McKay Securities
Annual Report 2017

Plain-text annual report

v2 McKay RFS Cover_18-05-17_visual_proof.pdf 1 18/05/2017 18:45 McKay RA Cover_07-05-17.qxp_McKay RA Cover 2017 07/05/2017 22:57 Page 1 REPORT AND FINANCIAL STATEMENTS 2017 McKay Securities PLC 20 Greyfriars Road Reading Berkshire RG1 1NL T: 0118 950 2333 www.mckaysecurities.plc.uk CONTENTS SECTION 1 02 Financial Highlights 03 Chairman’s Statement 07 Portfolio Properties 08 Strategic Report 08 Business Objective, Strategy and Model 09 Property and Financial Review 19 Five Year Summary 20 Principal Risks and Uncertainties and Viability Statement 24 Sustainability SECTION 2 31 Governance 32 Board of Directors 34 Corporate Governance 35 Directors’ Report 40 Audit & Risk Committee Report 42 Nomination Committee Report 44 Remuneration 47 Directors’ Remuneration Policy Report 51 Directors’ Annual Remuneration Report 58 Statement of the Directors’ Responsibilities 59 Report of the Independent Auditor SECTION 3 61 Financial Statements 2017 62 Consolidated Profit or Loss and other Comprehensive Income 63 Group Statement of Financial Position 64 Company Statement of Financial Position 65 Group Cash Flow Statement 66 Company Cash Flow Statement 67 Consolidated Statement of Changes in Equity 68 Company Statement of Changes in Equity 69 Notes to the Financial Statements 87 Glossary 88 Company and Shareholder Information Banbury Maidenhead Windsor Theale Reading Bracknell Newbury Fleet Woking Farnborough Brentford Poyle Staines Wimbledon Croydon Weybridge Leatherhead Redhill Crawley McKay Securities PLC is the only UK REIT focused exclusively on London and the South East England office and industrial markets. It specialises in the development and refurbishment of quality commercial buildings within established and proven markets. Completed projects are generally retained for growth within the Group’s portfolio, valued at £430 million. Properties are actively managed to maximise income and capital returns. As a result, there is a recurring rental stream underpinning growth in profits which are further enhanced from time to time by the sale of investment properties. Folkestone FINANCIAL HIGHLIGHTS PROFITS AND EARNINGS VALUATION £17.59 million Profit before tax (IFRS) (2016: £53.16 million) £8.60 million 1 Adjusted profit before tax (2016: £7.94 million) 8.4 pence 2 EPRA earnings per share (2016: 7.8 pence) SHAREHOLDERS’ FUNDS £270.79 million (2016: £261.22 million) 303 pence3 EPRA net asset value per share (2016: 301 pence) 289 pence 4 Net asset value per share (2016: 280 pence) £429.92 million (2016: £401.17 million) £7.07 million (1.7%) Surplus (2016: £35.31 million. 9.7%) TOTAL PORTFOLIO RETURN 6.8% (2016: 15.9%) DEBT TO PORTFOLIO VALUE (LTV) 31.6% (2016: 28.9%) PROPOSED FINAL DIVIDEND PER SHARE 6.3 pence (2016: 6.1 pence) Up 3.3%, making the total dividend per share for the year 9.0 pence (2016: 8.8 pence) 1 See note 5 in Financial Statements 2 See note 9 in Financial Statements 3 See note 22 in Financial Statements 4 See note 22 in Financial Statements 2 McKay Securities PLC Report and Financial Statements 2017 CHAIRMAN’S STATEMENT In this, my first year as Chairman, I am pleased to be able to report on another positive year for the Group, which continues to benefit from its exclusive focus on London and the South East. I took on the role with the business in good shape, and despite market volatility surrounding the EU referendum, these results show further gains coming through from the funds invested following the 2014 Capital Raising. Our refurbishment programme and proactive asset management activities over the period have continued to release the substantial portfolio potential that we have built up, with rental and capital growth out-performing the market. In addition, two of our three development projects reached completion and our third scheme remains on track for delivery next year. As a result of this progress, our rental income and portfolio value have reached historic highs for the Group, contributing to increases in shareholders’ funds, profits and dividend. Richard Grainger Chairman To achieve our objective of delivering attractive and sustainable returns to shareholders over the long term, our focus has been on building a resilient portfolio in our core London and South East markets. Selective capital investment has continued to improve the quality and scale of the portfolio in established and proven locations, whilst retaining diversity across our core office and industrial sectors. We also continue to aim for the highest standards of building management and occupier relations. Our refurbishment and development projects offer choice and flexibility in high quality, contemporary business space, with top environmental credentials. These are all essential design characteristics for an increasingly discerning occupier market. This focus on product and delivery contributed to 35 lettings over the period, of which 26 were new open market lettings with a combined rental value of £1.90 million pa, 6.4% ahead of estimated rental value (ERV). These lettings contributed to growth in contracted rental income, which ended the period up 11.0% (£2.32 million pa) at £23.42 million pa. In addition, the success of our refurbishment projects and other portfolio activity resulted in a 3.9% increase in the portfolio ERV to £32.68 million pa. The full benefit of these lettings to our gross rental income, which increased by 3.1% to £20.79 million, will be seen next year. In addition, the £9.26 million difference between contracted rents and the full portfolio ERV represents the substantial further potential in our portfolio for growth in income and earnings. Rents to be generated by our three office developments represent over half of this potential. The schemes in Reading (39,620 sq ft) and Redhill (50,370 sq ft) completed during the year, adding top quality new floor space to the portfolio in excellent locations. At the year-end we were 20% let at Redhill, and there is encouraging interest in the remaining space at both buildings. The redevelopment of 30 Lombard Street, our City of London scheme, remains on programme for delivery in mid-2018 and is progressing well. Demolition completed in February and construction of the lift core and steel frame is under way. This is a prime development with many attractive fundamental characteristics aside from its highly sought after location. We look forward to launching our marketing programme this month, and expect interest for either the whole building or individual floors. As anticipated at the end of last year, the pace of capital growth seen in our markets in recent periods was not sustained. Commercial property has remained an attractive asset class to a wide range of investors, but the IPD Index showed small declines in capital values across most sectors over the period. Despite these more challenging market conditions, our asset selection and proactive management resulted in the open market valuation of the portfolio of £429.92 million (March 2016: £401.17 million) generating a valuation surplus of 1.7% (£7.07 million). This outperformed the IPD Monthly Index (All Property) which showed a deficit of 1.8%. 2017 Report and Financial Statements McKay Securities PLC 3 CHAIRMAN’S STATEMENT continued 9 Greyfriars Reading 39,620 sq ft Development Completion: July 2016 4 McKay Securities PLC Report and Financial Statements 2017 As a result of our strong operational performance, the 3.1% increase in gross rental income referred to earlier added £0.63 million to our profits, despite the loss of £1.03 million of income from property disposals made in the last financial year. As administration and non-recoverable property costs were held at similar levels to last year, adjusted profit before tax increased by 8.3% (£0.66 million) to £8.60 million (March 2016: £7.94 million). Profit before tax (IFRS), which includes unrealised movements in the value of the property portfolio and hedging instruments and other non-recurring items, was £17.59 million (March 2016: £53.16 million), reflecting the lower valuation contribution this year. The increase in adjusted profit before tax, our measure of recurring earnings, achieved our ambitious target of a covered dividend within three years of doubling the share capital in 2014. This measure is set to increase over time as the portfolio reversion is crystallised, although earnings will be eroded by the carrying cost of the development properties until they are let. With the benefit of the valuation surplus, shareholders’ funds increased by 3.7% to £270.79 million. NAV per share (EPRA) increased by 0.7% to 303 pps. Our financing position remains strong with supportive lenders and flexible loan facilities. In order to help reduce our cost of debt, in December 2016 we took the opportunity to further reduce the notional amount of our remaining interest swap from £45.00 million to £33.00 million. This was achieved at a cost of £5.1 million, with a negotiated contribution made by the counterparty bank, resulting in annualised savings at current rates of £0.50 million. Our weighted average cost of debt if fully drawn at current rates would be a competitive 3.7% Dividend The Board is recommending a 3.3% increase in the final dividend to 6.3 pence per share (March 2016: 6.1 pence). This will be paid as an ordinary dividend on 27th July 2017. This takes the total dividend for the year to 9.0 pence per share (2016: 8.8 pence). This recommendation reflects the letting progress over the period, whilst recognising the importance of generating further income from the development programme. The Board intends to maintain a progressive dividend policy, with the scale and pace of increase dependent on growth in recurring earnings. The Board Over the year, we were pleased to announce the strengthening of the Board with the appointments of Jon Austen and Jeremy Bates as non-executive Directors, and Tom Elliott as an executive Director. These appointments add relevant and extensive experience and will be of great benefit as we continue to implement our growth plans. They also mark the end of the current phase of our succession planning, overseen by Nigel Aslin as Chairman of the Nomination Committee. As a result, Nigel retires from the Board today and Viscount Lifford in September, having both served for over ten years. I would like to thank them for their invaluable support and counsel over the years. They have been an integral part of the Group’s successful management through the challenges of the recession and the subsequent period of growth and leave with the Group in good health. Future Prospects We have created a strong platform from which we can continue to deliver capital and income growth from the extensive potential within our existing portfolio, underpinned by sound financing and sector and geographical diversity in the most resilient regions of the UK. Recent letting progress and further crystallisation of the portfolio’s income potential provide the opportunity to increase earnings by a significant margin. Despite the EU referendum and the imminent General Election, our markets and assets continue to prove robust, leaving us well placed to continue to deliver portfolio gains and further shareholder value. Richard Grainger Chairman 19th May 2017 2017 Report and Financial Statements McKay Securities PLC 5  6 McKay Securities PLC Report and Financial Statements 2017 PORTFOLIO PROPERTIES at 31st March 2017 Area sq. ft £15m and over –44.9% of portfolio Brentford The Mille, 1000 Great West Road (office) 96,700 EC3* Portsoken House, Minories (office and retail) 49,570 EC3* 30 Lombard Street (office under construction) 58,000 SW1 1 Castle Lane (office) 14,250 SW19 Wimbledon Gate, Worple Road (office and retail) 58,690 Reading Great Brighams Mead, Vastern Road (office) 84,840 Redhill Prospero, London Road (office) 50,370 £10m to £15m - 32.1% of portfolio Crawley Pegasus Place, Gatwick Road (office) 50,790 Croydon Corinthian House, Dingwall Road (office) 44,590 EC2 66 Wilson Street (office) 11,890 Maidenhead Switchback Office Park, Gardner Road (office) 37,155 Poyle McKay Trading Estate, Blackthorne Road (industrial) 73,955 Reading 9 Greyfriars Road (office) 39,620 Reading 20/30 Greyfriars Road (office) 33,345 Runnymede Runnymede Focus, Windsor Road (industrial) 90,890 Weybridge Sopwith Drive, Brooklands (industrial) 63,140 Woking 1 Crown Square (office and retail) 50,735 Woking The Planets, Crown Square (leisure) 98,255 £5m to £10m – 18.8% of portfolio Bracknell Building 329, Doncastle Road (office) 32,955 Crawley Oakwood Trade Park, Gatwick Road (industrial) 52,400 Farnborough Columbia House, 1 Apollo Rise (industrial) 40,755 Farnborough Pinehurst Park, Farnborough Road (office) 50,200 Fleet One Fleet, Ancells Road (office) 34,580 Leatherhead Ashcombe House, 5 The Crescent (office) 17,450 SW1* Parkside, Knightsbridge (residential) 2,900 Staines Mallard Court, Market Square (office and retail) 21,860 Theale Brunel Road (industrial) 96,850 Theale Station Plaza, Station Road (office) 41,420 Windsor Gainsborough House, 59-60 Thames Street (office) 18,660 £2m to £5m – 3.8% of portfolio Banbury Lower Cherwell Street Industrial Estate (industrial) 40,060 Folkestone 3 Acre Estate, Park Farm Road (industrial) 44,290 Folkestone 5 Acre Estate, Park Farm Road (industrial) 60,535 Newbury Strawberry Hill House, Bath Road (medical) 15,230 £2m and below – 0.5% of portfolio Chobham Castle Grove Road (land) — Newbury Albion House, Oxford Road (office) 6,720 Staines 2 Clarence Street (office) 3,440 Notes: Percentages based on the Group valuation at 31st March 2017. *Denotes leasehold properties 2017 Report and Financial Statements McKay Securities PLC 7 STRATEGIC REPORT Business Objective, Strategy and Model BUSINESS OBJECTIVE BUSINESS STRATEGY Our primary business objective is to deliver attractive and sustainable returns to shareholders over the long term, with exposure to those property markets where the benefit of our skills and experience will be most productive. To achieve this, our strategy is to apply entrepreneurial property initiatives to generate income and capital gains, primarily from office and industrial properties in London and South East England in order to maximise total portfolio return. An integral part of the strategy is to provide quality business space attractive to occupiers and to maintain loan facilities to support these initiatives. BUY SUSTAINABLE DEBT AND GEARING MANAGE REFURBISH DEVELOP MAXIMISE PORTFOLIO RETURNS SELL RECYCLE BUSINESS MODEL Delivery of this strategy is based on a clear business model proven through recent property cycles. The key elements of the model are: Acquisition of property assets that meet identified criteria with the potential to add value. Implementation of refurbishment, development and other property initiatives to enhance portfolio returns. Flexible financing and strong banking relationships. Active in-house management of assets to maximise property returns. Disposal of mature assets to recycle capital. 8 McKay Securities PLC Report and Financial Statements 2017 STRATEGIC REPORT Property and Financial Review Overview McKay Securities is the only Real Estate Investment Trust (REIT) focused entirely on London and the South East. Our track record demonstrates careful guardianship of our shareholder capital while having sufficient agility, market knowledge and experience to outperform the markets in which we operate. We manage our assets in-house, resulting in productive tenant relationships as well as in depth knowledge of each property. The Group’s 36 assets were externally valued at £429.92 million at 31st March 2017, consisting of 33 investment properties (£374.57 million) and three development properties (£55.35 million). By value the portfolio is 18.4% in London and 81.6% in the South East, with 78.0% of the portfolio in the office sector, 17.2% industrial and 4.8% in a range of other uses. The portfolio generated a total property return for the year of 6.8%, outperforming the IPD Monthly Index (All Property) return of 3.3%. The £86.7 million of capital raised in early 2014 was committed by April 2015, strategically invested into eight new acquisitions in a rising investment market, and the delivery of four refurbishments and three development projects into the supply constrained office markets of London and the South East. The acquisitions and completed refurbishment projects have delivered a combined 32.3% profit over cost to date, and rental growth of 25.9%. The development projects, covered in more detail below, are making good progress and are set to add to this strong performance. These assets, combined with performance elsewhere in the portfolio, have delivered a 43.0% increase in contracted rents and a 72.5% increase in the full estimated rental value (ERV) of the portfolio since March 2014. Furthermore, the office markets in which we operate are set to benefit considerably from the completion of national infrastructure projects, including Crossrail (2019) which will link the M4 corridor with central London and Canary Wharf and the Western Rail Access to Heathrow route (2024), improving access to Europe’s busiest airport which sits in the heart of our South East market. Our principal focus this year has been on retaining and increasing income through active management and our refurbishment and development programme. To that end, despite the EU referendum at the beginning of the period, our net contracted rent grew by 11.0% to £23.42 million (March 2016: £21.10 million) and the portfolio ERV grew, on a like for like basis, by 3.9% to £32.68 million (March 2016: £31.44 million). The difference between contracted rent and ERV represents the substantial portfolio reversion and the potential to increase income by a further 39.5% by continued letting progress. The portfolio void (by ERV) reduced over the period to 5.5% (March 2016: 7.2%) and to 22.7% (March 2016: 25.9%) including the three development properties. The weighted average lease length to expiry reduced marginally to 5.18 years (March 2016: 5.45 years) and to 4.28 years (March 2016: 4.45 years) to the first lease break. Four years ago we introduced a sustainability strategy with annual targets, reflecting our commitment to operate in an environmentally responsible manner. Last year we achieved 80% of the annual targets and have set further challenging targets for 2017/18. We were also awarded our first GRESB (Global Real Estate Sustainability Benchmark) Green Star, which is the highest benchmark award, and our completed development projects achieved our high BREEAM and EPC target levels. Our sustainability strategy also addressed the implications of the Energy Act 2011, which will make it illegal to let any property with an EPC rating of F or below from 2018. Our proactive approach over the last four years has resulted in having only 1% of our assets (by ERV) rated F or G, and mitigation measures are in place to reduce this further. Market review The London and South East markets have proved to be resilient in a year dominated by the EU referendum. Two positive market fundamentals have underpinned this stability. Firstly, on the leasing side, there are still low levels of new supply which have helped sustain rental values, while on the investment side, commercial property is still delivering attractive yields relative to other asset classes in a prolonged low interest rate environment. Throughout 2016, take up levels have been robust despite the uncertainty over Europe, but in many cases landlords are having to retain flexibility to accommodate a greater number of smaller deals, as some larger requirements are being postponed. Our portfolio is well placed for this market dynamic given our relatively small average building size of 44,000 sq ft and our willingness to deliver choice and flexibility in this evolving occupier market. We also have a deliberate policy of owning and procuring buildings capable of multiple occupation. This increase in smaller transactions was clearly seen in the South East office market which accounts for 59.6% of our portfolio (by value). Take up in this market was steady at 1.96 million sq ft in 2016 compared to the 5-year average of 1.90 million sq ft and the 10-year average of 2.03 million sq ft. However, this quantum was the result of 127 different transactions in 2016 compared to the 5-year average of 109 and the 10-year average of 113. This trend looks set to continue in 2017, which has started positively with a first quarter take up of 554,321 sq ft across 41 transactions. S Sector (by value) Location (by value) Offices Industrial Other % 78 17 5 17% 5% T Total £’million 430 78% South East Offices London Offices South East Industrial Other % % 60 18 17 5 5% 17% Total T £’million 430 18% 60% 2017 Report and Financial Statements McKay Securities PLC 9 STRATEGIC REPORT Property and Financial Review - continued The supply of good quality office accommodation remains limited in the South East. At the end of the period, total availability stood at 8.83 million sq ft (March 2016: 9.04 million sq ft) which is 10.3% of the total market (March 2016: 10.5%), of which 6.81 million sq ft was either new or Grade A. This means that if a tenant wants to find either a new or Grade A quality office, the choice will be limited to 7.9% of the entire floor space in the South East. If that requirement is specifically for new space, such as our schemes at Redhill (50,370 sq ft) and Reading (39,620 sq ft) which completed in the period, then the percentage choice falls to just 2.7%. Set against this historically low supply is 3.82 million sq ft of named occupier demand, which is just 2.5% below the long term average (source: Strutt & Parker). The City of London occupational market remains supported by balanced supply and demand and an increasingly diverse tenant base. The EU referendum has raised concerns over future occupier demand, but it has also limited the commencement of new schemes. Although supply has increased marginally, availability in the City core and fringe at the end of the period remains 16.9% below the long term average. Added to this, current named demand of 4.54 million sq ft is 24.4% higher than March 2016, and 14.9% ahead of its long term average. Within the City core, there is forecast to be only one other new development of similar size band (50,000 sq ft – 80,000 sq ft) to 30 Lombard Street completing in 2018. The City core has a total pipeline of new and Grade A supply of 3.62 million sq ft scheduled to complete up to the end of 2018. Of this, 39.5% (1.43 million sq ft) is already pre-let or under offer. The balance of 2.19 million sq ft compares favourably with average annual take up of 1.70 million sq ft, and a low current vacancy rate of 3.3%. The recent increase in occupier demand is encouraging, and if maintained, will continue to support rental levels and letting prospects generally for this prime development (source: Knight Frank). Acquisitions and disposals The investment market remains competitive and, despite the EU referendum uncertainty, prices for prime assets in London and some regional locations remain above those achieved at the peak of the previous cycle in 2007. As a result, our focus has primarily been on delivering value from the existing portfolio and opportunistic sales. Nonetheless, in a market covering the whole of London and the South East, there will be value add acquisition opportunities, and we continue to appraise potential acquisitions on this selective basis. In February 2017, we exchanged unconditional contracts to sell the freehold interest in our last remaining asset at Pinehurst Park, Farnborough for £5.88 million, representing an 11.5% premium to book value. The purchaser, who hopes to undertake a residential conversion, has paid a non-returnable deposit of £1.00 million. We will retain income until completion of the sale in November 2017. At that point, from initial purchase of the entire site in 2012 for £3.50 million, we will have generated net disposal proceeds of £6.36 million, representing a 71.9% return on cost, and rental income totalling £3.34 million. We remain committed to recycling capital from opportunistic sales, particularly of our smaller and more mature assets into both acquisitions and existing opportunities within the portfolio. Development programme Over the period we completed two of our three speculative office schemes; both of which are excellent additions to the portfolio. In central Reading, 9 Greyfriars Road (39,620 sq ft) completed in July 2016. This remains the only office building outside central London to be awarded the top BREEAM sustainability rating of ‘Outstanding’, and offers occupiers attractive, high quality, environmentally friendly business space just a three minute walk from the upgraded future Crossrail station. Our marketing campaign has attracted encouraging interest over the period, as prospective occupiers appreciate the combination of proximity to the station, on-site parking, and affordable rents for a top-quality building with a high standard of finish. Since the end of the period, this level of interest has been maintained with constructive discussions ongoing, and we hope to be able to make further letting announcements in due course. In November 2016 we completed Prospero (50,370 sq ft), Redhill’s first new office development for 10 years. This building has also been well received by the market, offering four large flexible floors, flooded with daylight through floor to ceiling windows. Within three months of completion we signed a 10-year lease of the top floor (10,643 sq ft) at a new rental high for the town of £31 psf. Good interest and regular inspections continue on the remaining space. Our only remaining development on site is 30 Lombard Street, in the heart of the City of London. Construction works are progressing well and the scheme remains on target to complete in mid-2018. It will provide 58,000 sq ft of exceptional quality office space and has been designed to offer an attractive prospect to either a single occupier, looking for a core City and globally recognised address, or to a number of occupiers. It will provide regular floor plates over lower ground and nine upper floors and a large roof terrace. We look forward to launching the full marketing campaign shortly. Years to expiry (exc breaks) Tenant Net Worth Year 0-3 3-5 5-10 10+ £m 6.3 7.3 8.8 1.0 23.4 10+ 0–3 5-10 Contracted rent £’million 23.4 3-5 £’m >35 15–35 7–15 <7 Source: Dun & Bradstreet % 30 17 8 45 30% 45% Contracted rent £’million 23.4 17% 8% 10 McKay Securities PLC Report and Financial Statements 2017 The Mille Brentford 96,700 sq ft Prospero Redhill 50,370 sq ft Development Completion: November 2016 2017 Report and Financial Statements McKay Securities PLC 11 REMUNERATION Directors’ Annual Remuneration Report - continued 12 McKay Securities PLC Report and Financial Statements 2017 Prospero Redhill In addition to our three existing schemes, we continue to work on a number of future opportunities within the portfolio. Next in the pipeline is the potential to refurbish or redevelop one of our industrial assets – a 96,850 sq ft warehouse next to Junction 12 of the M4 at Theale, on the western outskirts of Reading. We purchased the property in April 2015 with a lease in place until February 2021 and a tenant break option in 2018. The industrial sector (which includes warehouse properties) has witnessed the strongest IPD returns this year, principally due to the continued increase of internet retailing which generates large requirements for last-mile delivery in the South East. This asset gives us the opportunity to create a product perfectly suited to satisfy this strong demand and we will be submitting planning applications shortly for the redevelopment of the site for up to four warehouse units totalling 135,000 sq ft. Refurbishment and asset management At the prominent Mille office building in Brentford (96,950 sq ft) we completed the refurbishment of the 4th (part), 6th and 7th floors (20,554 sq ft) and reception. We subsequently secured the letting of the newly refurbished part 4th floor (3,930 sq ft) at £26.00 psf, which is a 30.0% increase in ERV from acquisition in 2014, and another letting of over half of the 7th floor (4,732 sq ft) at £25.00 psf. The Mille is proving to be an attractive option for tenants who require both the proximity to central London and M4 access at occupational costs which are less than half those of nearby Hammersmith and Chiswick. The rolling refurbishment of the reception, common areas and office floors at One Crown Square, Woking (52,115 sq ft) continues to attract multiple tenants. As with 329 Bracknell, we have responded to demand for smaller units and engaging communal break out areas – creating a co-working environment yet with direct control and management from the landlord. We signed nine new leases at this asset during the year at a combined contracted rent of £0.34 million pa, in line with an ERV of £24.00 psf. The most significant was the letting of the entire 6th floor (7,850 sq ft) on a ten-year term with no break options. The building is now 89.5% let by ERV. We completed the refurbishment of Building Five, Switchback Office Park in Maidenhead in September 2016. This is the last of six buildings in our rolling refurbishment programme, providing 8,375 sq ft over two floors. During the refurbishment, we pre-let the upper floor on a 10-year lease at a rent of £0.11 million pa, equating to £26.75 psf. This is the highest rent achieved at the Park, leaving just the ground floor unit of 4,133 sq ft (out of the whole Park of 37,155 sq ft) to be let. Small floors in the rapidly improving Victoria sub market in central London continue to be in high demand, as evidenced at Castle Lane, SW1 (14,250 sq ft). We have been actively managing leases and re-letting throughout the building, with minimal voids, taking rents from an ERV of £57.50 psf in March 2016 to the latest letting of £64.00 psf on the first floor. We have also secured a residential planning consent to protect future flexibility and value. The 11.0% increase in net contracted rent for the portfolio was attributable in part to these new lettings, but also to the rigorous asset management by the team through lease regears, renewals and rent reviews. At Wimbledon Gate, SW19 (58,690 sq ft) we settled the February 2016 rent review during the period at £2.35 million pa which was an increase of £0.80 million pa (51.6%). 2017 Report and Financial Statements McKay Securities PLC 13 STRATEGIC REPORT Property and Financial Review - continued This fully endorsed our strategy of holding this high quality office asset for growth, having developed it in 2005. This is an increasingly popular London sub-market with good transport connections that continues to benefit from the recent growth in central London rents. The only sector where we fell short of the index was our industrial assets (17.2% of the portfolio) where our surplus was 0.4% (IPD: 6.1%). This was mainly due to a 13.4% valuation deficit at Brunel Road, Theale where, as previously outlined, the tenant’s break option early next year has had a negative impact on value. At Gainsborough House (18,660 sq ft), we completed a lease renewal with the existing tenant of this attractive office building in central Windsor. This extended their term by 10 years at an increased rent of £0.58 million pa (12.5% uplift) with no capital expenditure incurred by the Group. The rent achieved was 4.8% ahead of ERV. Across the entire portfolio, the activity referred to above contributed to a total of 35 lettings over the period, 26 of which were open market lettings at a combined contracted rent of £1.90 million pa (6.4% ahead of ERV). The balance, being nine lease renewals, contributed to a tenant retention rate of 76.6% at lease break option and expiry, securing a combined contracted rent of £1.87 million pa, at a substantial 11.6% increase over the passing rent prior to these lease events. We also benefitted from a one-off contribution to our income this year of £1.65 million. This was compensation paid by adjoining landowners for the potential impact of their redevelopment proposals on the rights to light of our two central Reading office properties. Valuation The independent valuation of the Group’s portfolio as at 31st March 2017 totalled £429.92 million (March 2016: £401.17 million), resulting in a surplus for the 12 months of 1.7% (£7.07 million) overall and 2.5% excluding the three development properties. This compared favourably to the market benchmark (IPD Monthly (All Property) Index) which returned negative capital growth of -1.8%. Our total portfolio return was 6.8%, outperforming the IPD Monthly (All Property) index of 3.4%. Our greatest exposure (59.6% of the portfolio) is in the South East office sector, where our investment properties achieved capital growth of 3.6% compared to IPD of -2.6% and ERV growth of 5.8% compared to IPD of -1.7%. Our London office investment properties also outperformed the benchmark with capital growth of 2.5% (IPD City of London -2.1%) and ERV growth of 3.2% (IPD: 2.5%). The combined deficit for our three development properties was 3.5%. Prospero at Redhill returned a surplus as a result of letting progress, and 9 Greyfriars Road, Reading was little changed. At 30 Lombard Street, EC3 the valuation deficit of 12.4% was mainly due to an outward shift in yield and void assumptions in the first half of the year following the EU referendum, being the least advanced of the three schemes. The portfolio initial yield of 4.6% (March 2016: 4.5%), increases to 5.1% (March 2016: 5.0%) on the expiry of letting incentives. Our significant potential to grow income is demonstrated by our reversionary yield, which would be 7.1% (March 2016: 7.4%) calculated using current capital values against ERV. The equivalent yield was 6.4% (March 2016: 6.3%), highlighting that our valuation gains were as a result of higher contracted rents and ERVs. This valuation performance was achieved despite a lack of market momentum, as indicated by the IPD Index movements. Performance therefore relied on our pro-active asset management and well placed refurbishments. Examples in the portfolio are the significant lease regear at Windsor which generated 17.3% capital growth; 17.0% growth from the rolling refurbishment at Woking; and 13.2% from the rent review at Wimbledon. Total shareholder return Total Shareholder Return (TSR) for the three years to 31st March 2017 was 13.2%. This compares to a FTSE 350 Real Estate Index return of 14.6%. For the year to 31st March 2017, the sharp relative decline in share price following the EU referendum vote resulted in a negative TSR of 8.6% which compares to a FTSE 350 Real Estate negative return of 0.3%. Our share price reaction to the referendum result proved to be extreme and recent gains have outperformed the sector. Dividends The final dividend of 6.3 pence per share (March 2016: 6.1 pps) will be paid on 27th July 2017 to those on the register on 2nd June 2017. With the interim dividend of 2.7 pence per share, Yields and occupancy £million Occupancy Occupancy pa Yield2 by floor area by rental value Contracted rental income1 23.4 5.1% 86% 77% Reversions 1.8 Void properties 7.4 14% 23% Portfolio reversion 9.2 Total portfolio 32.6 7.1% 100% 100% Notes: 1 Contracted rental income at 31st March 2017, less ground rent 2 Yield on portfolio valuation at 31st March 2017 with notional purchasers costs (6.75%) added 14 McKay Securities PLC Report and Financial Statements 2017 2017 Report and Financial Statements McKay Securities PLC 15 STRATEGIC REPORT Property and Financial Review - continued this takes the total dividend for the year to 9.0 pence per share, an increase of 2.3% on the previous year. As a REIT, the Group is required to distribute at least 90% of rental income profits arising each financial year by way of a Property Income Distribution (PID), subject to exemptions. This is paid after deduction of withholding tax, at present 20%. The cost of cancelling interest rate hedging instruments over the period is treated as an exemption and has off-set the profits attributable to the PID. As a result, the final dividend will be paid as an ordinary dividend rather than a PID. Income statement Adjusted profit before tax increased by £0.66 million (8.3%) to £8.60 million (March 2016: £7.94 million) due primarily to a £0.63 million (3.1%) increase in gross rental income. A small decrease in administration costs was in part offset by an increase in property outgoings. Interest costs were steady. This increase in gross rental income came as a result of the letting progress and asset management initiatives referred to above and in previous periods, offset by £0.95 million less income as a result of disposals last year. Profit before tax (IFRS) totalled £17.59 million (March 2016: £53.16 million). This included the unrealised surplus on valuation (including SIC15 and other adjustments) for the period of £7.62 million, an improvement of £0.42 million in the negative value of the interest rate hedging instruments and the £1.65 million rights of light compensation payment. Administration costs decreased by 1.4% to £5.80 million (March 2016: £5.88 million). Staff pay increases of circa 2% were offset by a lower bonus cost for the period. The interest cost for the year of £6.34 million was the same as last year. Interest capitalised against projects during the year was comparable to the prior year at £1.82 million (March 2016: £1.88 million) as the development programme continues. As a result, interest payable totalled £4.52 million (March 2016: £4.46 million). The Group’s weighted average cost of debt for the period reduced from 4.78% for the six months to 30th September 2016 to 4.42% (prior to amortisation and finance lease interest). Contributing to this was the decision made in December 2016 to reduce the notional value of the Group’s interest rate hedging instrument by a further £12.00 million to £33.00 million at a net cost to the Group of £5.08 million, with the cost of cancellation offset by a lender contribution. This reduction reduces annualised interest cost by £0.50 million at current rates. The Group does not hedge account its interest rate derivatives and therefore includes the movement in fair value in the profit for the year. Balance sheet Shareholders’ funds increased from £261.22 million to £270.79 million over the period, principally due to the £7.62 million valuation surplus (£7.07 million excluding SIC15 and other adjustments). EPRA NAV per share increased by 0.7% over the period to 303 pence (March 2016: 301 pence). EPRA NNNAV per share increased by 2.9% to 285 pence (March 2016: 277 pence) and basic NAV per share increased by 3.2% to 289 pence (March 2016: 280 pence). The reduction in the difference between EPRA NAV and basic NAV (from 21p to 14p) is a consequence of the reduction in the notional value of the hedging instrument and the lender contribution. Key performance indicators: 2017 2016 2015 2014 2013 Portfolio Capital Return (capital) (%)1 1.7 11.4 13.8 10.2 2.2 The annual valuation and realised surpluses from the Group's investment portfolio expressed as a percentage return on the valuation at the beginning of the year, adjusted for acquisitions and capital expenditure. Total Portfolio Return (capital and income) (%) 6.8 15.9 18.4 15.6 8.6 The portfolio capital return referred to above and net rental income from investment properties for the year expressed as a percentage return on the valuation at the beginning of the year, adjusted for acquisitions and capital expenditure. Net Asset Value Return (%)2 3.6 14.7 22.7 10.1 7.6 The growth in adjusted net asset value per ordinary share plus dividends reinvested per ordinary share expressed as a percentage of the adjusted net asset value per share at the beginning of the year. Total Shareholder Return (TSR) (%)3 (8.6) (0.8) 24.8 54.7 21.3 The growth in the value of an ordinary share plus dividends reinvested during the year expressed as a percentage of the share price at the beginning of the year. Notes: 1 This measures both realised and unrealised movements in portfolio values over the year. 2 This is a common sector measure as movements are heavily influenced by changes in the value of the portfolio and the extent of borrowings. 3 This indicates movements in the value of a shareholders’ investment, although not directly related to the profitability of the Group. 16 McKay Securities PLC Report and Financial Statements 2017 Lombard Street, EC3 (C.G.I.) 58,000 sq ft 2017 Report and Financial Statements McKay Securities PLC 17 STRATEGIC REPORT Property and Financial Review - continued The Mille Brentford The Group currently benefits from £175.00 million of banking facilities, having refinanced three of the four facilities in 2015. The fourth facility is in the process of being refinanced ahead of expiry at the end of the year. Drawn debt at the end of the period was £136.00 million (March 2016: £116.00 million). The gearing ratio of drawn debt to portfolio value (LTV) as at 31st March 2017 was 31.6% (March 2016: 28.9%). The ratio of aggregate net borrowings to tangible net worth was 47.3% (March 2016: 40.9%). Both ratios have increased due to ongoing project expenditure of £20.06 million over the period, but remain at low levels relative to loan covenants which will continue to be carefully monitored. Net cash inflow from operating activities was £16.50 million (March 2016: inflow £3.30 million) and interest cover based on adjusted profit plus finance costs as a ratio to finance costs was 1.96x (March 2016: 1.86x). The interest rate hedging instrument of £33.00 million, coupled with the long dated £55.00 million fixed loan, give the Group £88.00 million of fixed or hedged debt (March 2016: £100.00 million). This equates to 64.7% fixed or hedged on the current drawings of £136.00 million. The negative mark to market valuation of the hedging instrument at 31st March 2017 improved by £0.42 million to £16.92 million. Although the mark to market valuation is negative, this represents a non-cash timing difference. The Group closely monitors the market for these instruments and regularly reviews the strategic options for these products. As a REIT, the Group is tax exempt in respect of capital gains and all qualifying rental income, which covers the majority of the Group’s activities. Any residual income has been offset by relevant costs, and there is therefore no tax charge for the period (March 2016: nil). Defined Benefit Pension Scheme Under the application of accounting standard IAS19, the Group’s pension deficit has increased over the period from £1.84 million to £2.28 million. The Group’s annual contribution to the Scheme of £0.24 million, which includes part payment towards the deficit over a 7-year recovery plan, is not affected by the increase in the deficit. The increase in the deficit is in the main due to the fall in the gilt curve during the year, resulting in the discount rate applied reducing from 3.3% to 2.3%. The Scheme was closed to new entrants in the 1980’s, and now consists of six pensioners and no active members. The Scheme is currently subject to a triennial valuation for the year to 31st March 2017. Financial risks The financial risks are documented in the principal risks and uncertainty section of the Strategic Report on pages 20 to 22. Signed on behalf of the Board of Directors. S. Perkins G. Salmon 19th May 2017 18 McKay Securities PLC Report and Financial Statements 2017 FIVE YEAR SUMMARY 2017 2016 2015 2014 2013 Financial measure Gross rental income (£’000) 20,790 20,159 17,617 14,683 16,097 Net rental income from investment properties (£’000) 19,871 17,664 14,922 12,787 14,373 Profit/(loss) before taxation (£’000) 17,594 53,160 33,282 38,290 1,745 Adjusted profit before taxation (£’000) 8,605 7,943 5,791 3,422 5,418 Investment properties (£’000) 429,915 401,170 352,760 254,550 212,935 Loans and other borrowings (£’000) (134,100) (113,701) (91,302) (37,266) (94,209) Total equity (£’000) 270,792 261,223 215,495 189,235 71,933 Ordinary dividends per share (pence) 9.0 8.8 8.7 8.6 8.5 Earnings per share – basic (pence) 18.8 57.2 36.1 75.0 3.8 Earnings per share – adjusted basic (pence) 9.2 8.5 5.3 6.2 11.8 Net asset value per share (pence) 289 280 233 206 157 EPRA net asset value per share (pence) 303 301 270 227 238 Interest cover 2.0 1.9 1.8 1.5 1.9 Loan to value 32 29 26 15 44 The above figures are extracted from previous accounts based on accounting standards effective at those dates. 1Excludes fair value of interest rate derivatives. Wimbledon Gate Worple Road 58,690 sq ft 2017 Report and Financial Statements McKay Securities PLC 19 PRINCIPAL RISKS AND UNCERTAINTIES The Board is responsible for determining the nature and extent of the Group’s principal risks to achieve its strategic objectives and to safeguard the Group’s assets. The Audit & Risk Committee is responsible for assessing those risks relating to internal control and risk management systems which are discussed within the Directors’ Report on page 23. To that end the Company has introduced a Risk Committee comprising the executive Directors who regularly review material risks to the Group. An ongoing process for identifying, evaluating and managing the principal risks faced by the Group was in place throughout the year to 31st March 2017 and up to the date of approval of the Annual Report and Financial Statements. A robust assessment of the principal risks facing the Group has been carried out and the principal risks are listed below along with an explanation of how these have been managed. PRINCIPAL RISKS AND THEIR IMPACT HOW RISK IS MANAGED MACRO ECONOMIC ENVIRONMENT Lack of economic growth and a recessionary environment leading to reduced tenant demand and higher voids. FINANCIAL Interest rate rises Leading to lower profits. Whilst the Board recognises it has limited control over many external risks, it monitors economic indicators and tailors delivery of the Group’s strategy accordingly. The Group’s policy is to borrow at both fixed and floating rates of interest. This, combined with interest rate hedging instruments, manages the Group’s exposure to interest rate fluctuations. Lack of liquidity Increasing the cost of borrowing and the ability to borrow. This is managed through a mixture of short and long term bank facilities to provide sufficient funds are available to cover potential liabilities arising against projected cash flows. Breach of financial covenants on bank borrowings As a result of rental or capital movement. Compliance with bank covenants is closely monitored by the Board which regularly reviews various forecast models to help its financial planning. RISK EXPOSURE CHANGE IN THE YEAR Current macro economic issues such as Brexit, global growth and elections increase risk. Group currently fixed or hedged at £88m as against £136m drawnings as at 31st March 2017. Group’s Facilities of £175m are in line with current business plan. The Group is currently re-financing one of it’s four facilities. Throughout the period the Group complied with all such covenants. Major tenant default Losing a significant tenant that materially impacts profits. This is monitored using Dun & Bradstreet checks for new tenants together with on-going credit checks and internal credit control. The Board receives regular information on rental arrears and rent collection activities. Credit control environment remains constant. Taxation REIT non-compliance. As a REIT, the Group is required to distribute at least 90% of rental income profits each year. It is tax exempt in respect of capital gains. Internal monitoring is in place to monitor compliance with the appropriate rules. Throughout the period the Group complied with the regulations. BEPs (Base erosion and profit shifting). Tax advisors appointed and keeping Management up-to-date on requirements. Final legislation is still outstanding and elections are yet to be confirmed. 20 McKay Securities PLC Report and Financial Statements 2017 PRINCIPAL RISKS AND THEIR IMPACT HOW RISK IS MANAGED PROPERTY Portfolio strategy Strategy at odds with economic conditions and occupier demand. The Board continually reviews its strategy against its objectives, taking into consideration the economic conditions, the property market cycle and occupier demand. The Group focuses entirely on London and the South East in established and proven markets. An experienced and proven acquisition team with a wide network of contacts and advisors ensure the Group is well placed to view and assess potential investment opportunities. All investment opportunities are subject to full due diligence procedures including physical, legal and environmental considerations. RISK EXPOSURE CHANGE IN THE YEAR Market conditions remain generally unchanged. Development/refurbishment Delays, overruns or other contractual disputes leading to increased costs, delayed delivery and reduced profitability. Failure of contractor. Construction cost inflation. Planning constraints. Reduction in rental values Exposure to volatility of rental values. Reduction in capital values Exposure to volatility of capital values. The Board is regularly presented with details of capital expenditure and progress on developments, including appraisals and sensitivity analysis. The Group continually monitors planning and regulatory reform and takes advice from external advisors and industry specialists. With two significant redevelopment / refurbishment projects completed the Group’s risk exposure reduces. Developing, refurbishing and managing the portfolio in order to offer new and Grade A space to attract and retain quality tenants. Actively managing the portfolio, identifying appropriate rental values alongside lease length and maintaining an open dialogue and good relationship with tenants. Occupier demand remains stable. Supply constraints in the Group’s markets have contributed to improved rental values. An open market valuation of the Group’s properties is undertaken at the year end and half year by independent external Valuers in accordance with RICS guidelines and analysed by the Group’s Auditors. Valuations are then reviewed by the Audit & Risk Committee and approved by the Board. Increased uncertainty in macro environment has increased the volatility of capital values. The Group retains a borrowing headroom should there be an overall decline in capital values. Constant review by Management of tenant covenant, lease length and asset management of buildings to preserve/increase capital values. 2017 Report and Financial Statements McKay Securities PLC 21 PRINCIPAL RISKS AND UNCERTAINTIES continued PRINCIPAL RISKS AND THEIR IMPACT HOW RISK IS MANAGED RISK EXPOSURE CHANGE IN THE YEAR CORPORATE Reputational Risk Adverse publicity/inaccurate media reporting. Major incident at a property. Actions by directors or staff including fraud and bribery. The Group retains an external investor and public relations consultancy. Press releases are approved by the Chief Executive Officer prior to release. The Group produces a staff handbook that sets out an employee code of conduct and other guidelines. No significant main factors to increase risk. Retention/Recruitment Failure to retain or attract key individuals could impact on major decision making and the future prosperity of the Group. Reviews are undertaken with staff on a regular basis to maintain a positive and encouraging working environment. The remuneration package is at market levels to attract and retain individuals with the skills, knowledge and experience required for the business. Sector employment opportunities remain constant. Health & Safety Accidents to employees, contractors, occupiers and visitors to properties resulting in injury, litigation or the delay of refurbishment/redevelopment projects. The Safety Management Group (SMG) meets regularly to review the Health and Safety risk profile and implement any new management systems required. These meetings review the Group’s Fire Risk Assessments, Safety Inspections, and contractors’ insurance and safe working practices. The SMG is supported by specialist external advisors. There were no significant issues to report in the year. IT/Cyber Cyber attack resulting in IT systems failure. Antivirus software and firewalls protect IT systems. Data and programmes are regularly backed up and back ups are secured off site. Increase in global incidents of this nature. Implementation of the Group’s Business Continuity Plan. Consideration being given to cyber fraud insurance. All buildings have insurance to cover a terrorist incident and loss of rent. All three Executive Directors do not travel together. Terrorism Terrorist attack impacting a building from the Group’s portfolio resulting in loss of income or building costs. Terrorist attack affecting employees travelling. Government advises that the threat level indicates the likelihood of a terrorist attack in the UK. The threat to the UK from international terrorism is severe. Key Risk exposure in the last year has: Increased Unchanged Reduced 22 McKay Securities PLC Report and Financial Statements 2017 Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the viability of the Group beyond the 12 month period required by the Going Concern provision. Based upon the robust risk assessment described above, the Directors have a reasonable expectation that the Group will be able to continue operations and meet its foreseeable liabilities as they fall due over the period to March 2022, subject to any significant events beyond its control. The principal risks to the continued operation of the Group have been reviewed and subjected to qualitative and quantitative analysis. Scenario testing, based on current economic circumstances, has been undertaken, including consideration of the implications of a decline in income, a decline in capital values and increasing interest costs. A five year period has been used for this assessment, with particular focus on years one to three. This time frame is considered appropriate as it complies with the Group’s internal modelling and is a reasonable period for matters including the assessment of income generation and the availability of debt funding. Going concern The Group prepared cash flow forecasts which show that the Group has sufficient facilities to meet forecast outgoings and expects to comply with all covenants for the forseeable future. The Group is currently refinancing one of the four banking facilities that expires in the year to 31st March 2018. The Directors have confidence that there are alternative debt providers if necessary. After making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. 2017 Report and Financial Statements McKay Securities PLC 23 STRATEGIC REPORT Sustainability Our approach to sustainability Operating in a responsible and sustainable manner is central to protecting and adding long term value to the business. Sustainability is a core element of the Group’s strategy to deliver quality business space that is attractive to both owners and occupiers, ensuring it maintains compliance with legislation and meets best practice asset management and development standards. During the financial year ending 31st March 2017, the Group continued to progress its ambitious sustainability strategy focused on delivering across three areas: managing sustainable buildings, creating sustainable buildings and engaging our stakeholders. This strategy aims to address the most material risks and opportunities associated with its core business activities. Targets are set at the beginning of the financial year for each of the three areas to drive improvement in the Group’s overall sustainability performance. The Group’s sustainability advisor, JLL, has provided ongoing support to implement the strategy and review progress made against the targets for the year under review. The Group’s sustainability objectives MANAGING SUSTAINABLE BUILDINGS To add value to the Group’s portfolio by improving the efficiency of the buildings and reducing their environmental impact CREATING SUSTAINABLE BUILDINGS To achieve best practice green building standards in order to deliver quality buildings ENGAGING OUR STAKEHOLDERS To maintain an active dialogue with key stakeholders about sustainability performance Four years on from the launch of its sustainability strategy, the Group has continued to implement sustainable practices across its portfolio with notable results. Over the course of the past financial year, the Group has: (cid:2) Obtained a BREEAM ‘Outstanding’ certification and EPC ‘A’ rating for the refurbishment of 9 Greyfriars Road, Reading, making it currently the most sustainable office building available in the South East market. (cid:2) Obtained a BREEAM ‘Excellent’ certification and EPC ‘A’ rating for Prospero, its completed office development in Redhill. (cid:2) Improved the environmental performance of its operational portfolio, achieving a 13% reduction in carbon emissions, a 19% reduction in gas consumption and an 11% reduction in water consumption on a like-for-like basis.1 (cid:2) Continued to divert 100% of operational waste from landfill and engaged with tenants to increase recycling rates from 25% in 2015/16 to 32% in 2016/17. (cid:2) Implemented an Energy Reduction Programme across five assets to identify and deliver cost saving opportunities, including the delivery of training to property managers to maximise building efficiency. (cid:2) Collected and benchmarked environmental data for our Lombard Street, EC3 construction site in order to assess and manage the impact of our development activity. (cid:2) Increased its employees’ knowledge and awareness of sustainability through a series of green building tours. (cid:2) Achieved GRESB ‘Green Star’ status for the first time having improved its score by 28 points in comparison to 2014. The Group has successfully achieved 80% of its 2017 targets, while 5% were partially achieved, 5% have not been achieved, and 10% were N/A.2 The Group is committed to continually improve its sustainability performance and has defined 24 new targets to support the delivery of each of its sustainability objectives in the year to 31st March 2018 (see pages 29 to 30). 1Like-for-like analysis takes into account heating degree days in the gas consumption trend calculations, and incorporates vacancy rates across the portfolio. 2Two targets are classed as N/A as their successful completion was predicated on the Group having had new occupiers in place for an extended period at 9 Greyfriars Road, Reading and Prospero, Redhill. Managing sustainable buildings Objective: To add value to the Group’s portfolio by improving the efficiency of the buildings and reducing their environmental impact. The Group’s business strategy is focused on maintaining and enhancing its portfolio of properties to maximise income and capital return. This approach to active asset management forms the core of its day-to-day activities and is the area in which the Group has the most significant ongoing environmental and social impacts. Sustainable asset management is synonymous with best practice asset management and the Group is continually looking to improve the environmental performance of its portfolio in the strong belief that this will contribute to its short, medium and long term value. For the year to 31st March 2017, the Group set 13 targets relating to this objective: Energy and Water Targets Status Achieve a 4% reduction in like-for-like Not achieved landlord controlled electricity consumption by the end of March 2017 against a 2015/16 baseline Achieve a 4% reduction in like-for-like Achieved landlord controlled gas consumption (adjusted for heating degree days) by the end of March 2017 against a 2015/16 baseline Achieve a 4% reduction in like-for-like Achieved landlord controlled carbon emissions by the end of March 2017 against a 2015/16 baseline Achieve a 3% reduction in like-for-like Achieved landlord controlled water consumption by the end of March 2017 against a 2015/16 baseline 24 McKay Securities PLC Report and Financial Statements 2017 Energy and Water Targets Status Continue to implement energy and Achieved water efficiency measures at the Group’s major energy and water consuming assets For landlord procured energy, Achieved investigate the cost of switching 100% to a low carbon energy tariff Where there is landlord access to N/A energy, water and waste data (either through landlord-controlled utility purchase, smart meters or occupier willingness to share data), monitor environmental performance of new developments and major refurbishments once in operation During 2016/17 the Group landlord controlled gas consumption decreased by 19% but electricity consumption rose by 4% on a like-for-like basis.1 This is due to the fact that several key improvement initiatives across our highest consuming assets are pending, while others were integrated towards the end of 2016/17, and have not yet had a significant impact on electricity consumption. However, the impressive reductions in gas consumption has allowed the Group to reduce its overall energy consumption by 5%, enabling it to avoid £26,719 in running costs. This, combined with the ongoing decarbonisation of the grid, has allowed the Group to reduce its carbon emissions by 13% during 2016/17 on a like-for-like basis. Over the past year, absolute energy use has also fallen by 24% to 7,795,462 kWh.3 This is in part due to changes in the nature of the portfolio since the baseline year of 2015/16, with some of the largest consuming assets no longer included in the calculations. The Group has continued to develop and implement resource reduction strategies for its five highest consuming assets (which together account for over 80% of total energy use). The five assets enrolled on the programme are: The Mille, Brentford; Corinthian House, Croydon; Mallard Court, Staines–upon-Thames; One Crown Square, Woking and Portsoken House, EC3. A diagram illustrating their contribution to total energy consumption is provided below. 3Inclusive of tenants usage, where available. Top 5 Consuming Assets: Proportion of Total Energy Consumption The Mille One Crown Square Portsoken House Corinthian House Mallard Court The Rest % 33.5 30.3 10.0 7.1 2.9 16.2 16.2% 2.9% 7.1% 10% 33.5% 30.3% In 2016 site visits were carried out at each of these high consuming assets and an energy reduction project tracker was created to record identified energy conservation measures and progress made to date. For each asset, practical and actionable energy-saving measures that are no or low cost have been identified. Measures implemented during the financial year ending March 2017 included: (cid:2) Remedial works to power correction units and the introduction of LED lighting on various floors, the reception and external areas at The Mille, Brentford. (cid:2) Additional LED lighting to the 8th floor, and external areas of Corinthian House, Croydon. (cid:2) Installation of more efficient air conditioning units at Mallard Court, Staines-upon-Thames. (cid:2) Introduction of LED lighting through office refurbishments on the 5th and 6th floors and common parts areas of the 3rd and 4th floors at 1 Crown Square, Woking. (cid:2) Introduction of LED lighting in car park areas of Mallard Court, Staines-upon-Thames. In spite of these measures three out of five of our largest assets saw energy consumption increase over the period January- December, 2016. Further measures have been identified at these and other assets across the portfolio and are awaiting technical and financial appraisal. Moreover, energy reduction training was delivered to M&E consultants and contractors following site visits to ensure best-in-class asset management and identify key areas for performance improvement. There is therefore optimism that the Group will begin to experience improved energy reductions in 2017. Energy data collected has been used to produce the Group’s mandatory carbon reporting and CRC liability calculations. The Group’s CRC liabilities are Year to March CRC Liabilities 2015 £68,449 2016 £61,516 2017 £49,000 (estimated) The forecasted reduction in 2016/17 corresponds to the sale of Bartley House, Hook and the demolition of 30 Lombard Street, EC3; both of which were amongst the portfolio’s largest energy consumers. Absolute water consumption decreased by 23% in the 2016/17 financial year, whilst on a like-for-like basis there was an 11% reduction, with corresponding cost savings of around £5,000. The Group has targeted those assets with the highest water consumption with efficiency projects including the installation of low-flow taps and dual-flush WCs. The Group will also monitor the environmental performance of recently completed new developments and major refurbishments to check that actual performance is reflective of the design intent. Common parts data is being gathered from 9 Greyfriars Road, Reading and Prospero, Redhill, but the Group will have to wait until both assets are fully let to obtain any meaningful information around the existence, or absence of a performance gap. 2017 Report and Financial Statements McKay Securities PLC 25 STRATEGIC REPORT Sustainability - continued Waste Target Status Maintain 100% of operational waste Achieved diverted from landfill for the landlord managed portfolio Increase the recycling rate across all Partially achieved properties for which the Group has management control to 41% by 2017, and 52% by 2020, in line with the Real Estate Environmental Good Practice Benchmark (REEB) Engage with occupiers to facilitate Achieved improved resource recycling rates Total waste generation in the 2016/17 financial year was 346 tonnes,3 100% of which was diverted from landfill, which means that the Group has maintained this commitment for a second consecutive year. Furthermore, the recycling rate increased from 25% in 2015/16 to 32% in 2016/17, and in spite of missing the 41% 2017 target, the Group remains determined to align its recycling rates with the REEB benchmark, establishing a 52% recycling rate by 2020. A 2018 target has been set, which takes into account the long term target to 2020. To support this, the Group re-negotiated its waste contract and engaged with tenants to improve recycling rates, organising a series of roadshows across the Group’s multi-tenanted sites to garner enthusiasm and support for this initiative. The Group is confident that as engagement expands across the managed portfolio, recycling rates will improve in 2017/ 18 and beyond. 4January-March 2017 data was estimated. Occupier Engagement Targets Status Engage with occupiers who have Achieved green lease clauses to ensure their effectiveness Implement occupier fit-out guidance Achieved to encourage retention of sustainability benefits of the base build in operation One of the Group’s key objectives has been to work with occupiers to improve sustainability across the portfolio. Sustainability clauses have been included within the Group’s lease precedent. Through these provisions the Group aims to work with occupiers to develop joint plans to improve the sustainability of its assets. These clauses help ensure that any sustainability features incorporated into the buildings’ base build are not impacted by an occupier’s activity, which may in turn have an adverse impact on the buildings’ Energy Performance Certificate (EPC) rating. During 2016/17 the Group engaged with tenants who have “green” clauses in their leases, and will continue to do so on an ongoing basis, incorporating feedback into asset-level strategies. Last year the Group also produced a fit-out guide, including guidance on sustainability for occupiers undertaking works. The aim is to ensure that an occupier’s fit-out complements the base build and minimises conflict with the building’s operational performance. The Group is eager to promote the use of standard finishes across its assets and include some basic minimum procurement standards within the tenant fit-out guide. In 2016 the Group assisted tenants at Building 329, Bracknell with the procurement of their fit-out, and will proceed to engage with tenants on the implementation of the fit-out guidance as and when further fit-outs are undertaken. EPC Risk Targets Status Continue to review EPC risk associated Achieved with new purchases and identify improvement works for any assets with an E rating or lower Over the last few years the Group has put significant effort into understanding and mitigating its portfolio EPC risk. The Energy Act 2011 will make it illegal to let any properties with an EPC rating of F or G from 2018. Whilst this will represent a significant challenge for many property owners, the Group has put itself in a very strong position, having taken a proactive approach to managing this risk: to that end only 1% of the assets within the portfolio (by ERV) are currently rated F or G. The Group continues to manage EPC risk through the implementation of ongoing improvement plans at all higher risk properties, specifically focusing on E-rated assets, to ensure this does not adversely impact on its business activities post-2018. For instance, following a host of improvement initiatives at 1 Crown Square, Woking, McKay will be recommissioning EPC assessments across several of the units currently in possession of an E rating. McKay Securities Adjusted Sites EPC Portfolio Breakdown by ERV No EPC held A B C D E F G % 3 0 9 8 19 40 20 1 1% 3% 9% 8% 19% 20% 40% 26 McKay Securities PLC Report and Financial Statements 2017 Creating Sustainable Buildings Objective: To achieve best practice green building standards in order to deliver quality buildings. The refurbishment and development of buildings are key intervention points for incorporating sustainability requirements and standards. For the year to 31st March 2017, the Group set four targets relating to this objective: Green Building Targets Status Ensure all new developments and major Achieved refurbishments achieve minimum BREEAM Very Good and an EPC rating of at least C Continue to monitor the compliance of Achieved contractors with development sustainability requirements, and continue to trial the collection of construction-related environmental data from at least one development project in 2016/17 Install smart meters at all new Achieved developments and major refurbishments starting on site from April 2016 Pilot a post-occupancy assessment N/A of the performance of one building which includes a review of sustainability performance After several years of exceeding its minimum standards, the Group has decided to increase the ambition of its major refurbishments and new developments, and will now seek to achieve BREEAM ‘Excellent’ and EPC ‘B’ as a minimum requirement. Two significant projects were completed by the Group in 2016: the major refurbishment of 9 Greyfriars Road, Reading (39,620 sq ft) and the construction of Prospero, a new office building in Redhill (50,370 sq ft). Both projects achieved an EPC ‘A’ rating; while Prospero achieved a BREEAM ‘Excellent’ rating and 9 Greyfriars Road a BREEAM ‘Outstanding’ (see case study for further details). The Prospero office building features LED lighting in office areas; automatic lighting controls; boasts excellent natural light and is designed to achieve the highest levels of insulation and low U values. Its electricity consumption is expected to be 60% lower than a typical UK office building and internal energy costs are estimated to be £1.59 per sq ft, compared to a typical UK office building of £4.77 per sq ft. The asset offers excellent public transport connectivity as well as facilities for cyclists. Case study: A BREEAM ‘Outstanding’ Award for 9 Greyfriars Road 9 Greyfriars Road is a striking office building located in the heart of Reading town centre. In 2016 it became the first building to be awarded a BREEAM ‘Outstanding’ rating outside London and this achievement, combined with an EPC A rating, has put 9 Greyfriars Road in the spotlight as the most sustainable office building available in the South East market. The building boasts a range of cutting edge features to deliver better environmental performance and promote the health and wellbeing of its occupiers, including: (cid:2) High levels of natural light and the provision of a controllable thermal environment to boost employee productivity. (cid:2) Passive design to improve thermal comfort and reduce running costs. (cid:2) Air source heat pumps contribute to summer and winter thermal regulation. (cid:2) Water efficient features and the use of insulation materials with a BRE Green Guide rating of A or A+. (cid:2) A new terrace with carefully selected plants. (cid:2) Excellent transport connections, facilities for cyclists and a sustainable travel plan. Waste production was minimised during the construction project through the retention of the building structure, and 92% of waste was recycled and re-processed on site. All in all, 9 Greyfriars Road offers increased quality, efficiency and comfort at a competitive quoting rent of £34.50 psf. Ongoing commissioning will ensure optimum performance during occupancy. “Securing an ‘Outstanding’ BREEAM rating along with an EPC A demonstrates the commitment of McKay and its project team in providing a high quality, sustainable building at a competitive cost. The building offers tenants a high specification and a flexible working environment, with the benefit of low running costs” – Simon Perkins, CEO, McKay Securities PLC. Once we have had tenants in place for a sufficient period of time at 9 Greyfriars, Reading and Prospero, Redhill, we have committed to trialling post-occupancy monitoring on one of these buildings to gather data and insights on their sustainability performance in use.5 A comprehensive set of indicators has been developed by the Group to ensure that the office space it creates is not only environmentally efficient but also enhances occupier wellbeing and business efficiency. In the context of growing interest in office occupiers’ health, wellbeing and productivity, during 2016 the Group supported the development of the Stoddart Review, an independent study which revealed that offices which are designed around the needs of users could deliver productivity gains of between 1 and 3.5 per cent and provide businesses with a key differentiator in an increasingly competitive landscape for recruiting and retaining talented employees.6 Going forwards, the Group will include information about its assets’ health and wellbeing features within marketing materials, highlighting their benefits for occupiers. During 2016/17 the Group proceeded to plan for smaller refurbishment projects at six assets, where we will take the opportunity to identify and introduce more sustainable technical building equipment and other features where applicable. Following the work undertaken in 2015/16 to investigate the potential for introducing photovoltaic (PV) systems at a small number of assets, we decided to install PV at Oakwood Trade Park, Crawley and Prospero, Redhill. The Group has also introduced a Responsible Procurement Policy which is now part of our tendering process for property development and management, and we are rolling out requirements for suppliers on smaller schemes. The Group’s Sustainability Steering Group has also continued to meet on a quarterly basis, assessing the Group’s ongoing sustainability performance and discussing new initiatives to develop the Group’s sustainability aspirations. 5This target has been published as N/A as the Group has not had occupants in the buildings for a sufficient period of time to carry out a post-occupancy assessment. 6For further information, see http://stoddartreview.com. 2017 Report and Financial Statements McKay Securities PLC 27 STRATEGIC REPORT Sustainability - continued Engaging stakeholders Objective: To maintain an active dialogue with key stakeholders about sustainability performance. The Group’s ability to deliver on its business and sustainability endeavours is, in part, dependent on its ability to communicate, support and gather feedback from its stakeholders. The Group’s key stakeholders are its employees, occupiers, shareholders, financial providers, suppliers and communities. For the year under review, three targets were set in relation to engaging with these stakeholders. The Group remains committed to providing stakeholders with a clear, transparent and balanced account of its sustainability journey, and it recognises the benefits that this offers customers, stakeholders and the Group itself. Occupier Engagement Target Status Develop and implement an action Achieved plan based on outcome of recent customer satisfaction survey Openness and transparency is helping to transform the way in which the Group operates, by strengthening its relationships with customers and stakeholders, and supporting the improvement of its product and service. The Group launched its first independent customer satisfaction survey in 2016 to gain insight into the issues that are important to its occupiers. This survey highlighted good levels of overall satisfaction, and also identified scope to improve performance. To this end, the Group has developed an action plan and is in the process of implementing it across its portfolio. For instance, at Building 329, Bracknell, we increased the number of staff on front of house following indications from tenants that they wanted a greater presence. The survey also revealed that the majority of occupiers (65%) think it important or very important that the building meets sustainability requirements and welcome further initiatives to encourage more sustainable business practices. This finding adds strength to our current initiatives to engage with tenants on green leases; fit-outs and waste recycling rates, as well as our focus on creating sustainable buildings by targeting high levels of environmental performance and health and wellbeing features on our new development and refurbishment projects. Investor Engagement Target Status Maintain or enhance GRESB Achieved performance relative to 2016 The Group seeks to maintain an open dialogue with investors and communicates its sustainability performance through annual reporting and presentations. Moreover, the Group participates in the key investor-led sustainability survey for the real estate sector, the Global Real Estate Sustainability Benchmark (GRESB) – to enable its performance to be compared with that of its peers. Having trialled participation in 2014, the Group participated fully in GRESB in 2015 and once more in 2016 with its score improving materially each time. In 2016 the Group achieved the coveted ‘Green Star’ status for the first time. Actions implemented in 2016/17 will further strengthen the Group’s response to a number of the GRESB criteria, so it can expect to maintain or enhance its score again this year. Employee Engagement Target Status Provide sustainability training for Achieved employees, including annual sustainable building tours To help develop the Group’s property team’s understanding of current sustainability issues, tours of some of London's most sustainable buildings were undertaken in March 2017. Employees have been able to hear more about lessons learned, and how these lessons can be applied to help achieve sustainable outcomes on the Group’s own projects. While not covered specifically through its sustainability targets, Health and Safety (H&S) is a critical element of the Group’s engagement programme. The Group engages with occupiers, employees and suppliers on H&S. Implementation of its policy and procedures continues on the basis of statutory compliance as an absolute minimum and where considered beneficial to the business, enhanced by best practice. The Group’s H&S Policy and Procedures reflect legislation and latest best practice; a copy of the General Statement is available on the Group’s website and has been shared with all suppliers and employees. Implementation of the Group’s H&S is managed by the Safety Management Group (SMG). The SMG meets monthly where it reviews any legislative changes that may affect the Group and its portfolio and takes appropriate action on any risks highlighted to actively reduce the Group’s risk profile. A program of health and safety training has been implemented for employees, alongside a programme of training with the Group’s contractors and consultants to ensure they are working to the same standard. For the period to 31st March 2017, there have been no accidents of a nature reportable to HSE. The Group’s main community engagement takes place through the planning process and its community investment activities. These community investment activities are co-ordinated by its Charity Committee, and focus on supporting local, children’s charities. For the year ending 31st March 2017, the Group made a total of £30,700 in charitable donations.This represents 0.4% of adjusted profit before tax (0.4% in 2016). The Group’s Diversity Policy and disclosure can be found on page 43. 28 McKay Securities PLC Report and Financial Statements 2017 2017/18 Sustainability Targets Building on the great work undertaken over the last year the Groups has set itself the following targets for 2017/18: Managing Sustainable Buildings Target Deadline Target Electricity consumption: In 2017/18 achieve a 4% reduction in like-for-like landlord controlled consumption relative to a 2016/17 baseline. Achieve a 16% reduction by the end of March 2020 relative to a 2015/16 baseline. Gas consumption: In 2017/18 achieve a 4% annual reduction in like-for-like landlord controlled consumption (adjusted for heating degree days) relative to a 2016/17 baseline. Achieve a 16% reduction by the end of March 2020 relative to a 2015/16 baseline. March 2018 March 2020 Carbon emissions: In 2017/18 achieve a 4% annual reduction in like-for-like landlord controlled emissions relative to a 2016/17 baseline. Achieve a 16% reduction by the end of March 2020 relative to a 2015/16 baseline. March 2018 March 2020 Water consumption: In 2017/18 achieve a 3% reduction in like-for-like landlord controlled consumption against a 2016/17 baseline. Achieve a 12% reduction by the end of March 2020 relative to a 2015/16 baseline. March 2018 March 2020 March 2018 March 2020 Waste: Maintain 100% of operational waste diverted from landfill for landlord managed portfolio. Deadline March 2018 March 2018 March 2020 March 2018 Waste: In 2017/18 increase recycling rate across all properties for which the Group has management control to 44%. By March 2020 improve the recycling rate to 52%, in line with the Real Estate Environmental Good Practice Benchmark (REEB). Continue to implement energy and water efficiency measures at the Group’s major energy and water consuming assets. Continue to review EPC risk associated with new purchases and prioritise improvement works for any asset with an E rating or lower. Also consider D rated assets. March 2018 Explore the feasibility of incorporating on-site renewable energy at a minimum of one of McKay Securities’ operational assets. March 2018 Conduct a review of major operational material spend categories and investigate establishing minimum sustainability procurement requirements based on the results March 2018 Creating Sustainable Buildings Engaging Stakeholders Target Deadline Target Continue to monitor the compliance of contractors with development sustainability requirements and ensure that sustainability is consistently integrated as part of the tendering process. March 2018 Maintain or enhance GRESB performance relative to 2016. Ensure all new developments and major refurbishments achieve minimum BREEAM Excellent and an EPC rating of at least B. March 2018 Include information about assets' sustainability and health and wellbeing features within marketing materials, highlighting their benefits for occupiers. March 2018 Hold a minimum of three sustainability related CPD sessions to increase awareness of key issues amongst employees. Continue to organise annual sustainable building tours to inform and inspire employees. Develop and publish stakeholder engagement policy. Pilot a post-occupancy sustainability assessment of either 9 Greyfriars, Reading or Prospero, Redhill with one tenant who has been in place for a minimum of six months. March 2018 Introduce building awards/competition to encourage uptake of sustainability practices. Deadline March 2018 March 2018 March 2018 March 2018 March 2018 2017 Report and Financial Statements McKay Securities PLC 29 STRATEGIC REPORT Sustainability - continued The Group’s Carbon Footprint Under the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013, quoted companies are required to report their annual emissions in their Directors’ report. This Mandatory Greenhouse Gas Emissions Reporting statement covers the reporting period 1st April 2016 to 31st March 2017 and has been prepared in line with the main requirements of the Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard and ISO 14064-1:2006. Sources of Greenhouse Gas Emissions 2016/17 (est.) tCO2e 2015/16 (actual) tCO2e Scope 1 Energy Gas (EPRA sBPR fuels – Abs) 428 788 Fugitive emissions Refrigerant emissions De minimis De minimis Scope 2 Energy Landlord-controlled electricity (EPRA sBPR Elec – Abs) 1418 1781 Data Qualifying Notes (cid:2) This is the Group’s fourth year of disclosure under the Mandatory Greenhouse Gas Emissions Reporting regulations. The Group’s emissions for 2015/16 have been restated due to Q4 2015/16 data not being available at the time of reporting in 2016; this final period of data will always need to be estimated. As a result of this restatement, the total emissions for 2015/16 have increased 3%, and the level of estimation has decreased from 30% to 8%. (cid:2) For 2016/17, 25% of energy consumption, and therefore carbon emissions, is estimated. Q4 2016/17 accounts for 98% of this estimated data. (cid:2) An operational control consolidation approach has been adopted, together with emissions factors from the UK Government Conversion Factors for Company Reporting 2016. (cid:2) Within Scope 1 emissions, refrigerant-related emissions for the period were calculated as de minimis, due to very minimal refrigerant top-ups being recorded for this time period. Scope 3 Energy Landlord-obtained energy (if sub-metered to tenants), all transmission and distribution losses, and tenant-obtained energy where applicable and tenant has provided data (EPRA sBPR 3.6) 1190 1429 (cid:2) Adjusted profit before tax value as reported in 2016/17 financial statements – page 74 of the Report and Financial Statements. Total Intensity 3036 3999 tCO2e / £m Adjusted profit before tax (Scopes 1 and 2 only) 0.215 0.322 30 McKay Securities PLC Report and Financial Statements 2017 The Mille Brentford 96,700 sq ft 31 GOVERNANCE 32 Board of Directors 34 Corporate Governance 35 Directors’ Report 40 Audit & Risk Committee Report 42 Nomination Committee Report 44 Remuneration 47 Directors’ Remuneration Policy Report 51 Directors’ Annual Remuneration Report 58 Statement of the Directors’ Responsibilities 59 Report of the Independent Auditor BOARD OF DIRECTORS Richard Grainger ACA Non-executive Chairman Aged 56. Appointed Chairman in July 2016, having been appointed a non-executive Director in May 2014. Chairman of Close Brothers Corporate Finance Limited until 2009 and Chairman of Safestore Plc until December 2013. Chairman of Harrington Brooks and a non-executive Director of Palmer & Harvey and Liberation Group. A member of the Remuneration, Audit & Risk and Nomination Committees. Viscount Lifford Senior Independent Director Aged 68. Appointed a non-executive Director in September 2006. Director of Rathbones Brothers PLC until October 2006. Trustee of the Portman Estates. A member of the Remuneration, Audit & Risk and Nomination Committees. Jon Austen FCA Non-executive Aged 60. Appointed a non-executive Director in July 2016. Chartered Accountant and formerly Group Financial Director of Terrace Hill plc and having implemented its reverse takeover of Urban&Civic plc was Group Finance Director of Urban&Civic plc to July 2016. Chairman of the Audit & Risk Committee and a member of the Nomination and Remuneration Committees. Nigel Aslin FRICS Non-executive Aged 68. Appointed a non-executive Director in May 2006. Chartered Surveyor and former Partner responsible for Strutt & Parker’s Thames Valley office. A member of the Remuneration, Audit & Risk and Nomination Committees. Retired as Chairman of the Nomination Committee on 1st April 2017. Nick Shepherd FRICS Non-executive Aged 58. Appointed a non-executive Director in January 2015. Chartered Surveyor and former Senior Partner of Drivers Jonas until 2010. Vice Chairman of Deloitte UK until May 2013. Chairman of the Property Income Trust for Charities. Non-executive Chairman of Riverside Capital Group. Chairman of the Remuneration Committee and a member of the Audit & Risk and Nomination Committees. Jeremy Bates MRICS Non-executive Aged 51. Appointed a non-executive Director in January 2017. Chartered Surveyor and a Director of Savills UK Limited, Head of UK Transactional Services and European Head of Worldwide Occupier Services. Appointed Chairman of the Nomination Committee on 1st April 2017. Member of the Audit & Risk and Remuneration Committees. 32 McKay Securities PLC Report and Financial Statements 2017 Simon Perkins MRICS Chief Executive Officer Aged 52. Joined the Company in August 2000 after ten years with business park developer, Arlington Securities PLC. Appointed a Director in April 2001 and Chief Executive Officer in January 2003. Member of the Nomination Committee. Giles Salmon FCA Chief Financial Officer Aged 51. Joined the Company in May 2011 and appointed as Chief Financial Officer in August 2011. Previously at BAA Lynton, managing the Airport Property Partnership. Tom Elliott MRICS Property Director Aged 42. Joined the Company in September 2016 after 11 years with Land Securities Group PLC, where his latest role was Head of Investment for the London Portfolio. Appointed a Director in April 2017. 2017 Report and Financial Statements McKay Securities PLC 33 This year we are focusing on strengthening the Group’s approach to risk and to this end we have created a Risk Committee comprising the executive Directors who will report to the Audit & Risk Committee. The Risk Committee will focus on identifying, evaluating and monitoring the key risks and how these risks impact on the Group. Details of the Principal Risks and Uncertainties are set out on pages 20 to 22. In 2017 the Remuneration Committee reviewed the Company’s remuneration policy and engaged with its major shareholders for their views on the proposed amendments. At this year’s Annual General Meeting we will propose the renewal of our existing Directors’ remuneration policy and the Company’s long term incentive plans for all employees. Details of the remuneration policy are set out in the Remuneration Committee report on pages 44 to 57. Our Annual General Meeting will be held on 6th July 2017. It is always a welcome opportunity for the Board to engage with shareholders and details of all business to be transacted is included within the Notice of Meeting. Richard Grainger Chairman 19th May 2017 CORPORATE GOVERNANCE RICHARD GRAINGER NON-EXECUTIVE CHAIRMAN Dear Shareholder I am pleased to introduce our 2017 Corporate Governance Report. This is my first year as Chairman having succeeded David Thomas at the conclusion of the 2016 Annual General Meeting and I look forward to building upon his solid work. Sound corporate governance is embedded into the culture of the Company and continues to be an essential part of the Board's stewardship and the delivery of our business strategy over the long term. We continue to strive for high standards throughout the business and aim to work in the best interests of our shareholders and all our stakeholders in a responsible and ethical manner. I can confirm that we have complied with the requirements of the 2014 UK Corporate Governance Code (the ‘Code’) and are following the 2016 Code; although we are not required to report under the 2016 Code this year. During the year we have continued to focus on the managed succession plan to refresh the composition of the Board. In 2017 we promoted Tom Elliott to executive Director and Jon Austen and Jeremy Bates joined the Board as independent non-executives, further strengthening the independence of our non-executive Directors. Having concluded our succession planning Nigel Aslin and Viscount Lifford, who have both served on the Board for over 10 years, are stepping down during 2017. More information can be found on this and the change of responsibilities of Directors within the Nomination Committee Report on pages 42 and 43. The Board and its Committees operate under a clear mandate with specific Terms of Reference for each Committee, a schedule of matters reserved for the Board and a clear division of written responsibilities between myself as Chairman and the Chief Executive Officer. I am satisfied that the Board has the appropriate balance of skills, experience and independence to add value to board decision making and debate. Board meetings are conducted in an open and transparent manner, with all Directors engaging in open and honest debate. 34 McKay Securities PLC Report and Financial Statements 2017 Directors The Board of Directors for the financial year to 31st March 2017 was: R. Grainger (Non-executive Chairman from 14th July 2016) D. Thomas (Non-executive Chairman to 14th July 2016) S. Perkins G. Salmon N. Aslin Viscount Lifford N. Shepherd J. Austen (from 1st July 2016) J. Bates (from 18th January 2017) S. Mew (to 21st September 2016) Mr T. Elliott joined the Board on 1st April 2017. Details of the Chairmen and members of the Nomination Committee, Audit & Risk Committee and Remuneration Committee are provided in each of the Committee Reports. Biographical details of the Directors are set out on pages 32 and 33. In accordance with the Company’s Articles of Association and the UK Corporate Governance Code. Mr J. Bates and Mr T. Elliott having been appointed since the 2016 AGM will retire and being eligible offer themselves for re-election at the 2017 AGM and all other Directors being eligible will offer themselves for re-election. Apart from service contracts and share options, details of which are set out in the Directors’ Remuneration Report on pages 44 to 57, no Director had a material business interest during the year in any contract with the Company. Details of the Directors’ interests in the ordinary shares of the Company and share options are provided in the Directors’ Annual Remuneration Report on pages 54 and 55. Directors and officers liability insurance In accordance with Article 140 of the Articles and to the extent permitted by the Companies Acts, the Company maintains Directors and Officers liability insurance, which is reviewed annually. DIRECTORS’ REPORT Introduction The Directors have pleasure in submitting their report and audited financial statements for the year ended 31st March 2017. As permitted under legislation (Companies Act 2006 Section 414C (11)) some of the matters in this report have been included in following pages of the Annual Report: Sections of the report and audited financial statements for the year ended 2017 Section Business Model and Strategy Future Business Developments Greenhouse Gas Emissions Principal Risks and Uncertainties Viability and Going Concern Statements Financial Instruments Diversity Policy Page 8 9 -18 24-30 20-22 23 16-18 & Note 15 43 Profit and distribution The profit for the year is set out in the Consolidated Profit or Loss and other Comprehensive Income. Profit before tax is £17.6 million (2016: £53.2 million). On 1st April 2007 the Group converted to Real Estate Investment Trust (REIT) status. Under the REIT regime the Company will, in the normal course of business, be required to pay at least 90% of its income profits arising in each accounting period, by way of a Property Income Distribution (PID) but in addition may also make distributions to shareholders by way of non PID dividend payments. The Directors have recommended a final dividend of 6.3p per share, all of which will be paid as an ordinary dividend, making a total for the year of 9.0p per share (2016: 8.8 pence). If approved at the Annual General Meeting on 6th July 2017 the dividend will be paid on 27th July 2017 to shareholders recorded on the register at the close of business on 2nd June 2017. Activity and assets The business of the Group is that of property investment and development in the United Kingdom. The subsidiary undertakings principally affecting the profits or net assets of the Group in the year are listed in note 13 of the Annual Report and Financial Statements. Property valuations The Group’s properties were valued by an external professional valuer at 31st March 2017. An increase in value of £7.6 million has been included in the Consolidated Profit or Loss and other Comprehensive Income. After taking into account retained profits and dividends paid during the year, basic net asset value per share at 31st March 2017 was 289 pence (2016: 280 pence). 2017 Report and Financial Statements McKay Securities PLC 35 DIRECTORS’ REPORT continued Substantial shareholdings In addition to the Directors’ interests referred to on page 55 of the Directors’ Annual Remuneration Report, the Company has been notified in accordance with the UK Listing Authorities Disclosure and Transparency Rules of the following notifiable interests in its issued share capital (see note 19 of the financial statements) as at 22nd May 2017: Shares % Aberforth Partners LLP 11,327,738 12.08 Bank of Montreal 10,347,209 11.03 Fidelity Investment Funds 8,718,532 9.29 J.O. Hambro Capital Management UK 4,752,510 5.07 Political donations No political donations were made during the year (2016: nil). Charitable donations Details of charitable donations can be found in the Sustainability section of the Strategic Report on page 28. Share capital The issued share capital of the Company as at 31st March 2017 was 93,808,450 ordinary shares of 20 pence each. There are no restrictions on transfer or limitations on the holding of the ordinary shares. None of the shares carry any special rights with regard to control of the Company. There are no known arrangements under which financial rights are held by a person other than the holder of the shares and no known agreements or restrictions on share transfers or voting rights. The Company has employee share schemes in which the voting rights in respect of the shares are exercisable by the employees. The rules about the appointment and replacement of Directors are contained in the Company’s Articles. Changes to the Articles must be approved by shareholders in accordance with the Articles and applicable legislation. The Company’s Articles will be available for inspection at the Annual General Meeting and in accordance with applicable legislation. Annual General Meeting The seventy-first Annual General Meeting of the Company will be held at The Royal Thames Yacht Club, 60 Knightsbridge, London SW1 on 6th July 2017 at 2.30p.m. At the forthcoming Annual General Meeting the following special resolutions will be proposed which constitute special business: Power to allot shares The Directors were granted authority at the last Annual General Meeting held in 2016 to allot relevant securities up to a nominal amount of £6,210,548. That authority will apply until the conclusion of this year’s Annual General Meeting. At this year’s Annual General Meeting shareholders will be asked to grant an authority to allot shares in the Company and to grant rights to subscribe for or convert any security into shares in the Company (i) up to a nominal amount of £6,253,896 and (ii) comprising equity securities up to a nominal amount of £12,507,793 (after deducting from such limit any shares or rights allotted or granted under (i)), in connection with an offer by way of a rights issue, (the “Section 551 authority”), such Section 551 authority to apply until the end of the next Annual General Meeting (or, if earlier, until close of business on 30th September 2018). Two special resolutions will also be proposed to grant the Directors power to make non pre-emptive issues for cash consideration with rights issues and otherwise up to a total nominal amount of £1,876,168. Market purchase of shares A special resolution will be proposed to renew the Directors’ authority to repurchase the Company’s ordinary shares in the market. The authority will be limited to a maximum of 9,380,845 ordinary shares and sets the minimum and maximum prices which may be paid. Significant agreements There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. Some of the Group’s banking arrangements may be terminable upon a change of control of the Company. Auditor In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG LLP as auditor of the Company is proposed at the forthcoming Annual General Meeting. The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware and each Director has taken all reasonable steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given in accordance with Section 418(2) of the Companies Act 2006. Disclosures required under Listing Rule 9.8.4R Section Information 1 2 4 Interest capitalised and tax relief Publication of unaudited financial information Details of long term incentive plans 5 + 6 Waiver of emoluments and future emoluments by a Director 7 9 10 11 Non pre-emptive allotments of equity for cash Non pre-emptive allotments of equity for cash by major subsidiary Contracts of significance involving a Director Contracts of significance involving a controlling shareholder 12 + 13 Waiver of dividends or future dividends of a shareholder 14 Agreements with controlling shareholder Page 74 None 44-57 None None None None None None None 36 McKay Securities PLC Report and Financial Statements 2017 Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and Financial Statements and the Group and Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company financial statements for each financial year. In addition, they are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and applicable law and have elected to prepare the Company financial statements on the same basis. 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 Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the Directors are required to: (cid:2) select suitable accounting policies and then apply them consistently; (cid:2) make judgements and estimates that are reasonable and prudent; (cid:2) state whether they have been prepared in accordance with IFRS as adopted by the EU; and (cid:2) prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and 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 enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and a Corporate Governance Statement that comply with such applicable law and regulations. The Directors consider the Annual Report and Financial Statements, taken as a whole, to be fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Throughout the year ended 31st March 2017 the Company has complied with the 2014 UK Corporate Governance Code (the “Code”) save for Director independence, details of which can be found at www.frc.org.uk. The Role of the Board The Board of Directors (the ‘Board’) formulates strategy and is responsible for the management of the Group. A schedule of matters specifically reserved for the Board, the content of which is reviewed annually, has been adopted and includes the approval of the dividend policy, major capital expenditure, investments and disposals. The Board For the year to 31st March 2017 the Board comprised up to three executive Directors, including Mr S. Perkins, Chief Executive Officer (‘CEO’) and up to seven non-executive Directors, including Mr R. Grainger, (Non-executive Chairman), Viscount Lifford (Senior Independent Director), Mr N. Aslin, Mr J. Austen, Mr J. Bates and Mr N. Shepherd. Their biographical details are set out on pages 32 and 33. Mr D. Thomas retired on 14th July 2016. The non-executive Chairman and non-executive Directors are considered by the Board to be independent in that they have no business or other relationship with the Group that might influence their independence or judgment. The Board formally met thirteen times during the period and is provided with full and timely information in order to discharge its duties. Attendance at Board and Committee Meetings is set out in the table on page 39. The roles of the Chairman and CEO are, and will continue to be, separate. The Chairman is responsible for the leadership of the Board and its effectiveness. He ensures a constructive relationship exists between the executive and non-executive Directors. Responsibility for the day to day running of the Company and the implementation of the Company’s strategy is delegated to the CEO with the support of the executive Directors. The division of responsibilities between the Chairman and the CEO is set out in writing and approved by the Board. The Board is satisfied that no individual or group of Directors has unfettered powers of discretion and that the Board and its Committees have an appropriate balance of skills and experience and are of sufficient size to discharge their duties. The Board has access to the advice and services of the Company Secretary and independent legal advice at the Company’s expense, if required. Continuing professional development training is available for Directors as necessary. The Board has adopted a policy and effective procedures for managing and, where appropriate, approving conflicts or potential conflicts of interest should they arise. Only Directors who have no interest in the matter being considered will be able to make the relevant decision and, in taking the decision, the Directors must act in a way they consider in good faith will be the most likely to promote the success of the Company. Committees There are three Committees that make their recommendations to the Board, all of which have clear terms of reference that comply with the Code; these are reviewed annually and are available on the Company’s website, www.mckaysecurities.plc.uk. 2017 Report and Financial Statements McKay Securities PLC 37 DIRECTORS’ REPORT continued Audit & Risk Committee Mr J. Austen FCA is Chairman of the Audit & Risk Committee, which met three times in the last year. Mr J. Austen is identified as having recent and relevant financial experience as required by the Code. The Committee’s responsibilities and activities are set out in the Audit & Risk Committee Report on pages 40 and 41. Nomination Committee Mr N. Aslin FRICS was Chairman of the Nomination Committee until 1st April 2017. Mr J. Bates MRICS succeeded Mr Aslin from 1st April 2017. The Committee met four times in the last year and its responsibilities and activities, including the appointment of new Directors, their induction and the performance evaluation of the Board are set out in the Nomination Committee Report on pages 42 and 43. Remuneration Committee Mr N. Shepherd FRICS is Chairman of the Remuneration Committee which met four times in the last year. The Committee members, the Directors’ Remuneration Policy and the Directors’ Annual Remuneration Report are set out in the Directors' Remuneration Report on pages 44 to 57. Risk management and internal control The following should be read in conjunction with the principal risks and uncertainties on pages 20 to 22 of the Strategic Report. The Board is responsible for establishing and reviewing the Group’s system of internal control to safeguard shareholders’ investment and the Group’s assets. The Audit & Risk Committee reviews the effectiveness of the Company’s internal financial control and internal control risk management systems on behalf of the Board. The Risk Committee meets on a regular basis and is responsible for identifying key risks and assessing their likely impact on the Group and report to the Audit & Risk Committee. Important areas cover property, financial and corporate risks. Other important areas such as risk management, corporate taxation, legal matters, defined benefit pension scheme, detailed insurance cover and contracts including maintenance and property management all come under the direct control of the executive Directors and are reviewed on an ongoing basis and reported to the Board on a regular basis. Identification of business risks The Group has an established system of internal financial control which is designed to ensure the maintenance of proper accounting records and the reliability of financial information used within the business. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Annual and long term revenue, cash flow and capital forecasts are updated quarterly during the year. Results and forecasts are reviewed against budgets and regular reports are made to the Board on all financial and treasury matters. The Directors confirm that they have specifically reviewed the framework and effectiveness of the system of internal control for the year ended 31st March 2017. Relations with shareholders The UK Stewardship Code, aims to enhance the quality of engagement between the Company and its institutional shareholders. The Board recognises the importance of maintaining an ongoing relationship with the Company’s shareholders and achieves this through regular dialogue with shareholders. The Directors meet with current and prospective shareholders and shareholders have an opportunity to question the Board at the Company’s Annual General Meeting. Shareholders are given at least 20 working days notice of the Annual General Meeting. The Chairmen of the Audit & Risk Committee, Nomination Committee and Remuneration Committee attend the Annual General Meeting to answer questions. Shareholders are given the opportunity of voting separately on each proposal and are informed of proxy voting figures and these figures are posted on the Company’s website, www.mckaysecurities.plc.uk. There is also an investor relations section on the Company’s website, which includes annual and interim reports, stock exchange releases, details of the Group’s portfolio and day to day contact details. The Company has a share account management and dealing facility for all shareholders via Equiniti Shareview. This offers shareholders secure access to their account details held on the share register to amend address information and payment instructions directly, as well as providing a simple and convenient way of buying and selling the Company’s ordinary shares. For internet services visit www.shareview.co.uk or the investor relations section of the Company’s website. The Shareview dealing service is also available by telephone on 03456 037 037 between 8.30am and 4.30pm Monday to Friday. 38 McKay Securities PLC Report and Financial Statements 2017 Table of Board meeting attendance (for the financial year to 31st March 2017) Audit & Risk Remuneration Nomination Board Committee Committee Committee (13 meetings) (3 meetings) (4 meetings) (4 meetings) R. Grainger 13 3 4 4 S. Perkins 13 13 12 4 G. Salmon 13 13 11 – N. Aslin 13 3 3 4 Viscount Lifford 13 3 3 4 N. Shepherd 13 3 4 4 J. Austen (from 1st July 2016) 10 3 3 3 J. Bates (from 18th January 2017) 2 1 1 1 D. Thomas (to 14th July 2016) 5 1 – 1 S. Mew (to 21st September 2016) 7 – – – 1In attendance by invitation. Signed by order of the Board J. McKeown Secretary 19th May 2017 Reading 2017 Report and Financial Statements McKay Securities PLC 39 AUDIT & RISK COMMITTEE REPORT Committee membership The Audit & Risk Committee (the “Committee”) consists solely of non-executive Directors. The members of the Committee are: J. Austen FCA – Chairman (from 14th July 2017) R. Grainger ACA – Chairman (to 14th July 2017) Viscount Lifford N. Shepherd FRICS J. Bates MRICS (from 18th January 2017) N. Aslin FRICS (to 22nd May 2017) D. Thomas FCA (to14th July 2016) The majority of the members of the Committee are independent. Jon Austen and Richard Grainger are identified as having recent and relevant financial experience and the Committee believes as a whole it has competence relevant to the sector in which the Group operates. ,in The Committee met three times in the last year. Attendance of the Committee is set out in the table in the Directors' Report on page 39. The Chief Financial Officer, Chief Executive Officer and external auditors regularly attend Committee meetings by invitation. Twice a year during the Committee meetings the Committee meets separately with the external audit engagement partner to provide the opportunity to discuss matters without executive management being present. The Committee evaluates its performance during the year via an internally prepared questionnaire completed by all members and feedback is provided at a meeting of the Committee. The evaluation during the year concluded that the introduction of a separate Risk Committee regularly reviewing risks to the Group for consideration by the Committee provided a deeper insight into potential future risks to the Group and underpinned future strategies to mitigate risks where possible. For more information on the principal risks and uncertainties to the Group please see pages 20 to 22. The evaluation concluded that the Committee continued to operate in an efficient and effective way. Committee role and responsibilities The main role and responsibilities of the Committee are set out within its Terms of Reference which are reviewed annually and are available on the Company’s website, www.mckaysecurities.plc.uk. These responsibilities include: (cid:2) monitoring and assessing the integrity of the financial statements of the Group including its annual and half yearly reports; (cid:2) reviewing the Company’s internal control and risk management systems and reviewing annually the requirement for an internal audit function; (cid:2) recommending to the Board for shareholder approval at the Annual General Meeting the appointment of the external auditor and to approve their remuneration and terms of engagement; (cid:2) reviewing and monitoring the external auditor’s independence and objectiveness and the effectiveness of the audit process; JON AUSTEN CHAIRMAN OF THE AUDIT & RISK COMMITTEE Dear Shareholder I am pleased to present my first report as Audit & Risk Committee Chairman having been appointed following the Annual General Meeting in July 2017 when my predecessor, Richard Grainger, became Chairman of the Company. Richard remains a Committee member. As a Chartered Accountant and former Group Finance Director of a listed company I am well qualified for the role of Committee Chairman as I have the recent and relevant financial experience required by the UK Corporate Governance Code. During the last year, the Committee continued to play a key role for the Board in maintaining the quality of our financial reporting and overseeing the adequacy and effectiveness of internal controls and risk management. As a result of regular discussions with management and reporting developments in risk management we now report as the Audit & Risk Committee and have created a Risk Committee comprising the executive Directors to regularly review material risks to the Group and report to the Audit & Risk Committee. This additional Committee will further support our robust approach to effective risk management. This year we have updated our policy for the use of the external auditor for non-audit services in line with European Regulation on the provision of non-audit services as a public interest entity and the Ethical Standard to ensure the continued independence and objectivity of the Company’s auditor and have transferred the Company’s tax services to an alternative provider, PwC. Finally, I would like to welcome Jeremy Bates to the Committee following his appointment to the Board and its Committees in January 2018 and thank Nigel Aslin, who has now stepped down from the Committee, and Viscount Lifford, who will be stepping down in September 2017, for their advice and support during their tenure. Jon Austen Chairman of the Audit Committee 19th May 2017 40 McKay Securities PLC Report and Financial Statements 2017 (cid:2) developing and reviewing policy on the engagement of the external auditor to supply non-audit services; and (cid:2) reviewing the assumptions or qualifications in support of the going concern statement, and the longer term viability statement over an appropriate and justified period. Significant judgements The Committee focused on the significant judgement in the Report and Financial Statements in respect of the Group's property valuation. The valuation of the Group’s portfolio is undertaken by an external professional valuer and the assumptions and judgements are discussed and reviewed with the Committee. The external auditor has an in-house department of chartered surveyors who independently review the valuation of the portfolio and have direct access to the Group’s valuers. The valuation was reviewed along with its associated risks, and the Committee gained comfort from the valuer's methodology and other supporting market information. Whistleblowing policy The Audit & Risk Committee reviews arrangements by which staff of the Company may in confidence raise concerns in respect of financial reporting or other matters. These detailed procedures are set out in the Company’s Staff Handbook and the Company’s policy is available on the Company’s website www.mckaysecurities.plc.uk. Internal audit The Group has a small management team operating from one location. This enables the close involvement of the executive Directors with the day to day operational matters of the Group. Coupled with the Internal Controls currently in place, the Committee recommended to the Board that, at the present time, there is no requirement to establish an internal audit function. External auditor The Committee has recommended to the Board that KPMG LLP be put forward to be appointed as auditor and a resolution concerning their appointment will be put to the forthcoming AGM of the Company. The Board is aware of the FRC guidance and EU audit reforms in respect of auditor appointment and will conform with this guidance. KPMG were appointed over 20 years ago. Although there has not been a tender process in that period fees are negotiated on an annual basis. The last year KPMG can audit the Group is for the year ending 31st March 2021. KPMG rotate the engagement partner on a 5 year cycle designed to retain objectivity and independence. The KPMG audit fee was £80,740, with related assurance work of £19,420. Taxation related fees totalled £54,536. The Committee has reviewed the Group’s policy on non-audit services in line with the European Regulation on the provision of non-audit services as a public interest entity and the Ethical Standard and recommended to the Board that KPMG be retained for audit services and the Group move the provision of tax services to an alternative provider to ensure the continued independence and objectivity of the Company’s auditor. The Board agreed to this recommendation and PwC have been appointed to provide tax services to the Group from 1st April 2017. The Committee can confirm that it is satisfied the external auditor remains independent. 2017 Report and Financial Statements McKay Securities PLC 41 NOMINATION COMMITTEE REPORT as of 22nd May, and Viscount Lifford will be stepping down from the Board and its Committees in September 2017. His role as Senior Independent non-executive Director will be undertaken thereafter by Jon Austen. I have enjoyed my time with McKay tremendously and was delighted to be able to oversee this final phase of Board changes. Following this completion of succession planning, the Board will have the appropriate balance of skills, experience, independence and knowledge to enable it to discharge its duties and responsibilities effectively and therefore be compliant with Section B of the UK Corporate Governance Code. Nigel Aslin Former Chairman of the Nomination Committee 19th May 2017 Committee membership Members of the Nomination Committee (the “Committee”) are: J. Bates MRICS – Chairman (from 1st April 2017) N. Aslin FRICS – Chairman (to 1st April 2017 and Committee member to 22nd May 2017) J. Austen FCA (from 1st July 2016) R. Grainger ACA Viscount Lifford N. Shepherd FRICS S. Perkins MRICS D. Thomas FCA ( to 14th July 2016) The Committee met four times in the last year. Attendance of the Committee meetings is set out in the table in the Directors' Report on page 39. Committee role and responsibilities The main roles and responsibilities of the Committee are set out within its Terms of Reference which are reviewed annually and are available on the Company’s website, www.mckaysecurities.plc.uk. These responsibilities include: (cid:2) regularly reviewing the structure, size and composition of the Board; (cid:2) membership of Board Committees; (cid:2) succession planning for Directors and other senior executives; (cid:2) identifying and nominating for the approval of the Board, candidates to fill board vacancies as and when they arise; (cid:2) reviewing the results of the board performance evaluation process that relate to the composition of the Board; and (cid:2) reviewing the equality and diversity policy of the Company; and making recommendations to the Board concerning the re-election of Directors by shareholders. NIGEL ASLIN FORMER CHAIRMAN OF THE NOMINATION COMMITTEE Dear Shareholder As previously announced, I stepped down as Chairman of the Nomination Committee on 1st April 2017 and was succeeded by Jeremy Bates. However, as this report covers the period from 1st April 2016 to date it is appropriate for me introduce the Nomination Committee Report this year, particularly as there has been considerable change. These changes include the appointment of two non-executive Directors, the departure of the Chairman and the Property Director, and various Committee changes. As part of our succession plan to refresh the Board and its Committees, and thereby comply with the UK Corporate Governance Code on the independence of Board members, Jon Austen and Jeremy Bates joined the Board and its Committees on 1st July 2016 and 18th January 2017 respectively, as independent non-executive Directors. Both have a wealth of experience in their areas of expertise; Jon in finance as a qualified chartered accountant and former Group Finance Director with Urban&Civic Plc and Jeremy, a qualified surveyor and Director of Savills UK Limited and we welcome them both to the Board. On 14th July 2016, at the conclusion of the Annual General Meeting, David Thomas stood down as Chairman of the Company and was succeeded by Richard Grainger. At the same time Jon Austen took over as Chairman of the Audit & Risk Committee and Nick Shepherd took over as Chairman of the Remuneration Committee. In September 2016, we were pleased to welcome Tom Elliott, who joined us from Land Securities PLC. Tom was appointed to the Board as an executive Director on 1st April 2017, replacing Steven Mew who resigned from the Board on 21st September 2016. Finally, Viscount Lifford and I will both be stepping down from the Board and its Committees during 2017 having served for over ten years. I stand down from the Board and Committees 42 McKay Securities PLC Report and Financial Statements 2017 Succession planning The Nomination Committee considers the succession planning for Directors and other senior executives and ensures a formal, rigorous and transparent procedure for the appointment of new Directors. The gender diversity of the Company is set out below: Gender diversity of the Company Year to 31st March 2017 Main activities of the Committee during the year During 2016 the Committee focused on the final phase of its planned programme to refresh the composition of the Board and comply with the UK Corporate Governance Code requirements for Board independence. Board Senior Management M M F Independent executive search consultants Spencer Stuart were engaged with regard to the appointments of Mr J. Austen, Mr T. Elliott and Mr J. Bates. Spencer Stuart has no other connection nor provided any other services to the Company. A description of the role and capabilities required for each appointment was prepared and a list of potential candidates was compiled. Each list comprised of male and female candidates and their skills, experience and background were assessed. A shortlist of three candidates for each position was interviewed by the Chairman of the Committee and the CEO. The selected candidate was then invited to meet with the Committee and recommended to the Board for appointment. Following the notification in March 2016 by Mr S. Mew of his decision to leave the Company, Spencer Stuart was engaged in the search for his replacement. A list was drawn up from a diverse pool of male and female potential candidates with the required expertise, experience and knowledge in the sector. After a series of interviews, the Company announced in July 2016 the appointment of Mr Tom Elliott. Mr Elliott joined McKay from Land Securities Group PLC in September 2016 and was invited to join the Board as an executive Director on 1st April 2017. Policy on diversity The Company is committed to treating all employees equally and considers all aspects of diversity, including gender, when considering recruitment at any level of the business. The Board supports the principle of the Hampton-Alexander review for greater female representation on the Board and ensures that any list of candidates for any Board position includes both male and female candidates with a wide range of backgrounds. However, the Board is mindful that the right balance of skills and experience of the candidate is key and therefore all candidates are considered on merit and no diversity targets are set. The Board takes overall responsibility for the development of equality and diversity and ensures that progress is reviewed and further actions taken as necessary. Other Employees M F 0 1 2 3 4 5 6 7 8 9 10 11 Male M Female F Our operations are based solely in the UK and are low risk in relation to human rights issues. No human rights concerns have arisen during the period. Board performance appraisal A formal annual appraisal of the Board, its Committees and individual Directors was undertaken during February and March 2017. All appraisals consisted of an internally run exercise using an appraisal questionnaire on a range of benchmarks. It concluded that the Board operated in an effective manner with open and transparent dialogue and a high level of challenging and constructive debate. The review confirmed that the Board would continue to allow sufficient time in order to conduct property site visits as it was agreed that these added value to strategic discussions. The Chairman assessed the individual Directors' questionnaires and the Senior Independent Director assessed the questionnaire completed by the Chairman. Feedback was provided to all Directors. The appraisals concluded that each individual Director continued to be effective and demonstrated commitment to their roles, providing a range of skills, experience and independence. Re-election of Directors The Board has reviewed its approach to the re-election of Directors at the Company’s Annual General Meeting (‘AGM’) and notwithstanding that it is not in the FTSE 350, has decided to adopt Code Provision B.7.1. of the 2014 UK Corporate Governance Code. Therefore, all Directors of the Company will be subject to re-election at the 2017 AGM. Mr J. Bates and Mr T. Elliott having been appointed since the last AGM, being eligible, will offer themselves for election. The biographical details of the Directors are available on pages pages 32 and 33. 2017 Report and Financial Statements McKay Securities PLC 43 REMUNERATION Policy renewal In contemplation of the need to renew our existing policy, the Remuneration Committee conducted a full review of our current approach to senior executive remuneration. Following the conclusion of this review, the Committee believes that the current structure should be retained, albeit with certain minor changes that (i) reflect developments in best practice that have occurred since our existing policy was established and (ii) ensure that our policy is directly aligned with McKay’s circumstances and strategic objectives. Our review was conducted in an environment of unprecedented focus on executive remuneration. The Committee continues to keep abreast of all relevant developments in market and best practice in this area, while also ensuring that the policies and practices it adopts are appropriate for McKay and have the overriding aim of aligning the long term interests of our executive Directors and shareholders. We conducted a consultation with our major shareholders as part of the policy review process and were pleased that the responses we received were supportive of our proposals. McKay continues to deliver growth based on clear strategic objectives. McKay is delivering growth in adjusted profit before tax, gross rental income, Earnings per Share and property portfolio value. Key redevelopment schemes in Reading and Redhill are completed and being marketed, with the redevelopment of 30 Lombard Street, EC3 on schedule for completion in mid 2018. We are well financed and have the ability to generate growth from our programme of development and refurbishment projects and management initiatives within our existing portfolio. While we accept that the world is a more uncertain place than it was a few years ago, McKay is in good shape to continue to deliver value for our shareholders. This strong performance has been driven by the commitment of our senior executive team, headed by Simon Perkins (CEO) and Giles Salmon (CFO) and further enhanced by the appointment of Tom Elliott in September 2016 (who joined the Board in April 2017). It is therefore important that we continue to offer remuneration packages that ensure the retention and incentivisation of this strong team, albeit in a considered and prudent manner. NICK SHEPHERD CHAIRMAN OF THE REMUNERATION COMMITTEE Dear Shareholder I was very pleased to take over the role of Remuneration Committee Chairman from Viscount Lifford following last year’s AGM. At the 2017 AGM we will be tabling a binding resolution to seek shareholder approval to renew our existing Directors’ remuneration policy, for which shareholder approval was obtained in 2014. Binding resolutions will also be tabled to seek approval for: (i) the renewal of our existing Performance Share Plan which is reaching the end of its 10 year life, and (ii) the establishment of a Deferred Share Bonus Plan which will operate in conjunction with our existing annual bonus plan, thereby allowing the continuation of our policy of deferring a portion of our executive Directors’ annual bonus into shares. In addition, the regular advisory resolution to approve the Annual Report on Remuneration will also be tabled. As we are seeking shareholder approval for the renewal of our policy (and as required by the relevant Regulations), this Report is split into three sections: (cid:2) this introductory letter, (cid:2) the proposed new Directors’ Remuneration Policy, and (cid:2) the Annual Report on Remuneration 44 McKay Securities PLC Report and Financial Statements 2017 The underlying current structure of our existing executive Directors’ remuneration policy can be summarised as follows: Base salary (cid:2) Set to recruit and reward executives of the quality required and with the appropriate skills to manage and develop the Group successfully Pension (cid:2) Maximum 20% of base salary Other benefits (cid:2) Includes car allowance, private medical and life insurance Annual bonus (cid:2) 75% of salary opportunity (cid:2) Payable subject to absolute NAV per share (as to 60% of the bonus) and absolute EPS (40% of bonus) growth targets (cid:2) Any bonus in excess of 50% of salary is deferred into shares for 3 years* (cid:2) Malus/clawback provisions operate for one year post payment* LTIP (cid:2) Regular annual awards under the Performance Share Plan (cid:2) Policy award level of 100% of salary that vest three years later subject to absolute NAV per share growth targets (as to 40% of the award) and relative TSR targets (60% of award) (cid:2) Two year post vesting holding period applies for 2015 awards onwards* (cid:2) Malus/clawback provisions operate for one year post vesting* Share ownership guidelines (cid:2) 200% of salary* *feature introduced/enhanced voluntarily by McKay since the existing policy was established to ensure policy continued to take due account of best practice developments and which will be formalised as part of this policy review process. As noted above, we are not proposing any material changes as part of the policy renewal process. The main features of our new policy are as follows: Base salary (cid:2) No change to underlying approach (cid:2) To reflect best practice, an overriding cap on base salaries of £500,000 per executive will be included, although this should not be viewed as any indication of likely salary levels over the policy period Pension (cid:2) No change Other benefits (cid:2) No change save that, to reflect best practice, an overriding cap on the value of benefits of £75,000 per executive will be included (NB current benefit levels are substantially below this cap and are not expected to increase materially during the life of the new policy) Annual bonus (cid:2) 75% of salary opportunity will be retained for 2017/18 (cid:2) Flexibility will be reserved to increase bonus opportunity to up to a more market standard 100% of salary over 2018/19 and/or 2019/20 if the Committee considers it appropriate to do so (cid:2) Flexibility will be reserved to use such financial and non-financial metrics as the Committee considers appropriate. However, for 2017/18 the bonus will continue to be payable based on absolute NAV per share and absolute EPS growth targets save that the weighting will be changed to 40:60 from the current 60:40 to reflect McKay’s focus on income generation and its REIT status. The bonus targets will be set in light of internal and external forecasts (cid:2) The Committee will also retain the flexibility to adjust the bonus outturn if it believes that this outturn does not reflect overall performance and/or shareholders’ experience (cid:2) Any bonus in excess of 50% of salary will continue to be deferred into shares for 3 years, with awards made under the proposed new Deferred Share Bonus Plan. To reflect market practice and further align the interests of management and shareholders, dividends declared over the shares during the deferral period will be accrued (cid:2) Malus/clawback provisions will continue to operate but, to reflect best practice, their application will be extended to three years post payment (from the current one year) LTIP (cid:2) Annual awards will continue to be made under the proposed new Performance Share Plan with a policy award level of 100% of salary (with a “normal” maximum of 150% and an “exceptional circumstances” maximum of 200%) (cid:2) Awards will continue to vest after three years subject to performance targets. Flexibility will be reserved to use such financial and non-financial metrics as the Committee considers appropriate. For the 2017/18 grants, these targets will continue to be based on absolute NAV per share growth (as to 40% of the award) and relative TSR (60% of award). As with the bonus targets, the PSP targets will be set in light of internal and external forecasts, with the Committee also retaining the flexibility to adjust the vesting outturn if it believes that this outturn does not reflect overall performance and/or shareholders’ experience (cid:2) The two year post vesting holding period will continue to apply, as will malus/clawback save that (as with the bonus and to reflect best practice) their application will be extended to three years post vesting (from the current one year) Share ownership guidelines (cid:2) Remain at 200% of salary 2017 Report and Financial Statements McKay Securities PLC 45 Introduction The Directors’ Remuneration Policy Report and the Directors’ Annual Remuneration Report set out the information required by Part 4 of Schedule 8 to the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (the "Regulations"). The report also satisfies the relevant requirements of the Listing Rules of the Financial Conduct Authority, and describes how the Board has applied the principles and complied with the provisions relating to Directors’ remuneration in the UK Corporate Governance Code. The auditors have reported on certain sections of the Annual Report on Remuneration and stated whether, in their opinion, those parts have been properly prepared in accordance with the Companies Act 2006. Those sections subject to audit are clearly indicated. The Remuneration Committee has been established by the Board and is responsible for the remuneration of the executive Directors and the Chairman. The Committee’s terms of reference are available in full on the Company’s website or from the Company Secretary on request. The table below summarises the Committee’s future policy on the remuneration of executive Directors which, if approved by shareholders at the forthcoming Annual General Meeting on 6th July 2017, will replace the existing policy for which shareholder approval was obtained at the 2014 Annual General Meeting, and will become binding immediately thereafter. The material differences between the existing and proposed new policy (which has also been designed with due account taken of the UK Corporate Governance Code) are explained in the statement by the Committee Chairman and in the table below. It is currently intended that the policy will remain valid until the 2020 Annual General Meeting. The policy of the Committee is to align the interests of the executive Directors with those of shareholders by structuring the levels of basic salary and remuneration to attract, retain and incentivise executive Directors of the quality required and with the appropriate skills to manage and develop the Group successfully. When determining the structure of remuneration, the Committee ensures that (i) inappropriate risk-taking is neither encouraged nor rewarded and (ii) the Company’s policies and practices support the long term success of the Company with a sensible balance struck between fixed and performance linked pay and the use of different performance metrics measured over differing periods. REMUNERATION Finally, as part of the policy review process, we also reviewed the fees payable to the Company Chairman. The current fee of £61,500 was found to be substantially below the appropriate rate given the size and complexity of the role. As such, we have agreed to increase the Chairman’s fee to £90,000 (which would still be conservatively positioned), with this increase made on a phased basis over the next two years i.e. £80,000 for 2017/18, increasing to £90,000 in 2018/19 (assuming the Committee considers this second increase appropriate at the relevant time). Furthermore, again to reflect market practice, we are introducing the concept of paying NEDs supplementary fees to reflect additional responsibilities (e.g. chairing Board Committees). Again, the NEDs’ fees will remain conservatively positioned following the introduction of this approach. Other committee activities during the year In addition to undertaking the policy review, the Committee addressed the following other matters during the course of, and in relation to, the 2016/17 financial year: (cid:2) Determining the executive Directors’ base salary levels for 2017/18 (Simon Perkins – £383,500, Giles Salmon – £251,000, Tom Elliott – £220,000) (cid:2) Agreeing the termination arrangements of Steven Mew who left the Board on 21st September 2016, full details of which are set out on page 55 (cid:2) Setting the executive Directors’ bonus targets for 2016/17 and agreeing the ultimate outturn. The targets were a blend of challenging absolute NAV per share (as to 60% of the bonus) and absolute EPS (40% of bonus) growth targets. Based on performance against these targets (which is more fully described on page 55 bonuses of 28% of salary were payable to Simon Perkins and Giles Salmon (cid:2) Determining vesting of the 8th grant of the PSP award (awarded in 2014) which reached the end of the 3 year performance period on 31st March 2017, as described more fully on page 53 (cid:2) Overseeing the final grant under the 2007 PSP in 2016/17 which was made over shares worth 100% of salary to Simon Perkins and Giles Salmon which vest subject to the achievement of a blend of challenging absolute NAV per share growth targets (as to 40% of the award) and relative TSR targets (60% of award) (cid:2) Agreeing the terms upon which Tom Elliott joined the Board (cid:2) Appointing FIT Remuneration Consultants as new independent advisors to the Committee Conclusion I hope you are supportive of the approach we intend to adopt going forward – which is a continuation of our prudent/responsible approach to remuneration at McKay, with the minor changes outlined above ensuring that our policy continues to reflect best practice and the Company’s evolving strategy – and that you will therefore vote in favour of the four remuneration-related resolutions that are to be tabled at the forthcoming AGM. Nick Shepherd Chairman of the Remuneration Committee 19th May 2017 46 McKay Securities PLC Report and Financial Statements 2017 REMUNERATION Directors’ Remuneration Policy Report Purpose and Element link to strategy Operation Maximum opportunity Performance measures Base salary To recruit and reward Reviewed annually by the The Committee is guided by the general N/A executives of the Committee, on the basis of the salary increase for the broader employee quality required and performance of the individual population and market conditions but on appropriate skills to executive Director and occasions may need to recognise, for manage and develop comparability with other similarly example, a change in the scale, scope the Group successfully. sized companies within the sector. or role and/or market movements. and the market generally. However, a formal cap on salaries will apply such that no incumbent executive Paid on a monthly basis. Director’s base salary shall be increased beyond £500,000. Benefits To provide appropriate The Company typically provides: The aggregate value of any benefits N/A levels of benefits to (cid:2) Car allowance (paid monthly) provided to any single Director will not executives of the quality (cid:2) Medical insurance exceed £75,000. required and appropriate (cid:2) Life assurance skills to manage and develop the Group successfully. The Committee reserves the discretion to introduce new benefits where it concludes that it is appropriate to do so, having regard to the particular circumstances and to market practice. Where appropriate, the Company will meet certain costs relating to executive Director relocations (which are not subject to the benefits cap). Pension To provide appropriate Executive Directors can receive Up to 20% of salary N/A levels of pension provision pension contributions to personal to executives of the quality pension arrangements or, if a required and appropriate Director is impacted by annual or skills to manage and lifetime limits on contribution levels develop the Group to qualifying pension plans, the balance successfully. (or all) can be paid as a cash supplement. Annual bonus To incentivise and Annual bonus plan levels and the Up to 100% of salary. For 2017/18, The performance measures reward the delivery of appropriateness of measures are the maximum bonus opportunity will applied may be financial or the Company’s strategic reviewed annually as close as is be 75% of salary. non-financial and corporate, objectives. practicable to the commencement divisional or individual and of each financial year to ensure they in such proportions as the continue to support our strategy. Committee considers appropriate. Where a sliding scale of targets Once set, performance measures and is used, attaining the threshold targets will generally remain unchanged level of performance for any for the year, except to reflect events such measure will not typically produce as corporate acquisitions or other major a pay-out of more than 30% of transactions where the Committee the maximum portion of overall considers it to be necessary in its opinion annual bonus attributable to that to make appropriate adjustments. measure, with a sliding scale to full pay-out for maximum Annual bonus plan outcomes are paid performance. The Committee in cash up to 50% of salary, with 3 year will also retain the flexibility to deferral into shares for outcomes greater adjust the bonus outturn based than 50% of salary. The number of shares upon a formulaic assessment of subject to vested deferred share awards performance against the targets may be increased to reflect the value of if it believes that this outturn does dividends that would have been paid in not reflect overall performance respect of any ex-dividend dates falling and/or shareholders’ experience. between the grant of awards and the expiry of any deferral period. Malus/clawback provisions apply in the event of material misstatement, error or misconduct up to three years following the relevant payment date. Performance To incentivise and Awards under the PSP may be granted Normal grant policy: The Committee may set such Share Plan reward the delivery as nil/nominal cost options or conditional Up to 100% of salary pa performance conditions on PSP (‘PSP’) of the Company’s awards which vest to the extent awards as it considers appropriate, strategic objectives. performance conditions are satisfied Maximum normal grant level: whether financial or non-financial and to provide further over a period of at least three years. Up to 150% of salary pa and whether corporate, divisional alignment with A two year posting vesting holding period or individual. shareholders through will also normally apply. Part/all of vested Exceptional grant level: the use of shares awards may also be settled in cash. Up to 200% of salary pa Performance periods may be over and to aid retention. The PSP rules allow that the number such periods as the Committee of shares subject to vested PSP awards selects at grant, which will not may be increased to reflect the value of be less than, but may be longer dividends that would have been paid in than, three years. No more than respect of any ex-dividend dates falling 25% of awards vest for attaining between the grant of awards and the the threshold level of performance expiry of any vesting period. Clawback conditions. and malus provisions apply in the event of material misstatement, error or misconduct up to three years following the relevant vesting date. 2017 Report and Financial Statements McKay Securities PLC 47 REMUNERATION Directors’ Remuneration Policy Report - continued Non-executive To attract and retain a The fees paid to the Chairman and When determining fee increases, N/A Director fees high-calibre Chairman non-executive Directors are set by the Company is guided by the and non-executive reference to comparability with other general increase for the broader Directors by offering similarly sized companies within the employee population and market appropriate fees. sector and the market generally. conditions but on occasion may The fees payable to the non-executive need to recognise, for example, Directors are determined by the Board, change in responsibility, time with the Chairman’s fees determined commitment and/or market by the Committee. movements. The Chairman and non-executive The aggregate fees and any benefits of Directors will not participate in any the Chairman and non-executive Directors cash or share incentive arrangements. will not exceed the limit from time to time prescribed within the Company’s The Company reserves the right to provide Articles of Association for such fees. benefits including travel and office support. Fees are paid on a monthly basis Notes 1. Executive Directors are required to build a holding of shares in the Company to the value of 200% of salary. 2. The Committee operates incentive plans according to their respective rules and where relevant in accordance with the Listing Rules. Consistent with market practice, the Committee retains discretion over a number of areas relating to the operation and administration of the plan. These include, but are not limited to, determining who participates, the timing of awards, award levels, setting performance targets, amending performance targets (if an event occurs, in exceptional circumstances, to enable the targets to fulfil their original purpose), assessing performance targets, treatment of awards on a change of control, treatment of awards for leavers and adjusting awards (e.g. as a result of a change in capital structure). 3. 4. 5. 6. The annual bonus and PSP are based on performance against targets that are aligned with the Company's short, medium and long term strategic plan. Where appropriate, a sliding scale of targets is set for each metric to encourage continuous improvement and the delivery of stretch performance. There are currently no material differences in the broad structure of remuneration arrangements for the executive Directors and the general employee population, aside from participation rates in incentive schemes. While the appropriate benchmarks vary by role, the Company seeks to apply the philosophy behind this policy across the Company as a whole. To the extent that the Group’s pay policy for Directors differs from its pay policies for groups of staff, this reflects the appropriate market rate position and/or typical practice for the relevant roles. The Company takes into account pay levels, bonus opportunity and share awards applied across the Group as a whole when setting the executive Directors’ remuneration policy. For the avoidance of doubt, in approving this Directors' Remuneration Policy, authority is given to the Company to honour any commitments entered into with current or former Directors (such as the payment of the prior year's annual bonus or the vesting/exercise of share awards granted in the past). Details of any payments to former Directors will be set out in the Annual Report on Remuneration as they arise. The Regulations and related investor guidance encourages companies to disclose a cap within which each element of the Directors’ remuneration policy will operate. Where maximum amounts for elements of remuneration have been set within the Directors’ remuneration policy, these will operate simply as caps and are not indicative of any aspiration. 7. While the Committee does not consider it to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality, whether paid for by the Company or another, and business travel for Directors and in exceptional circumstances their families, may technically come within the applicable rules and so the Committee expressly reserves the right for the Committee to authorise such activities within its agreed policies. 8. The Committee may make minor amendments to the policy set out above for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation, without obtaining shareholder approval for that amendment. How the views of shareholders are taken into account The Remuneration Committee considers shareholder feedback received each year following the AGM. This feedback, plus any additional feedback received during any meetings from time to time, is then considered as part of the Company's annual review of the operation of our remuneration practices. In addition, the Remuneration Committee will seek to engage directly with major shareholders and their representative bodies should any material changes be proposed to the remuneration policy. Details of votes cast for and against the resolution to approve last year’s remuneration report and any matters discussed with shareholders during the year are set out in the Directors’ Remuneration Report (subject to issues of commercial sensitivity). How the views of employees are taken into account When determining salaries and other elements of remuneration for our executives we take account of general pay movement and employment conditions elsewhere in the Group, as well as the relevant general markets. The Committee takes due account of employees' views when determining the design of the Company's senior executive remuneration policy although, reflecting typical current practice, the Committee does not formally consult with employees when determining remuneration of the executive Directors. External appointments The Company’s policy is to permit an executive Director to serve as a non-executive Director elsewhere when this does not conflict with the individual’s duties to the Company, and where an executive Director takes such a role they may be entitled to retain any fees which they earn from that appointment. Such appointments are subject to approval by the Chairman. At present no executive Director holds any such external appointments. 48 McKay Securities PLC Report and Financial Statements 2017 Remuneration scenarios for Executive Directors The charts below illustrate how the composition of the executive Directors' remuneration packages varies at three performance levels, namely, at minimum (i.e. fixed pay only), target and maximum levels. Value of the gross remuneration packages at different levels of performance. Total Fixed Annual Bonus PSP 1,200 1,000 1,000 900 800 700 600 500 400 300 200 100 0 0 0 0 £ ’ £1158k 33% £727k 13% 20% 67% 25% 42% £487k 100% £766k 33% 25% 42% £656k 34% 25% 41% £409k 13% 20% 66% £271k 100% £484k 13% 19% 68% £327k 100% Basic Target Maximum Basic Target Maximum Basic Target Maximum S. PERKINS, CEO G. SALMON, CFO T. ELLIOTT, PROPERTY DIRECTOR Basic Target – Consists of base salary, benefits and pension. – Base salary is the salary to be paid in 2017/18. – Benefits measured as benefits paid in the year ended 31 March 2017 as set out in the single figure table (an estimated figure is used for Tom Elliott). – Pension measured as the defined contribution or cash allowance in lieu of Company contributions of up to 20% of salary. Based on what the Director would receive if performance was on target (excl. share price appreciation and dividends): – Annual Bonus: consists of the on-target bonus (50% of maximum opportunity of 75% of salary used for illustrative purposes). – PSP: consists of the threshold level of vesting (25% vesting) of awards of 100% of salary under PSP. £,000 S. Perkins G. Salmon T. Elliott Base Salary 384 251 220 Benefits Pension 27 31 25 77 45 26 Total Fixed 487 327 271 Maximum Based on the maximum remuneration receivable (excluding share price appreciation and dividends): – Annual Bonus: consists of maximum bonus of 75% of base salary. – PSP: consists of the face value of awards of 100% of salary under PSP. 2017 Report and Financial Statements McKay Securities PLC 49 REMUNERATION Directors’ Remuneration Policy Report - continued Service contracts The executive Directors' service contracts are terminable by the Company on not less than one year's notice. In each case the contracts (which are available for inspection at the Company’s head office) are subject to six months' notice by the executive Director. The service contracts are dated as follows: Executive Director Date of service contract S. Perkins 16th March 2004 G. Salmon 2nd May 2011 S. Mew1 16th March 2004 T. Elliott2 8th July 2016 1Steven Mew left the Board on 21st September 2016. 2Tom Elliott joined the Board on 1st April 2017. The non-executive Directors have rolling terms of appointment, providing for them to retire by rotation in accordance with the Articles of Association. In line with the UK Corporate Governance Code all Directors will submit themselves for re-election annually. The terms of appointment for the non-executive Directors are dated as follows: Non-Executive Director Date of service contract D. Thomas1 31st August 2005 N. Aslin2 2nd May 2006 Viscount Lifford 29th August 2006 R. Grainger 1st May 2014 N. Shepherd 21st January 2015 J. Austen3 13th April 2016 J. Bates4 17th January 2017 1David Thomas left the Board on 14th July 2016. 2Nigel Aslin will leave the Board on 22nd May 2017. 3Jon Austen joined the Board on 1st July 2016. 4Jeremy Bates joined the Board on 18th January 2017. Approach to recruitment and promotions The remuneration package for a new executive Director would be set in accordance with the terms of the Company’s prevailing approved remuneration policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a candidate of that experience and the importance of securing the relevant individual. Salary would be provided at such a level as required to attract the most appropriate candidate and may be set initially at a below mid-market level on the basis that it may increase once expertise and performance has been proven and sustained. The caps on fixed pay in the policy table will not apply to a new recruit, as provided for in the Regulations. The annual bonus potential would be limited to 100% of salary and grants under the PSP would be limited to 100% of salary (up to 200% of salary in exceptional circumstances). In addition, the Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an executive leaving a previous employer. It would seek to ensure, where possible, that these awards would be consistent with awards forfeited in terms of vesting periods, expected value and performance conditions. For an internal executive Director appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out according to its original terms. For external and internal appointments, the Committee may agree that the Company will meet certain relocation and/or incidental expenses as appropriate. Approach to leavers There are no predetermined provisions for compensation within the executive Directors' service contracts in the event of loss of office. The Committee considers all proposals for the early termination of the service contracts for executive Directors and senior executives and would observe the principle of mitigation. It has been the Committee’s general policy that the service contracts of executive Directors (none of which are for a fixed term) should provide for termination of employment by giving up to 12 months’ notice or by making a payment of an amount equal to 12 months’ basic salary and pension contributions in lieu of notice. It is the Committee’s general policy that no executive Director should be entitled to a notice period or payment on termination of employment in excess of the levels set out in his or her service contract. Annual bonus may be payable with respect to the period of the financial year served although it will normally be pro-rated and paid at the normal pay-out date. Any share-based entitlements granted to an executive Director under the Company’s share plans will be determined based on the relevant plan rules. However, in certain prescribed circumstances, such as death, ill-health, disability, retirement or other circumstances at the discretion of the Committee, “good leaver” status may be applied. For good leavers, awards will normally vest on the date of cessation, subject normally to the satisfaction of the relevant performance conditions at that time and reduced pro-rata to reflect the proportion of the performance period actually served, although the Remuneration Committee has the discretion to disapply the application of time pro-rating if it considers it appropriate to do so. Deferred share awards would normally vest on cessation (save where “good leaver” status is not conferred). 50 McKay Securities PLC Report and Financial Statements 2017 REMUNERATION Directors’ Annual Remuneration Report Committee role and membership The Committee consists solely of non-executive Directors. The members of the Committee who served during the year are: N. Shepherd – Chairman N. Aslin J. Austen (from 1st July 2016) R. Grainger Viscount Lifford J. Bates (from 18th January 2017) D. Thomas (to 14th July 2016) No member has any personal interest in the matters decided by the Committee, nor any day to day involvement in the running of the business and therefore all members are considered by the Company to be independent. The Committee members have no personal financial interest, other than as shareholders, in the matters to be decided. The terms of reference of the Remuneration Committee are available on the Company's website www.mckaysecurities.plc.uk. Details of the Committee members' attendance at Committee meetings during the financial year are as follows: Committee member Number of meetings attended N. Shepherd 4 out of 4 N. Aslin 3 out of 4 Viscount Lifford 3 out of 4 J. Austen1 3 out of 3 R. Grainger 4 out of 4 J. Bates2 1 out of 1 D. Thomas3 0 out of 0 1Jon Austen joined the Committee on 1st July 2016. 2David Thomas left the Committee on 14th July 2016. 3Jeremy Bates joined the Committee on 18th January 2017. External advisors During the year the Committee received independent advice from New Bridge Street (part of Aon plc) on a range of remuneration issues. New Bridge Street was originally appointed by the Committee and neither New Bridge Street nor any other part of Aon plc have any other connection or provided any other services to the Company. Total fees paid to New Bridge Street in respect of its services to the Committee during the year were £2,480. New Bridge Street is a member of the Remuneration Consultants Group and abides by the Remuneration Consultants Group Code of Conduct, which requires its advice to be objective and impartial. During the year the Committee undertook a review of its advisors, resulting in the appointment of FIT Remuneration Consultants LLP (“FIT”). From its appointment, the Committee received independent advice from FIT on a range of remuneration issues. FIT has no other connection nor does it provide any other services to the Company. Total fees paid to FIT in respect of its services to the Committee during the year were £50,590. FIT is a member of the Remuneration Consultants Group and abides by the Remuneration Consultants Group Code of Conduct, which requires its advice to be objective and impartial. The Chief Executive attends meetings by invitation, but is not involved in the discussion of his own remuneration. 2017 Report and Financial Statements McKay Securities PLC 51 REMUNERATION Directors’ Annual Remuneration Report - continued Directors’ remuneration for the year ended 31st March 2017 (audited) The remuneration of the Directors for the years 2017 and 2016 was as follows Pension Value of including long Fees/salary salary Annual term Total fees Benefits supplement bonus incentives remuneration Directors’ remuneration £’000 £’000 £’000 £’000 £’000 £’000 Executive S. Perkins 2017 376 27 66 106 115 690 2016 358 23 68 251 497 1,197 S. Mew1 2017 125 9 21 — — 155 2016 255 24 45 179 354 857 G. Salmon 2017 246 31 40 69 71 457 2016 230 22 41 162 303 758 Non-executive R. Grainger2 2017 54 — — — — 54 2016 36 — — — — 36 D. Thomas3 2017 21 — — — — 21 2016 59 — — — — 59 Viscount Lifford 2017 37 — — — — 37 2016 36 — — — — 36 N. Aslin 2017 37 — — — — 37 2016 36 — — — — 36 N. Shepherd 2017 37 — — — — 37 2016 36 — — — — 36 J. Austen4 2017 28 — — — — 28 2016 — — — — — — J. Bates5 2017 8 — — — — 8 2016 — — — — — — 1Steven Mew left the Board on 21st September 2016. Details of his termination arrangements can be found on page 55. 2Richard Grainger became Company Chairman on 14th July 2016. 3David Thomas left the Board on 14th July 2016. 4Jon Austen joined the Board on 1st July 2016. 5Jeremy Bates joined the Board on 18th January 2017. 52 McKay Securities PLC Report and Financial Statements 2017 Notes 1. Taxable benefits Benefits comprise car allowance, medical insurance and life assurance. 2. Annual bonus payments The annual bonus for the year ended 31st March 2017 was based on performance against NAV per share targets (60% of the bonus potential) and EPS targets (40% of the bonus potential). Metric Weighting Threshold Maximum Actual % outturn NAV growth 60% RPI + 3% RPI + 10% RPIX + 25% 40% growth of RPIX + 6% to 25% (full vesting) over three financial years Relative TSR 60% Relative TSR performance Median Upper quartile

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