventures’ items Non-controlling interests in respect of the above Net assets £m Shares million 5,522.7 1,345.2 (347.5) (430.8) (23.7) (47.8) 22.9 2017 NAV per share pence 411p (26)p (32)p (2)p (4)p 2p Net assets £m Shares million 5,437.7 1,346.5 (377.7) (375.0) (0.1) (9.4) 23.4 2016 NAV per share pence 404p (28)p (28)p – (1)p 2p NNNAV per share (diluted, adjusted) 4,695.8 1,345.2 349p 4,698.9 1,346.5 349p 14 Investment and development property Investment property £m Development property £m Total £m At 1 January 2016 Acquisition of intu Merry Hill (note 33) Additions Recognition of leasehold on Charter Place Disposals Disposal of intu Bromley (note 34) Deficit on revaluation Foreign exchange movements At 31 December 2016 Acquisition of Madrid Xanadú (note 33) Additions Disposals Disposal of Madrid Xanadú to joint venture (note 34) Transfer of intu Chapelfield to assets held for sale (note 35) (Deficit)/surplus on revaluation Foreign exchange movements At 31 December 2017 A reconciliation to market value is given in the table below: Balance sheet carrying value of investment and development property Tenant incentives included within trade and other receivables (note 20) Head leases included within finance leases in borrowings (note 24) Market value of investment and development property 8,259.7 889.3 52.6 – (2.0) (179.4) (17.2) – 9,003.0 461.4 109.6 (3.1) (472.3) (302.0) (59.0) 9.4 8,747.0 144.2 8,403.9 – 61.0 55.9 – – (60.8) 8.8 209.1 – 129.8 (0.3) – – 89.8 4.0 432.4 889.3 113.6 55.9 (2.0) (179.4) (78.0) 8.8 9,212.1 461.4 239.4 (3.4) (472.3) (302.0) 30.8 13.4 9,179.4 2017 £m 2016 £m 9,179.4 9,212.1 109.2 (80.2) 109.9 (80.2) 9,208.4 9,241.8 The market value of investment and development property at 31 December 2017 includes £8,831.9 million (31 December 2016: £9,088.6 million) in respect of investment property and £376.5 million (31 December 2016: £153.2 million) in respect of development property. Investment and development property is measured at fair value in the Group’s balance sheet and categorised as Level 3 in the fair value hierarchy (see note 28 for definition) as one or more significant inputs to the valuation are partly based on unobservable market data. 124 124 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 14 Investment and development property (continued) Transfers into and transfers out of the fair value hierarchy levels are recognised on the date of the event or change in circumstances that caused the transfer. There were no transfers in or out of Level 3 for investment properties during the year. The Group has only one class of investment and development property asset. All the Group’s significant investment and development property relates to prime shopping centres which are of a similar nature and share characteristics and risks. Valuation process It is the Group’s policy to engage independent external valuers to determine the market value of its investment and development property at both 30 June and 31 December. The Group provides information to the valuers, including current lease and tenant data along with asset-specific business plans. The valuers use this and other inputs including market transactions for similar properties to produce valuations (see valuation methodology below). These valuations and the assumptions they have made are then discussed and reviewed with the Group’s asset management team and Directors. The Group engages independent valuation experts to undertake the Group’s property valuations. A summary of the valuers and the value of property assets they have been engaged to value is presented below: Cushman & Wakefield CBRE Knight Frank Jones Lang LaSalle Assets not valued externally held at cost 2017 £m 4,609.6 2,420.8 1,964.0 197.7 16.3 2016 £m 4,564.4 2,352.9 2,243.9 – 80.6 9,208.4 9,241.8 In addition to the above, investment properties in the Group’s joint ventures were valued by CBRE, Cushman & Wakefield, Knight Frank and Jones Lang LaSalle. Assets not valued externally held at cost relate to certain development land. These amounts have been reviewed internally and it has been concluded that the cost is the appropriate carrying value and so no valuation adjustment is needed. As the developments advance these will be valued by independent external valuers. In respect of the intu Costa del Sol development site near Málaga, Spain, as the General Plan of Torremolinos was approved in the year, with the remaining consents expected in the coming months, the Group obtained an independent external valuation at 31 December 2017 as cost is no longer an appropriate approximation of fair value. The valuation is based on the assumption that planning approval is in place at the valuation date. Valuation fees are a fixed amount agreed between the Group and the valuers in advance of the valuation and are not linked to the valuation output. Valuation methodology The fair value of the Group’s investment and development property at 31 December 2017 was determined by independent external valuers at that date other than certain development land as detailed above. The valuations are in accordance with the Royal Institution of Chartered Surveyors (RICS) Valuation – Global Standards 2017 and were arrived at by reference to market transactions for similar properties and rent profiles. Fair values for investment properties are calculated using the present value income approach. The main assumptions underlying the valuations are in relation to rent profile and yields as discussed below. The key driver of the property valuations is the terms of the leases in place at the valuation date. These determine the majority of the cash flow profile of the property for a number of years and therefore form the base of the valuation. The valuation assumes adjustments from these rental values in place at the valuation date to current market rent at the time of the next rent review (where a typical lease allows only for upward adjustment) and as leases expire and are replaced by new leases. The current market level of rent is assessed based on evidence provided by the most recent relevant leasing transactions and negotiations. This is based on evidence available at the date of valuation and does not assume future increases in market rent. The nominal equivalent yield is applied as a discount rate to the rental cash flows which, after taking into account other input assumptions such as vacancies and costs, generates the market value of the property. The nominal equivalent yield applied is assessed by reference to market transactions for similar properties and takes into account, amongst other things, any risks associated with the rent uplift assumptions. 125 125 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 14 Investment and development property (continued) In respect of development valuations, deductions are then made for anticipated costs, including an allowance for developer’s profit and any other assumptions before arriving at a valuation. Annual property income as disclosed in the following table reflects current annualised gross income. The net initial yield is calculated as the current net income over the gross market value of the asset and is used as a sense check and to compare against market transactions for similar properties. Full definitions of nominal equivalent yield, annual property income and net initial yield are provided in the glossary. The valuation output, inputs and assumptions are reviewed to ensure that they are in line with those of market participants. A significant change in the nominal equivalent yield of investment property in isolation would result in a significant change in the value of investment and development property. A decrease in nominal equivalent yield of 50 basis points would result in an increase in the total market value of £1,055.5 million (31 December 2016: £1,062.9 million), while a 50 basis point increase would result in a decrease in the total market value of £806.5 million (31 December 2016: £834.9 million). Additionally, development property is sensitive to income, cost and developer’s profit assumptions included in the valuations. The tables below provide details of the assumptions used in the valuation of the core portfolio and key unobservable inputs: Market value £m Net initial yield (EPRA) Nominal equivalent yield 2017 Annual property income £m Market value £m Net initial yield (EPRA) Nominal equivalent yield 2016 Annual property income £m intu Trafford Centre intu Lakeside intu Merry Hill intu Metrocentre intu Braehead intu Derby Manchester Arndale intu Victoria Centre intu Watford intu Eldon Square intu Milton Keynes Cribbs Causeway 2,324.0 1,416.5 931.1 929.0 533.1 458.0 456.4 355.5 336.0 322.7 285.0 240.0 3.7% 3.3% 3.8% 4.7% 5.1% 6.0% 4.1% 4.7% 4.0% 4.9% 4.4% 4.9% 4.3% 4.5% 5.0% 5.3% 6.1% 6.2% 5.1% 5.7% 5.1% 5.0% 4.9% 5.2% 93.7 53.2 42.4 48.1 28.1 28.9 21.3 19.5 15.8 16.1 13.7 12.9 2,312.0 1,375.0 898.5 945.2 546.2 450.0 445.8 360.5 336.0 317.7 281.0 238.9 2017 Net £m 3.9% 3.7% 4.0% 4.5% 4.5% 5.8% 4.5% 4.6% 5.0% 4.3% 4.6% 4.6% 4.3% 4.5% 5.0% 5.3% 6.3% 6.2% 5.2% 5.7% 5.1% 5.1% 4.9% 5.6% Cost £m Accumulated impairment £m 89.3 56.9 39.1 51.6 27.2 29.7 22.2 19.0 18.8 15.0 13.9 12.2 2016 Net £m 15 Investment in Group companies Company At 1 January Additions Impairment reversal/(charge) in the year Cost £m Accumulated impairment £m 3,338.1 (517.2) 2,820.9 3,313.7 (447.1) 2,866.6 4.4 – – 67.0 4.4 67.0 24.4 – – (70.1) (517.2) 24.4 (70.1) 2,820.9 At 31 December 3,342.5 (450.2) 2,892.3 3,338.1 The impairment reversal in the year and charge in prior year are principally the result of property valuation movements seen in the relevant subsidiaries. The valuation of investment and development property is a significant estimate as referenced in note 1. Impairment is assessed by comparing the carrying value against the underlying assets and liabilities of the respective subsidiaries. Details of related undertakings are provided in note 38. 126 126 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 16 Investment in joint ventures The Group’s principal joint ventures own and manage investment and development property. At 1 January 2017 Acquisition of joint venture interest (note 34) Group’s share of underlying profit Group’s share of other net profit/(loss) Group’s share of profit Investment of capital Distributions Loan advances Loan repayments Foreign exchange movements At 31 December 2017 Represented by: Loans to joint ventures Group’s share of net assets At 1 January 2016 Group’s share of underlying profit Group’s share of other net profit/(loss) Group’s share of profit/(loss) Distributions Loan advances Loan repayments Disposal of joint venture interest Foreign exchange movements At 31 December 2016 Represented by: Loans to joint ventures Group’s share of net assets St David’s, Cardiff £m 355.2 – 13.4 (6.8) 6.6 – – – (14.8) – 347.0 83.6 263.4 intu Merry Hill £m 447.0 3.3 (4.3) (1.0) (1.0) – – (445.0) – – – – Puerto Venecia £m 119.4 – 0.6 8.9 9.5 – – – – 5.0 133.9 99.1 34.8 St David’s, Cardiff £m 368.5 13.7 (14.3) (0.6) – – (12.7) – – 355.2 98.4 256.8 Madrid Xanadú £m – 117.1 1.4 0.4 1.8 0.7 – – – (0.2) 119.4 57.7 61.7 Puerto Venecia £m 85.9 0.7 19.4 20.1 – – – – 13.4 119.4 95.3 24.1 intu Asturias £m 76.0 – 2.0 14.7 16.7 – – – – 2.9 95.6 35.0 60.6 intu Asturias £m 53.4 0.8 12.9 13.7 – – – – 8.9 76.0 33.9 42.1 2017 Total £m 587.6 117.1 18.3 17.2 35.5 0.7 (1.2) 3.0 (14.8) 7.6 735.5 282.9 452.6 2016 Total £m 991.9 19.8 12.3 32.1 (3.2) 1.2 (12.7) (445.0) 23.3 587.6 232.2 355.4 Other £m 37.0 – 0.9 – 0.9 – (1.2) 3.0 – (0.1) 39.6 7.5 32.1 Other £m 37.1 1.3 (1.4) (0.1) (2.2) 1.2 – – 1.0 37.0 4.6 32.4 At 31 December 2017, the boards of joint ventures had approved £13.8 million (2016: £15.7 million) of future expenditure for the purchase, construction, development and enhancement of investment property. Of this, £12.7 million (2016: nil) is contractually committed. These amounts represent the Group’s share. 127 127 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 16 Investment in joint ventures (continued) Set out below is the summarised information of the Group’s joint ventures with financial information presented at 100 per cent. The 2017 summary information and the summarised income statement of Madrid Xanadú is presented for the period from 31 July 2017, the date which it ceased being a 100 per cent owned subsidiary of the Group. Summary information Group’s interest Principal place of business Summarised income statement Revenue Net rental income Revaluation of investment and development property Loss on sale of other investments Administration expenses – underlying Administration expenses – exceptional Finance costs Change in fair value of financial instruments Taxation Profit Attributable to non-controlling interests Profit attributable to owners Group’s share of profit Summarised balance sheet Investment and development property Other non-current assets Total non-current assets Cash and cash equivalents Other current assets Total current assets Current financial liabilities Other current liabilities Total current liabilities Partners’ loans Non-current financial liabilities Other non-current liabilities Total non-current liabilities Net assets Non-controlling interests Net assets attributable to owners Group’s share of net assets St David’s, Cardiff £m Puerto Venecia £m Madrid Xanadú £m intu Asturias £m Other £m 50% Wales 50% Spain 50% Spain 50% Spain 39.6 26.7 (13.6) – – – – – – 13.1 – 13.1 6.6 692.0 14.0 706.0 8.9 7.7 16.6 – (12.6) (12.6) (167.2) – (16.1) (183.3) 526.7 – 526.7 263.4 25.1 19.2 18.1 (0.4) (1.9) – (15.9) 0.6 (0.1) 19.6 (0.6) 19.0 9.5 460.4 0.8 461.2 38.2 2.5 40.7 (17.0) (13.9) (30.9) (198.3) (199.6) – (397.9) 73.1 (3.4) 69.7 34.8 13.0 8.6 2.0 – (1.1) (1.0) (4.4) 0.4 (0.9) 3.6 – 3.6 1.8 470.5 81.2 551.7 18.9 – 18.9 (6.1) (15.2) (21.3) (115.4) (230.9) (79.7) (426.0) 123.3 – 123.3 61.7 17.0 12.5 26.6 (0.3) (1.0) – (7.5) 0.6 3.2 34.1 (0.7) 33.4 16.7 281.0 5.3 286.3 31.2 1.5 32.7 (6.2) (1.9) (8.1) (70.0) (105.2) (11.4) (186.6) 124.3 (3.1) 121.2 60.6 2017 Total £m 113.5 79.9 33.1 (0.7) (6.3) (1.0) (32.8) 2.3 2.2 76.7 (1.3) 75.4 35.5 2,169.2 105.0 2,274.2 103.2 21.1 124.3 (29.8) (49.4) (79.2) (565.9) (667.3) (107.2) 18.8 12.9 – – (2.3) – (5.0) 0.7 – 6.3 – 6.3 0.9 265.3 3.7 269.0 6.0 9.4 15.4 (0.5) (5.8) (6.3) (15.0) (131.6) – (146.6) (1,340.4) 131.5 – 131.5 32.1 978.9 (6.5) 972.4 452.6 128 128 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 16 Investment in joint ventures (continued) The 2016 summary information and the summarised income statement of intu Merry Hill is presented for the period to 22 June 2016, after which it became a 100 per cent owned subsidiary of the Group. intu Merry Hill £m St David’s, Cardiff £m Puerto Venecia £m intu Asturias £m Other £m 50% England 50% Wales 50% Spain 50% Spain Summary information Group’s interest Principal place of business Summarised income statement Revenue Net rental income Revaluation of investment and development property Administration expenses – underlying Administration expenses – exceptional Finance costs Change in fair value of financial instruments Taxation – underlying Profit/(loss) Group’s share of profit/(loss) Summarised balance sheet Investment and development property Other non-current assets Total non-current assets Cash and cash equivalents Other current assets Total current assets Current financial liabilities Other current liabilities Total current liabilities Partners’ loans Non-current financial liabilities Other non-current liabilities Total non-current liabilities Net assets Group’s share of net assets 2016 Total £m 125.7 88.8 31.8 (4.9) (0.8) (41.6) (3.2) (0.1) 70.0 32.1 19.1 13.3 1.7 (1.9) – (4.3) (3.2) – 5.6 (0.1) 254.5 8.6 263.1 1,604.6 27.4 1,632.0 5.9 2.4 8.3 (0.5) (5.4) (5.9) (4.6) (131.8) – (136.4) 129.1 32.4 75.9 18.5 94.4 (18.8) (33.2) (52.0) (459.8) (425.1) (14.4) (899.3) 775.1 355.4 27.0 20.2 (8.5) (0.5) – (13.1) – – (1.9) (1.0) – – – – – – – – – – – – – – – 40.4 27.4 (28.6) (0.1) – – – – (1.3) (0.6) 689.5 13.5 703.0 9.4 11.5 20.9 (0.2) (13.3) (13.5) (196.8) – – 24.2 17.8 38.6 (1.4) – (14.9) 0.2 (0.1) 40.2 20.1 424.0 0.5 424.5 25.2 2.9 28.1 (12.1) (9.9) (22.0) (190.6) (191.8) – (196.8) (382.4) 513.6 256.8 48.2 24.1 15.0 10.1 28.6 (1.0) (0.8) (9.3) (0.2) – 27.4 13.7 236.6 4.8 241.4 35.4 1.7 37.1 (6.0) (4.6) (10.6) (67.8) (101.5) (14.4) (183.7) 84.2 42.1 129 129 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 17 Joint operations The Group’s interests in Cribbs Causeway and Manchester Arndale are accounted for as joint operations. The Group holds 50 per cent beneficial interests in the relevant freehold or leasehold of these properties. Each joint arrangement is governed by a Trust Deed giving each party rights to income and obligations for expenses in respect of their beneficial interest in the property. The management of the property is established under the Trust Deed as being undertaken by an entity jointly controlled by the beneficial owners of the property. This entity does not have the right to a share of the income or expenditure from the property, other than the receipt of a management fee. Therefore these interests are accounted for as joint operations. The principal place of business of both joint operations is England. 18 Investment in associates At 1 January Share of profit of associates Foreign exchange movements At 31 December 2017 £m 65.2 1.3 (1.7) 64.8 2016 £m 54.7 1.6 8.9 65.2 Investment in associates comprises a 32.4 per cent holding in the ordinary shares of Prozone Intu Properties Limited (‘Prozone’), a listed Indian shopping centre developer, and a 26.8 per cent holding in the ordinary shares of Empire Mall Private Limited (‘Empire’). Both companies are incorporated in India. As required by IAS 28 Investments in Associates and Joint Ventures, the equity method of accounting is applied in accounting for the Group’s investments in Prozone and Empire. The results for the year to 30 September have been used as 31 December information is not available in time for these financial statements. Those results are adjusted to be in line with the Group’s accounting policies and include the most recent property valuations, determined at 30 September 2017, by independent professionally qualified external valuers in line with the valuation methodology described in note 14. The market price per share of Prozone at 31 December 2017 was INR72 (31 December 2016: INR35), valuing the Group’s interest at £41.1 million (31 December 2016: £20.3 million) compared to the carrying value of £45.1 million (31 December 2016: £45.5 million). As the share price of Prozone is lower than its carrying value, a review of the carrying value has been undertaken. The net assets of Prozone principally comprise investment property which is held at fair value within the investment in associates line. As with other Group investment property, it is subject to independent valuation to fair value and that valuation reflects the future cash flows expected to be generated from those assets. As such the net asset carrying value recorded in the Group’s financial statements is deemed to be a reasonable approximation of the value in use of the business and so no adjustment to that carrying value is considered necessary. 130 130 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 18 Investment in associates (continued) Set out below is the summarised information of the Group’s investments in associates with financial information presented at 100 per cent. Summary information Group’s interest Summarised income statement Revenue Revaluation of investment and development property Other income statement items Profit/(loss) reported by associate Attributable to non-controlling interests Profit/(loss) attributable to owners Group’s share of profit/(loss) Summarised balance sheet Investment and development property Other non-current assets Current assets Current liabilities Non-current liabilities Net assets Non-controlling interests Net assets attributable to owners Group’s share of net assets attributable to owners Prozone 2017 £m Empire 2017 £m Total 2017 £m Prozone 2016 £m Empire 2016 £m Total 2016 £m 32.4% 26.8% 32.4% 26.8% 9.1 5.5 (10.8) 3.8 (1.5) 2.3 0.8 270.3 24.2 7.6 (10.7) (35.8) 255.6 (116.4) 139.2 45.1 4.8 (1.0) (1.8) 2.0 – 2.0 0.5 79.3 2.9 4.0 (1.2) (11.5) 73.5 – 73.5 19.7 13.9 4.5 (12.6) 5.8 (1.5) 4.3 1.3 349.6 27.1 11.6 (11.9) (47.3) 329.1 (116.4) 212.7 64.8 7.1 19.7 (5.9) 20.9 (11.9) 9.0 2.9 265.7 15.8 8.8 (12.6) (26.2) 251.5 (111.1) 140.4 45.5 3.2 (5.6) (2.4) (4.8) – (4.8) (1.3) 81.3 1.0 2.1 (5.5) (5.3) 73.6 – 73.6 19.7 10.3 14.1 (8.3) 16.1 (11.9) 4.2 1.6 347.0 16.8 10.9 (18.1) (31.5) 325.1 (111.1) 214.0 65.2 19 Other investments At 1 January Additions Disposals Revaluation Foreign exchange movements At 31 December These investments are available-for-sale investments and are analysed by type as follows: Listed securities – equity Unlisted securities – equity 131 131 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 2016 £m 210.3 14.1 (209.4) 0.4 0.1 15.5 2016 £m 15.5 – 15.5 2017 £m 15.5 1.5 – (0.2) – 16.8 2017 £m 15.3 1.5 16.8 Listed investments are accounted for at fair value using the bid market value at the reporting date. On 19 January 2016, the Group disposed of its interest of 11.4 million units in a US venture controlled by Equity One, receiving £201.9 million. The transaction resulted in a gain of £74.1 million recognised in the income statement, after transfer from other comprehensive income of £77.0 million and settlement costs. 20 Trade and other receivables Current Trade receivables Amounts owed by subsidiary undertakings Amounts owed by joint ventures Other receivables Net investment in finance leases Prepayments and accrued income Group 2017 £m 26.4 – 13.6 17.2 0.4 84.3 Group 2016 £m 22.1 – 9.9 15.4 0.5 75.5 Company 2017 £m 1.8 972.9 – 3.9 – 1.6 Company 2016 £m – 1,093.5 – 0.8 – 0.7 Trade and other receivables – current 141.9 123.4 980.2 1,095.0 Non-current Amounts owed by associates Net investment in finance leases Prepayments and accrued income Trade and other receivables – non-current 4.7 1.2 96.6 102.5 – 1.5 97.6 99.1 – – – – – – – – Included within prepayments and accrued income for the Group of £180.9 million (2016: £173.1 million) are tenant lease incentives of £109.2 million (2016: £109.9 million), of which £12.6 million are classified as current (2016: £12.3 million) and £96.6 million as non-current (2016: £97.6 million). Amounts owed by subsidiary undertakings are unsecured and repayable on demand. 132 132 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 21 Cash and cash equivalents Unrestricted cash Restricted cash Cash and cash equivalents Group 2017 £m 225.1 2.9 228.0 Group 2016 £m 251.7 3.0 254.7 Company 2017 £m Company 2016 £m 0.8 – 0.8 0.9 – 0.9 A number of the Group’s borrowing arrangements place certain restrictions on the rent received each quarter. These do not prevent access to or use of this funding within the borrowing entities, however they do place certain restrictions on moving those funds around the wider group, typically requiring debt servicing costs to be paid before restrictions are lifted. 22 Derivative financial instruments All derivative financial instruments held by the Group relate to interest rate swaps which are classified as held for trading (see note 28). The derivative financial instruments held by the Company relate to the bondholder options (see note 26) and are classified as held for trading. 23 Trade and other payables Current Rents received in advance Trade payables Amounts owed to joint ventures Amounts owed to subsidiary undertakings Accruals and deferred income Other payables Other taxes and social security Trade and other payables Group 2017 £m Group 2016 £m Company 2017 £m Company 2016 £m 102.1 105.2 6.1 0.3 – 137.9 10.9 31.2 288.5 6.9 0.1 – 128.8 10.3 29.7 281.0 – 0.5 – 553.1 11.5 0.3 8.3 – – – 684.6 11.9 0.1 8.1 573.7 704.7 Amounts owed to subsidiary undertakings are unsecured and repayable on demand. 133 133 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 2017 Fair value £m 28.1 161.0 189.1 2.4 191.5 20.4 49.5 98.6 85.9 393.1 212.1 139.7 32.9 470.2 277.3 482.7 486.2 535.7 410.0 402.3 267.9 377.3 24 Borrowings Group Current Commercial mortgage backed securities (CMBS) notes 2.5% convertible bonds 2018 (note 26) Current borrowings, excluding finance leases Finance lease obligations Carrying value £m 23.3 161.0 184.3 2.4 186.7 23.3 – 23.3 2.4 25.7 – 161.0 161.0 – 161.0 Secured £m Unsecured £m Fixed rate £m Floating rate £m Non-current Revolving credit facility 2021 (including £88.8 million drawn in euros) 233.8 233.8 233.8 233.8 19.9 43.0 88.0 73.2 311.2 192.8 139.7 32.9 470.2 246.8 482.7 443.5 478.5 342.3 345.0 228.8 377.3 19.9 43.0 88.0 73.2 311.2 192.8 139.7 32.9 470.2 246.8 482.7 443.5 478.5 342.3 345.0 228.8 CMBS notes 2019 CMBS notes 2022 CMBS notes 2024 CMBS notes 2029 CMBS notes 2033 CMBS notes 2035 Bank loan 2019 Bank loan 2020 Bank loans 2021 Bank loan 2022 Bank loan 2024 3.875% bonds 2023 4.125% bonds 2023 4.625% bonds 2028 4.250% bonds 2030 Debenture 2027 2.875% convertible bonds 2022 (note 26) Non-current borrowings, excluding finance leases and Metrocentre compound financial instrument Metrocentre compound financial instrument Finance lease obligations Total borrowings Cash and cash equivalents (note 21) Net debt – 377.3 4,549.6 4,172.3 183.7 77.8 – 77.8 4,811.1 4,250.1 4,997.8 4,275.8 (228.0) 4,769.8 377.3 183.7 – 561.0 722.0 2,997.5 1,552.1 4,975.6 183.7 77.8 – – 183.7 77.8 3,259.0 1,552.1 5,237.1 3,445.7 1,552.1 5,428.6 23.3 161.0 184.3 2.4 186.7 – 19.9 43.0 88.0 73.2 311.2 – – – – 246.8 – – – – – – – – – – 192.8 139.7 32.9 470.2 – – 482.7 443.5 478.5 342.3 345.0 228.8 377.3 – – – – – – – – – – – – – – – – – – – – – – – Analysis of the Group’s net external debt is provided in the other information section. The Group substantially eliminates its interest rate exposure to floating rate debt through interest rate swaps as described in note 28. The market value of investment property secured, either directly or indirectly, as collateral against borrowings at 31 December 2017 is £9,802.2 million including £1,001.0 million of investment property held within joint ventures (2016: £9,763.6 million including £731.9 million held within joint ventures). In most circumstances the Group can realise up to 50 per cent without restriction providing the Group continues to manage the asset. Realising an amount in excess of this would trigger a change of control and mandatory repayment of the facility. The fair values of fixed rate borrowings and CMBS are assessed based on quoted market prices, and as such are categorised as Level 1 in the fair value hierarchy (see note 28 for definition). The fair values of unlisted floating rate borrowings are equal to their carrying values. 134 134 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 24 Borrowings (continued) Group Current Bank loans and overdrafts CMBS notes Current borrowings, excluding finance leases Finance lease obligations Non-current Revolving credit facility 2021 (including nil drawn in euros) CMBS notes 2019 CMBS notes 2022 CMBS notes 2024 CMBS notes 2029 CMBS notes 2033 CMBS notes 2035 Bank loan 2018 Bank loan 2020 Bank loans 2021 3.875% bonds 2023 4.125% bonds 2023 4.625% bonds 2028 4.250% bonds 2030 Debenture 2027 2.5% convertible bonds 2018 (note 26) 2.875% convertible bonds 2022 (note 26) Non-current borrowings, excluding finance leases and Metrocentre compound financial instrument Metrocentre compound financial instrument Finance lease obligations Total borrowings Cash and cash equivalents (note 21) Net debt Carrying value £m Secured £m Unsecured £m 125.1 14.9 140.0 2.4 142.4 10.0 19.8 50.5 87.8 78.7 325.4 190.6 494.8 32.8 468.9 442.4 477.5 341.7 344.8 228.4 308.1 362.4 125.1 14.9 140.0 2.4 142.4 10.0 19.8 50.5 87.8 78.7 325.4 190.6 494.8 32.8 468.9 442.4 477.5 341.7 344.8 228.4 – – 4,264.6 3,594.1 177.8 77.8 – 77.8 4,520.2 3,671.9 4,662.6 3,814.3 (254.7) 4,407.9 – – – – – – – – – – – – – – – – – – – – 308.1 362.4 670.5 177.8 – 848.3 848.3 The maturity profile of debt (excluding finance leases) is as follows: Repayable within one year Repayable in more than one year but not more than two years Repayable in more than two years but not more than five years Repayable in more than five years Fixed rate £m – 14.9 14.9 2.4 17.3 – 19.8 50.5 87.8 78.7 325.4 – – – – 442.4 477.5 341.7 344.8 228.4 308.1 362.4 Floating rate £m 125.1 – 125.1 – 125.1 10.0 – – – – – 190.6 494.8 32.8 468.9 – – – – – – – 2016 Fair value £m 125.1 18.3 143.4 2.4 145.8 10.0 20.8 60.6 98.6 92.3 406.4 196.5 494.8 32.8 468.9 486.8 536.1 402.4 389.4 269.3 308.1 362.4 3,067.5 1,197.1 4,636.2 177.8 77.8 – – 177.8 77.8 3,323.1 1,197.1 4,891.8 3,340.4 1,322.2 5,037.6 Group 2017 £m 184.3 175.5 1,445.9 3,111.9 4,917.6 Group 2016 £m 140.0 804.8 620.6 3,017.0 4,582.4 Certain borrowing agreements contain financial and other conditions that, if contravened, could alter the repayment profile. During the year there were no breaches of these conditions (see financial covenants in the other information section). 135 135 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 24 Borrowings (continued) At 31 December 2017 the Group had committed borrowing facilities of £640.7 million, expiring in 2021, £406.9 million of which was undrawn (2016: facilities £640.7 million, undrawn £630.7 million). The Company had non-current borrowings of £233.8 million at 31 December 2017 consisting of a revolving credit facility expiring in 2021 (2016: £10.0 million). This debt is floating rate, secured and its fair value is equal to book value. Finance lease disclosures: Minimum lease payments under finance leases fall due: Not later than one year Later than one year and not later than five years Later than five years Future finance charges on finance leases Present value of finance lease liabilities Present value of finance lease liabilities: Not later than one year Later than one year and not later than five years Later than five years Group 2017 £m 2.4 9.5 115.1 127.0 (46.8) 80.2 2.4 9.5 68.3 80.2 Group 2016 £m 2.4 9.5 112.7 124.6 (44.4) 80.2 2.4 9.5 68.3 80.2 Finance lease liabilities are in respect of head leases on investment and development property. A number of these leases provide for payment of contingent rent, usually a proportion of net rental income, in addition to the rents above. 25 Movement in net debt Group At 1 January Acquisition of businesses Disposal of subsidiaries Borrowings drawn Borrowings repaid Other net cash movements Other non-cash movements At 31 December Liabilities from financing activities Cash and cash equivalents £m Current borrowings £m Non- current borrowings £m 2017 Net debt £m 254.7 (216.0) 104.1 968.5 (660.0) (223.3) – 228.0 (142.4) (4,520.2) (4,407.9) – – – – – (44.3) (230.7) 231.4 (968.5) 660.0 – 16.9 (446.7) 335.5 – – (223.3) (27.4) (186.7) (4,811.1) (4,769.8) 136 136 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 25 Movement in net debt (continued) Group At 1 January Acquisition of businesses Disposal of subsidiaries Sale of other investments Borrowings drawn Borrowings repaid Other net cash movements Other non-cash movements At 31 December Liabilities from financing activities Cash and cash equivalents £m Current borrowings £m Non- current borrowings £m 2016 Net debt £m 275.8 (102.6) 80.5 201.9 469.2 (529.6) (140.5) – 254.7 (139.3) (4,332.3) (4,195.8) – 0.9 – – 169.1 – (173.1) (142.4) (302.9) 103.1 – (469.2) 360.5 – 120.6 (405.5) 184.5 201.9 – – (140.5) (52.5) (4,520.2) (4,407.9) 26 Convertible bonds 2.875 per cent convertible bonds (‘the 2.875 per cent bonds’) On 1 November 2016 Intu (Jersey) 2 Limited (the ‘Issuer’) issued £375.0 million 2.875 per cent Guaranteed Convertible Bonds due 2022 at par, all of which remain outstanding at 31 December 2017. At 31 December 2017 the exchange price was £3.7506 per ordinary share. intu properties plc has unconditionally and irrevocably guaranteed the due and punctual performance by the Issuer of all of its obligations (including payments) in respect of the 2.875 per cent bonds and the obligations of the Company, as guarantor, constitute direct, unsubordinated and unsecured obligations of the Company. Subject to certain conditions, the 2.875 per cent bonds are convertible into preference shares of the Issuer which are automatically transferred to the Company in exchange for ordinary shares in the Company or (at the Company’s election) any combination of ordinary shares and cash. The 2.875 per cent bonds can be converted at any time from the date which is 180 days prior to the Final Maturity Date of 1 November 2022, to the 20th dealing date prior to the Final Maturity Date. The initial exchange price was £3.7506 per ordinary share, a conversion rate of approximately 26,662 ordinary shares for every £100,000 nominal of the 2.875 per cent bonds. Under the terms of the 2.875 per cent bonds, the exchange price is adjusted upon certain events including the payment of dividends by the Company over a certain threshold. The 2.875 per cent bonds may be redeemed at par at the Company’s option subject to the Company’s ordinary share price having traded at 30 per cent above the conversion price for a specified period, or at any time once 85 per cent by nominal value of the 2.875 per cent bonds originally issued have been converted or cancelled. If not previously converted, redeemed or purchased and cancelled, the 2.875 per cent bonds will be redeemed at par on 1 November 2022. The 2.875 per cent bonds are designated as at fair value through profit or loss and so are presented on the balance sheet at fair value with all gains and losses taken to the income statement through the change in fair value of financial instruments line. At 31 December 2017, the fair value of the 2.875 per cent bonds was £377.3 million (2016: £362.4 million), with the change in fair value reflected in note 9. The 2.875 per cent bonds are listed on the Channel Islands Securities Exchange and the Open Market (Freiverkehr) of the Frankfurt Stock Exchange. During the year interest of £10.8 million (2016: £1.8 million) in respect of these bonds has been recognised within finance costs. In the Company’s balance sheet the bondholder option is held at its fair value of £28.3 million as a derivative financial instrument (2016: £0.5 million). 2.5 per cent convertible bonds (‘the 2.5 per cent bonds’) On 4 October 2012 Intu (Jersey) Limited (the ‘Issuer’) issued £300.0 million 2.5 per cent Guaranteed Convertible Bonds due 2018 at par, £160.4 million of which remains outstanding at 31 December 2017. At 31 December 2017 the exchange price was £3.1164 per ordinary share. intu properties plc has unconditionally and irrevocably guaranteed the due and punctual performance by the Issuer of all of its obligations (including payments) in respect of the 2.5 per cent bonds and the obligations of the Company, as guarantor, constitute direct, unsubordinated and unsecured obligations of the Company. During the year the Group purchased and subsequently cancelled £139.6 million of 2.5 per cent bonds. 137 137 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 26 Convertible bonds (continued) Subject to certain conditions, the 2.5 per cent bonds are convertible into preference shares of the Issuer which are automatically transferred to the Company in exchange for ordinary shares in the Company or (at the Company’s election) any combination of ordinary shares and cash. The 2.5 per cent bonds can be converted at any time from 14 November 2012 up to the 20th dealing day before the Final Maturity Date of 4 October 2018. The initial exchange price was £4.3752 per ordinary share, a conversion rate of approximately 22,856 ordinary shares for every £100,000 nominal of the 2.5 per cent bonds. Under the terms of the 2.5 per cent bonds, the exchange price is adjusted upon certain events including the payment of dividends by the Company. The 2.5 per cent bonds may be redeemed at par at the Company’s option subject to the Company’s ordinary share price having traded at 30 per cent above the conversion price for a specified period, or at any time once 85 per cent by nominal value of the 2.5 per cent bonds originally issued have been converted or cancelled. If not previously converted, redeemed or purchased and cancelled, the 2.5 per cent bonds will be redeemed at par on 4 October 2018. The 2.5 per cent bonds are designated as at fair value through profit or loss and so are presented on the balance sheet at fair value with all gains and losses taken to the income statement through the change in fair value of financial instruments line. At 31 December 2017, the fair value of the 2.5 per cent bonds was £161.0 million (2016: £308.1 million), with the change in fair value reflected in note 9. The 2.5 per cent bonds are listed on the Professional Securities Market of the London Stock Exchange. During the year interest of £6.7 million (2016: £7.5 million) in respect of these bonds has been recognised within finance costs. In the Company’s balance sheet the bondholder option is held at its fair value of £4.9 million as a derivative financial instrument (2016: £13.9 million). 27 Operating leases The Group earns rental income by leasing its investment properties to tenants under operating leases. In the UK the standard shopping centre lease is for a term of 10 to 15 years. Standard lease provisions include service charge payments, recovery of other direct costs and review every five years to market rent. Standard turnover based leases have a turnover percentage agreed with each lessee which is applied to a retail unit’s annual sales and any excess between the resulting turnover rent and the minimum rent is receivable by the Group. The future minimum lease amounts receivable by the Group under non-cancellable operating leases for continuing operations are as follows: Not later than one year Later than one year and not later than five years Later than five years 2017 £m 431.2 1,179.4 1,141.0 2,751.6 2016 £m 431.5 1,261.7 1,330.3 3,023.5 The income statement includes £19.0 million (2016: £18.0 million) recognised in respect of contingent rents calculated by reference to tenants’ turnover. 28 Financial risk management The Group is exposed to a variety of financial risks arising from the Group’s operations being principally market risk (including interest rate risk and foreign exchange risk), liquidity risk and credit risk. The majority of the Group’s financial risk management is carried out by the Group’s treasury department. The policies for managing each of these risks and their impact on the results for the year are summarised below. Market risk a) Interest rate risk Interest rate risk comprises both cash flow and fair value risks. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Fair value interest rate risk is the risk that the fair value of financial instruments will fluctuate as a result of changes in market interest rates. 138 138 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 28 Financial risk management (continued) The Group’s interest rate risk arises from borrowings issued at variable rates that expose the Group to cash flow interest rate risk, whereas borrowings issued at fixed interest rates expose the Group to fair value interest rate risk. Bank debt is typically issued at floating rates linked to LIBOR. Bond debt and other capital market debt is generally issued at fixed rates. It is Group policy, and often a requirement of the Group’s lenders, to eliminate substantially all exposure to interest rate fluctuations by using floating to fixed interest rate swaps in order to establish certainty over cash flows. Such swaps have the economic effect of converting borrowings from floating to fixed rates. As a consequence, the Group is exposed to market price risk in respect of the fair value of its fixed rate interest rate swaps, as discussed in the financial review on pages 48 to 53. The table below shows the effects of interest rate swaps on the borrowings profile of the Group: Borrowings1 Derivative impact (nominal value of interest rate swaps) Net borrowings profile Interest rate protection Fixed 2017 £m 2,998.2 1,371.6 4,369.8 Floating 2017 £m 1,607.0 (1,371.6) 235.4 94.9% Fixed 2016 £m 3,086.5 829.7 3,916.2 Floating 2016 £m 1,380.2 (829.7) 550.5 87.7% 1 Borrowings are stated at nominal value and exclude the Metrocentre compound financial instrument and finance leases. At 31 December 2017 they include the £233.8 million (2016: £10.0 million) drawn under the revolving credit facility (RCF) which incurs interest at a variable rate. Excluding the revolving credit facility, interest rate protection is 100 per cent (2016: 87.9 per cent). Group policy is to target interest rate protection within the range of 75 per cent to 100 per cent. The weighted average rate for interest rate swaps currently effective is 1.71 per cent (2016: 2.35 per cent). Unallocated interest rate swaps are excluded from the above calculation. The nominal value of these swaps is £566.7 million (2016: £566.7 million). Their fair value of £235.4 million (2016: £253.2 million) is included as a liability in the balance sheet. The approximate impact of a 50 basis point increase in the level of interest rates would reduce the liability by £87.6 million (2016: £78.5 million) in the fair value of derivatives. The approximate impact of a 50 basis point reduction in the level of interest rates would increase the liability by £87.6 million (2016: £78.5 million) in the fair value of derivatives. In practice, a parallel shift in the yield curve is highly unlikely. However, the above sensitivity analysis is a reasonable illustration of the possible effect from the changes in slope and shifts in the yield curve that may occur. Where the fixed rate derivative financial instruments are matched by floating rate debt, the overall effect on Group cash flow of such a movement would be very small. b) Foreign exchange risk Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a functional currency other than pounds sterling. At 31 December 2017 the exposure is 10.6 per cent of net assets attributable to shareholders of the Group (31 December 2016: 7.2 per cent). Once the Eurofund future interest in the share capital of the intu Costa del Sol development company concludes, we expect this to reduce to 9.7 per cent, below the Group’s policy of a maximum of 10 per cent. The table summarises the Group’s exposure to foreign currency risk: Net exposure 2017 €m 524.2 2016 €m 341.6 2017 INRm 2016 INRm 6,067.3 5,526.6 2017 US$m 0.1 2016 US$m 0.1 The following foreign exchange rates, at 31 December 2017, apply to the Group’s foreign exchange risk: 2017 €m 2016 €m 2017 INRm 2016 INRm 2017 US$m 2016 US$m Foreign exchange rate 1.1266 1.1715 86.0441 83.8636 1.3513 1.2357 The approximate impact of a 10 per cent appreciation in foreign exchange rates would be positive movement of £59.6 million (2016: £39.8 million) to equity attributable to owners of the Group. The approximate impact of a 10 per cent depreciation in foreign exchange rates would be a negative movement of £48.8 million (2016: £32.5 million) to equity attributable to owners of the Group. 139 139 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 28 Financial risk management (continued) As part of the strategy to comply with the Group’s policy, the Group is able to borrow part of its RCF in euros, up to €100 million. The RCF borrowings denominated in euros have been designated as a hedging instrument (net investment hedge) against the Group’s net investment in Spain with the hedged risk being the changes in the euro/pounds sterling spot rate that will result in changes in the value of the Group’s net investments in Spain. At 31 December 2017, €100 million (2016: nil) was drawn in euros. Liquidity risk Liquidity risk is managed to ensure that the Group is able to meet future payment obligations when financial liabilities fall due. Liquidity analysis is conducted to ensure that sufficient headroom is available to meet the Group’s operational requirements and committed investments. The Group treasury policy aims to meet this objective by maintaining adequate cash, marketable securities and committed facilities. Undrawn borrowing facilities are detailed in note 24. The Group’s policy is to seek to optimise its exposure to liquidity risk by balancing its exposure to interest rate risk and to refinancing risk. In effect the Group seeks to borrow for as long as possible at the lowest acceptable cost. Group policy is to maintain a weighted-average debt maturity of over five years. At 31 December 2017, the maturity profile of Group debt showed an average maturity of seven years (2016: seven years). The Group regularly reviews the maturity profile of its borrowings and seeks to avoid bunching of maturities through the regular replacement of facilities and by arranging a selection of maturity dates. Refinancing risk may be reduced by doing so prior to the contracted maturity date, effectively switching liquidity risk for market risk. The tables below set out the maturity analysis of the Group’s financial liabilities based on the undiscounted contractual obligations to make payments of interest and to repay principal. Where interest payment obligations are based on a floating rate, the rates used are those implied by the par yield curve for the relevant currency. Where payment obligations are in foreign currencies, the spot exchange rate at the balance sheet date is used. Group Within 1 year £m 1–2 years £m 2–5 years £m Over 5 years £m 2017 Total £m Borrowings (including interest) (367.9) (367.8) (1,959.6) (3,512.4) (6,207.7) Finance lease obligations Other financial liabilities Derivative payments Derivative receipts (2.4) (17.1) (51.6) 9.4 (2.4) (1.2) (51.7) 12.5 (7.1) – (130.6) 43.1 (115.1) – (403.9) 132.3 (127.0) (18.3) (637.8) 197.3 (429.6) (410.6) (2,054.2) (3,899.1) (6,793.5) Group Within 1 year £m 1–2 years £m 2–5 years £m Over 5 years £m 2016 Total £m Borrowings (including interest) (311.8) (996.9) (1,057.2) (3,541.1) (5,907.0) Finance lease obligations Other financial liabilities Derivative payments Derivative receipts Company Borrowings (including interest) Other financial liabilities Amounts owed to subsidiary undertakings (2.4) (17.4) (92.8) 18.3 (2.4) (1.2) (43.5) 5.3 (7.2) – (115.7) 22.3 (112.6) – (375.9) 128.6 (124.6) (18.6) (627.9) 174.5 (406.1) (1,038.7) (1,157.8) (3,901.0) (6,503.6) Within 1 year £m 1–2 years £m 2–5 years £m Over 5 years £m (4.7) (0.8) (553.1) (558.6) (4.7) (242.3) – – – – (4.7) (242.3) – – – – 2017 Total £m (251.7) (0.8) (553.1) (805.6) 140 140 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 28 Financial risk management (continued) Company Borrowings (including interest) Other financial liabilities Amounts owed to subsidiary undertakings Within 1 year £m 1–2 years £m 2–5 years £m Over 5 years £m (0.2) (0.3) (684.6) (685.1) (0.2) (10.6) – – – – (0.2) (10.6) – – – – 2016 Total £m (11.0) (0.3) (684.6) (695.9) Credit risk Credit risk is the risk of financial loss if a tenant or counterparty fails to meet an obligation under a contract. Credit risk arises primarily from trade receivables but also from the Group’s holdings of assets with counterparties such as cash deposits and derivative financial instruments. Credit risk associated with trade receivables is actively managed; tenants are managed individually by asset managers, who continuously monitor and work with tenants, aiming wherever possible to identify and address risks prior to default. Prospective tenants are assessed via a review process, including obtaining credit ratings and reviewing financial information, which is conducted internally. As a result deposits or guarantees may be obtained. The amount of deposits held as collateral at 31 December 2017 is £4.1 million (2016: £4.5 million). It is Group policy to calculate any impairment of receivables specifically on each contract. The ageing analysis of trade receivables is as follows: Up to three months Three to six months Trade receivables Group 2017 £m 23.1 3.3 26.4 Group 2016 £m 20.8 1.3 22.1 At 31 December 2017 trade receivables are shown net of provisions totalling £4.5 million (2016: £4.2 million). The credit risk relating to cash deposits and derivative financial instruments is actively managed by the Group’s treasury department. Relationships are maintained with a number of tier one institutional counterparties, ensuring compliance with Group policy relating to limits on the credit ratings of counterparties (between BBB+ and AAA). Excessive credit risk concentration is avoided through adhering to authorised limits for all counterparties. Counterparty Counterparty #1 Counterparty #2 Counterparty #3 Counterparty #4 Counterparty #5 Sum of five largest exposures Sum of cash deposits and derivative financial instrument assets Five largest exposures as a percentage of risk Credit rating Authorised limit £m Group exposure 31 December 2017 £m AA A+ A+ AAA AA- 125.0 100.0 100.0 150.0 75.0 106.2 45.7 31.2 18.1 15.4 216.6 228.3 95% 141 141 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 28 Financial risk management (continued) Classification of financial assets and liabilities The tables below set out the Group’s accounting classification of each class of financial assets and liabilities and their fair values at 31 December 2017 and 31 December 2016. The fair values of derivative financial instruments are determined from observable market prices or estimated using appropriate yield curves at 31 December each year by discounting the future contractual cash flows to the net present values. The determination of the fair values of borrowings is defined in note 24. Loans to joint ventures Trade and other receivables Cash and cash equivalents Total cash and receivables Other investments Total available-for-sale investments Derivative financial instruments Total held for trading Trade and other payables Borrowings Total loans and payables Loans to joint ventures Trade and other receivables Cash and cash equivalents Total cash and receivables Other investments Total available-for-sale investments Derivative financial instrument liabilities Total held for trading liabilities Trade and other payables Borrowings Total loans and payables 2017 Loss to other comprehensive income £m Profit/(loss) to income statement £m – – – – – – 28.3 28.3 – (6.3) (6.3) – – – – (0.2) (0.2) – – – – – 2016 Profit to other comprehensive income £m Profit/(loss) to income statement £m – – – – – – (47.2) (47.2) – 30.9 30.9 – – – – 0.4 0.4 – – – – – Fair value £m 282.9 61.9 228.0 572.8 16.8 16.8 (347.5) (347.5) (18.3) (5,428.6) (5,446.9) Fair value £m 232.2 47.4 254.7 534.3 15.5 15.5 (377.7) (377.7) (18.6) (5,037.6) (5,056.2) Carrying value £m 282.9 61.9 228.0 572.8 16.8 16.8 (347.5) (347.5) (18.3) (4,997.8) (5,016.1) Carrying value £m 232.2 47.4 254.7 534.3 15.5 15.5 (377.7) (377.7) (18.6) (4,662.6) (4,681.2) 142 142 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 28 Financial risk management (continued) The table below presents the Group’s financial assets and liabilities recognised at fair value. Level 1 £m Level 2 £m Level 3 £m Assets Derivative financial instruments: —(cid:3)Fair value through profit or loss Available-for-sale investments Total assets Liabilities Convertible bonds: – 15.3 15.3 0.3 – 0.3 —(cid:3)Designated as at fair value through profit or loss (538.3) – Derivative financial instruments: —(cid:3)Fair value through profit or loss Total liabilities – (538.3) (347.8) (347.8) – 1.5 1.5 – – – Assets Available-for-sale investments Total assets Liabilities Convertible bonds: —(cid:3)Designated as at fair value through profit or loss Derivative financial instruments: —(cid:3)Fair value through profit or loss Total liabilities Level 1 £m Level 2 £m Level 3 £m 15.5 15.5 (670.5) – (670.5) – – – (377.7) (377.7) – – – – – 2017 Total £m 0.3 16.8 17.1 (538.3) (347.8) (886.1) 2016 Total £m 15.5 15.5 (670.5) (377.7) (1,048.2) Fair value hierarchy Level 1: Valuation based on quoted market prices traded in active markets. Level 2: Valuation techniques are used, maximising the use of observable market data, either directly from market prices or derived from market prices. Level 3: Where one or more significant inputs to valuation are unobservable. Valuations at this level are more subjective and therefore more closely managed, including sensitivity analysis of inputs to valuation models. Such testing has not indicated that any material difference would arise due to a change in input variables. Transfers into and transfers out of the fair value hierarchy levels are recognised on the date of the event or change in circumstances that caused the transfer. There were no transfers between Levels 1, 2 and 3 during the year. Valuation techniques for Level 2 hierarchy financial assets and liabilities are presented in the accounting policies. 143 143 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 28 Financial risk management (continued) Capital structure The Group seeks to enhance shareholder value both by investing in the business so as to improve the return on investment and by managing the capital structure. The capital of the Group consists of equity, debt and compound financial instruments. The Group aims to access both debt and equity capital markets with maximum efficiency and flexibility. The key ratios used to monitor the capital structure of the Group are the debt to assets ratio and interest cover. The Group’s stated medium to long-term preference is for the debt to assets ratio to be within the 40–50 per cent range and interest cover to be greater than 1.60x. At 31 December 2017 the debt to assets ratio remains within the preferred range and the interest cover ratio continues to be above the preferred level. As the Group’s debt is sometimes secured on its interests in joint ventures, these ratios are monitored for the Group including share of joint ventures. A reconciliation from the relevant amounts as presented to those including the Group’s share of joint ventures is included in the other information section. Debt to assets ratio Market value of investment and development property Add market value of investment and development property classified as held for sale Net external debt Debt to assets ratio Interest cover Finance costs Finance income Underlying operating profit Interest cover Group 2017 £m Group 2016 £m 10,222.7 9,984.7 306.5 – 10,529.2 9,984.7 (4,835.5) (4,364.1) 45.9% 43.7% Group 2017 £m (219.9) 3.3 (216.6) 419.3 1.94x Group 2016 £m (208.5) 1.5 (207.0) 407.7 1.97x 29 Deferred tax Under IAS 12 Income Taxes, provision is made for the deferred tax assets and liabilities associated with the revaluation of assets and liabilities at the corporate tax rate expected to apply to the Group at the time the temporary differences are expected to reverse. For those UK assets and liabilities benefitting from REIT exemption the relevant tax rate will be 0 per cent (2016: 0 per cent), and for other UK assets and liabilities the relevant rate will be 19 per cent if the temporary difference is expected to be realised before 1 April 2020 and 17 per cent if it is expected to be realised on or after 1 April 2020 (2016: 20 per cent before 1 April 2017, 19 per cent before 1 April 2020 and 17 per cent thereafter). For Spanish assets and liabilities the relevant tax rate will be 25 per cent (2016: 25 per cent). 144 144 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 29 Deferred tax (continued) Movements in the provision for deferred tax: Group Provided deferred tax provision/(asset): At 1 January 2016 Recognised in the income statement Recognised in other comprehensive income At 31 December 2016 Acquisition of Madrid Xanadú (note 33) Recognised in the income statement Recognised in other comprehensive income Foreign exchange movements Disposal of subsidiaries (note 34) At 31 December 2017 Investment and development property £m Other investments £m Derivative financial instruments £m Other temporary differences £m – – – – 84.5 24.8 – 1.8 (86.5) 24.6 18.9 (2.3) (16.5) 0.1 – – (0.1) – – – (16.4) 16.4 – – – – – – – – (2.5) 2.4 – (0.1) (6.8) (0.8) – (0.1) 6.9 (0.9) Total £m – 16.5 (16.5) – 77.7 24.0 (0.1) 1.7 (79.6) 23.7 The net deferred tax provision of £23.7 million arises in respect of the revaluation of development property at intu Costa del Sol, partially offset by tax losses in the same company. At 31 December 2017, the Group had unrecognised deferred tax assets calculated at a tax rate of 17 per cent (2016: 17 per cent) of £43.1 million (2016: £39.7 million) for surplus UK revenue tax losses carried forward, £45.6 million (2016: £45.5 million) for temporary differences on derivative financial instruments, £0.5 million (2016: £0.6 million) for temporary differences on capital allowances and £5.8 million (2016: £3.4 million) for capital losses. On its sale in 2016, the deferred tax provision in respect of the Group’s investment in Equity One was reduced to nil. The revaluation of this investment was recognised in reserves and so the deferred tax movements related to it were also recognised in other comprehensive income. With the provision reduced to nil, the deferred tax asset on derivative financial instruments and other temporary differences could no longer be recognised, and £18.9 million was therefore released to the income statement. In accordance with the requirements of IAS 12 Income Taxes, the deferred tax asset has not been recognised on the Group’s balance sheet due to uncertainty over the level of profits that will be available in the non-REIT elements of the Group in future periods. The Company recognises no deferred tax asset or liability (2016: nil). 30 Share capital and share premium Issued and fully paid: At 1 January 2016: 1,344,661,827 ordinary shares of 50 pence each Ordinary shares issued At 31 December 2017 and 31 December 2016: 1,355,040,243 ordinary shares of 50 pence each Share capital £m 672.3 5.2 677.5 Share premium £m 1,303.1 24.3 1,327.4 During 2016 the Company issued a total of 110,075 ordinary shares in connection with the exercise of options by employees and former employees under the intu properties plc approved share option scheme and the intu properties plc unapproved share option scheme. As a result the Company’s share capital increased by £0.1 million and share premium by £0.2 million. On 22 November 2016, the Company issued 10,268,341 new ordinary shares of 50 pence each respectively to shareholders who elected to receive their 2016 interim dividend in shares under the Scrip Dividend Scheme. The value of the Scrip Shares was calculated in accordance with the terms of the Scrip Dividend Scheme, being the average middle market quotations for each day between 4 October and 10 October 2016 inclusive less the gross amount of dividend payable. As a result the Company’s share capital increased by £5.1 million and share premium by £24.1 million. 145 145 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 30 Share capital and share premium (continued) Full details of the rights and obligations attaching to the ordinary shares are contained in the Company’s Articles of Association. These rights include an entitlement to receive the Company’s report and financial statements, to attend and speak at general meetings of the Company, to appoint proxies and to exercise voting rights. Holders of ordinary shares may also receive dividends and may receive a share of the Company’s assets on the Company’s liquidation. There are no restrictions on the transfer of the ordinary shares. At 22 February 2018 the Company had an unexpired authority to repurchase shares up to a maximum of 135,504,024 shares with a nominal value of £67.8 million, and the Directors have an unexpired authority to allot up to a maximum of 451,680,081 shares with a nominal value of £225.8 million. Included within the issued share capital at 31 December 2017 are 11,633,680 ordinary shares (2016: 12,069,559) held by the Trustee of the ESOP which is operated by the Company (see note 31). The nominal value of these shares at 31 December 2017 is £5.8 million (2016: £6.0 million). 31 Employee Share Ownership Plan (ESOP) The cost of shares in intu properties plc held by the Trustee of the Employee Share Ownership Plan operated by the Company is accounted for as a deduction from equity. The purpose of the ESOP is to acquire and hold shares which will be transferred to employees in the future under the Group’s employee incentive arrangements as described in note 40 and the Directors’ remuneration report on pages 78 to 93, including joint ownership of shares in its role as Trustee of the Joint Share Ownership Plan. Dividends of £1.7 million (2016: £1.0 million) in respect of these shares have been waived by agreement. Group and Company At 1 January Acquisitions Disposals At 31 December 32 Other reserves Group At 1 January 2016 Revaluation of other investments (note 19) Exchange differences Tax relating to components of other comprehensive income (note 10) Transferred to income statement on sale of other investments At 31 December 2016 Revaluation of other investments (note 19) Exchange differences Tax relating to components of other comprehensive income (note 10) At 31 December 2017 Shares million 12.1 0.4 (0.9) 11.6 Capital redemption £m 61.4 – – – – 61.4 – – – 61.4 2017 £m 40.8 1.3 (3.0) 39.1 Translation reserve £m 7.7 – 31.6 – (13.4) 25.9 – 16.9 – 42.8 Shares million 12.7 0.3 (0.9) 12.1 Other £m 303.7 0.4 – 16.5 (63.6) 257.0 (0.2) – 0.1 256.9 2016 £m 43.3 0.7 (3.2) 40.8 Total £m 372.8 0.4 31.6 16.5 (77.0) 344.3 (0.2) 16.9 0.1 361.1 Other reserves in respect of the Company relate to the capital redemption reserve of £61.4 million (2016: £61.4 million). 146 146 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 33 Business combinations Accounting for acquisitions is a significant judgement as referenced in note 1. The Group individually assesses each acquisition to determine if it should be accounted for as a business combination in accordance with IFRS 3 Business Combinations. In respect of the below acquisitions, the Group has concluded the assets and liabilities acquired constitute a business. They include the shopping centre asset itself along with the employees and processes that operate the centre on a day-to-day basis. These inputs and processes in turn drive the operation of the centre and the related output for its beneficial owner. As a result, this acquisition is to be accounted for as a business combination in accordance with IFRS 3. Acquisition during 2017 On 10 March 2017 the Group acquired 100 per cent interests in three entities, which together own and manage Madrid Xanadú shopping centre, for total cash consideration of €517.3 million (£453.9 million). The cash flow statement outflow of £446.7 million reflects the £453.9 million less the unrestricted cash acquired of £7.2 million. Acquisition related costs of £1.3 million were incurred and recognised in the income statement in exceptional administration expenses during the year. The fair value of assets and liabilities acquired, at 100 per cent, are set out in the table below: Assets Investment and development property Cash and cash equivalents (including restricted cash of £3.1 million) Trade and other receivables Total assets Liabilities Trade and other payables Deferred tax Total liabilities Net assets Fair value of consideration paid Goodwill on acquisition of business Fair value £m 461.4 10.3 0.1 471.8 (21.3) (77.7) (99.0) 372.8 453.9 81.1 The fair value of the consideration is greater than the fair value of the assets and liabilities acquired, resulting in goodwill of £81.1 million being recognised on acquisition. The goodwill balance is primarily attributable to the recognition of a deferred tax balance which is required to be recorded in accordance with IAS 12 Income Taxes but has not been taken into account as part of the purchase price as it is not expected to be realised. From the date of acquisition to the end of the year, the acquired subsidiaries and subsequent joint venture interest (see note 34) contributed £13.2 million of revenue and £3.1 million of profit to the Group. Had the entities been acquired on 1 January 2017, the Group would have reported revenue of £622.9 million and profit of £206.0 million for the year. 147 147 33 Business combinations (continued) Acquisition during 2016 On 22 June 2016 the Group acquired the remaining 50 per cent of intu Merry Hill for total consideration of £409.7 million. Following this transaction intu Merry Hill has ceased to be accounted for as a joint venture and is now a subsidiary of the Group. The cash flow statement outflow of £405.5 million reflects the £409.7 million less the unrestricted cash acquired of £4.2 million. Acquisition related costs of £1.0 million were incurred and recognised in the income statement in exceptional administration expenses during the year. The fair value of assets and liabilities acquired, at 100 per cent, are set out in the table below: i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Assets Investment and development property Cash and cash equivalents Trade and other receivables Total assets Liabilities Trade and other payables Total liabilities Net assets Fair value of consideration paid Gain on acquisition of business Fair value £m 889.3 4.2 3.9 897.4 (8.1) (8.1) 889.3 854.7 34.6 The fair value of the assets and liabilities acquired exceeded the fair value of the consideration and as a result a gain of £34.6 million was recognised in the income statement on acquisition. With a motivated seller, we were able as manager and owner of the other 50 per cent interest to conclude the transaction at a value lower than the independent market value. The fair value of consideration paid included the cash consideration for the acquired 50 per cent interest of £409.7 million and the fair value of intu’s existing interest of £445.0 million. There were no material differences between the carrying value and fair value of intu’s existing joint venture interest at acquisition. From 22 June 2016, the date on which the acquired entities joined the Group as subsidiaries, they contributed £28.5 million to the revenue of the Group (acquired 50 per cent contribution: £14.2 million) and contributed £13.5 million of profit in the period. Had the entities been acquired on 1 January 2016, the Group would have reported revenue of £650.0 million and profit of £170.9 million for the year. 148 148 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 34 Disposal of subsidiaries Disposals during 2017 On 31 July 2017 the Group sold 50 per cent of its interest in Xanadú Retail and Leisure S.L.U., a wholly owned subsidiary, to TH Real Estate for total consideration of €131.7 million (£117.9 million) before expenses of £1.0 million. Xanadú Retail and Leisure S.L.U. owns, through its wholly owned subsidiaries, Madrid Xanadú. Following this transaction Madrid Xanadú has ceased to be accounted for as a subsidiary and is now a joint venture. Therefore the assets and liabilities of Madrid Xanadú are no longer recorded at 100 per cent in the Group’s balance sheet but the remaining 50 per cent interest is included in investment in joint ventures at an initial value of £117.1 million. As a result of this transaction the Group has recorded a loss on disposal of £1.0 million in the income statement. The cash flow statement inflow of £104.1 million represents the net consideration received of £116.9 million net of unrestricted cash in the business of £12.8 million. Assessing control over joint arrangements is a significant judgement as referenced in note 1. Based on the terms set out in the partnership agreement, the Group has classified its retained 50 per cent interest as a joint venture as key decisions require the consent of both partners. The assets and liabilities of the subsidiaries disposed of, at 100 per cent, are set out below: Assets Investment and development property Goodwill Cash and cash equivalents (including restricted cash of £3.2 million) Trade and other receivables Total assets Liabilities Trade and other payables Deferred tax Derivative financial instruments Borrowings Total liabilities Net assets Net assets (at 50 per cent) Fair value of consideration received Loss on disposal of subsidiaries £m 472.3 81.1 16.0 7.3 576.7 (28.4) (79.6) (1.6) (231.4) (341.0) 235.7 117.9 116.9 1.0 149 149 34 Disposal of subsidiaries (continued) Disposals during 2016 On 15 December 2016 the Group sold 100 per cent of its interest in Intu Bromley Limited, a wholly owned subsidiary, to Alaska Permanent Fund for initial consideration of £81.5 million before expenses of £1.3 million. Intu Bromley Limited holds a 64 per cent interest in intu Bromley. It was anticipated the Group would receive a cash payment of £0.8 million following final agreement of the completion balance sheet. As a result of this transaction the Group recorded a loss on disposal of £0.3 million in the income statement. The cash flow statement inflow of £80.5 million reflects the net consideration of £81.0 million net of cash in the business of £0.5 million. The assets and liabilities of the subsidiary disposed of, at 100 per cent, are set out below: i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Assets Investment and development property Cash and cash equivalents Trade and other receivables Total assets Liabilities Trade and other payables Borrowings Total liabilities Net assets Fair value of consideration received Loss on disposal of subsidiaries £m 179.4 0.5 12.7 192.6 (7.3) (104.0) (111.3) 81.3 81.0 0.3 35 Assets classified as held for sale In November the Group announced the formation of a joint venture with LaSalle Investment Management (acting on behalf of Greater Manchester Pension Fund and West Yorkshire Pension Fund) for them to take ownership of 50 per cent of intu Chapelfield for initial net proceeds of £148.0 million. This transaction completed on 31 January 2018 following the receipt of EU merger approval. As a result, at 31 December 2017 in accordance with IFRS the Group has classified 100 per cent of intu Chapelfield (which is part of the UK operating segment) and all its related assets and liabilities as held for sale. Assessing non-current assets and disposal groups held for sale is a significant judgement as referenced in note 1. The assets and liabilities below are presented at their carrying amount. There are no material differences between their carrying amount and fair value less costs to sell. Assets of disposal groups classified as held for sale Investment and development property Cash and cash equivalents Trade and other receivables Total Liabilities of disposal groups classified as held for sale Trade and other payables Total £m 302.0 0.5 6.6 309.1 (6.2) (6.2) 150 150 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 36 Capital commitments At 31 December 2017 the Board had approved £253.8 million (2016: £241.3 million) of future expenditure for the purchase, construction, development and enhancement of investment property. Of this, £145.9 million (2016: £136.6 million) is contractually committed. The majority of this is expected to be spent during 2018 and 2019. 37 Cash generated from operations Profit/(loss) before tax, joint ventures and associates Adjusted for: Revaluation of investment and development property Gain on acquisition of businesses Loss on disposal of subsidiaries Gain on sale of other investments Depreciation Share-based payments Lease incentives and letting costs (Reversal)/charge of impairment of investment in Group companies Reversal of impairment of amounts owed by subsidiary undertakings Net finance costs/(income) Changes in working capital: Change in trade and other receivables Change in trade and other payables Cash generated from operations Notes 14 33 4 19 40 15 9 Group 2017 £m 190.4 (30.8) – 1.8 – 2.9 2.3 Group 2016 £m 154.6 78.0 (34.6) 0.3 (74.1) 2.2 1.9 (4.1) (16.7) – – – – 218.2 242.2 (0.6) (14.5) 365.6 (1.0) 3.1 355.9 Company 2017 £m 36.0 Company 2016 £m (66.1) – – – – 2.5 2.3 – (67.0) (24.4) 36.4 151.4 (135.0) 2.2 – – – – 1.6 1.9 – 70.1 – (24.5) 187.6 385.4 556.0 151 151 38 Subsidiaries, joint ventures and associates The table below lists all of the Company’s subsidiaries, joint ventures and associates. The country of incorporation and registration is England and Wales and the registered office is 40 Broadway, London SW1H 0BT except as indicated. The Company’s interest in each subsidiary is 100 per cent, except as indicated. The Company’s interest in each joint venture is 50 per cent, except as indicated. i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Name of entity Class of capital Name of entity Subsidiaries based at 40 Broadway, London, SW1H 0BT Intu Cardiff Holdco Limited (dormant) Barton Square Holdco Limited (holding company) Barton Square Limited (property) Braehead Glasgow Limited (property) Braehead Leisure Partnership (property) Braehead Park Estates Limited (property) Braehead Park Investments Limited (property) Ordinary shares Ordinary shares ‘A’ Ordinary shares ‘B’ Ordinary shares n/a Ordinary shares Ordinary shares Broadmarsh Retail (Nominee No.1) Limited (dormant) Ordinary shares Broadmarsh Retail (Nominee No.2) Limited (dormant) Ordinary shares Broadmarsh Retail (Nominee No.3) Limited (dormant) Ordinary shares Broadmarsh Retail (Nominee No.4) Limited (dormant) Ordinary shares Broadmarsh Retail General Partner Limited (general partner) ‘A’ Ordinary shares ‘B’ Ordinary shares Broadway Construction & Development Limited (dormant) Ordinary shares Broadway Retail Leisure Limited (management of leisure facilities) Cable Plaza Limited (limited partner) Capital Shopping Centres Limited (dormant)3 Castle & Pedmore Houses Limited (holding company) Chapelfield GP Limited (general partner) Chapelfield LP Limited (limited partner) Chapelfield Nominee Limited (dormant) Chapelfield Property Management Limited (property management) Conduit Insurance Holdings Limited (holding company)3 Cribbs Mall Nominee (2) Limited (dormant) Crossmane Limited (limited partner) CSC Uxbridge Limited (dormant) Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Derby Business Management Limited (business manager) Ordinary shares Derby Investments General Partner Limited (general partner) Ordinary shares Derby Investments Limited Partnership (limited partner) n/a Derby Investments Trustee Limited (dormant) Fortheath (No.3) Limited (dormant) Intu (SGS) Finco Limited (finance) Intu (SGS) Holdco Limited (holding company) Intu (SGS) Limited (holding company) Intu (SGS) Topco Limited (holding company)3 Intu 2027 Limited (dormant) Intu Braehead Leisure Limited (holding company) Intu Braehead Limited (holding company) Intu Braehead Property Management Limited (property management) Intu Broadmarsh Limited (dormant)3 Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Intu Cardiff Limited (dormant) Intu Centaurus Retail Limited (holding company) Intu Chapelfield Limited (dormant) Intu Chapelfield Residential Limited (property) Intu Debenture plc (finance, holding company) 3 Intu Eldon Square Limited (property) Intu Energy Limited (holding company) Intu Experiences Limited (mall commercialisation) Intu Finance MH Limited (finance) Intu FM Limited (dormant) Intu India (Direct) Limited (investment holdings) Intu India (Portfolio) Limited (investments holdings) Intu Investments Limited (property) Intu IP Limited (intellectual property) Intu Lakeside Hotel Limited (dormant) Intu Lakeside Limited (property) Intu Metrocentre Parent Company Limited (dormant) Intu Metrocentre Property Management Limited (property management) Intu Metrocentre Topco Limited (holding company)3 Intu MH Acquisitions Limited (limited partner) Intu MH Group Limited (holding company) Intu MH Holdings Limited (holding company) Intu MH Investments Limited (limited partner) Intu MH Leaseholds Limited (holding company) Intu MH Parking Limited (limited partner) Intu MH Phase 1 Limited (limited partner) Intu MH Properties Limited (holding company) Intu MH Waterfront Limited (limited partner) Intu MHDS Holdco Limited (holding company)3 Intu Milton Keynes Limited (property) Class of capital Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Preference shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Intu Lakeside Property Management Limited (property management) Intu Management Services Limited (management services)3 Ordinary shares Ordinary shares Intu Metrocentre Limited (limited partner) Ordinary shares Intu Nottingham Investments Limited (limited partner) Ordinary shares Intu Payments Limited (Group payment services) Intu Potteries Limited (limited partner) Ordinary shares Ordinary shares Intu Properties Investments Limited (limited partner) Ordinary shares Intu Property Management Limited (property management) Ordinary shares Intu Property Services Limited (dormant) Ordinary shares Intu Retail Services Limited (facilities management) Ordinary shares Intu RS Limited (facilities management) Ordinary shares ‘A’ shares Intu MH Participations Limited (holding company) 152 152 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 38 Subsidiaries, joint ventures and associates (continued) Name of entity Class of capital Name of entity Class of capital Intu Shelfco 1 Limited (dormant) Ordinary shares MH (No.2) Limited Partnership (property) n/a Intu Shelfco 3 plc (dormant) Intu Shopping Centres plc (holding company)3 Intu Spain Limited (holding company) Ordinary shares MH (No.2) Nominee A Limited (dormant) Ordinary shares MH (No.2) Nominee B Limited (dormant) Ordinary shares Ordinary shares Ordinary shares MH (No.3) General Partner Limited (general partner) Ordinary shares Intu The Hayes Limited (limited partner) Ordinary shares MH (No.3) Limited Partnership (property) n/a Intu Trafford Centre Group (UK) Limited (holding company) Ordinary shares MH (No.3) Nominee A Limited (dormant) Intu Trafford Centre Limited (development management) Ordinary shares MH (No.3) Nominee B Limited (dormant) Ordinary shares Ordinary shares Intu Ventures Limited (dormant) Intu Victoria Centre Limited (dormant)3 Intu Watford Limited (property) Intu Watford Property Management Limited (property management) IntuDigital Holdco Limited (holding company) IntuDigital Limited (digital services) Kindmotive Limited (dormant) Lakeside 1988 Limited (dormant) Liberty Capital PLC (dormant)3 Liberty International Construction and Development Limited (dormant)3 Liberty International Financial Services Limited (financial services) Liberty International Group Treasury Limited (treasury management) Liberty International Holdings Limited (holding company)1 Ordinary shares Ordinary shares Manchester Nominee (2) Limited (dormant) Ordinary shares Merry Hill Management Services Limited (dormant) Ordinary shares Merry Hill Services Limited (dormant) Merry Hill Trading Limited (trading) Metrocentre (GP) Limited (general partner) Metrocentre (Holdco) Limited (dormant) Metrocentre (Nominee No.1) Limited (dormant) Metrocentre (Nominee No.2) Limited (dormant) Metrocentre (Subco) Limited (dormant) Metrocentre Lancaster LLP (property)4 Metrocentre Lancaster No.1 Limited (holding company) Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares n/a Ordinary shares MH (No.4) General Partner Limited (general partner) Ordinary shares Ordinary shares MH (No.4) Limited Partnership (property) n/a Ordinary shares MH (No.4) Nominee A Limited (dormant) Ordinary shares MH (No.4) Nominee B Limited (dormant) Ordinary shares Ordinary shares ‘A’ Ordinary shares ‘B’ Ordinary shares Ordinary shares Cumulative redeemable preference shares Ordinary shares ‘A’ Ordinary shares ‘B’ Redeemable preference shares ‘C’ Preference shares Ordinary shares Ordinary shares MH (No.5) General Partner Limited (general partner) Ordinary shares MH (No.5) Limited Partnership (property) n/a MH (No.5) Nominee A Limited (dormant) MH (No.5) Nominee B Limited (dormant) Ordinary shares Ordinary shares MH (No.6) General Partner Limited (general partner) Ordinary shares MH (No.6) Limited Partnership (property) n/a MH (No.6) Nominee A Limited (dormant) MH (No.6) Nominee B Limited (dormant) Ordinary shares Ordinary shares MH (No.7) General Partner Limited (general partner) Ordinary shares MH (No.7) Limited Partnership (property) n/a MH (No.7) Nominee A Limited (dormant) MH (No.7) Nominee B Limited (dormant) Ordinary shares Ordinary shares MH (No.8) General Partner Limited (general partner) Ordinary shares MH (No.8) Limited Partnership (property) n/a MH (No.8) Nominee A Limited (dormant) MH (No.8) Nominee B Limited (dormant) Ordinary shares Ordinary shares Middleford Property Investments Limited (dormant) Ordinary shares Potteries (GP) Limited (general partner) Ordinary shares Potteries (Nominee No.1) Limited (dormant) Potteries (Nominee No.2) Limited (dormant) Runic Nominees Limited (dormant) Sandal Investments Limited (dormant) Staffordshire Property Management Limited (property) TAI Investments Limited (holding company)2 TAI Nominees Limited (dormant) Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares ‘B’ Deferred shares Ordinary shares Ordinary shares The Broadmarsh Retail Limited Partnership (property) n/a The Bullfinch Company Limited (dormant) Ordinary shares The Chapelfield Partnership (property) The Metrocentre Partnership (property)4 The Potteries Shopping Centre Limited Partnership (property) n/a n/a n/a Ordinary shares The Trafford Centre Holdings Limited (holding company) Ordinary shares Metrocentre Lancaster No.2 Limited (holding company) Ordinary shares The Trafford Centre Investments Limited (holding company) Ordinary shares MH (No.1) General Partner Limited (general partner) Ordinary shares The Trafford Centre Limited (property) MH (No.1) Limited Partnership (property) n/a MH (No.1) Nominee A Limited (dormant) MH (No.1) Nominee B Limited (dormant) Ordinary shares Ordinary shares ‘A’ Preference shares ‘B’ Preference shares Ordinary shares MH (No.2) General Partner Limited (general partner) Ordinary shares The Victoria Centre Partnership (property) n/a 153 153 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s Class of capital Units 38 Subsidiaries, joint ventures and associates (continued) Name of entity Class of capital Name of entity The Wilmslow (No.3) Limited Partnership (property) n/a TransAtlantic Holdings Limited (dormant) Transol Investments Limited (dormant) VCP (GP) Limited (general partner) VCP Nominees No.1 Limited (dormant) VCP Nominees No.2 Limited (dormant) Westgate Oxford Investments Limited (dormant) Whitesun Limited (property) Wilmslow (No.3) (Nominee A) Limited (dormant) Wilmslow (No.3) (Nominee B) Limited (dormant) Wilmslow (No.3) General Partner Limited (general partner) Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares ‘A’ Ordinary shares ‘B’ Ordinary shares WRP Management Limited (property) Ordinary shares Subsidiaries based at 1 Waverly Place, Union Street, St Helier, Jersey, JE1 1SG Belside Limited (property) Curley Limited (property) Steventon Limited (property) Ordinary shares Ordinary shares Ordinary shares Subsidiaries based at 22 Grenville Street, St Helier, Jersey, JR4 8PX CSC Capital (Jersey) Limited (dormant)3 Intu (Jersey) 2 Limited (finance)3 Intu (Jersey) Limited (finance)3 Intu Capital (Jersey) Limited (dormant)3 Ordinary shares Ordinary shares Ordinary shares Ordinary shares Redeemable preference shares Intu Derby 2 Limited (holding company) Ordinary shares Intu Derby Jersey Unit Trust (limited partner) Units Intu Derby Limited (holding company) Intu Merry Hill 2 Limited (holding company) Intu Merry Hill Limited (holding company) Intu MH (No.1) Jersey Unit Trust (limited partner) Intu MH (No.1) Sub-Trust (limited partner) Intu MH (No.2) Jersey Unit Trust (limited partner) Intu MH (No.2) Sub-Trust (limited partner) Intu MH (No.3) Jersey Unit Trust (limited partner) Intu MH (No.3) Sub-Trust (limited partner) Intu MH (No.4) Jersey Unit Trust (limited partner) Intu MH (No.4) Sub-Trust (limited partner) Intu MH (No.5) Jersey Unit Trust (limited partner) Intu MH (No.5) Sub-Trust (limited partner) Intu MH (No.6) Jersey Unit Trust (limited partner) Intu MH (No.6) Sub-Trust (limited partner) Intu MH (No.7) Jersey Unit Trust (limited partner) Intu MH (No.7) Sub-Trust (limited partner) Intu MH (No.8) Jersey Unit Trust (limited partner) Intu Sprucefield 2 Limited (holding company) Intu Sprucefield Limited (holding company) Intu Uxbridge Holdco Limited (holding company) Ordinary shares Ordinary shares Ordinary shares Units Units Units Units Units Units Units Units Units Units Units Units Units Units Units Midlands Shopping Centre Jersey Unit Trust (No.1) (limited partner) Sprucefield No.1 Nominee Limited (dormant) Ordinary shares Sprucefield No.2 General Partner Limited (general partner) Ordinary shares Sprucefield No.2 Limited Partnership (property) n/a Sprucefield No.2 Nominee Limited (dormant) Ordinary shares Sprucefield Unit Trust (limited partner) W (No.3) GP (Nominee A) Limited (dormant) W (No.3) GP (Nominee B) Limited (dormant) Units Ordinary shares Ordinary shares Subsidiaries based at 58 Rue Charles Martel, L-213, Luxembourg ICS Holding S.à r.l. (holding company) ICS InvestCo S.à r.l. (holding company) ICS JV S.à r.l. (holding company) Ordinary shares Ordinary shares Ordinary shares Intu Eurofund Developments S.à r.l. (holding company) Ordinary shares Intu Management Spain Holding S.à r.l. (holding company) Ordinary shares Subsidiaries based at 7 Rue Robert Stumper, L-2557, Luxembourg Intu Holding S.à r.l. (holding company) Intu Xanadú Holding S.à r.l. (holding company) Ordinary shares Ordinary shares Subsidiaries based at Ayala 66, 28001, Madrid, Spain Intu Costa del Sol Resort Holdco S.A. (holding company) Ordinary shares Intu Costa del Sol Resort S.L. (property) Intu Management Spain S.L. (property management and management services) Madrid Xanadú Management S.A. (management) Rosholt Invest S.L. (property) Other subsidiaries Intu Trafford Centre Group Limited (holding company)3 (Cains Fiduciary, Fort Anne, Douglas, Isle of Man, IM1 1LB) Libint (Proprietary) Limited (local administration services) (Liberty Life Centre, 1 Ameshoff Street, Braamfontein, Johannesburg 2007, South Africa)3 Libtai Holdings (Jersey) Limited (holding company) (PO Box 761 Ordnance House 31 Pier Road, St Helier, Jersey, JE4 8ZZ)3 Merry Hill Finance Designated Activity Company (finance) (6th Floor, Pinnacle 2, Eastpoint Business Park, Dublin, Republic of Ireland) (in liquidation) Ocio y Nieve S.L. (Paseo de Eduardo Dato 18, 28010, Madrid, Spain) Nailsfield Limited (holding company) (IFS Court, Twentyeight, Cybercity, Ebene, Mauritius)3 The Trafford Centre Finance Limited (finance) (89 Nexus Way, Canama Bay, KY1-9007, Cayman Islands) Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Wattenberg Invest S.L. (property) (Calle Principal, Vergara 131, 28002, Madrid, Spain) Ordinary shares Joint ventures based at 40 Broadway, London, SW1H 0BT Centaurus Retail LLP (property) Cribbs Causeway JV Limited (property management) n/a ‘A’ Ordinary shares ‘B’ Ordinary shares ‘A’ Ordinary shares ‘B’ Ordinary shares Ordinary shares Ordinary shares Ordinary shares Manchester JV Limited (property management) 154 154 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 38 Subsidiaries, joint ventures and associates (continued) Name of entity Class of capital Name of entity Class of capital Joint ventures based at 100 Victoria Street, London, SW1E 5JL St. David’s (Cardiff Residential) Limited (property) Ordinary shares St. David’s (General Partner) Limited (general partner) St. David’s (No.1) Limited (dormant) St. David’s (No.2) Limited (dormant) ‘A’ Ordinary shares ‘B’ Ordinary shares Ordinary shares Ordinary shares St. David’s Limited Partnership (property) n/a Joint ventures based at Ayala 66, 28001, Madrid, Spain Intu Eurofund Mallorca S.L. (property development) Ordinary shares Intu Eurofund Valencia S.L. (property development) Ordinary shares Intu Eurofund Vigo S.L. (property development) Madrid Xanadú 2003 S.L. (property) Xanadú Retail and Leisure S.L (holding company) Ordinary shares Ordinary shares Ordinary shares Joint ventures based at Paseo de Eduardo Dato 18, Planta Semisotano, 28010 Madrid Asturias Propco Numero Uno S.L. (property) Ordinary shares Asturias Retail and Leisure SOCIMI S.A. (holding company) Ordinary shares Zaragoza Properties SOCIMI S.A. (holding company) Ordinary shares Joint ventures based at 7 Rue Robert Stumper, L-2557, Luxembourg Intu Zaragoza Holding S.à r.l. (holding company) Intu Zaragoza S.à r.l. (holding company) Parque Principado S.à r.l. (holding company) Ordinary shares Ordinary shares ‘A’ shares ‘B’ shares Joint ventures based at Atrium building, 8th Floor, Strawinskylaan 3127, 1077, ZX, Amsterdam, Netherlands Intu Eurofund Investments Mallorca B.V. (holding company) Ordinary shares Intu Eurofund Investments Valencia B.V. (holding company) Ordinary shares Intu Eurofund Investments Vigo B.V. (holding company) Ordinary shares Other joint ventures Intu Eurofund Developments S.à r.l. (holding company) (58 Rue Charles Martel, L-2134, Luxembourg) Metropolitan Retail JV (Jersey) Unit Trust (property) 7 (28 – 30 The Parade, St Helier, Jersey, JE1 1EQ) ‘A’ shares ‘B’ shares ‘A’ units ‘B’ units Puerto Venecia Investments SOCIMI S.A. (property) (Paseo de Eduardo Dato 18, 28010, Madrid, Spain) Snowzone S.L. (Paseo de Eduardo Dato 18, 28010, Madrid, Spain) (leisure) Ordinary shares Ordinary shares St. David’s Unit Trust (limited partner) (47 Esplanade, St. Helier, Jersey JE1 0BD) Units Associates based at 105-106 Provogue House, Off New Link Road, Andheri (West) Mumbai, 400 053 India Empire Mall Private Limited (property)5 Prozone Intu Properties Limited (property)6 Ordinary shares Ordinary shares 1 40.2 per cent is held by intu properties plc, 31.1 per cent is held by Conduit Insurance Holdings Limited and 28.7 per cent is held by TAI Investments Limited. 2 95.4 per cent is held by Libtai Holdings (Jersey) Limited and 4.6 per cent is held by intu properties plc. 3 Related undertaking held directly by intu properties plc. 4 Group’s interest is 60 per cent. 5 Group’s interest is 26.8 per cent. 6 Group’s interest is 32.4 per cent. 7 Group’s interest is 20 per cent. This is classified as a joint venture due to an equal voting interest. 155 155 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 38 Subsidiaries, joint ventures and associates (continued) Other entities Intu (SGS) Finance plc and Intu Metrocentre Finance plc are consolidated as subsidiaries in these financial statements but are not listed in the table above as the Group does not own the shares in these companies. These companies are vehicles set up on behalf of the Group for the sole purpose of issuing some of the Group’s listed debt. The Group’s obligations in respect of this debt via a back-to-back intercompany loan agreement between these companies and other Group companies, and security over investment property via a deed of charge between the security trustees and other Group companies, mean that the Group is deemed to have control of these entities. Non-controlling interests By virtue of their 40 per cent interest in The Metrocentre Partnership, GIC Real Estate is entitled to appoint 40 per cent of the directors of Metrocentre (GP) Limited. £53.9 million of the non-controlling interest shown in the balance sheet at 31 December 2017 (2016: £67.4 million) and £13.5 million of the non-controlling interest share of loss shown in the income statement for the year ended 31 December 2017 (2016: share of loss £11.0 million) relates to GIC Real Estate’s interest. Set out below is the summarised financial information of The Metrocentre Partnership at 100 per cent, as consolidated: Summarised income statement Revenue Loss for the year Summarised balance sheet Investment and development property Borrowings Other net liabilities Net liabilities 2017 £m 68.5 (33.7) 908.3 (938.1) (12.5) (42.3) 2016 £m 66.8 (27.7) 924.4 (922.5) (10.5) (8.6) During the year the Group acquired the 49 per cent non-controlling interest in Intu Retail Services Limited from Bilfinger Europa Facilities Management Limited for consideration of £1. Prior to the transaction, no amount was included within the non-controlling interest shown in the balance sheet (2016: nil) and nil of the non-controlling interest share of loss shown in the income statement for the year ended 31 December 2017 (2016: nil) related to their interest. 39 Related party transactions Key management1 compensation is analysed below: Salaries and short-term employee benefits Pensions and other post-employment benefits Share-based payments 2017 £m 5.4 0.7 2.0 8.1 2016 £m 4.8 0.5 3.7 9.0 1 Key management comprises the Directors of intu properties plc and the Executive Committee who have been designated as persons discharging managerial responsibility (PDMR). During the year the Group’s joint ventures in Puerto Venecia, Zaragoza and intu Asturias sold shares in subsidiaries, previously wholly owned by the respective joint ventures, listed on the Spanish MaB to PDMR’s of the Group. The total value of the shares sold at fair value on the date of sale is €1.0 million and €0.9 million, representing 3 per cent and 2 per cent of outstanding share capital respectively. The sale of shares in these entities was required to comply with Spanish MaB free float listing requirements. The Group provided an interest-free loan to PDMR’s to enable them to purchase the shares. The loans are treated as a taxable benefit which accordingly is included in the above table. As John Whittaker, Deputy Chairman and Non-Executive Director of intu properties plc, is the Chairman of the Peel Group (Peel), members of Peel are considered to be related parties. Total transactions between the Group and members of Peel are shown below: Income Expenditure 2017 £m 1.3 (0.6) 2016 £m 1.3 (0.9) 156 156 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 39 Related party transactions (continued) Income predominantly relates to leases of office space and contracts to provide advertising services. Expenditure predominantly relates to costs incurred under a management services agreement, travel costs and the supply of utilities. All contracts are on an arm’s length basis at commercial rates. Balances outstanding between the Group and members of Peel at 31 December 2017 and 31 December 2016 are shown below: Net investment in finance lease Amounts owed by members of Peel 2017 £m 1.6 1.0 2016 £m 2.0 0.2 Under the terms of the Group’s acquisition of intu Trafford Centre from Peel in 2011, Peel have provided a guarantee in respect of Section 106 planning obligation liabilities at Barton Square which at 31 December 2017 totalled £12.4 million (2016: £11.7 million). During 2016, the Group agreed terms on three advertising services agreements related to digital screens with Peel Advertising Limited (a member of Peel) under which Peel will procure advertising on behalf of the Group. The minimum fixed payments in these agreements have been classified as a finance lease (see net investment in finance lease above). Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation in the Group’s financial information. Significant transactions between the Company and its subsidiaries are shown below: Interest expense Interest income Additions to investment in subsidiaries 2017 £m (24.4) 12.2 4.4 2016 £m (10.9) 14.6 24.4 The Company has provided Intu (Jersey) Limited a guarantee over obligations in relation to the 2.5 per cent convertible bonds and Intu (Jersey) 2 Limited over obligations in relation to the 2.875 per cent convertible bonds (see note 26). Significant balances outstanding between the Company and its subsidiaries are shown within notes 15, 20 and 23. 40 Share-based payments The Group operates a number of share-based payment arrangements providing employee benefits and incentives. All schemes are equity settled, and as such the expense recognised in the income statement is based on the fair value of the equity instruments awarded as determined at their grant date. The expense is recognised on a straight-line basis over the vesting period based on Group estimates of the number of shares that are expected to vest. In 2017 the total share-based payment charge was £2.3 million (2016: £1.9 million). Details of share options outstanding under each of the Group’s schemes is set out below: Share Option Scheme1 Performance Share Plan1 Bonus Share Scheme Share incentive plan3 Save as you earn scheme Note Outstanding 1 January 2017 Granted during the year Exercised during the year Expired/forfeited during the year Outstanding 31 December 2017 Exercisable 31 December 2017 A B C D E 9,144,212 2,040,000 5,419,795 1,743,849 1,020,021 313,041 174,849 729,600 178,661 72,181 – (228,778)2 (404,982)2 (107,243)2 – (168,405) 11,015,807 5,446,712 (886,932) 6,047,934 (1,541) 1,343,098 (23,926) (39,512) 360,533 207,518 n/a n/a n/a – 1 Includes share interests held jointly under the Joint Share Ownership Plan. See F below for further details. 2 Shares ordinarily exercised immediately on vested date. 3 Relates to non-vested SIP bonus shares granted. In respect of the Share Option Scheme, the weighted average exercise prices of the outstanding options and outstanding options exercisable at 31 December 2017 are 293 pence and 274 pence respectively (2016: 295 pence and 267 pence respectively). No options were exercised during the year. In respect of the save as you earn scheme, the weighted average exercise prices of the outstanding options and outstanding options exercisable at 31 December 2017 are 260 pence and nil respectively (2016: 278 pence and nil respectively). 157 157 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s 40 Share-based payments (continued) During the year the Group incurred a £49.4 million share related charge in relation to its Spanish development partner Eurofund’s future interests in the share capital of the intu Costa del Sol development company. The positive impact of this share related charge on equity attributable to owners of intu properties plc, a credit to retained earnings of £49.4 million, is expected to reverse once these arrangements are concluded, with the Eurofund interest to be included in non-controlling interests which will result in a reduction of net assets. A Share Option Scheme Options to subscribe for ordinary shares may be awarded under the intu properties plc approved Share Option Scheme and the intu properties plc unapproved Share Option Scheme. Except in the case of a ‘good’ leaver, options may not be exercised within three years of grant and before satisfaction or waiver of any applicable performance condition, and are forfeited if the employee leaves the Group before the options become capable of exercise. The options automatically lapse if not exercised within 10 years of the date of grant. B Performance Share Plan (PSP) The Company operates a PSP for eligible employees at the discretion of the Remuneration Committee. Awards may be made in the form of nil cost options, a conditional share award or a joint share ownership award and fixed-value zero-cost option, and eligible employees may be granted any combination of such awards subject to any individual limits. Vesting of PSP awards is based on Total Shareholder Return (TSR) and Absolute Total Return (TR) with performance measured one-third over three years, one-third over four years and one-third over five years. Half of the awards vest by reference to TR (25 per cent vesting for 6 per cent per annum return; full vesting for 10 per cent per annum; straight-line vesting in between). The remaining half of the awards vest by reference to TSR relative to the top-five UK-listed REITs (25 per cent return vesting for TSR in line with the third-rated company; full vesting for TSR in line with the top-rated company; straight-line vesting in between) subject to a Remuneration Committee-operated discretionary assessment of underlying financial performance. C Bonus Share Scheme (Bonus Scheme) Under the Company’s Bonus Scheme, deferred shares may be awarded as part of any bonus. Such awards comprise ‘Restricted’ shares and ‘Additional’ shares. Where awarded, Additional shares would be equal to 50 per cent of the Restricted shares and SIP shares (see below) combined. No Additional shares were outstanding at 1 January 2016 and no awards have been made in 2016 or 2017. The vesting of deferred share awards is not dependent on the achievement of any further performance conditions other than that participants remain employed by the Group for a specified time from the date of the award, typically two to three years in the case of Restricted shares and four years in the case of Additional shares. D Share incentive plan (SIP) The Company operates a SIP for all eligible employees, who may receive up to £3,600 worth of shares as part of their annual bonus arrangements. The SIP arrangements offer worthwhile tax advantages to employees and to the Company. The SIP Bonus shares can be released three years after the date of the award, provided the individual employee has remained in employment, but the shares must then be held in trust for a further two years in order to qualify for tax advantages. As part of the SIP arrangements, the Company also offers eligible employees the opportunity to participate in a ‘Partnership’ share scheme, under which employees can save up to £150 a month. The Group offers one free Matching share for every two Partnership shares purchased by the employee at the end of a 12-month saving period. Matching shares are forfeited if the employee leaves the Group within three years of the date of award, and qualify for tax advantages if they are held in the SIP for five years. E Save as you earn scheme (SAYE) The Company operates a SAYE for all eligible employees under which UK employees can enter into contracts to save currently up to a maximum of £500 per month with a bank or building society for a period of three or five years and use the proceeds from their savings accounts to purchase shares in the Company on the exercise of their options. The option price is usually the average mid- market closing share price over the three consecutive dealing days preceding the invitation date, discounted by up to 20 per cent. Options may be exercised typically within six months following the end of the savings period. 158 158 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Notes to the financial statements continued 40 Share-based payment (continued) F Joint Share Ownership Plan (JSOP) Eligible employees were invited to participate in the JSOP which forms part of the intu properties plc unapproved share option scheme and the PSP. Under the JSOP, shares are held jointly by the employee and the employee share ownership plan trustee with any increases in the share price and dividends paid on those shares being allocated between the joint owners in accordance with the terms of the scheme. Conditions for exercise (including satisfaction of the same performance condition), forfeiture and lapsing are as set out above for options or PSP generally. 41 Pensions The Group operates defined contribution group pension plans for its staff. All contributions are invested in funds administered outside of the Group. The pension charge for the Group’s contributions to these arrangements is the amount paid which totalled £4.4 million for the year ended 31 December 2017 (2016: £3.6 million). 42 Events after the reporting date In November 2017 the Group announced the formation of a joint venture with LaSalle Investment Management (acting on behalf of Greater Manchester Pension Fund and West Yorkshire Pension Fund) for them to take ownership of 50 per cent of intu Chapelfield for initial net proceeds of £148.0 million. This transaction completed on 31 January 2018 following the receipt of EU merger approval. 43 Directors’ interests and emoluments (a) Shares in the Company The number of ordinary shares of the Company in which the Directors were beneficially interested were: Chairman: John Strachan Patrick Burgess1 Deputy Chairman: John Whittaker2 Executive: David Fischel Matthew Roberts Non-Executive: Adèle Anderson Richard Gordon Rakhi Goss-Custard Andrew Huntley1 Louise Patten Andrew Strang 2017 2016 30,000 n/a 30,000 37,627 368,635,097 363,850,297 1,155,030 1,048,884 341,992 259,487 32,504 32,504 7,005,211 7,005,211 7,383 n/a 12,857 – 7,383 7,714 12,857 – 1 Patrick Burgess and Andrew Huntley each stepped down from the Board following the 3 May 2017 annual general meeting. 2 Total beneficial interest includes shares held by subsidiaries of the Peel Group of which John Whittaker is the Chairman. Conditional awards of shares have previously been made to executive directors under the Company’s annual bonus scheme. The awards comprise ‘Restricted’ shares and ‘Additional’ shares, the latter equal to 50 per cent of the Restricted and share incentive plan shares combined. Executive directors were required to retain the shares, net of shares sold to meet tax and PAYE deductions, which vested ahead of the normal vesting date. 43 Directors’ interests and emoluments (continued) Awards to executive directors under the scheme since January 2013 are as follows: 159 159 i i F F n n a a n n c c i i a a l l s s t t a a t t e e m m e e n n t t s s David Fischel Matthew Roberts Award date 29/04/2014 11/03/2015 11/03/2015 07/03/2016 07/03/2016 07/03/2017 07/03/2017 29/04/2014 11/03/2015 11/03/2015 07/03/2016 07/03/2016 07/03/2017 07/03/2017 Market price at award (pence) Original vesting date Market price at vesting (pence) Number of shares at 31 December 2016 Number of shares awarded during 2017 Number of shares vested during 2017 Number of shares at 31 December 2017 292 349 349 300 300 285 285 292 349 349 300 300 285 285 29/04/2017 11/03/2017 11/03/2018 07/03/2018 07/03/2019 07/03/2019 07/03/2020 29/04/2017 11/03/2017 11/03/2018 07/03/2018 07/03/2019 07/03/2019 07/03/2020 – – – – – – – – – – – – – – 29,627 30,478 29,446 53,863 52,663 – – 23,530 24,154 23,122 42,471 41,271 4,135* 2,643* (33,762) (33,121) – – – 58,905 57,642 3,284* 2,094* – – – – – – – – (26,814) (26,248) – – – – – – – 46,982 45,719 – – 29,446 53,863 52,663 58,905 57,642 – – 23,122 42,471 41,271 46,982 45,719 * Dividend received for their two and three year holding period. Details of Restricted and Additional shares awarded in respect of the year ended 31 December 2017 are given in the Directors’ remuneration report on pages 78 to 93. (b) Share options in the Company Executive directors’ interests in share options, the PSP and the SIP are given in the Directors’ remuneration report on pages 78 to 93. (c) Other disclosures No Director had any dealings in the shares of any Group company between 31 December 2017 and 22 February 2018, being a date less than one month prior to the date of the notice convening the annual general meeting. Other than as disclosed in these financial statements, no Director of the Company had a material interest in any contract (other than service contracts), transaction or arrangement with any Group company during the year ended 31 December 2017. (d) Emoluments The details of individual Directors’ remuneration and pension benefits, as set out in the tables contained in the Directors’ remuneration report on pages 78 to 93, form part of these financial statements. 160 160 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Investment and development property (unaudited) 1 Property data At 31 December 2017 Subsidiaries intu Trafford Centre intu Lakeside intu Merry Hill intu Metrocentre intu Braehead intu Derby Manchester Arndale intu Victoria Centre intu Watford intu Eldon Square intu Milton Keynes Cribbs Causeway OtherC Investment and development property excluding Group’s share of joint ventures Joint ventures St David’s, Cardiff Madrid Xanadú Puerto Venecia, Zaragoza intu Asturias OtherD Investment and development property including Group’s share of joint ventures At 31 December 2016 including Group’s share of joint ventures Notes A Revaluation surplus assessed from date of acquisition. B Calculated in local currency. Market value £m Revaluation surplus/deficit Net initial yield (EPRA) ‘Topped-up’ NIY (EPRA) Nominal equivalent yield Occupancy 2,324.0 1,416.5 931.1 929.0 533.1 458.0 456.4 355.5 336.0 322.7 285.0 240.0 621.1 9,208.4 345.8 235.2 230.8 140.8 61.7 10,222.7 9,984.7 – +2% -1% -3% -2% +1% – -1% -3% +1% +1% – -2% +1%A/B +4%B +11%B 3.7% 3.3% 3.8% 4.7% 5.1% 6.0% 4.1% 4.7% 4.0% 4.9% 4.4% 4.9% 4.2% 4.2% 4.5% 4.6% 3.7% 3.6% 4.0% 5.2% 5.2% 5.8% 4.3% 4.9% 4.1% 4.9% 4.6% 4.7% 4.5% 4.5% 4.7% 4.7% 4.3% 4.5% 5.0% 5.3% 6.1% 6.2% 5.1% 5.7% 5.1% 5.0% 4.9% 5.2% 4.8% 5.4% 5.7% 5.2% 4.20%E 4.36% E 5.03% E 4.27% 4.45% 5.02% 98% 92% 95% 94% 96% 97% 97% 98% 95% 99% 100% 98% 94% 98% 98% 96% 96% 96% C D Includes the Group’s interests in intu Potteries, intu Broadmarsh, Soar at intu Braehead, development land in Spain, Charter Place, Watford and Sprucefield, Northern Ireland. Includes the Group’s interest in intu Uxbridge. E Weighted average yields exclude developments. Passing rent Annual property income ERV Weighted average unexpired lease term Please refer to the glossary for definitions of terms. 31 December 2017 £m 31 December 2016 £m 426.9 462.2 544.4 427.3 467.4 542.5 7.5 years 7.7 years 161 161 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n 2 Analysis of capital return in the year – including Group’s share of joint ventures Market value Revaluation surplus/(deficit) (cid:3) Like-for-like property Acquisition and part disposal: Madrid Xanadú Classified as held for sale: intu Chapelfield Spain developments Other 2017 £m 9,446.8 235.2 – 212.8 327.9 2016 £m 9,360.1 – 297.7 76.7 250.2 Total investment and development property 10,222.7 9,984.7 3 Additional property information 2017 £m (37.8) 1.7 9.6 74.5 (0.7) 47.3 2017 % (0.4) 0.7 3.3 53.8 (0.2) 0.5 Ownership Note Form of(cid:3)(cid:3) ownershipE Gross area million(cid:3)(cid:3) sq ftF Year opened Acquisition(cid:3)(cid:3) dateG At 31 December 2017 intu Trafford Centre intu Lakeside intu Merry Hill intu Metrocentre intu Braehead intu Derby Manchester Arndale intu Victoria Centre intu Watford intu Eldon Square intu Milton Keynes Cribbs Causeway St David’s, Cardiff Madrid Xanadú Puerto Venecia, Zaragoza intu Asturias Other Investment and development property including Group’s share of joint ventures At 31 December 2016 including Group’s share of joint ventures Notes 100% 100% 100% 90% 100% 100% 48% 100% 93% 60% 100% 33% 50% 50% 50% 50% FH(cid:3)(cid:3) FH(cid:3) FH(cid:3) LH(cid:3) FH(cid:3) FH/LH(cid:3) LH(cid:3) FH(cid:3) LH(cid:3)(cid:3) FH/LH(cid:3) FH(cid:3) FH/LH(cid:3) FH/LH(cid:3) FH FH FH (cid:3) A B C D 1998 1990 1985 1986 1999 2007 1976 1972 1992 1976 2000 1998 2009 2003 2012 2001 2011 – 2016I 1995 – 2014 2005 2002H – – 2013 2005 2006 2017 2015 2013 2.0 1.4 1.7 2.1 1.1 1.3 1.8 1.0 0.7 1.4 0.4 1.1 1.4 1.3 1.3 0.8 2.1 22.9 21.9 A Interest shown is that of The Metrocentre Partnership in intu Metrocentre (90 per cent) and the Metro Retail Park (100 per cent). The Group has a 60 per cent interest in The Metrocentre Partnership which is consolidated as a subsidiary of the Group. B The Group’s interest is through a joint operation ownership of a 95 per cent interest in Manchester Arndale, and a 90 per cent interest in New Cathedral Street, Manchester. C The Group’s interest is through a joint operation ownership of a 66 per cent interest in The Mall at Cribbs Causeway and a 100 per cent interest in The Retail Park, Cribbs Causeway. D Includes intu Potteries, intu Uxbridge, intu Broadmarsh, Soar at intu Braehead and Sprucefield, Northern Ireland. E Form of ownership is shown as either freehold (FH), leasehold (LH) or freehold and leasehold (FH/LH). F Area shown is not adjusted for the proportion of ownership. G The acquisition date is presented only where the centre was not built by the Group. H intu held a 20 per cent stake in intu Victoria Centre prior to 2002 when it acquired the remaining 80 per cent to take its holding to 100 per cent. I intu held a 50 per cent stake in intu Merry Hill from 2014. In 2016 it acquired the remaining 50 per cent to take its holding to 100 per cent. 162 162 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Investment and development property (unaudited) continued 4 Analysis of net rental income in the year – including Group’s share of joint ventures Like-for-like property Acquisition: Madrid Xanadú Acquisition: intu Merry Hill (50%) Disposal: intu Bromley Developments Net rental income Year ended 31 December 2017 £m 31 December 2016 £m 436.9 13.0 10.1 – – 460.0 434.8 – – 12.5 (0.3) 447.0 £m 2.1 13.0 10.1 (12.5) 0.3 13.0 Movement % 0.5 n/a n/a n/a n/a 2.9 Financial covenants (unaudited) 163 163 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n Intu (SGS) Finance plc and Intu (SGS) Finco Limited (Secured Group Structure) Term loan 3.875 per cent bonds 4.625 per cent bonds 4.250 per cent bonds Loan £m 351.8 450.0 350.0 350.0 1,501.8 Maturity 2021 2023 2028 2030 LTV covenant LTV actual Interest cover covenant Interest cover actual (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 80% 48% 125% 247% Covenants are tested on the Security Group, the principal assets of which are intu Lakeside, intu Braehead, intu Watford, intu Victoria Centre and intu Derby. During the year, intu Chapelfield was withdrawn from the Secured Group Structure. The structure has a tiered operating covenant regime giving the Group a significant degree of flexibility when the covenants are below certain levels. In higher tiers the level of flexibility is reduced. The Group retains operating control at loan to value below 72.5 per cent and interest cover above 1.4x. No financial covenant default occurs unless the loan to value exceeds 80 per cent or the interest cover falls below 1.25x. The Trafford Centre Finance Limited There are no financial covenants on the intu Trafford Centre debt of £767.5 million at 31 December 2017. However, a debt service cover ratio is assessed quarterly and where this falls below specified levels restrictions come into force. The loan to 31 December 2017 market value ratio is 32 per cent. No restrictions are in place at present. Intu Metrocentre Finance plc 4.125 per cent bonds Loan £m 485.0 Maturity 2023 LTV covenant 100% LTV actual 52% Interest cover covenant 125% Interest cover actual 224% The structure’s covenant regime gives the Group a significant degree of flexibility when the covenants are below certain levels. The Group retains operating control below loan to value of 70 per cent and interest cover above 1.4x. No financial covenant default occurs unless loan to value exceeds 100 per cent or interest cover falls below 1.25x. Other asset-specific debt intu Milton Keynes Sprucefield intu Uxbridge4 St David’s, Cardiff intu Trafford Centre intu Merry Hill Puerto Venecia, Zaragoza4 (€) intu Asturias4 (€) Madrid Xanadú4 (€) Loan outstanding(cid:3) at 31 December(cid:3) 20171 £m(cid:3) Maturity LTV covenant Loan to(cid:3) 31 December(cid:3) 2017(cid:3) market value2 140.5 33.2 26.0 122.5 250.0 487.8 112.5 60.5 131.5 2019 2020 2020 2021 2022 2024 2019 2021 2022 65% 65% 70% 65% 65% 75% 65% 65% 65% 49% 50% 54% 35% 45% 52% 43% 41% 50% Interest cover covenant 150% 150% 125% 150% 103%5 150% 150% 150% 150% Interest(cid:3) cover(cid:3) actual3 363% 253% 241% 321% 137%5 259% 308% 581% 398% 1 The loan values are the actual principal balances outstanding at 31 December 2017, which take into account any principal repayments made up to 31 December 2017. The balance sheet value of the loans includes unamortised fees. 2 The loan to 31 December 2017 market value provides an indication of the impact the 31 December 2017 property valuations could have on the LTV covenants. The actual timing and manner of testing LTV covenants varies and is loan specific. 3 Based on latest certified figures, calculated in accordance with loan agreements, which have been submitted between 31 December 2017 and 31 January 2018. The calculations are loan specific and include a variety of historical, forecast and in certain instances a combined historical and forecast basis. 4 Debt shown is consistent with the Group’s economic interest. 5 Covenant is a debt service cover ratio (includes interest and scheduled debt repayments). 164 164 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Financial covenants (unaudited) continued Intu Debenture plc Loan £m 231.4 Maturity 2027 Capital cover covenant Capital cover actual Interest cover covenant Interest cover actual 150% 244% 100% 117% The debenture is currently secured on a number of the Group’s properties including intu Potteries, intu Eldon Square, intu Broadmarsh and Soar at intu Braehead. Should the capital cover or interest cover test be breached, Intu Debenture plc (the ‘Issuer’) has three months from the date of delivery of the valuation or the latest certificate to the Trustees to make good any deficiencies. The Issuer may withdraw property secured on the debenture by paying a sum of money or through the substitution of alternative property provided that the capital cover and interest cover tests are satisfied immediately following the substitution. Financial covenants on corporate facilities £600m facility, maturing in 2021* £375m due in 2022 2.875 per cent convertible bonds (note 26)** £160m due in 2018 2.5 per cent convertible bonds (note 26)** Net worth covenant Net worth actual Interest cover covenant Interest cover actual Borrowings/net worth covenant Borrowings/net worth actual £1,200m £2,533m 120% 210% 125% n/a n/a n/a n/a n/a n/a n/a n/a 175% 175% 66% 12% 12% * Tested on the Borrower Group which excludes, at the Group’s election, certain subsidiaries with asset-specific finance. The facility is secured on the Group’s investments in Manchester Arndale and Cribbs Causeway. ** Tested on the Group excluding, at the Group’s election, the borrowings on certain subsidiaries with asset-specific finance. Interest rate swaps The table below sets out the nominal amount and average rate of hedging, excluding lenders’ margins, in place under current and forward-starting swap contracts. In effect on or after: 1 year 2 years 5 years 10 years 15 years Nominal amount £m Average rate % 2,258.7 1,918.5 1,671.1 670.1 457.8 2.41 2.76 3.36 5.02 4.73 Financial information including share of joint ventures (unaudited) for the year ended 31 December 2017 165 165 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n The information in this section is presented to show the Group including share of joint ventures. A reconciliation from the amounts shown in the Group’s income statement and balance sheet is provided on the following page. Group underlying profit £m Share of joint ventures £m 2017 Group including share of joint ventures £m Group underlying profit £m Share of joint ventures £m 2016 Group including share of joint ventures £m Underlying earnings Rent receivable Service charge income Facilities management income from joint ventures Revenue Net rental income Net other income/(expenses) Administration expenses Underlying operating profit Finance costs Finance income Other finance costs 503.4 109.1 3.5 616.0 423.4 3.0 (40.9) 385.5 (213.9) 12.6 (5.9) 42.8 8.7 (0.7) 50.8 36.6 (2.1) (0.7) 33.8 (6.0) (9.3) – 546.2 117.8 2.8 666.8 460.0 0.9 (41.6) 419.3 (219.9) 3.3 (5.9) 484.5 101.6 8.2 594.3 406.1 0.6 (37.8) 368.9 (202.9) 14.9 (5.9) Underlying net finance costs (207.2) (15.3) (222.5) (193.9) Underlying profit before tax, joint ventures and associates Tax on underlying profit Share of underlying profit of joint ventures Share of underlying profit of associates Remove amounts attributable to non-controlling interests Underlying earnings 178.3 0.1 18.3 0.9 3.4 201.0 18.5 (0.2) (18.3) – – – 196.8 (0.1) – 0.9 3.4 201.0 175.0 – 19.8 0.5 4.7 200.0 A reconciliation from the Group’s profit to underlying earnings is provided in note 12(c). 48.1 9.5 (3.1) 54.5 40.9 (1.3) (0.8) 38.8 (5.6) (13.4) – (19.0) 19.8 – (19.8) – – – 532.6 111.1 5.1 648.8 447.0 (0.7) (38.6) 407.7 (208.5) 1.5 (5.9) (212.9) 194.8 – – 0.5 4.7 200.0 166 166 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Financial information including share of joint ventures (unaudited) continued for the year ended 31 December 2017 Consolidated income statements Revenue Net rental income Net other income/(expenses) Revaluation of investment and development property Gain on acquisition of businesses Loss on disposal of subsidiaries (Loss)/gain on sale of other investments Administration expenses – ongoing Administration expenses – exceptional Operating profit Finance costs Finance income Other finance costs Change in fair value of financial instruments Net finance costs Profit before tax, joint ventures and associates Share of post-tax profit of joint ventures Share of post-tax profit of associates Profit before tax Current tax Deferred tax Taxation Profit for the year Non-controlling interests Profit for the year attributable to owners of intu properties plc Group income statement £m Share of joint ventures £m 2017 Group including share of joint ventures £m Group income statement £m Share of joint ventures £m 2016 Group including share of joint ventures £m 616.0 423.4 3.0 30.8 – (1.8) – (40.9) (5.9) 408.6 (213.9) 12.6 (38.9) 22.0 50.8 36.6 (2.1) 16.5 – – (0.3) (0.7) (0.7) 49.3 (6.0) (9.3) – 1.0 666.8 460.0 0.9 47.3 – (1.8) (0.3) (41.6) (6.6) 457.9 (219.9) 3.3 (38.9) 23.0 594.3 406.1 0.6 (78.0) 34.6 (0.3) 74.1 (37.8) (2.5) 396.8 (202.9) 14.9 (37.9) (16.3) (218.2) (14.3) (232.5) (242.2) 190.4 35.5 1.3 227.2 0.1 (24.0) (23.9) 203.3 13.4 216.7 35.0 (35.5) – (0.5) (0.2) 1.3 1.1 0.6 (0.6) 225.4 – 1.3 226.7 (0.1) (22.7) (22.8) 203.9 12.8 154.6 32.1 1.6 188.3 – (16.5) (16.5) 171.8 10.9 – 216.7 182.7 54.5 40.9 (1.3) 14.2 – – – (0.8) (0.4) 52.6 (5.6) (13.4) (0.9) (0.6) (20.5) 32.1 (32.1) – – – – – – – – 648.8 447.0 (0.7) (63.8) 34.6 (0.3) 74.1 (38.6) (2.9) 449.4 (208.5) 1.5 (38.8) (16.9) (262.7) 186.7 – 1.6 188.3 – (16.5) (16.5) 171.8 10.9 182.7 167 167 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n Consolidated balance sheets Group balance sheet £m Share of joint ventures £m 2017 Group including share of joint ventures £m Group balance sheet £m Share of joint ventures £m 2016 Group including share of joint ventures £m Assets Investment and development property 9,179.4 1,013.1 10,192.5 Investment in joint ventures Derivative financial instruments Assets classified as held for sale Cash and cash equivalents Other assets Total assets Liabilities Borrowings Derivative financial instruments Liabilities associated with assets classified as held for sale Other liabilities Total liabilities Net assets Non-controlling interests Net assets attributable to owners of intu properties plc 735.5 0.3 309.1 228.0 342.2 (735.5) 0.2 – 50.2 54.3 – 0.5 309.1 278.2 396.5 9,212.1 587.6 – – 254.7 314.8 732.4 (587.6) – – 36.9 17.8 9,944.5 – – – 291.6 332.6 10,794.5 382.3 11,176.8 10,369.2 199.5 10,568.7 (4,997.8) (347.8) (6.2) (313.5) (5,665.3) 5,129.2 (54.2) (300.1) (5,297.9) (4,662.6) (170.9) (4,833.5) (2.5) (350.3) (377.7) (2.3) (380.0) – (76.5) (379.1) 3.2 (3.2) (6.2) (390.0) – (282.5) (6,044.4) (5,322.8) 5,132.4 5,046.4 (57.4) (67.6) – (26.3) (199.5) – – – – (308.8) (5,522.3) 5,046.4 (67.6) 4,978.8 5,075.0 – 5,075.0 4,978.8 168 168 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Financial information including share of joint ventures (unaudited) continued for the year ended 31 December 2017 Investment and development property Balance sheet carrying value of investment and development property Tenant incentives included within trade and other receivables Head leases included within finance leases in borrowings Market value of investment and development property 2017 £m 2016 £m 10,192.5 9,944.5 118.5 (88.3) 120.4 (80.2) 10,222.7 9,984.7 Net external debt The table below provides a reconciliation between the components of net debt included on the Group’s balance sheet and net external debt including the Group’s share of joint ventures’ debt and cash. Total borrowings Cash and cash equivalents Net debt Less Metrocentre compound financial instrument Less cash and cash equivalents within assets classified as held for sale Net external debt – before Group’s share of joint ventures Add share of borrowings of joint ventures Less share of cash of joint ventures Net external debt – including Group’s share of joint ventures Analysed as: Debt including Group’s share of joint ventures Cash including Group’s share of joint ventures Net external debt – including Group’s share of joint ventures Debt to assets ratio Market value of investment and development property Add market value of investment and development property classified as assets held for sale Net external debt Debt to assets ratio Interest cover Finance costs Finance income Underlying operating profit Interest cover 2017 £m 4,997.8 (228.0) 4,769.8 (183.7) (0.5) 4,585.6 300.1 (50.2) 2016 £m 4,662.6 (254.7) 4,407.9 (177.8) – 4,230.1 170.9 (36.9) 4,835.5 4,364.1 5,113.7 (278.2) 4,835.5 4,655.7 (291.6) 4,364.1 2017 £m 2016 £m 10,222.7 9,984.7 306.5 10,529.2 (4,835.5) 45.9% – 9,984.7 (4,364.1) 43.7% 2017 £m (219.9) 3.3 (216.6) 419.3 1.94x 2016 £m (208.5) 1.5 (207.0) 407.7 1.97x Underlying profit statement (unaudited) for the year ended 31 December 2017 169 169 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n The underlying profit information in the table below shows the Group including share of joint ventures on a line-by-line basis. Net rental income Net other income/(expenses) Administration expenses Underlying operating profit Finance costs Finance income Other finance costs Underlying net finance costs Underlying profit before tax and associates Tax on underlying profit Share of underlying profit of associates Remove amounts attributable to non-controlling interests Underlying earnings Underlying earnings per share (pence) Year ended 31 December 2017 £m Year ended 31 December 2016 £m Six months ended 31 December 2017 £m Six months ended 31 December 2016 £m Six months ended 30 June 2017 £m Six months ended 30 June 2016 £m 460.0 0.9 (41.6) 419.3 (219.9) 3.3 (5.9) (222.5) 196.8 (0.1) 0.9 3.4 201.0 15.0p 447.0 (0.7) (38.6) 407.7 (208.5) 1.5 (5.9) (212.9) 194.8 – 0.5 4.7 200.0 15.0p 233.8 0.8 (21.0) 213.6 (112.4) 2.2 (3.0) (113.2) 100.4 0.1 0.5 1.5 102.5 7.6p 227.6 (0.4) (20.3) 206.9 (107.1) 0.8 (3.0) 226.2 0.1 (20.6) 205.7 (107.5) 1.1 (2.9) 219.4 (0.3) (18.3) 200.8 (101.4) 0.7 (2.9) (109.3) (109.3) (103.6) 97.6 0.1 0.2 2.6 100.5 7.5p 96.4 (0.2) 0.4 1.9 98.5 7.3p 97.2 (0.1) 0.3 2.1 99.5 7.5p Weighted average number of shares (million) 1,343.2 1,333.5 1,343.4 1,334.8 1,343.1 1,332.0 For the reconciliation from basic earnings per share see note 12(c). 170 170 intu properties plc Annual report 2017 intu properties plc Annual report 2017 EPRA performance measures (unaudited) 1 Summary The EPRA Best Practice Recommendations identify six key performance measures, including the EPRA cost ratios. The measures are deemed to be of importance for investors in European property companies and aim to encourage more consistent and widespread disclosure. The Group is supportive of this initiative but continues to disclose additional measures throughout this report which it believes are more appropriate to the Group’s current circumstances. In 2017, the Group retained its EPRA Gold Award for exceptional compliance with the EPRA Best Practice Recommendations. The EPRA measures are summarised below and detailed in the tables following: EPRA cost ratio (including direct vacancy costs) EPRA cost ratio (excluding direct vacancy costs) EPRA earnings —(cid:3)per share EPRA NAV —(cid:3)per share EPRA NNNAV —(cid:3)per share EPRA net initial yield EPRA ‘topped-up’ NIY EPRA vacancy rate Table 2 2 3 3 4(a) 4(a) 4(b) 4(b) 5 5 6 2017 19.4% 15.1% 2016 18.6% 15.0% £192.3m £192.9m 14.3p 14.5p £5,287.3m £5,200.9m 393p 386p £4,695.8m £4,698.9m 349p 4.2% 4.4% 3.0% 349p 4.3% 4.5% 3.0% Details of the Group’s performance against the EPRA Best Practice Recommendations on Sustainability Reporting can be found in full in the 2017 corporate responsibility report. In 2017, the Group retained its Gold EPRA Sustainability Best Practice Recommendations award. 2 EPRA cost ratios Administration expenses – ongoing Net service charge costs Other non-recoverable costs Remove: Service charge costs recovered through rents EPRA costs – including direct vacancy costs Direct vacancy costs EPRA costs – excluding direct vacancy costs Rent receivable Rent payable Gross rental income less ground rent payable Remove: Service charge costs recovered through rents Gross rental income 2017 £m 41.6 19.1 46.6 (6.5) 100.8 (22.6) 78.2 546.2 (20.5) 525.7 (6.5) 519.2 2016 £m 38.6 16.1 44.1 (5.6) 93.2 (18.0) 75.2 532.6 (25.4) 507.2 (5.6) 501.6 EPRA cost ratio (including direct vacancy costs) EPRA cost ratio (excluding direct vacancy costs) 19.4% 15.1% 18.6% 15.0% 171 171 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n 3 EPRA earnings EPRA earnings per share has been presented as recommended by EPRA which seeks to assist comparison between European property companies. However, we believe that our measure of underlying earnings per share, as presented in note 12(c), is more appropriate than the EPRA measure in the context of our business. The key difference relates to the adjustments in respect of exceptional items where EPRA is prescriptive about the adjustments that can be made limiting these to acquisition-related costs and costs incurred on termination of derivative financial instruments. A reconciliation of EPRA earnings per share to the Group’s measure of underlying earnings per share is provided below: Basic earnings per share Adjusted for: Revaluation of investment and development property Gain on acquisition of businesses Loss on disposal of subsidiaries Gain on sale of other investments Exceptional administration costs – acquisition and disposal related Exceptional finance charges – termination of derivative financial instruments Change in fair value of financial instruments Tax on the above Share of joint ventures’ items Share of associates’ items Non-controlling interests in respect of the above EPRA earnings per share Reconciliation to the Group’s measure of underlying earnings per share Adjusted for: Other exceptional items Other exceptional tax Share of associates’ items Share of joint ventures’ items Underlying earnings per share 2017 2016 Earnings £m Shares million Pence per share Earnings £m Shares million Pence per share 216.7 1,343.2 16.1p 182.7 1,333.5 13.7p (30.8) – 1.8 – 4.9 26.1 (22.0) 23.9 (17.2) (1.1) (10.0) 192.3 1,343.2 7.9 0.1 0.7 – (2.3)p – 0.1p 78.0 (34.6) 0.3 – (74.1) 0.4p 1.9p (1.6)p 1.8p (1.3)p (0.1)p (0.7)p 14.3p 0.6p – 0.1p – 1.1 26.9 16.3 16.3 (12.7) (1.1) (6.2) 192.9 1,333.5 6.5 0.2 – 0.4 5.9p (2.6)p – (5.6)p 0.1p 2.1p 1.2p 1.2p (0.9)p (0.1)p (0.5)p 14.5p 0.5p – – – 201.0 1,343.2 15.0p 200.0 1,333.5 15.0p 172 172 intu properties plc Annual report 2017 intu properties plc Annual report 2017 EPRA performance measures (unaudited) continued 4 EPRA NAV (a) EPRA NAV EPRA NAV has been presented as recommended by EPRA which seeks to assist comparison between European property companies. However, we believe that our measure of NAV per share (diluted, adjusted), as presented in note 13(a), is more appropriate than the EPRA measure in the context of our business. The key difference relates to interest rate swaps not currently used for economic hedges of debt which are excluded in the Group’s definition of NAV per share (diluted, adjusted). The adjustment in respect of the non-controlling interest recoverable balance not recognised is due to historical accounting practices and is required, in our view, to give a more appropriate value of net assets attributable to equity owners of the Group. A reconciliation of EPRA NAV to the Group’s measure of NAV per share (diluted, adjusted) is provided below: Net assets £m Shares million 2017 NAV per share pence Net assets £m Shares million 2016 NAV per share pence NAV per share attributable to owners of intu properties plc 5,075.0 1,343.4 378p 4,978.8 1,343.0 371p Dilutive convertible bonds, share options and awards – 1.8 2.6 3.5 Diluted NAV per share Adjusted for: 5,075.0 1,345.2 377p 4,981.4 1,346.5 370p Fair value of derivative financial instruments (excluding swaps not currently used for economic hedges of debt) Deferred tax on investment and development property and other investments Share of joint ventures’ items Non-controlling interest recoverable balance not recognised 112.1 23.7 5.2 71.3 8p 2p 1p 5p 140.9 0.1 7.2 71.3 10p – 1p 5p EPRA NAV per share 5,287.3 1,345.2 393p 5,200.9 1,346.5 386p Reconciliation to the Group’s measure of underlying earnings per share Adjusted for: Swaps not currently used for economic hedges of debt 235.4 18p 236.8 NAV per share (diluted, adjusted) 5,522.7 1,345.2 411p 5,437.7 1,346.5 18p 404p (b) EPRA NNNAV The Group’s measure of NNNAV per share (diluted, adjusted), as presented in note 13(b), is equal to the EPRA NNNAV measure presented below: Net assets £m Shares million 2017 NAV per share pence Net assets £m Shares million EPRA NAV per share 5,287.3 1,345.2 393p 5,200.9 1,346.5 Fair value of derivative financial instruments Excess of fair value of borrowings over carrying value Deferred tax on investment and development property and other investments Share of joint ventures’ items Non-controlling interests in respect of the above (112.1) (430.8) (23.7) (47.8) 22.9 (8)p (32)p (140.9) (375.0) (2)p (4)p 2p (0.1) (9.4) 23.4 2016 NAV per share pence 386p (10)p (28)p – (1)p 2p EPRA NNNAV per share 4,695.8 1,345.2 349p 4,698.9 1,346.5 349p 173 173 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n 2017 £m 10,223 (379) 9,844 673 2016 £m 9,985 (153) 9,832 660 10,517 10,492 462 (25) 437 23 460 4.2% 4.4% 467 (22) 445 27 472 4.3% 4.5% 5 EPRA net initial yield and ‘topped-up’ NIY Investment and development property Less developments Completed property portfolio Allowance for estimated purchasers’ costs Gross up completed property portfolio valuation Annualised cash passing rental income Property outgoings Annualised net rents Notional rent on expiration of rent free periods or other lease incentives Topped-up net annualised rent EPRA net initial yield EPRA ‘topped-up’ NIY EPRA net initial yield and ‘topped-up’ NIY by property is given in the investment and development property section. 6 EPRA vacancy rate intu Trafford Centre intu Lakeside intu Merry Hill intu Metrocentre intu Braehead intu Derby Manchester Arndale intu Victoria Centre intu Watford intu Eldon Square intu Milton Keynes Cribbs Causeway St David’s, Cardiff Madrid Xanadú Puerto Venecia, Zaragoza intu Asturias 2017 % 2016 % 1.6 5.8 1.8 5.5 2.5 2.1 1.8 1.5 2.8 1.2 0.4 1.7 6.0 4.5 1.9 3.6 3.0 1.7 7.2 3.1 4.1 2.4 2.7 1.8 3.7 0.2 1.1 – 4.3 4.2 n/a 3.2 0.9 3.0 EPRA vacancy rate is the ERV of vacant space divided by total ERV. This differs from the Group’s measure of occupancy which measures the occupied units using passing rent not ERV. 174 174 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Financial record 2013-2017 (cid:3) Net rental income Underlying earnings Underlying earnings per share1 Dividend per share1 2013 £370m £140m 13.7p 13.7p 2014 £397m £162m 13.3p 13.7p 2015 £428m £187m 14.2p 13.7p 2016 £447m £200m 15.0p 14.0p Property revaluation surplus/(deficit) £126m £648m £351m £(64m) 2017 £460m £201m 15.0p 14.0p £47m NAV per share (diluted, adjusted)1 Market value of investment and development property Net external debt Debt to assets ratio Interest cover Change in like-for-like net rental income Occupancy Growth in footfall (like-for-like) 346p £7,624m £3,698m 379p £8,963m £3,963m 404p £9,602m £4,139m 404p £9,985m £4,364m 411p £10,223 £4,836m 48.5% 1.71x (1.9)% 95% (2)% 44.2% 1.82x (3.2)% 95% +0% 43.1% 1.91x 1.8% 96% +0% 43.7% 1.97x 3.6% 96% +1.3% 45.9% 1.94x 0.5% 96% +0% Amounts presented include the Group’s share of joint ventures. 1 Amounts for 2013 are as adjusted by the 2014 rights issue bonus factor. Glossary 175 175 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n ABC1 customers Proportion of customers within UK social groups A, B and C1, defined as members of households whose chief earner’s occupation is professional, higher or intermediate management, or supervisory. Annual property income The Group’s share of passing rent plus the independent external valuers’ estimate of annual excess turnover rent and sundry income such as that from car parks and mall commercialisation. CACI Provide market research on intu’s customers and UK-wide location analysis. Debt to assets ratio Net external debt divided by the market value of investment and development property including investment and development property classified as held for sale. Diluted figures Reported amounts adjusted to include the effects of dilutive potential shares issuable under convertible bonds and employee incentive arrangements. Earnings per share Profit for the year attributable to owners of intu properties plc divided by the weighted average number of shares in issue during the period. EPRA European Public Real Estate Association, the publisher of Best Practice Recommendations intended to make financial statements of public real estate companies in Europe clearer, more transparent and comparable. ERV (estimated rental value) The independent external valuers’ estimate of the Group’s share of the current annual market rent of all lettable space after expiry of concessionary periods net of any non-recoverable charges but before bad debt provisions. Exceptional items Items that in the Directors’ view are required to be separately disclosed by virtue of their size, nature or incidence. Underlying earnings is considered to be a key measure in understanding the Group’s financial performance, and excludes exceptional items. Headline rent ITZA Annual contracted rent per square foot after expiry of concessionary periods in terms of Zone A. Interest cover Underlying operating profit divided by the net finance costs excluding the change in fair value of financial instruments, exceptional finance costs and amortisation of the Metrocentre compound financial instrument. Interest rate swap A derivative financial instrument enabling parties to exchange interest rate obligations for a predetermined period. These are used by the Group to convert floating rate debt to fixed rates. IPD Investment Property Databank Limited, producer of an independent benchmark of property returns. Like-for-like property Investment property which has been owned throughout both periods without significant capital expenditure in either period, so that income can be compared on a like-for-like basis. For the purposes of comparison of capital values, this will also include assets owned at the previous reporting period end but not throughout the prior period. Long-term lease A lease with a term certain of at least five years. LTV (loan to value) The ratio of attributable debt to the market value of an investment property. NAV per share (diluted, adjusted) NAV per share calculated on a diluted basis and adjusted to remove the fair value of derivatives (net of tax), goodwill resulting from the recognition of deferred tax liabilities, and deferred tax on investment and development property and other investments. Net asset value (NAV) per share Net assets attributable to owners of intu properties plc divided by the number of ordinary shares in issue at the year end. Net external debt Net debt after removing the Metrocentre compound financial instrument and including net debt within liabilities associated with assets classified as held for sale. Net initial yield (EPRA) Annualised net rent on investment property (after deduction of revenue costs such as head rent, running void, service charge after shortfalls, empty rates and merchant association contribution) expressed as a percentage of the gross market value before deduction of theoretical acquisition costs, consistent with EPRA’s net initial yield, and as provided by the Group’s independent external valuers. Net rental income The Group’s share of net rents receivable as shown in the income statement, having taken due account of non-recoverable costs, bad debt provisions and adjustments to comply with IFRS including those regarding tenant lease incentives. 176 176 intu properties plc Annual report 2017 intu properties plc Annual report 2017 Glossary continued NNNAV per share (diluted, adjusted) NAV per share (diluted, adjusted) adjusted to include the fair values of derivatives, borrowings and deferred taxes. Nominal equivalent yield Effective annual yield to a purchaser from an asset at market value before taking account of notional acquisition costs assuming rent is receivable annually in arrears, reflecting ERV but disregarding potential changes in market rents, as determined by the Group’s independent external valuers. Occupancy The passing rent of let and under-offer units expressed as a percentage of the passing rent of let and under-offer units plus ERV of un-let units, excluding development and recently completed properties. Units let to tenants in administration and still trading are treated as let and those no longer trading are treated as un-let. Passing rent The Group’s share of contracted annual rents receivable at the balance sheet date. This takes no account of accounting adjustments made in respect of rent free periods or tenant incentives, the reclassification of certain lease payments as finance charges or any irrecoverable costs and expenses, and does not include excess turnover rent, additional rent in respect of unsettled rent reviews or sundry income such as from car parks etc. Contracted annual rents in respect of tenants in administration are excluded. PMA Property Market Analysis LLP, a producer of property market research and forecasting. Property Income Distribution (PID) A dividend, generally subject to UK withholding tax at the basic rate of income tax, that a UK REIT is required to pay to its shareholders from its qualifying rental profits. Certain classes of shareholder may qualify to receive a PID gross, shareholders should refer to intugroup.co.uk for further information. The Group can also pay non-PID dividends which are not subject to UK withholding tax. Real Estate Investment Trust (REIT) REITs are internationally recognised property investment vehicles which have now been introduced in many countries around the world. Each country has its own rules, but the broad intention of REITs is to encourage investment in domestic property by removing tax distortions for investors. In the UK, REITs must meet certain ongoing rules and regulations, including the requirement to distribute at least 90 per cent of qualifying rental profits to shareholders. Withholding tax of 20 per cent is deducted from these Property Income Distributions. Profits from a REIT’s non-property business remain subject to normal corporation tax. The Group elected for REIT status in the UK with effect from 1 January 2007. Scrip Dividend Scheme The Group may offer shareholders the opportunity to participate in the Scrip Dividend Scheme. This enables participating shareholders to receive shares instead of cash when a Scrip Alternative is offered for a particular dividend. Short-term lease A lease with a term certain of less than five years. SOCIMI The Spanish equivalent of a Real Estate Investment Trust. Tenant (or lease) incentives Any incentives offered to occupiers to enter into a lease. Typically, incentives are in the form of an initial rent-free period and/or a cash contribution to fit out the premises. Under IFRS the value of incentives granted to tenants is amortised through the income statement on a straight-line basis over the lease term. Topped-up NIY (EPRA) Net initial yield (NIY) adjusted for the expiration of rent-free periods and other unexpired lease incentives. Total financial return The change in NAV per share (diluted, adjusted) plus dividends per share paid in the year expressed as a percentage of opening NAV per share (diluted, adjusted). Total property return The change in capital value, less any capital expenditure incurred, plus net income in the year expressed as a percentage of the capital employed (opening capital value plus capital expenditure incurred) in the year as calculated by IPD. Underlying earnings per share (EPS) Earnings per share adjusted to exclude valuation movements, exceptional items and related tax. Underlying figures Amounts described as underlying exclude valuation movements, exceptional items and related tax. Vacancy rate (EPRA) The ERV of vacant space divided by total ERV. Yield shift A movement (usually expressed in basis points) in the yield of a property asset. 177 177 O O t t h h e e r r i i n n f f o o r r m m a a t t i o i o n n PID Special Note: UK shareholders For those who are eligible for exemption from the 20 per cent withholding tax and have not previously registered for exemption, an HM Revenue & Customs (HMRC) Tax Exemption Declaration is available for download from the ‘Investors’ section of the intu properties plc website (intugroup.co.uk), or on request to our UK registrars, Link Asset Services. Validly completed forms must be received by Link Asset Services no later than the dividend Record Date, as advised; otherwise the dividend will be paid after deduction of tax. South African and other non-UK shareholders South African shareholders may apply to HMRC after payment of the dividend for a refund of the difference between the 20 per cent withholding tax and the UK/South African double taxation treaty rate of 15 per cent. Other non-UK shareholders may be able to make similar claims for a refund of UK withholding tax deducted. Refund application forms for all non- UK shareholders are available for download from the ‘Investors’ section of the intu properties plc website (intugroup.co.uk), or on request to our South African registrars, Terbium, or HMRC. UK withholding tax refunds are not claimable from intu properties plc, the South African Revenue Service (SARS) or other national authorities, only from the UK’s HMRC. Additional information on PIDs can be found at intugroup.co.uk/en/investors/shareholder-information/real- estate-investment-trust/. The above does not constitute advice and shareholders should seek their own professional guidance. intu properties plc does not accept liability for any loss suffered arising from reliance on the above. Dividends The Directors of intu properties plc have proposed a final dividend per ordinary share (ISIN GB0006834344) of 9.4 pence (2016: 9.4 pence) to bring the total dividend per ordinary share for the year to 14.0 pence (2016: 14.0 pence). A scrip dividend alternative may be offered. The dividend may be partly paid as a Property Income Distribution (PID) and partly paid as a non-PID. The PID element will be subject to deduction of a 20 per cent withholding tax unless exemptions apply (please refer to the PID special note below). Any non-PID element will be treated as an ordinary UK company dividend. For South African shareholders, non-PID cash dividends may be subject to deduction of South African Dividends Tax at 20 per cent. The following are the salient dates for the payment of the proposed final dividend. Monday 9 April 2018 Sterling/Rand exchange rate struck Tuesday 10 April 2018 Sterling/Rand exchange rate and dividend amount in South African currency announced Wednesday 18 April 2018 Ordinary shares listed ex-dividend on the Johannesburg Stock Exchange Thursday 19 April 2018 Ordinary shares listed ex-dividend on the London Stock Exchange Friday 20 April 2018 Record date for 2017 final dividend in London and Johannesburg Thursday 17 May 2018 Dividend payment date for shareholders South African shareholders should note that, in accordance with the requirements of Strate, the last day to trade cum-dividend will be Tuesday 17 April 2018 and that no dematerialisation or rematerialisation of shares will be possible from Wednesday 18 April 2018 to Friday 20 April 2018 inclusive. No transfers between the UK and South African registers may take place from Tuesday 10 April 2018 to Friday 20 April 2018 inclusive. 178 178 intu properties plc Annual report 2017 Shareholder information Registered Office 40 Broadway, London SW1H 0BT Registered in England & Wales no. 3685527 LEI: 213800JSNTERD5CJZO95 Websites intugroup.co.uk intu.co.uk Registrars All enquiries concerning shares or shareholdings, including notification of change of address, queries regarding loss of a share certificate and dividend payments should be addressed to: For shareholders registered in the UK Link Asset Services PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU. Calls are charged at the standard geographic rate and will vary by provider; lines are open 9.00am to 5.30pm Monday to Friday Telephone +44 (0) 371 664 0300 Email: enquiries@linkgroup.co.uk signalshares.com For shareholders registered in South Africa Terbium Financial Services 31 Beacon Road, Florida North, 1709 South Africa Postal address: PO Box 61272 Marshalltown 2107, South Africa Telephone +27 (0) 860 222 213 Email: intu@terbium.global Payment of dividends Shareholders who wish to have their dividends paid directly into a bank or building society account should complete a mandate form available from the appropriate registrars. Share price information The latest information on the intu properties plc share price is available on the website intugroup.co.uk. Web-based enquiry service for shareholders Shareholders registered in the UK can go to capitashareportal.com to obtain details of their shareholdings and dividends. The shareholder’s surname, Investor Code (found on any correspondence from registrars) and postcode are required to use this service. Shareholders may also use this service to amend or change their address and dividend mandate details. Shareholders registered in South Africa can go to terbium.global to obtain details of their shareholdings. Shareholders will need to follow a registration process in order to access such information. Unfortunately, due to South African legal requirements, shareholders may not update records, but will be able to view their entire holding of shares globally. Please note that the Terbium company code for intu properties plc is ITUZ. Share dealing Existing UK shareholders may trade intu properties plc shares through Link Share Dealing Services who provide a real-time online, telephone and postal dealing service. Contact details are: linksharedeal.com Telephone (within UK) 0871 664 0364 (calls cost 10p per minute plus network extras; lines are open 8.00 am to 4.30 pm Monday to Friday) (Ireland) Lo-call 1 890 946 375 (outside UK) +44 20 3367 2686 Sharegift Shareholders with a small number of shares, which may be uneconomic to sell on a commission basis, may wish to consider donating them to the charity Sharegift (registered charity no. 1052686). Further information can be found on Sharegift’s website sharegift.org or by calling them on 020 7930 3737. Strate Charity Shares South African shareholders for whom the cost of selling their shares would exceed the market value of such shares may wish to consider donating them to charity. An independent non-profit organisation called Strate Charity Shares has been established to administer this process. The South African Revenue Service (SARS) has advised Strate Charity Shares that the value of any shares donated may be deducted from taxable income, as the scheme is registered under section 18A of the Income Tax Act. For further details, queries and/or donations contact the Strate Share Care toll free help line on 0800 202 363 or +27 11 373 0038 if you are phoning from outside South Africa or email charityshares@terbium.global Electronic communication The Company supplies information such as the annual report via its website to shareholders who have consented to such communication. Shareholders will be notified by email or post when new information is available on the website. Shareholders can at any time revoke a previous instruction in order to receive hard copies of shareholder information. UK shareholders may register to receive email alerts by logging on to the website of the UK Registrars (signalshares.com) and following the instructions given to register an email address. SA shareholders may register to receive email alerts by written instruction to the South African Registrar, Terbium, by email (intu@terbium.global). Once registered, shareholders are sent a ‘Notice of Availability’ email highlighting that the annual report or other information is available for viewing on the website. This report contains ‘forward-looking statements’ regarding the belief or current expectations of intu properties plc, its Directors and other members of its senior management about intu properties plc’s businesses, ﬁnancial performance and results of operations. These forward-looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside the control of intu properties plc and are difficult to predict, that may cause actual results, performance or developments to differ materially from any future results, performance or developments expressed or implied by the forward-looking statements. These forward-looking statements speak only as at the date of this report. Except as required by applicable law, intu properties plc makes no representation or warranty in relation to them and expressly disclaims any obligation to update or revise any forward-looking statements contained herein to reﬂect any change in intu properties plc’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Any information contained in this report on the price at which shares or other securities in intu properties plc have been bought or sold in the past, or on the yield on such shares or other securities, should not be relied upon as a guide to future performance. Copyright © intu properties plc March 2018 Designed and produced by Printed by Pureprint Group on FSC® certiﬁed paper. Pureprint Group is an EMAS certiﬁed CarbonNeutral® Company and its Environmental Management System is certiﬁed to ISO14001. 100% of the inks used are vegetable oil-based. This document is printed on Claro Bulk, a paper containing 100% virgin ﬁbre sourced from well managed, sustainable, FSC certiﬁed forests. The pulp used in this product is bleached using an elemental chlorine free (ECF) process. intu properties plc 40 Broadway, London SW1H 0BT intugroup.co.uk

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