McKay Securities Annual Report 2017

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FY2017 Annual Report · McKay Securities

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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

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

CHAIRMAN’S STATEMENT
continued

9 Greyfriars
Reading
39,620 sq ft

Development
Completion: July 2016

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

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

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.

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

17%

T
Total
£’million

430

78%

South East Offices

London Offices

South East Industrial

Other

%
%

17%

Total
T
£’million

430

18%

60%

2017 Report and Financial Statements McKay Securities PLC

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

Source: Dun & Bradstreet

30%

45%

Contracted
rent £’million

23.4

17%

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

REMUNERATION
Directors’ Annual Remuneration Report - continued

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

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

McKay Securities PLC Report and Financial Statements 2017

2017 Report and Financial Statements McKay Securities PLC

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.

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

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

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

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.

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

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

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

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

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

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

19%

20%

40%

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

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.

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

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

2017 Report and Financial Statements McKay Securities PLC

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

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

McKay Securities PLC Report and Financial Statements 2017

The Mille
Brentford
96,700 sq ft

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.

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

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.

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

9 -18

24-30

20-22

16-18 & Note 15

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

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

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

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

Agreements with controlling shareholder

Page

None

44-57

None

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

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.

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

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

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

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

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

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

Male

Female

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

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

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

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

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

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).

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.

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.

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

900

800

700

600

500

400

300

200

100

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

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

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).

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

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.

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