McKay Securities Annual Report 2018

Plain-text annual report

Contents SECTION 1 01 Strategic Report 02 Financial Highlights 03 Chairman’s Statement 06 Portfolio Properties 08 Business Objective, Strategy and Model 09 Strategic Delivery 2014–2018 14 Property and Financial Review 24 Principal Risks and Uncertainties 28 Sustainability SECTION 2 35 Governance 36 Board of Directors 38 Corporate Governance 39 Directors’ Report 43 Statement of Directors’ Responsibilities 44 Audit & Risk Committee Report 46 Nomination Committee Report 48 Remuneration 50 Directors’ Remuneration Policy Report 54 Directors’ Annual Remuneration Report 62 Independent Auditor’s Report SECTION 3 67 Financial Statements 2018 68 Consolidated Proﬁt and Loss and other Comprehensive Income 69 Group Statement of Financial Position 70 Company Statement of Financial Position 71 Group Cash Flow Statement 72 Company Cash Flow Statement 73 Consolidated Statement of Changes in Equity 74 Company Statement of Changes in Equity 75 Notes to the Financial Statements 93 Glossary 94 Company and Shareholder Information 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 £460 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. mckaysecurities.plc.uk Financial Highlights Profits and earnings Total property return Proposed final dividend per share 12.3% (2017: 6.8%) 7.2 pence Up 14.2% (2017: 6.3 pence), making the total dividend per share for the year 10.0 pence (2017: 9.0 pence) £43.44 million Proﬁt before tax (IFRS) (2017: £17.59 million) £9.07 million1 Adjusted proﬁt before tax (2017: £8.60 million) 9.6 pence2 EPRA diluted earnings per share (2017: 8.4 pence) Shareholders’ funds Debt to portfolio value (LTV) Portfolio valuation £306.44 million (2017: £270.79 million) 31.9% (2017: 31.6%) 322 pence3 EPRA net asset value per share (2017: 303 pence) 326 pence4 Net asset value per share (IFRS) (2017: 289 pence) £460.15 million (2017: £429.92 million) £24.46 million 6.1% Surplus (2017: £7.07 million /1.7%) 1See note 5 in Financial Statements 2See note 9 in Financial Statements 3See note 22 in Financial Statements 4See note 22 in Financial Statements 2 McKay Securities PLC Report and Financial Statements 2018 Chairman’s Statement Richard Grainger Chairman I am pleased to be able to report an exceptionally productive year for the Group, during which progress with our growth strategy has enabled the Board to recommend a 14.3% increase in the ﬁnal dividend. Before considering the year under review, I would like to reﬂect on the transformation of the business since the £86.70 million capital raising in 2014, and the support from shareholders at that time. Our strategic objective, as set out in the Prospectus, was to grow the capital value and recurring income from a portfolio of predominantly ofﬁce and industrial properties through development, refurbishment and active management, whilst maintaining an appropriate level of gearing. This has been, and continues to be, delivered to the letter. Since then our portfolio value as reported by our valuers has increased by 80.8% to £460.15 million, our recurring contracted rents have increased by 66.5%, the portfolio rental value (ERV) has increased by 76.0% and gearing (loan to value) has reduced from 44.5% to 31.9%. The acquisition of eight properties at a cost of £74.24 million added a mix of value enhancing opportunities, and the disposal of twelve smaller and low growth assets realised net proceeds of £68.01 million. To date, the acquisitions have delivered a combined valuation surplus of 30.5% whilst the disposals have realised a substantial 22.1% surplus of £15.04 million. The growth in portfolio and rental value is all the more impressive considering the scale of disposals made, which has enabled the recycling of capital and the improvement of the overall quality of the portfolio. Three major speculative development projects and four refurbishments have proved a great success, with a fourth development currently under way. The rental value of these assets has increased by 181.3%, and after £61.32 million of capital expenditure to date, these projects have delivered a 28.7% valuation surplus of £31.16 million. Beyond the headlines, there has been a real desire to increase market awareness of the business and to enhance our reputation by exceeding tenants’ expectations and providing engaging workspace to attract new occupiers. Underpinning these property initiatives is a more robust ﬁnancial base. Since 2014, all loan facilities have been renewed, the debt available to the Group has increased by £35.00 million to £190.00 million and the loan expiry proﬁle has been extended. Our cost of debt is also now at a more competitive level following the cancellation of legacy interest rate swaps. We have collectively been fortunate with the well executed selection of non-executive directors of the highest calibre to replace those standing down after admirable service and support, and to maintain an independent balance. Despite these changes, the Board has remained stable, fully engaged and enthusiastic at all times. Management foresight has been endorsed with outstanding performance across all key metrics, delivering a 164.9% increase in adjusted proﬁt before tax since March 2014 to £9.07 million for the current year and a 44.7% increase in shareholders’ funds to £306.44 million. The combination of property and ﬁnancial progress has enabled us to achieve our objective of covering the cost of the dividend, which doubled on issue of the new shares, within three years. The cost of the dividend this year is over £9.00 million, compared with £3.90 million in 2013. In relative terms, this success is highlighted by a total shareholder return (TSR) of 54.2%, driven by a 45.5% increase in the 2018 Report and Financial Statements McKay Securities PLC 33 Lombard Street, EC3 58,000 sq ft Development completion: Summer 2018 4 McKay Securities PLC Report and Financial Statements 2018 share price since the capital raising, which is more than double the return delivered by the FTSE 350 Real Estate Index and the FTSE All Share Index over the same period. In summary, the combination of shareholder support and the management of the business has delivered outperformance, signiﬁcant shareholder value and leaves the Group in a strong position for the future. Moving on to the year under review, we have been able to contribute to the progress above with the further release of reversionary potential built up in the portfolio since 2014 with a record year of lettings for the Group. Twenty six open market lettings were completed at or above March 2017 ERV, unlocking combined contracted income of £7.00 million pa. A signiﬁcant proportion of this contracted income resulted from letting progress with the speculative ofﬁce schemes within our development programme. Clear focus on London and the South East remains core to the Group’s success and ensures we remain acutely aware of occupier needs in order to deliver relevant and ﬂexible space for today’s businesses, as evidenced through our three latest developments in Reading, Redhill and London which have all attracted high quality tenants with strong covenants. At 9 Greyfriars Road, Reading (39,620 sq ft), we achieved a single letting of the whole building, and at Prospero, Redhill (50,370 sq ft), we ended the period 91.8% let, having secured lettings to local and regional occupiers on a ﬂoor by ﬂoor basis. In March 2018, we were also very pleased to announce a pre-let of 30 Lombard Street, EC3 (58,000 sq ft) where the scheme and its globally recognised location resulted in the FTSE 100 wealth manager St. James’s Place plc committing to a 15 year lease, without break, for the entire building. The lease, which remains conditional on completion of the building this summer, will commence in January 2019 and makes the largest single contribution to the increase in contracted rent over the year. The completed schemes have created high quality assets, which enhance the income proﬁle and resilience of the portfolio. They were the main contributors to a 23.3% (like for like) increase in contracted rents which ended the year at £27.05 million pa (March 2017: £23.42 million pa). They were also the main contributors to the 5.1% increase in gross rents received and the resulting 5.4% increase in adjusted proﬁt before tax. We have also increased the reversionary potential of the portfolio with planning consent for a 38.5% increase in ﬂoorspace at Brunel Road, Theale, Reading. Development of a speculative 134,150 sq ft warehouse scheme is now under way and we expect to generate strong interest from logistics occupiers drawn to its strategic location just off the M4 motorway. The increase in potential rental value for this asset, combined with refurbishment and asset management elsewhere in the portfolio, resulted in the portfolio ERV increasing by 6.7% to £33.15 million, outperforming the 1.9% increase in the IPD index. The £6.10 million pa differential to contracted rents still provides a substantial 22.6% portfolio reversion for future returns. With the beneﬁt of valuation gains from the development projects and elsewhere in the portfolio, including a strong 19.5% contribution from our industrial assets, the independent portfolio valuation of £460.15 million delivered a 6.1% (£26.46 million) surplus, also outperforming the IPD index increase of 5.3%. Balance sheet gains were also generated with the sale of properties in Farnborough, Newbury and Egham. These disposals were in line with our policy of the targeted recycling of capital out of smaller and lower growth assets where we can capitalise on recent value add initiatives or, as in the case of the warehouse unit in Egham, aggressive market pricing. High levels of investor demand for warehouse assets resulted in a sale price reﬂecting a 4.2% yield for this unrefurbished unit, developed by the Group over forty years ago. Combined net sale proceeds of £26.80 million delivered a substantial 27.3% (£5.75 million) surplus over March 2017 book value. The headroom created from disposals provided us with the ability to cancel the remaining £33.00 million interest rate swap. The swap predated the global ﬁnancial crisis and its 5.17% coupon reﬂected the higher interest rate environment at that time. The cancellation cost to the Group was £13.35 million after a signiﬁcant contribution from the counterparty bank. This removes the ﬁnal legacy swap which will enhance earnings, further strengthen the balance sheet and improve the Group’s debt proﬁle. It also ﬁnally removes the negative value from the balance sheet. Valuation and disposal gains helped offset portfolio expenditure and ﬁnancing costs, maintaining a loan to value ratio of 31.9% (March 2017: 31.6%) and substantial headroom of £43.00 million to loan facilities, which we increased over the year by £15.00 million to £190.00 million. With supportive lenders, this provides us with robust ﬁnancing for the immediate future. With the beneﬁt of the positive activity over the period, shareholders’ funds increased by £35.65 million (13.2%) to £306.44 million, equivalent to IFRS NAV per share of 326 pence (March 2017: 289 pence). EPRA NAV per share increased by 6.3% to 322 pence (March 2017: 303 pence). The Board As reported at the end of the last ﬁnancial year, Nigel Aslin and Viscount Lifford both retired during the period. They were an integral part of the Group’s successful management through the last recession and the subsequent period of growth, and I would like to reiterate my thanks to them for their invaluable counsel and support over the years. Dividend The Board is recommending a 14.3% increase in the ﬁnal dividend to 7.2 pence per share (March 2017: 6.3 pence). In reaching this recommendation the Board has taken into account the anticipated earnings growth in future periods from recent lettings and the swap cancellation, in addition to the adjusted proﬁt before tax achieved for the year. The ﬁnal dividend will be paid as an ordinary dividend on 26th July 2018, and will take the total dividend for the year to 10.0 pence per share (2017: 9.0 pence), an increase of 11.1%. Future prospects This has been a year of major strategic progress for the Group, which will deliver further shareholder value as income from the pre-let at 30 Lombard Street, EC3 and other lettings make a full contribution. This progress also provides a strengthened platform to release the signiﬁcant reversionary potential that remains within the portfolio and to capitalise on the Group’s unique position in its core markets. Since the EU referendum there have been concerns regarding the potential for a more cautious occupier market. This remains a risk but, as we have shown, the markets that we operate in and know well continue to prove robust and our assets are well placed to deliver further shareholder value. Richard Grainger Chairman 18th May 2018 2018 Report and Financial Statements McKay Securities PLC 5 Portfolio Properties at 31st March 2018 Area sq. ft £15m and over – 60.9% of portfolio Brentford The Mille, 1000 Great West Road (ofﬁce) 96,700 Croydon Corinthian House, Dingwall Road (ofﬁce) 44,590 EC3* 30 Lombard Street (ofﬁce under construction) 58,000 EC3* Portsoken House, Minories (ofﬁce and ancillary retail) 49,570 SW1 1 Castle Lane (ofﬁce) 14,250 SW19 Wimbledon Gate, Worple Road (ofﬁce and ancillary retail) 58,690 Poyle McKay Trading Estate, Blackthorne Road (industrial) 73,955 Reading Great Brighams Mead, Vastern Road (ofﬁce) 84,840 Reading 9 Greyfriars Road (ofﬁce) 39,620 Redhill Prospero, London Road (ofﬁce) 50,370 £10m to £15m – 18.5% of portfolio Crawley Oakwood Trade Park, Gatwick Road (industrial) 52,400 Crawley Pegasus Place, Gatwick Road (ofﬁce) 50,790 EC2 66 Wilson Street (ofﬁce) 11,890 Maidenhead Switchback Ofﬁce Park, Gardner Road (ofﬁce) 37,155 Weybridge Sopwith Drive, Brooklands (industrial) 63,140 Woking 1 Crown Square (ofﬁce and ancillary retail) 50,735 Woking The Planets, Crown Square (leisure) 98,255 £5m to £10m – 17.6% of portfolio Bracknell Building 329, Doncastle Road (ofﬁce) 32,955 Farnborough Columbia House, 1 Apollo Rise (industrial) 40,755 Fleet One Fleet, Ancells Road (ofﬁce) 34,580 Folkestone 3 Acre Estate, Park Farm Road (industrial) 44,290 Leatherhead Ashcombe House, 5 The Crescent (ofﬁce) 17,450 SW1* Parkside, Knightsbridge (residential) 2,900 Reading 20/30 Greyfriars Road (ofﬁce) 33,345 Staines Mallard Court, Market Square (ofﬁce and ancillary 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 – 2.8% of portfolio Banbury Lower Cherwell Street Industrial Estate (industrial) 40,060 Folkestone 5 Acre Estate, Park Farm Road (industrial) 60,535 Newbury Strawberry Hill House, Bath Road (medical) 15,230 £2m and below – 0.2% of portfolio Chobham Castle Grove Road (land) — Staines 2 Clarence Street (ofﬁce) 3,440 Notes: Percentages based on the Group valuation at 31st March 2018. *Denotes leasehold properties 6 McKay Securities PLC Report and Financial Statements 2018 Banbury Maidenhead Poyle Brentford London Theale Reading Newbury Windsor Bracknell Staines Wimbledon Croydon Fleet Woking Farnborough Weybridge Leatherhead Redhill Crawley Folkestone Office Industrial Other 2018 Report and Financial Statements McKay Securities PLC 7 7 Business Objective, Strategy and Model I E V T C E J B O S S E N S U B I 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. Y G E T A R T S S S E N S U B I BUY SUSTAINABLE DEBT AND GEARING MANAGE REFURBISH DEVELOP MAXIMISE PORTFOLIO RETURNS SELL RECYCLE L E D O M S S E N S U B I 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. Active in-house management of assets to maximise property returns. Implementation of refurbishment, development and other property initiatives to enhance portfolio returns. Disposal of mature assets to recycle capital Flexible financing and strong banking relationships 8 McKay Securities PLC Report and Financial Statements 2018 McKay Securities PLC Report and Financial Statements 2018 Strategic Delivery 2014–2018 8 Acquisitions £74m invested 31% capital growth 41% rental growth LTV1 from 45% to 32% WACD2 from 6% to 4% EPRA NAV up 42% BUY 4 Refurbishments 4 Developments SUSTAINABLE DEBT AND GEARING MANAGE REFURBISH DEVELOP MAXIMISE PORTFOLIO RETURNS SELL RECYCLE Capex £61m Capital growth £31m (29%) ERV growth £6m (168%) 12 Disposals £68m net proceeds £15m realised gain3 22% surplus3 1LTV = Loan to value 2WACD = Weighted average cost of debt 2 3 3Over carrying value 2018 Report and Financial Statements McKay Securities PLC 2018 Report and Financial Statements McKay Securities PLC 9 9 Strategic Delivery 2014–2018 Acquisitions The Planets, Woking Ashcombe House, Leatherhead Crown Square, Woking The Mille, Brentford 9 Greyfriars Road, Reading Station Plaza, Theale Gainsborough House, Windsor Brunel Road, Theale Refurbishments 66 Wilson Street, London EC2 329 Bracknell Strawberry Hill House, Newbury Switchback Office Park, Maidenhead Developments 30 Lombard Street, London EC3 Prospero, Redhill 9 Greyfriars Road, Reading Brunel Road, Theale 2018 Report and Financial Statements McKay Securities PLC 10 Strategic Delivery 2014–2018 “The combination of property and ﬁnancial progress has enabled us to achieve our objective of covering the cost of the dividend, which doubled on issue of the new shares, within three years. The cost of the dividend this year is over £9.00 million, compared with £3.90 million in 2013” Gains since March 2014 TSR 54% EPRA NAV (per share) 42% IFRS NAV (per share) 58% Adjusted proﬁt before taxation 165% IFRS proﬁt before taxation 13% Contracted rent 67% Portfolio ERV 76% Portfolio value 81% Annual dividend – cost (2013-2018) 141% Annual dividend – pence (2013-2018) 18% 11 McKay Securities PLC Report and Financial Statements 2018 Strategic Delivery 2014–2018 Five Year Summary 2018 2017 2016 2015 2014 Financial measure Gross rental income (£’000) 21,844 20,790 20,159 17,617 14,683 Net rental income from investment properties (£’000) 20,453 19,871 17,664 14,922 12,787 Proﬁt before taxation (£’000) 43,443 17,594 53,160 33,282 38,290 Adjusted proﬁt before taxation (£’000) 9,067 8,605 7,943 5,791 3,422 Investment properties (£’000) 460,150 429,915 401,170 352,760 254,550 Loans and other borrowings (£’000) (144,598) (134,100) (113,701) (91,302) (37,266) Total equity (£’000) 306,440 270,792 261,223 215,495 189,235 Ordinary dividends per share (pence) 10.0 9.0 8.8 8.7 8.6 Earnings per share – basic (pence) 46.3 18.8 57.2 36.1 75.0 Earnings per share – adjusted basic (pence) 9.7 9.2 8.5 5.3 6.2 Net asset value per share (pence) 326 289 280 233 206 EPRA net asset value per share (pence)1 322 303 301 270 227 Interest cover 2.0 2.0 1.9 1.8 1.5 Loan to value 32 32 29 26 15 The above ﬁgures are extracted from previous accounts based on accounting standards effective at those dates. 1Excludes fair value of interest rate derivatives. Adjusted proﬁt before taxation (£’000) EPRA net asset value per share (pence) A 0 0 0 £ ’ 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 9,067 8,605 7,943 5,791 350 300 e c n e P 250 322p 301p 303p 270p 3,422 227p 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 12 McKay Securities PLC Report and Financial Statements 2018 Portsoken House London EC3 329 Bracknell 2018 Report and Financial Statements McKay Securities PLC 13 2 Property and Financial Review Overview McKay Securities remains the only Real Estate Investment Trust (REIT) exclusively focused on developing and investing solely in the established and proven ofﬁce and industrial real estate markets of London and the South East. As at 31st March 2018, the Group owned 31 investment assets and 2 assets in development, with a combined value of £460.2 million (March 2017: 36 assets / £429.9 m). By value, 56.5% of the portfolio is in South East ofﬁces, 23.5% in London ofﬁces and 15.3% in South East industrial with a range of other sectors making up 4.7%. This year heralded great success for the Group. By the end of the period we had let 9 Greyfriars Road, Reading (39,620 sq ft) to a single tenant, 91.8% of Prospero, Redhill (50,370 sq ft) on a multi-let basis and pre-let the whole of 30 Lombard Street, EC3 (58,000 sq ft) conditional on completing the building. These lettings contributed to a 23.3% increase in contracted rents (on a like for like basis) to £27.05 million pa (March 2017: £23.42 million pa) and a total return of 12.3% compared to the IPD benchmark of 10.5%. The entire portfolio is now 89.4% let (March 2017:77.3%) and, excluding developments, is 92.6% let (March 2017: 93.3%). Through the development lettings our weighted average lease length to expiry has now increased to 6.9 years (March 2017: 5.2 years) and to 5.8 years to tenant’s ﬁrst break (March 2017: 4.3 years). We have continued to capitalise on the supply constraints across all our markets, especially in the South East, and have delivered the right product in the right locations, generating ERV growth of 6.7% compared to IPD All Property of 1.9%. During the period we achieved 26 open market lettings totalling £7.0 million pa, 1.9% ahead of ERV. As a result, our South East ofﬁce void rate has reduced from 19.2% to 7.9% and we continue to refurbish and improve our remaining portfolio voids wherever possible. The Group’s substantial rental reversion has been established predominantly through our ambitious development programme referred to above, which is now realising shareholder value. We remain well placed to beneﬁt from supply constrained markets, with an enviable logistics development at Theale now commenced, and 22.6% reversionary potential portfolio to an ERV of £33.14 million pa. Occupiers are focussed more than ever on the environment, health and wellbeing. Catering to these demands, sustainability is embedded in everything we do. Five years ago we launched our sustainability strategy and, with our external consultants, we continue to set ambitious short and long term targets centred on three core areas: creating sustainable buildings, managing sustainable buildings and engaging with stakeholders. Over the period we successfully achieved 90.0% of those targets and maintained our GRESB ‘Green Star’ status for the second year running. We continue to meet our strict criteria of developing buildings to a minimum of BREEAM Excellent and EPC B rating and we have reduced our carbon emissions by 14.0% year on year. Market review Our London and South East markets have proved resilient thanks to an historic undersupply of high quality ofﬁce space, buoyed by consistent levels of demand. The pace of rental growth has levelled out, but shortfalls in certain centres provide the scope for further growth. Rent free incentives are stabilising after the 2017 spike in development completions, but the steady levels of take up highlight that ﬁt for purpose buildings of the right size and in the right locations are letting. Real estate as an asset class continues to beneﬁt from the low interest rate environment as investors search for income, particularly in the globally established London and the South East markets. Overseas and institutional investors have moved down the risk curve over the year, re-introducing a more apparent value gap between prime and secondary assets. In 2017, central London investment totalled £17.0 billion (2016: £12.8 billion) which was only marginally below the record year of 2013, which saw turnover peak at £19.6 billion (source: Knight Frank) while the South East recorded its second highest year on record of £4.00 billion (2016: £2.80 billion) (source: BNP). High quality ofﬁce supply remains very constrained across all our markets. At the end of the period, the vacancy rate S Location (by value) Years to expiry (exc breaks) T South East Offices London Offices South East Industrial Other 5% 15% Total £’million 460 % 57 23 15 5 Year 0-3 3-5 5-10 10+ 23% 57% £m 7.8 6.0 7.4 5.8 27.0 5-10 10+ Contracted rent £’million 27.0 0–3 3-5 14 McKay Securities PLC Report and Financial Statements 2018 gap has also increased from a 20.0% discount to a 33.0% discount over the same period. The appeal of the South East will increase further with the Elizabeth Line (Crossrail) service to London and the quick access to Heathrow which the Western Rail Access to Heathrow (WRATH) will deliver. Supply in the industrial and logistics market (15.3% of the portfolio) fell for a seventh successive year, leaving the availability rate at a new all time low of 4.4%. Take up, conversely, reached a record 9.80 million sq ft in the ﬁrst quarter of 2018 and remains high to meet the exponential growth of e-commerce and the resultant need for last mile delivery to urban centres. This supply and demand imbalance supports the commencement of our speculative warehouse development at Theale, referred to below. Acquisitions and disposals We continue to monitor the market closely and assess potential development acquisitions and investment opportunities where we can add value. Having invested heavily in prior years, we directed our capital resources over the year primarily into existing assets rather than compete in a relatively supply starved investment market. However, we are beginning to see the gap in pricing widen between prime and secondary assets which should present value add opportunities, provided stock is selected wisely. We made three disposals in the period, realising a combined surplus over March 2017 book value of 27.3% (£5.75 million). The most notable sale was in Egham, where we capitalised on a very strong industrial market having added value with a recent lease extension, by disposing of Runnymede Focus - a 90,890 sq ft warehouse which was developed by the Group in 1974. It was let for a further seven years at a rent of £0.89 million pa and the sale for £19.91 million, representing a yield of 4.2%, realised a surplus over March 2017 book value of 35.3% (£5.12 million). Two other sales consisted of the previously reported Pinehurst Park, Farnborough and Albion House in Newbury, which together delivered the remaining £0.63 million of surplus. of new and Grade A refurbished stock in London was just 2.0%, compared to the long term average of 2.3%. At the same time, the South East equivalent vacancy rate was 6.1%, signiﬁcantly below the long term average of 7.8%. The volume of South East ofﬁce lettings has remained steady post the EU referendum and despite wider economic concerns. Take up for 2017 was 2.00 million sq ft, equalling 2016 and in line with the 10 year average of 1.99 million sq ft. Current active occupier demand is also being sustained; at the end of Q1 2018, including space under offer, this stood at 3.59 million sq ft which compares to the long term average of 3.90 million sq ft. Set against this environment, and compounding the constrained supply, the speculative development pipeline is historically thin with just 0.48 million sq ft and 0.45 million sq ft of new development due to complete in 2018 and 2019 respectively, which compares to a 10 year average of 0.71 million sq ft pa. While there was a resurgence of new buildings in the South East in 2016 and 2017 in response to the ﬁve year undersupply following the ﬁnancial crisis, many of these were larger schemes which have proved incompatible with market demand for smaller buildings. Just four buildings make up 44.0% of the 1.79 million sq ft spike in development completions in 2017 and the remaining vacancy within these buildings creates a misleading supply picture in certain locations. Building obsolescence is an increasingly important market driver with over 50% of buildings within the IPD index at least 25 years old. Tenants therefore have less choice for efﬁcient new ofﬁce space, and large buildings are not satisfying the pattern of demand and take up. In 2017, 82.6% of the South East ofﬁce letting transactions were in the 5,000 – 20,000 sq ft size band which we have beneﬁted from given our portfolio average of 6,700 sq ft per tenant. Total occupational costs in prime West End of London locations are now circa £175.00 psf compared to central Reading of circa £60.00 psf. The rental discount has increased by 25.0% since 2007 and the cost of housing Tenant Net Worth £’m >35 15–35 7–15 <7 Source: Dun & Bradstreet % 31 10 12 47 47% 31% Contracted rent £’million 27.0 10% 12% 2018 Report and Financial Statements McKay Securities PLC 15 5 Property and Financial Review continued 16 McKay Securities PLC Report and Financial Statements 2018 Development programme Over the period development and refurbishment capital expenditure totalled £23.31 million. In Reading town centre, two minutes walk from the station, 9 Greyfriars Road (39,620 sq ft) was completed in mid 2016. In July 2017 we let the whole of the building to Spaces, guaranteed by Regus Holdings plc on a 15 year lease (10 year tenant break). The headline rent of £1.21 million pa equated to £31.00 per sq ft, which was 3.3% ahead of March 2017 ERV. This letting to a major new co-working tenant was the third largest letting in the Thames Valley last year and was a strong endorsement for both the location and the product, providing a valuation surplus for the period of 37.6% (£5.40 million). In Redhill, we completed the only new ofﬁce development in the last eleven years at Prospero (50,370 sq ft) in late 2016. Since then, we have achieved record rents for the town (£30.00 – £31.00 per sq ft) and all four tenants (91.8% of the building with a combined contractual rent of £1.37 million pa), have committed to 10 years term certain. This is rare in a market now characterised by tenant ﬂexibility and shorter leases, and shows great commitment to the quality and sustainability of the building by the new tenants. The only remaining vacant space is 4,112 sq ft on part of the ﬁrst ﬂoor which is being marketed and generating good interest. In the heart of the City of London, we remain on programme to deliver a brand new Grade A ofﬁce development at 30 Lombard Street, EC3 (58,000 sq ft) in the summer. Ahead of this we have successfully exchanged contracts to pre-let the entire building to the FTSE 100 wealth manager, St. James’s Place plc who will take occupation in January 2019. The lease, which remains conditional on practical completion, is for a term of 15 years at a gross rent of £3.76 million pa (£3.38 million pa net of ground rent), marginally ahead of ERV. During the period we added to our development pipeline and topped up the reversionary potential of the portfolio by securing vacant possession and planning approval for a new 134,150 sq ft logistics warehouse at Junction 12 of the M4 at Theale, on the south side of Reading. Demolition of the former chilled warehouse unit has already commenced, and the new building, which will increase the ﬂoor area on the site by 38.5%, is programmed to complete in Spring 2019. Demand for well speciﬁed high quality industrial and logistics units with good motorway access, particularly to London, remains strong, and marketing is already generating positive interest. Asset management In our London and South East ofﬁce markets, as well as the delivery of development lettings success, we also remain focused on the day to day rigorous asset management and refurbishment of our assets. At the Mille (96,700 sq ft) in Brentford we continue to refurbish and improve the building and its environment. The works encouraged UBC, an existing serviced ofﬁce Brunel Road (CGI) Theale 2018 Report and Financial Statements McKay Securities PLC 17 Property and Financial Review continued tenant to commit to the two lower ﬂoors (16,624 sq ft) on 10 year leases without break at £0.33 million pa. These leases replaced legacy management proﬁt share agreements which provided little return. An example of the beneﬁt of our focus on London and the South East was Benecol, an existing tenant at Switchback, Maidenhead, who needed to relocate closer to London. To accommodate this we accepted a surrender of their existing lease of a ﬂoor at Switchback and were able simultaneously to grant them a new lease at the Mille, thereby retaining them in the portfolio. These lettings contributed to a total of 34.0% of the ﬂoor space at the Mille being successfully let or having leases renewed in the last 12 months, creating a valuation gain over the period of 12.2%. Croydon, with its excellent transport links to central London, is still proving very popular to occupiers as evidenced at Corinthian House (44,590 sq ft) which sits directly opposite East Croydon station. Our active asset management has continued to drive ERV growth of 16.8% over the period assisted by re-letting the 4th ﬂoor (4,497 sq ft) on expiry with no void, at a 47.4% rental increase to £28.00 per sq ft. We also took a surrender of the dated 7th ﬂoor (at £17.30 per sq ft) to enable its refurbishment and granted that tenant a new 10 year lease of the recently refurbished part 8th ﬂoor at £30.00 per sq ft. Our average building size is 43,500 sq ft and 11 out of 16 (68.8%) of our South East buildings are multi let. We recognise that smaller tenants value ﬂexibility, personality of building and co-working break out areas which is exactly what we have been providing at both 329 Bracknell and One Crown Square, Woking for many years now. 15.3% of the portfolio by value is South East industrial assets, both single let larger units and popular trade counter type properties. These assets have all continued to perform well in terms of rental and capital growth, enhanced by refurbishment and lease renewals where appropriate. At 3 Acre (44,290 sq ft) in Folkestone we upgraded the estate while simultaneously renewing and extending 40.0% of the tenants’ leases, providing a valuation gain of 13.3% over the period. At Oakwood Trade Park (52,400 sq ft) in Crawley which contains 16 fully let trade counter units, we accepted a surrender from an expanding tenant and simultaneously re-let the unit to a new occupier on a longer lease at an increased record rent for the estate of £15.00 psf. As a result, the ERV increased over the period by 15.2% and together with subsequent lease renewals, drove a valuation gain of 36.0%. At Poyle, adjacent to Terminal 5 of Heathrow Airport, the McKay Trading Estate (73,955 sq ft) continues to represent the ideal stock for that market. This fully let estate achieved a 27.3% growth in ERV and a corresponding valuation gain of 22.1%. The Group manages all assets in house resulting in strong tenant relationships and extremely thorough building knowledge. This proves advantageous when managing lease events, and at lease break and expiry, 25 out of 42 tenants were retained at contracted rents totalling £1.11 million pa. Whilst the retention rate of 59.5% was lower over the period (March 2017: 76.6%) in a number of instances, we chose to end leases to facilitate refurbishment work and the achievement of higher rents on the open market. Combined rent for retained tenants was 7.5% ahead of rent prior to the lease events. At One Crown Square (50,735 sq ft) we continue to upgrade and provide managed suites with associated co-working areas and communal kitchens. We concluded eight open market lettings in the period at a combined rent of £0.17 million pa which contributed to a 12.4% increase in ERV compared to the South East IPD rental growth index of 2.4%. Valuation Knight Frank was appointed as Group Valuer after the March 2017 year end valuation, replacing Mellersh & Harding who had provided many years of exceptional service. Knight Frank’s extensive strength across our markets makes them well placed to assist with the increasing size of the portfolio and to reafﬁrm the Yields and occupancy £million Occupancy Occupancy pa Yield2 by ﬂoor area by rental value Contracted rental income1 27.1 5.5% 87% 89% Reversions 2.5 Void properties 3.6 13% 11% Portfolio reversion 6.1 Total portfolio 33.2 6.8% 100% 100% Notes: 1 Contracted rental income at 31st March 2018, less ground rent 2 Yield on portfolio valuation at 31st March 2018 with notional purchasers costs (6.75%) added 18 McKay Securities PLC Report and Financial Statements 2018 value of the Group’s assets. They are also an accepted valuer by our lending banks, which will reduce the cost of valuations for loan purposes. Knight Frank’s independent valuation of the Group’s assets totalled £460.15 million as at 31st March 2018 (March 2017: £429.92 m). This showed a surplus of £26.46 million (6.1%), outperforming IPD All Property capital growth of 5.3% over the same period, and a surplus of £17.78 million (4.7%) excluding developments. The initial yield was 4.1% (March 2017: 4.6%) rising to a topped up yield of 5.6% at the expiry of rent free periods (March 2017: 5.1%), the equivalent yield was 5.8% (March 2017: 6.4%) and the reversionary yield at ERV was 6.8% (March 2017: 7.1%). These year on year movements have been driven by the strong development lettings which are still in rent free periods, generating a lower initial yield but a higher topped up yield. As expected the reversionary yield has reduced as the development lettings have added value but remains signiﬁcant, driven by the new development at Theale Logistics Park as well as the investment portfolio voids and rental reversion. The quality of buildings and locations in the portfolio was demonstrated by the rental growth outperformance against the IPD benchmark. Excluding developments, our South East ofﬁce assets achieved rental growth of 4.0% (IPD: 2.4%), with London assets at 5.2% (IPD: 0.3%). Turning to capital growth, again excluding developments, our South East ofﬁces were marginally lower than IPD at 3.0% versus 3.9% while our London assets achieved -0.5% capital growth versus IPD of 3.6%. The industrial sector is widely accepted by the market as the strongest performer with IPD capital growth of 18.5% and rental growth of 6.3%. Our seven industrial assets outperformed both these measures with capital growth of 19.5% and rental growth of 11.4%. This excludes Runnymede Focus, Egham which achieved a sale price at the end of the period 35.3% ahead of March 2017 book value. Total shareholder return Total Shareholder Return (TSR) for the year to 31st March 2018 was 36.2%. This compares to a FTSE 350 Real Estate Index return of 7.9% and a FTSE All Share return of 1.2% for the same period. Recent increases in share price reverse the decline in the prior year resulting from the extreme movement in our share price following the EU referendum vote. Over a three year period the Group has delivered a 23.5% return compared to a 0.7% for the FTSE 350 Real Estate and 18.6% for the FTSE All Share. Key performance indicators: 2018 2017 2016 2015 2014 Portfolio Capital Return (capital) (%)1 7.4 1.7 11.4 13.8 10.2 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) (%) 12.3 6.8 15.9 18.4 15.6 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 9.4 3.6 14.7 22.7 10.1 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 36.2 (8.6) (0.8) 24.8 54.7 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. 2018 Report and Financial Statements McKay Securities PLC 19 Property and Financial Review continued 20 McKay Securities PLC Report and Financial Statements 2018 Dividends The ﬁnal dividend of 7.2 pence per share (March 2017: 6.3 pps) will be paid on 26th July 2018 to those on the register on 1st June 2018. With the interim dividend of 2.8 pence per share, this takes the total dividend for the year to 10.0 pence per share, an increase of 11.1% on the previous year. As a REIT, the Group is required to distribute at least 90.0% 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 20.0%. Over the period, the cost of cancelling interest rate hedging instruments 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 £0.46 million (5.4%) to £9.07 million (March 2017: £8.60 million) due primarily to a £1.05 million increase in property revenues. Gross rents beneﬁtted from letting progress at the Group’s developments at 9 Greyfriars Road, Reading and Prospero, Redhill, which will add further to subsequent periods, which will be further enhanced by the pre-let at 30 Lombard Street, EC3. In addition, recent lettings elsewhere in the portfolio including at One Crown Square, Woking and Castle Lane, London added to gross rents. These positives were offset to a degree by the loss of income at Pegasus Place, Crawley as a result of a tenant insolvency. Proﬁt before tax (IFRS) totalled £43.44 million (March 2017: £17.59 million). This included the unrealised surplus on valuation (including SIC15 adjustment) for the period of £25.07 million and the positive impact of the swap cancellation of £3.56 million. Administration costs increased to £6.31 million (March 2017: £5.79 million). This 8.8% increase was primarily due to staff salaries rising in line with inﬂation and an increase in bonus payable. The interest cost for the year of £6.74 million was similar to the prior year (March 2017: £6.34 million). This cost will reduce on a like for like basis going forward as a result of the cancellation of the Group’s remaining £33.00 million legacy interest rate swap, carrying a coupon of 5.17%. The swap was cancelled on 28th March 2018 at a net cost to the Group of £13.35 million, with the full cost of cancellation offset by a lender contribution. Interest capitalised against projects during the year was comparable to the prior year at £1.66 million (March 2017: £1.82 million) but will reduce as the development programme matures. The Group’s weighted average cost of debt reduced to 4.06% prior to amortisation and ﬁnance lease interest (March 2017: 4.42%). The Group does not hedge account its interest rate derivatives and therefore includes the movement in fair value in the Consolidated Statement of Comprehensive Income. Corinthian House Croydon 2018 Report and Financial Statements McKay Securities PLC 21 Property and Financial Review continued One Crown Square Woking Balance sheet Shareholders’ funds increased from £270.08 million to £306.44 million over the period, principally due to the £26.46 million valuation surplus (£25.07 million excluding SIC15 adjustment). 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 2017: nil). EPRA NAV per share increased by 6.3% over the period to 322 pence (March 2017: 303 pence). NNNAV per share increased by 13.0% to 322 pence (March 2017: 285 pence) and IFRS NAV per share increased by 12.8% to 326 pence (March 2017: 289 pence). The cancellation of the remaining interest rate swap results in the EPRA and EPRA NNNAV per share now being equal at 322 pence. The Group currently beneﬁts from £190.00 million (March 2017: £175.00 million) of banking facilities, having reﬁnanced the ﬁnal of its four facilities in August 2017 and increased the existing Aviva loan by a further £10.00 million in March 2018. Drawn debt at the end of the period was £147.00 million (March 2017: £136.00 million). The gearing ratio of drawn debt to portfolio value (LTV) as at 31st March 2018 was 31.9% (March 2017: 31.6%). The ratio of aggregate net borrowings to tangible net worth was 48.0% (March 2017: 47.3%). Both ratios have remained constant, with capital expenditure of £23.30 million on the portfolio and the cost of the cancellation of the swap being offset by asset sales above book value and the valuation surplus achieved during the year. Net cash inﬂow from operating activities was £7.50 million (March 2017: inﬂow £16.53 million) and interest cover based on adjusted proﬁt plus ﬁnance costs as a ratio to ﬁnance costs was 1.98x (March 2017: 1.96x). Defined Benefit Pension Scheme Under the application of accounting standard IAS19, the Group’s pension deﬁcit has reduced over the period from £2.28 million to £2.16 million. The decrease in the deﬁcit is mainly due to an increase in the discount rate from 2.3% to 2.4%. As a result of the triennial valuation for the period to 31st March 2017, which showed a funding level of 87.5% on a continuing valuation basis, the Group’s annual contribution to the Scheme remains at £0.24 million. The Scheme was closed to new entrants in the 1980’s, and now consists of six pensioners and no active members. Financial risks The ﬁnancial risks are documented in the principal risks and uncertainty section of the Strategic Report on pages 24 to 27. Signed on behalf of the Board of Directors. S. Perkins G. Salmon 18th May 2018 22 McKay Securities PLC Report and Financial Statements 2018 2018 Report and Financial Statements McKay Securities PLC 23 Principal Risks and Uncertainties RISK GOVERNANCE STRUCTURE THE BOARD The Board develops the Group’s strategic approach to risk and maintains overall responsibility for monitoring the effectiveness of the Group’s risk management and internal control systems. THE AUDIT & RISK COMMITTEE Membership: Independent non-executive Directors. The Audit & Risk Committee, on behalf of the Board, reviews the effectiveness of the Group’s internal financial control and internal control risk management systems. THE RISK SUB-COMMITTEE Membership: The executive Directors The Risk Sub-committee maintains the Group’s Risk Register, designs and maintains the Group’s financial control and internal risk management systems and advises on future risk exposure 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 2018 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 on pages 25 to 27 along with an explanation of how these have been managed. 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. 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. 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 2023, subject to any signiﬁcant events beyond its control. 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. During the year the Group successfully renegotiated and increased its facilities with two of its four long term lenders and cancelled its remaining interest rate swap. For more detailed information please see page 87. 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. 24 McKay Securities PLC Report and Financial Statements 2018 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. 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. FINANCIAL Interest rate rises Leading to lower profits. The Board’s policy is to borrow at both fixed and floating rates of interest. 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 The triggering of Article 50 and ongoing Brexit negotiations continue to maintain a climate of uncertainty that could impact on corporate decision making and increased sector risk. The Group is currently fixed at £65m out of £147m of debt as at 31st March 2018. The Group’s facilities of £190m are in line with current business plan. The Group re-negotiated one of its four facilities in August 2017 and a second in March 2018. 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. BEPs (Base erosion and profit shifting). 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. Management kept up to date on requirements by tax advisors, including need to submit election for exemption. Throughout the period the Group complied with the regulations. Election made in March 2018. 2018 Report and Financial Statements McKay Securities PLC 25 Principal Risks and Uncertainties continued PRINCIPAL RISKS AND THEIR IMPACT HOW RISK IS MANAGED RISK EXPOSURE CHANGE IN THE YEAR PROPERTY Portfolio strategy Strategy at odds with economic conditions and occupier demand. 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. The Board continually reviews its strategy against its objectives, taking into consideration the economic climate, the property market cycle and occupier demand. Market conditions remain generally unchanged. 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. The Board is regularly presented with details of capital expenditure and progress on developments, including appraisals and sensitivity analysis. Regular appraisals of developments and refurbishments are carried out. Contractors are assessed for financial stability and historic performance. Design and build contracts are issued where appropriate, others are fully designed prior to commencement of works. The Group continually monitors planning and regulatory reform and takes advice from external advisors and industry specialists. 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. With one significant development due for completion in Summer 2018 and another in the development pipeline the Group’s risk exposure remains constant. Occupier demand in smaller lot sizes. Supply constraints in the Group’s markets have contributed to improved rental values. Reduction in capital values Exposure to volatility of capital 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. 26 McKay Securities PLC Report and Financial Statements 2018 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. Legal and regulatory risk Non compliance with regulations and laws resulting in planning and project delays, fines and loss of reputation. The Group employs experienced staff and external advisors to provide guidance on regulatory requirements. The Board approves and adopts the Group’s policies for compliance with current legislation. Continued compliance with regulation. 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 and 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 to implement 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. Terrorism Terrorist attack impacting a building from the Group’s portfolio resulting in loss of income or building costs. Terrorist attack affecting employees. Implementation of the Group’s Business Continuity Plan. Cyber fraud insurance is in place. All buildings have insurance to cover a terrorist incident and loss of rent. All three Executive Directors generally avoid travelling together. 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 2018 Report and Financial Statements McKay Securities PLC 27 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 investors and occupiers, ensuring it maintains compliance with legislation and meets best practice asset management and development standards. During the ﬁnancial year ended 31st March 2018, the Group continued to make progress with its ambitious sustainability strategy. This is focused on delivering across three areas: managing sustainable buildings; creating sustainable buildings; and engaging stakeholders. The strategy addresses the most material risks and opportunities associated with our core business activities and targets are set at the beginning of the ﬁnancial year across all three focus areas. The Group’s sustainability advisor, JLL, provides ongoing support to implement the strategy and reviews progress made against the targets on a quarterly basis. 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 Five 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) improved the environmental performance of its operational portfolio, achieving a 14% year-on-year reduction in carbon emissions, 7% reductions in electricity and gas consumptions, and a 35% 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 35.4% in 2017/18;2 (cid:2) continued to implement energy and water efﬁciency measures, prioritising improvement works at highest consuming properties and those with lower EPC ratings; (cid:2) Piloted a post-occupancy assessment for Prospero, Redhill, our high quality ofﬁce development completed in 2016, to gain an understanding of the health and wellbeing performance of the building in operation; (cid:2) ensured that the design of the Aurum ofﬁce development at 30 Lombard Street, London, is on track to achieve a BREEAM ‘Excellent’ certiﬁcation and minimum EPC ‘B’ rating; (cid:2) updated the Group’s Responsible Procurement Policy and pre-qualiﬁcation questionnaires to ensure that suppliers are best placed to support the Group in reducing its environmental impacts and amplifying its socio-economic beneﬁts; (cid:2) maintained GRESB ‘Green Star’ status for the second year running. During the year, the Group successfully achieved 90% of its sustainability targets (5% are still in progress and 5% not achieved). Details of actions taken to meet targets are set out under each focus area below. In keeping with its commitment to continually improve its sustainability performance, the Group has set 19 targets for the ﬁnancial year ending on 31st March 2019 (see page 33), and, furthermore, it will include sustainability factors in the annual performance targets of its employees. The Group also plans to review and refresh its sustainability strategy over of the course of the coming year, to ensure that it keeps apace with evolving market norms; technological developments; government policy and stakeholder requirements in this area. 1Like-for-like analysis takes into account heating degree days in the gas consumption trend calculations, and incorporates vacancy rates across the portfolio. Calendar year 2017 consumption is taken as an approximation of the ﬁnancial year 2017/18 consumption. The water like-for-like analysis has excluded a very large proportion of the portfolio due to missing data, and should be viewed with signiﬁcant caution. 2Calendar year 2017 recycling rate is taken as an approximation of the ﬁnancial year 2017/18 rate. 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 active asset management approach forms the core of its day-to-day activities and is the area in which the Group has identiﬁed the most signiﬁcant opportunities to enhance asset value by improving environmental performance. Energy and water targets – year to March 2018 Status Achieve a 4% reduction in like-for-like landlord Achieved controlled electricity consumption by the end of March 2018 against a 2016/17 baseline Achieve a 4% reduction in like-for-like landlord Achieved controlled gas consumption (adjusted for heating degree days) by the end of March 2018 against a 2016/17 baseline Achieve a 4% reduction in like-for-like landlord Achieved controlled carbon emissions by the end of March 2018 against a 2016/17 baseline Achieve a 3% reduction in like-for-like landlord Achieved controlled water consumption by the end of March 2018 against a 2016/17 baseline Continue to implement energy and water Achieved efﬁciency measures at the Group’s major energy and water consuming assets 28 McKay Securities PLC Report and Financial Statements 2018 Energy During the year, the Group’s landlord-procured gas and electricity consumptions both decreased by 7% on a like-for-like basis. This is due to the fact that several key improvements that were implemented across our highest consuming assets towards the end of 2016/17 have now had time to exert their impact. These reductions in energy consumption achieved at these assets have allowed the Group to reduce its like-for-like energy consumption by 7%, enabling it to avoid an estimated £56,000 in running costs. This, combined with the ongoing decarbonisation of the grid, has allowed the Group to reduce its carbon emissions by 14% during the year on a like-for-like basis. Water Absolute water consumption decreased by 17% during the year, whilst on a like-for-like basis there was a 35% reduction, with corresponding cost savings of around £12,500. Nonetheless it should be noted that water data from four large water-consuming properties had to be excluded from the like-for-like analysis due to missing data. The Group has targeted efﬁciency projects – such as the installation of low-ﬂow taps and dual-ﬂush WCs – at those assets with the highest water consumption and therefore expects to see performance improving at these properties as and when accurate data is obtained. Environmental management programme The Group has continued to develop and implement resource reduction strategies for ﬁve of its highest consuming assets (which together accounted for over 80% of the total absolute energy use during the year). The energy consumption proﬁle of the ﬁve assets is shown below. 3Estimated based on a ﬂat electricity rate of 0.105 £/kWh, and a ﬂat natural gas rate of 0.035 £/kWh. Assets within the Environmental Management Programme: Proportion of Total Energy Consumption (year to March 2018) (cid:2) replacement of the traditional wet heating system with a more efﬁcient air conditioning system as part of ongoing refurbishment at Portsoken House; and (cid:2) continued installation of new controls to all AC units on refurbished ﬂoors at the Mille; Only one of the assets in the Environmental Management Programme saw energy consumption increase over the period January-December 2017, and this caused by efforts to improve occupier wellbeing following tenant engagement. Cumulatively the ﬁve assets reduced their consumption by 10.5%. Further measures have been identiﬁed at these and other assets across the portfolio and are awaiting technical and ﬁnancial appraisal. 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 £53,887 2018 £54,000 (estimated) Renewable energy Renewable energy target – year to March 2018 Status Explore the feasibility of incorporating on-site Achieved renewable energy at a minimum of one of McKay Securities’ operational assets The Group assessed the viability of installing solar photovoltaic panels (PV) at 17 sites during the year, identifying ﬁve assets which qualify for more detailed feasibility studies based on site characteristics; proposed PV area; energy and carbon emissions reductions; capital costs and ROI. The Mille sq ft 96,700 20% One Crown Square 50,735 Portsoken House Corinthian House Mallard Court 49,570 44,735 21,860 Other managed assets in the like-for-like analysis Total consumption: 10,180,995 kWh 4% 7% 12% 21% During the year, the Group continued to research and explore new and innovative technology that could help to reduce energy consumption at the highest consuming assets. For example, a feasibility assessment was launched for a technology that could help to reduce HVAC energy use by up to 20%. It is anticipated that if the results of the feasibility studies are positive, the pilot project will be undertaken in the second half of 2018. In addition to this, the following were also undertaken: (cid:2) LED lighting upgrades to car parking areas at Pegasus Place, Mallard Court, Ancells Business Park, Switchback and the McKay Trading Estate in Poyle; Waste 36% Waste targets – year to March 2018 Status 1 Maintain 100% of operational waste diverted Achieved from landﬁll for the landlord managed portfolio Increase the recycling rate across all properties Not for which the Group has management control to achieved 44% by 31st March 2018 Of the 167 tonnes of waste generated by the Group during the year, 100% was diverted from landﬁll, meaning that the Group has maintained this commitment for the third consecutive year. However, the Group has not been able to meet its target for recycling; 59 tonnes were recycled, representing 35.4% of total waste. However, the Group has engaged with tenants on the issue of waste, and has introduced food waste recycling at a number of properties during the year. The Group remains determined to align its recycling rates with the Real Estate Environmental Benchmark (REEB) by achieving a 52% recycling rate by 2020. In the coming year the Group will continue to run a tenant engagement campaign to increase recycling rates and will conduct a waste audit to identify further recycling opportunities. 4January-March 2018 data is estimated. 2018 Report and Financial Statements McKay Securities PLC 29 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: Green buildings target – year to March 2018 Status Ensure all new developments and major Achieved refurbishments achieve minimum BREEAM Excellent and an EPC rating of at least B Continue to monitor the compliance of Achieved contractors with development sustainability requirements and ensure that sustainability is consistently integrated as part of the tendering process Include information about assets’ sustainability Achieved and health and wellbeing features within marketing materials, highlighting their beneﬁts for occupiers Pilot a post-occupancy sustainability assessment Achieved of either 9 Greyfriars, Reading or Prospero, Redhill with one tenant who has been in place for a minimum of six months The Group has continued to monitor the compliance of its contractors with its development sustainability requirements, and this has helped it reach its ambitious target of achieving BREEAM ‘Excellent’ and EPC ‘B’ as a minimum for its new developments. The development of Aurum, 30 Lombard Street is on course to achieve BREEAM ‘Excellent’, and the Group’s next planned development, an industrial project, is also being designed to achieve this level of performance. The Group has showcased the high sustainability standards achieved at recently completed projects Prospero, Redhill, and 9 Greyfriars Road, Reading, allowing it to attract high-calibre occupants to these spaces. Greyfriars is now fully let, whilst Prospero is 91% let; Aurum, 30 Lombard Street, which is due for practical completion in summer 2018, has been fully pre-let. Sustainability continued EPC risk EPC risk target – year to March 2018 Status Continue to review EPC risk associated with Achieved new purchases and identify improvement works for any assets with an E rating or lower. Also consider D rated assets. Over the last few years the Group has put signiﬁcant effort into understanding and mitigating its portfolio EPC risk. The minimum energy efﬁciency standard (MEES), which originates from the Energy Act 2011, came into force on 1st April 2018, making it unlawful to let any properties with an EPC rating of F or G. Having taken a proactive approach to managing EPC risk, less than 1% of the assets within the Group’s portfolio (by ERV) are currently F or G rated. McKay Securities Adjusted Sites EPC Portfolio Breakdown by ERV No EPC held A B C D E F G % 4 5 8 20 43 19 0.4 0.4 19% 43% 0.4% 0.4% 5% 8% 20% Sustainable procurement Sustainable procurement target – year to March 2018 Status Conduct a review of major operational Achieved material spend categories and investigate establishing minimum sustainability procurement requirements based on the results Suppliers and contractors play a fundamental role in delivering the Group’s sustainability vision and provide a way to amplify its positive impact beyond its direct operations. This year, the Group conducted an assessment of its top spend categories, and used the results to update its Responsible Procurement Policy and pre-qualiﬁcation questionnaires with more ambitious requirements on aspects such as the “living wage”; the environmental credentials of key products purchased and the implementation of Environmental Management Systems (EMS). Among other changes, the Group has committed to auditing the key suppliers in the top ﬁve operational procurement categories to ensure compliance with the policy. The policy can be found in the Sustainability section of the Group website. 30 McKay Securities PLC Report and Financial Statements 2018 Case study: post-occupancy assessment of Prospero, Redhill In a bid to better understand the extent to which design intent is reﬂected in occupiers’ actual experience, the Group carried out a post-occupancy assessment of Prospero, its completed ofﬁce development in Redhill. Based on the World Green Building Council (World GBC)’s Health, Wellbeing & Productivity Framework, the assessment involved a technical survey of the physical characteristics of the ofﬁce using indoor environmental quality (IEQ) measurements and an occupier perception survey to gauge people’s experience of working in the building. Overall the ﬁndings were very positive: (cid:2) 72% of respondents believe that the building provides a space that is conducive to a healthy and productive work environment, and (cid:2) 78% of respondents believe that the building promotes sustainability and they have adopted environmentally beneﬁcial behaviours as a result. Two issues relating to the open plan areas, noise and temperature ﬂuctuations, were identiﬁed for further attention. The Group is seeking ways to address these and will take on board the ﬁndings of the assessment in future ofﬁce developments and refurbishment projects, if found to be relevant more widely to the rest of the portfolio. 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. Occupier engagement targets Status Develop and publish stakeholder engagement policy Achieved Maintain or enhance GRESB performance Achieved relative to 2016 Hold a minimum of three sustainability related Achieved CPD sessions to increase awareness of key issues amongst employees. Continue to organise annual sustainable building Achieved tours to inform and inspire employees Introduce building awards/competition to encourage In progress uptake of sustainability practices 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. To this end, the Group has developed and published a Stakeholder Engagement Policy, which can now be found on its website. The Group seeks to maintain an open dialogue with investors and communicates its sustainability performance through annual reporting and presentations. During the year, the Group once again participated in the key investor-led sustainability survey for the real estate sector, the Global Real Estate Sustainability Benchmark (GRESB), and retained the coveted ‘Green Star’ status which it achieved in 2016. Actions implemented during the year will further strengthen the Group’s response to a number of the GRESB criteria, so it can expect to further maintain or enhance its score. “The ofﬁce has created a more sociable space, helping staff to interact with each other where they didn’t before the move” – Ofﬁce worker, Prospero 2018 Report and Financial Statements McKay Securities PLC 31 Sustainability continued During the year, the Group held Continuing Professional Development (CPD) sessions and organised tours of some of UK’s most sustainable ofﬁce and industrial buildings in order to develop the property team’s understanding of sustainability issues, draw inspiration from other sites and learn about innovations in the sector. The Group is currently working towards the launch of a tenant competition which will reward sustainable behaviours and result in increased tenant engagement, supporting both the Group’s and the tenants’ sustainability endeavours. 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 to March 2018, the Group made a total of £28,100 in charitable donations.This represents 0.31% of adjusted proﬁt before tax (0.4% in 2017). Additionally, the Group has contributed to a community allotment within the local area of one of its properties following continued engagement with neighbouring residential properties. The Group was the main sponsor for the Mayor of Bracknell’s charity event held in November 2017 for the Fireﬁghters Charity. Health & Safety While not covered speciﬁcally through its sustainability targets, Health and Safety (H&S) is a critical element of the Group’s stakeholder engagement programme. 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 programme 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 year to March 2018, there have been no accidents of a nature reportable to HSE. The Group’s Diversity Policy and disclosure can be found on page 47. 32 McKay Securities PLC Report and Financial Statements 2018 Sustainability targets – year to March 2019 Building on the great work undertaken over the last year the Group has set itself the following targets to ﬁnancial year to March 2019: Managing Sustainable Buildings Target Deadline: 31st March 2019 Deadline: 31st March 2019 Electricity consumption: Achieve a 12% reduction in like-for-like landlord controlled electricity consumption relative to a 2015/16 baseline. Pilot an innovative energy-saving technology at one of the Group’s major energy consuming assets. Gas consumption: Achieve a 12% annual reduction in like-for-like landlord controlled gas consumption (adjusted for heating degree days) relative to a 2015/16 baseline. Carbon emissions: Achieve a 12% reduction in like-for-like landlord controlled carbon emissions, against a 2015/16 baseline. Water consumption: Achieve a 9% reduction in like-for-like landlord controlled water consumption, against a 2015/16 baseline. Waste: Maintain 100% of operational waste diverted from landfill for landlord managed portfolio. Waste: Increase the recycling rate across all properties for which the Group has management control to 48% by 31st March 2019, in line with 'Good Practice' according to the Real Estate Environmental Benchmark (REEB). D Pilot an innovative water-saving technology at one of the Group’s major water consuming assets. Continue to review EPC risk associated with new purchases and create improvement plans for any asset with an E rating or below, to bring it up to at least a D. Roll out phase two of the Group's Renewable Energy Review Strategy, which will involve conducting detailed studies into the feasibility of incorporating solar PV panels at five properties, and then select at least one property at which to take forward an installation subject to commercial viability. Continue to ensure compliance with the Group’s Responsible Procurement Policy through the agreed annual auditing process.. E Creating Sustainable Buildings Engaging Stakeholders Target Deadline: 31st March 2019 Target Deadline: 31st March 2019 Continue to monitor the compliance of contractors with McKay's Sustainability Requirements for Development and Refurbishment Projects, ensuring that sustainability is consistently integrated as part of the tendering process. Maintain or enhance GRESB performance relative to 2017. Hold a minimum of three sustainability related CPD sessions to increase awareness of key issues amongst employees. Ensure all new developments and major refurbishments achieve minimum BREEAM Excellent and an EPC rating of at least B. Continue to organise annual sustainable building tours to inform and inspire employees. Follow up on the results and recommendations of the post-occupancy evaluation of Prospero, Redhill, to ensure that all aspects of operational performance meet design intent. Include information about asset’s sustainability, including energy efficiency and health and wellbeing features, within marketing materials, highlighting their benefits to occupiers. Introduce building awards/competition to encourage uptake of sustainability practices amongst tenants. 2018 Report and Financial Statements McKay Securities PLC 33 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 2017 to 31st March 2018 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. The signiﬁcant reduction in the overall footprint is partly due to a 7% reduction in energy consumption, combined with the ongoing decarbonisation of the grid. Sources of Greenhouse Gas Emissions 2017/18 (est.) tCO2e 2016/17 (actual) tCO2e Scope 1 Energy Gas (EPRA sBPR fuels – Abs) 655 678 Fugitive emissions Refrigerant emissions De minimis De minimis Scope 2 Energy Landlord-controlled electricity (EPRA sBPR Elec – Abs) 1,221 1,454 Scope 3 Energy Total Intensity 1,401 1,692 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) 3,277 3,823 tCO2e / £m Adjusted profit before tax (Scopes 1 and 2 only) 0.207 0.248 Data Qualifying Notes (cid:2) This is the Group’s ﬁfth year of disclosure under the Mandatory Greenhouse Gas Emissions Reporting regulations. (cid:2) The Group’s emissions for the year to March 2017 have been restated due to Q4 2016/17 data not being available at the time of reporting in 2017; this ﬁnal period of data is estimated in every Annual Report. (cid:2) For the year to March 2018, 33% of energy consumption, and therefore carbon emissions, is estimated. Q4 2017/18 accounts for 94% of this estimated data. (cid:2) This statement 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, with the exception of Scope 2 dual reporting which is not yet being followed. (cid:2) An operational control consolidation approach has been adopted, together with emissions factors from the UK Government Conversion Factors for Company Reporting 2017. (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. (cid:2) Adjusted proﬁt before tax value as reported in 2017/18 ﬁnancial statements – page 80 of the 2018 Annual Report and Accounts. 34 McKay Securities PLC Report and Financial Statements 2018 Governance 36 Board of Directors 38 Corporate Governance 39 Directors’ Report 43 Statement of Directors’ Responsibilities 44 Audit & Risk Committee Report 46 Nomination Committee Report 48 Remuneration 50 Directors’ Remuneration Policy Report 54 Directors’ Annual Remuneration Report 62 Independent Auditor’s Report 2018 Report and Financial Statements McKay Securities PLC 35 Board of Directors Richard Grainger ACA Non-executive Chairman Aged 57. 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 Liberation Group. A member of the Remuneration, Audit & Risk and Nomination Committees. Jon Austen FCA Senior Independent Director Aged 61. 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. A non-executive Director of Supermarket Income REIT plc. Chairman of the Audit & Risk Committee and a member of the Nomination and Remuneration Committees. Nick Shepherd FRICS Non-executive Aged 59. 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 52. 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. Chairman of the Nomination Committee and a member of the Audit & Risk and Remuneration Committees. 36 McKay Securities PLC Report and Financial Statements 2018 Simon Perkins MRICS Chief Executive Officer Aged 53. 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 52. 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 43. 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. 2018 Report and Financial Statements McKay Securities PLC 37 Corporate Governance Richard Grainger Chairman Dear Shareholder I am pleased to introduce our Corporate Governance Report for the year ended 31st March 2018. We continue to strive for high standards of corporate governance throughout the business and aim to work in the best interests of our shareholders and other stakeholders in a responsible and ethical manner. 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. 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. We have complied with the requirements of the 2016 UK Corporate Governance Code (the ‘Code’) and are monitoring the proposals for a revised Code to be introduced by the FRC. During the year we completed the managed succession plan to refresh the composition of the Board. As previously reported, Nigel Aslin and Viscount Lifford stepped down from the Board and Committees with Jeremy Bates taking over as Chairman of the Nomination Committee in April 2017. The Audit & Risk Committee oversaw the important process of appointing Knight Frank LLP as valuer. Further details are set out in the Audit & Risk Committee Report on pages 44 and 45. It was also an important year for the Remuneration Committee, and we were pleased to receive over 99% support for the Directors’ Remuneration Policy at the 2017 AGM. This is covered in greater detail in the Remuneration Committee Report on pages 48 to 61. Our Annual General Meeting will be held on 4th July 2018. 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 18th May 2018 38 McKay Securities PLC Report and Financial Statements 2018 Directors’ Report Introduction The Directors have pleasure in submitting their report and audited ﬁnancial statements for the year ended 31st March 2018. 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 31st March 2018 Section Business Model and Strategy Future Business Developments Principal Risks and Uncertainties Viability and Going Concern Statements Greenhouse Gas Emissions Financial Instruments Statement of Directors’ Responsibilities Diversity Policy Page 8 14-22 24-27 24 28-34 21-22 & Note 15 43 47 Profit and distribution The proﬁt for the year is set out in the Consolidated Proﬁt and Loss and other Comprehensive Income Statement. Proﬁt before tax is £43.4 million (2017: £17.6 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 7.2p per share, all of which will be paid as an ordinary dividend, making a total for the year of 10.0p per share (2017: 9.0 pence). If approved at the Annual General Meeting on 4th July 2018 the dividend will be paid on 26th July 2018 to shareholders recorded on the register at the close of business on 1st June 2018. Activity and assets The business of the Group is that of property investment and development in the United Kingdom. The subsidiary undertaking principally affecting the proﬁts or net assets of the Group in the year is 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 2018. An increase in value of £25.1 million has been included in the Consolidated Proﬁt and Loss and other Comprehensive Income Statement. After taking into account retained proﬁts and dividends paid during the year, basic net asset value per share at 31st March 2018 was 326 pence (2017: 289 pence). Directors The Board of Directors for the ﬁnancial year to 31st March 2018 was: R. Grainger1 S. Perkins G. Salmon T. Elliott J. Austen J. Bates N. Shepherd N. Aslin (to 22nd May 2017) Viscount Lifford (to 18th September 2017) 1Independent on appointment as Chairman. 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 36 and 37. In accordance with the Company’s Articles of Association and the UK Corporate Governance Code all the Directors being eligible will offer themselves for re-election at the 2018 AGM. Apart from service contracts and share options, details of which are set out in the Directors’ Remuneration Report on pages 53 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 57 and 58. Directors’ and officers’ liability insurance In accordance with Article 140 of the Articles and to the extent permitted by the Companies Act, the Company maintains Directors’ and Ofﬁcers’ liability insurance, which is reviewed annually. 2018 Report and Financial Statements McKay Securities PLC 39 Directors’ Report continued Substantial shareholdings In addition to the Directors’ interests referred to on page 58 of the Directors’ Annual Remuneration Report, the Company has been notiﬁed in accordance with the UK Listing Authorities Disclosure Guidance and Transparency Rules of the following holdings of the Company’s shares (see note 19 of the ﬁnancial statements) as at 31st March 2018: Shares % Aberforth Partners LLP 12,214,575 13.00 Bank of Montreal* (BMO) 11,426,580 12.16 ING Groep N.V. 5,181,470 5.51 J.O. Hambro Capital Management UK 4,752,510 5.06 *the aggregate interest held by BMO includes 9.92% held by TR Property Investment Trust. Notiﬁcation since 31st March 2018: Shares % Bank of Montreal* (BMO) 11,448,147 12.18 Political donations No political donations were made during the year (2017: nil). Charitable donations Details of charitable donations can be found in the Sustainability section of the Strategic Report on page 32. Share capital The issued share capital of the Company as at 31st March 2018 was 93,955,109 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-second Annual General Meeting of the Company will be held at The Royal Thames Yacht Club, 60 Knightsbridge, London SW1 on 4th July 2018 at 3.00p.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 2017 to allot relevant securities up to a nominal amount of £6,253,896. 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 £6,263,673 and (ii) comprising equity securities up to a nominal amount of £12,527,347 (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 2019). 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 £1,879,102. 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 9,395,510 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. As a result of the EU audit reforms, the Company is intending to change auditor for the year ending 31st March 2020. The Directors who held ofﬁce at the date of approval of this Directors’ Report conﬁrm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware and each Director has taken all reasonable steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This conﬁrmation is given in accordance with Section 418(2) of the Companies Act 2006. Disclosures required under Listing Rule 9.8.4R Section Information 1 4 Interest capitalised and tax relief Details of long term incentive plans Page 80 48- 61 Throughout the year ended 31st March 2018 the Company has complied with the 2016 UK Corporate Governance Code (the “Code”) details of which can be found at www.frc.org.uk. 40 McKay Securities PLC Report and Financial Statements 2018 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 2018 the Board comprised up to three executive Directors, including Mr S. Perkins, Chief Executive Ofﬁcer (‘CEO’) and up to six non-executive Directors, including Mr R. Grainger, (Non-executive Chairman), Mr J. Austen (Senior Independent Director), Mr J. Bates and Mr N. Shepherd. Their biographical details are set out on pages 36 and 37. Mr N. Aslin retired on 22nd May 2017 and Viscount Lifford retired on 18th September 2017. The composition of the Board complies with provision B.1.2 of the Code. 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 eleven 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 42. 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. 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 44 and 45. Nomination Committee Mr J. Bates MRICS is Chairman of the Nomination Committee. The Committee met once 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 46 and 47. Remuneration Committee Mr N. Shepherd FRICS is Chairman of the Remuneration Committee which met three 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 48 to 61. Risk management and internal control The following should be read in conjunction with the principal risks and uncertainties on pages 24 to 27 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 Sub-committee, introduced in 2017 and consisting of the executive Directors, meets on a regular basis. It is responsible for identifying key risks and assessing their likely impact on the Group and maintaining the Risk Register. The Risk Sub-committee reports to the Audit & Risk Committee. Important areas include property, ﬁnancial and corporate risks. Other important areas such as 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. 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 2018. 2018 Report and Financial Statements McKay Securities PLC 41 Directors’ Report continued 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 Group’s website, www.mckaysecurities.plc.uk. There is also an investor relations section on the Group’s website, which includes annual and interim reports. The website also includes 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 Group’s ordinary shares. For internet services visit www.shareview.co.uk or the investor relations section of the Group’s website. The Shareview dealing service is also available by telephone on 03456 037 037 between 8.30am and 4.30pm Monday to Friday. Table of Board meeting attendance (for the financial year to 31st March 2018) Audit & Risk Remuneration Nomination Board Committee Committee Committee (11 meetings) (3 meetings) (3 meetings) (1 meeting) R. Grainger 11 3 3 1 S. Perkins 11 13 13 1 G. Salmon 11 12 – – T. Elliott 11 12 – – J. Austen 11 3 3 1 J. Bates 11 3 3 1 N. Shepherd 11 3 3 1 N. Aslin (to 22nd May 2017) 2 1 1 – Viscount Lifford (to 18th September 2017) 6 1 2 – 1In attendance by invitation. Signed by order of the Board J. McKeown Secretary 18th May 2018 Reading 42 McKay Securities PLC Report and Financial Statements 2018 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. 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. Responsibility statement of the Directors in respect of the annual financial report We conﬁrm that to the best of our knowledge: (cid:2) the ﬁnancial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the company and the undertakings included in the consolidation taken as a whole; and (cid:2) the Report of the Directors, incorporating the Chairman’s Statement and the Strategic Review, includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. S. Perkins Chief Executive Ofﬁcer G. Salmon Chief Financial Ofﬁcer 18th May 2018 The Directors are responsible for preparing the Annual Report and the Group and parent Company ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent Company ﬁnancial statements for each ﬁnancial year. Under that law they are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent 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 parent Company and of their proﬁt or loss for that period. In preparing each of the Group and parent Company ﬁnancial statements, the Directors are required to: (cid:2) select suitable accounting policies and then apply them consistently; (cid:2) make judgements and estimates that are reasonable, relevant and reliable; (cid:2) state whether they have been prepared in accordance with IFRSs as adopted by the EU; (cid:2) assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and (cid:2) use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the parent Company and enable them to ensure that its ﬁnancial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. 2018 Report and Financial Statements McKay Securities PLC 43 Audit & Risk Committee Report ,in Jon Austen Chairman of the Audit & Risk Committee Dear Shareholder I am pleased to present the Audit & Risk Committee report for the year ended 31st March 2018. The Committee continues to play a key role in maintaining the quality of our ﬁnancial reporting and overseeing the adequacy and effectiveness of internal controls and risk management. During the year, due to the increasing size and scale of the portfolio and the length of service of the Group’s previous valuer, a decision was made to refresh this appointment and in mid 2017 an invitation was made to four valuation companies to tender for the Group’s external valuation. Knight Frank LLP, was subsequently appointed, offering extensive strength and depth across our markets. Their ﬁrst valuation was at 30th September 2017 for the interim results, followed up with the 31st March 2018 portfolio valuation, and we have been pleased with the transition. The Committee has recommended to the Board that KPMG LLP be put forward for shareholder approval at the forthcoming AGM as auditors of the Group. Under EU audit reforms, the last period KPMG can act as auditor to the Group is for the year ending 31st March 2021. Consideration has already been given to the engagement of a replacement external auditor for the 2020 audit. This will be subject to a competitive tender process, anticipated to commence during 2018. Jon Austen Chairman of the Audit Committee 18th May 2018 Committee membership The Audit & Risk Committee (the “Committee”) consists solely of non-executive Directors. The members of the Committee are: J. Austen FCA – Chairman J. Bates MRICS R. Grainger ACA N. Shepherd FRICS N. Aslin FRICS (to 22nd May 2017) Viscount Lifford (to 18th September 2017) All 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. The Committee met three times in the last year with full Committee attendance at all meetings. The table of attendance is set out in the Directors’ Report on page 42. The Chief Executive Ofﬁcer, Chief Financial Ofﬁcer and external auditors regularly attend by invitation. The Committee meets twice a year 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 in 2017 of a separate Risk Sub-committee was working well. The evaluation concluded that the Audit & Risk Committee continued to operate in an efﬁcient and effective way. 44 McKay Securities PLC Report and Financial Statements 2018 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 Group’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 Group’s risk management and internal control 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 remuneration and terms of engagement; (cid:2) reviewing and monitoring the external auditor’s independence and objectiveness and the effectiveness of the audit process; (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 Main activities of the Committee during the year Significant judgements and Group valuer 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. This year due to the increasing size and scale of the portfolio and to the length of service of the Group’s valuers consideration was given to refreshing this appointment. An invitation to tender for the Group’s external valuation was sent out to four companies and included a request for valuations on two sample properties within the portfolio. Following a review of the tenders the successful candidate, Knight Frank LLP, was appointed and undertook a full valuation of the portfolio at the year end. The valuation was reviewed along with its associated risks, and the Committee gained comfort from the valuer’s methodology and other supporting market information. Risk management and internal control The Committee is responsible for reviewing the Group’s risk management and internal control systems and in 2017 established the Risk Management Sub-committee whose key responsibilities include overseeing and advising on the current and future risk exposure of the Group, maintaining the Group’s risk register and reviewing the effectiveness of the Group’s internal ﬁnancial control systems. The Risk Management Sub-committee met three times during the year and reported its ﬁndings to the Audit & Risk Committee. For further information on the Group’s principal risks and uncertainties please see pages 24 to 27. The Committee reviewed the requirement for an internal audit function and concluded that as there is a small management team operating from one location enabling close involvement of the executive Directors in the day to day operational matters of the Group, coupled with the comprehensive internal controls currently in place, no requirement to establish an internal audit function was needed at this time. This recommendation was made to the Board. Whistleblowing policy The Audit & Risk Committee reviewed arrangements by which staff of the Company may in conﬁdence raise concerns in respect of the ﬁnancial reporting and other matters. These detailed procedures are set out in the Group’s Staff Handbook and the Group’s policy is available on the Group’s website www.mckaysecurities.plc.uk. 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. KPMG rotate their engagement partner on a 5 year cycle designed to retain objectivity and independence. The Committee can conﬁrm that it is satisﬁed that the external auditor remains independent. The KPMG audit fee was £71,940 with related assurance work of £19,394. Non-audit fees being tax services are provided by PwC and their fee was £65,136. Whilst under the regulations the last year KPMG LLP can audit the Group is the year ending 31st March 2021, the Committee has given consideration to the engagement of an alternative external auditor for the 2020 audit. This will be subject to a competitive tender process and it is anticipated that this process will commence during 2018. 2018 Report and Financial Statements McKay Securities PLC 45 Nomination Committee Report Jeremy Bates Chairman of the Nomination Committee Dear Shareholder I am pleased to present my ﬁrst report as Nomination Committee Chairman since my appointment on 1st April 2017. During the year, as part of our succession plan, Nigel Aslin, and Viscount Lifford stepped down from the Board and its Committees on 22nd May 2017 and 18th September 2017 respectively, and Jon Austen became Senior Non-executive Director on Viscount Lifford’s departure. The composition of the Board now complies with the non-executive director independence requirements of Code provision B.1.2. of the UK Corporate Governance Code. The Committee’s focus for the coming year is to continue to support the Board and its Committees, to ensure they have the appropriate balance of skills, experience, independence and knowledge to enable them to discharge their respective duties and responsibilities effectively. Jeremy Bates Chairman of the Nomination Committee 18th May 2018 Committee membership Members of the Nomination Committee are: J. Bates MRICS – Chairman J. Austen FCA R. Grainger ACA N. Shepherd FRICS S. Perkins MRICS N. Aslin (to 22nd May 2017) Viscount Lifford (to 18th September 2017) The Nomination Committee met once in the last year with 100% attendance. The majority of the members of the Committee are independent non-executive Directors. 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 Group’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; (cid:2) reviewing the equality and diversity policy of the Group; (cid:2) making recommendations to the Board concerning the re-election of Directors by shareholders; and (cid:2) annual review of the Nomination Committee Terms of Reference. 46 McKay Securities PLC Report and Financial Statements 2018 Board performance appraisal A formal annual appraisal of the Board, its Committees and individual Directors was undertaken during February and March 2018. 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 provide an effective and appropriate range of skills and experience, whilst demonstrating commitment and independence. Re-election of Directors As recommended under Code Provision B.7.1. of the 2016 UK Corporate Governance Code, all Directors of the Company, being eligible, will offer themselves for election at the 2018 AGM. The biographical details of the Directors are available on pages 36 and 37. Succession planning The Nomination Committee considers succession planning for Directors and other senior executives and ensures a formal, rigorous and transparent procedure for the appointment of new Directors. During the year the Committee completed the ﬁnal phase of its planned programme to refresh the composition of the Board to comply with the 2016 UK Corporate Governance Code requirements for Board independence. Mr Nigel Aslin retired from the Board and its Committees on 22nd May 2017 and Viscount Lifford on 18th September 2017. Mr Jon Austen was appointed Senior Independent non-executive Director on the retirement of Viscount Lifford. Non-executive Directors are appointed for an initial three year term and are subject to re-election at the Annual General Meeting. Any term beyond six years is subject to particularly rigorous review which will take into consideration the need for progressive refreshing of the Board. The longest serving non-executive Director is Richard Grainger, who joined the Board in May 2014. Policy on diversity The Group is committed to treating all employees equally and considers all aspects of diversity, including gender and ethnicity, 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 the Parker Review on ethnic diversity 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. The gender diversity of the Group is set out below: Gender diversity of the Company as at 31st March 2018 Board Senior Management Other Employees M M M F F 1 2 3 4 5 6 7 8 9 10 Male M Female F Our operations are based solely in the UK and are low risk in relation to human rights issues. No human rights concerns have arisen during the period. 2018 Report and Financial Statements McKay Securities PLC 47 Remuneration Nick Shepherd Chairman of the Remuneration Committee Dear Shareholder I am pleased to present the Directors’ Remuneration Report for the year ended 31st March 2018, which has been prepared by the Remuneration Committee ("the Committee") and approved by the Board. The report is divided into three sections: (cid:2) this Annual Statement for the year ended 31st March 2018, summarises remuneration outcomes and how the Remuneration Policy will operate for the year ending 31st March 2019; (cid:2) the Remuneration Policy Report, which details the Group’s policy on the remuneration of executive and non-executive Directors which was last approved by shareholders at the 2017 AGM; and (cid:2) the Annual Report on Remuneration, which explains how the Remuneration Policy was implemented in the year ended 31st March 2018, and how the Remuneration Policy will operate for the year ending 31st March 2019. As no changes are being proposed to the Remuneration Policy Report, given that it was approved by shareholders last year, only the Annual Statement and Annual Report on Remuneration will be subject to a vote (advisory) at the forthcoming 2018 AGM. Committee activities during the year The Committee met three times during 2017/18. The main Committee activities during the year (full details of which are set out in the relevant sections of the Annual Report on Remuneration) included: (cid:2) determining executive Directors’ base salary levels for 2018/19 (i.e. Simon Perkins - £395,000, Giles Salmon £258,500, Tom Elliott - £226,600); (cid:2) setting the executive Directors’ bonus targets for 2017/18 and agreeing the outturn in respect of the 2016/17 annual bonus; (cid:2) agreeing the structure of the annual bonus for 2018/19, including consulting with major shareholders and representative bodies in respect of bonus potential and performance metrics (see below); (cid:2) determining vesting of the 2015 PSP awards which reached the end of the 3 year performance period on 31st March 2018; and (cid:2) overseeing the grant of the PSP awards in 2017/18 which was made over shares worth 100% of salary to the executive Directors and which vest subject to the achievement of a blend of challenging absolute NAV per share growth targets and relative TSR targets. Pay and performance The strong ﬁnancial performance for the year ended 31st March 2018 has been reﬂected in the payments made to the executive Directors under the annual bonus plan, amounting to 68% of salary. Performance against the EPS targets resulted in a bonus of 100% of that element (i.e. approx. 45% of salary) while performance against the NAV targets resulted in a bonus of 75% of that element (i.e. approx. 23% of salary). The excess annual bonus over 50% of salary will be deferred into shares for three years. Further details (including information regarding performance against the relevant targets and the operation of the deferred share element of the plan) are set out in the Annual Report on Remuneration. In respect of the PSP awards granted in 2015, which vest in June 2018, three-year performance to 31st March 2018 against the NAV targets will result in 100% of that element vesting while performance against the relative TSR targets will result in 0% of that element vesting. 48 McKay Securities PLC Report and Financial Statements 2018 Proposed changes to policy implementation for the year ending 31st March 2019 At the 2017 AGM, the Directors’ Remuneration Policy was approved by shareholders with over 99% support and I am pleased to report that the Policy implementation has progressed smoothly. Following shareholder consultation, the Committee proposes to increase annual bonus potential to 100% of salary for 2018/19 as set out in the Policy. In doing so, the Committee has identiﬁed a select number of key strategic targets which are consistent with the Group’s strategy, whilst retaining the focus on EPS and NAV, resulting in 45% of potential bonus based on EPS performance conditions, 30% based on NAV performance conditions and 25% based on strategic targets. The strategic targets will be based on operational areas covering occupancy, tenant retention, rent collection, environmental and health & safety, and will be consistent with annual bonus targets for the general workforce. Disclosure of the targets, and the performance against the targets, will be included in the relevant Directors’ Remuneration Report following the year end to the extent that they are not considered to be commercially sensitive. The bonus deferral policy for executive Directors will continue, whereby any bonus in excess of 50% of salary is deferred into McKay shares for 3 years. In respect of the operation of the rest of the Directors’ Remuneration Policy for 2018/19: (cid:2) base salaries were increased in line with the general workforce rate of increase; (cid:2) pension provision will remain unchanged for existing executive Directors, although it is the Committee’s intention that pension provision for the future appointment of executive Directors will be consistent with the general workforce; (cid:2) long term incentive awards will continue to be granted under the 2017 Performance Share Plan, with executive Directors receiving awards over shares worth 100% of base salary, with 40% of the award based on NAV performance targets and 60% based on relative TSR targets. For the 2018 grant of PSP awards, the NAV performance targets will be varied to exclude RPI. Rather than a performance range of RPI+6% (25% of this part of an award vests) increasing pro-rata to RPI+25% (100% of this part of an award vests), an NAV range of 12% to 35% will be set. The TSR targets - median (25% of this part of an award vests) to upper quartile (100% of this part of an award vests) as measured against a FTSE Real Estate sector group will remain unchanged; (cid:2) a two-year post vesting holding period will continue to apply to PSP awards after the three year performance period; (cid:2) malus and clawback provisions will continue to operate; and (cid:2) shareholding guidelines will remain at 200% of salary. Conclusion I hope you remain supportive of the approach to Policy implementation for 2018/19 which is a continuation of our considered and prudent approach to remuneration at McKay, and that you will therefore vote in favour of the remuneration- related resolution that will be tabled at the forthcoming AGM. Nick Shepherd Chairman of the Remuneration Committee 18th May 2018 2018 Report and Financial Statements McKay Securities PLC 49 Remuneration Directors’ Remuneration Policy Report A summary of the Remuneration Policy approved by shareholders at the 2017 AGM is as follows: 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 with 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 The performance measures reward the delivery of appropriateness of measures are applied may be ﬁnancial or the Company’s strategic reviewed annually as close as is 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 payable not reﬂect overall performance during the vesting period. and/or shareholders’ experience. 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 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 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 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 dividends payable falling 25% of awards vest for attaining between the grant and the release of the threshold level of performance. shares. 50 McKay Securities PLC Report and Financial Statements 2018 Non-executive To attract and retain a The fees paid to the Chairman and When determining fee increases, N/A Director fees high-calibre Chairman non-executive Directors are set by the Company is guided by the and non-executive reference to comparability with other general increase for the broader Directors by offering similarly sized companies within the employee population and market appropriate fees. sector and the market generally. conditions but on occasion may The fees payable to the non-executive need to recognise, for example, Directors are determined by the Board, change in responsibility, time with the Chairman’s fees determined commitment and/or market by the Committee. movements. The Chairman and non-executive The aggregate fees and any beneﬁts of Directors will not participate in any the Chairman and non-executive Directors cash or share incentive arrangements. will not exceed the limit from time to time prescribed within the Company’s The Company reserves the right to provide Articles of Association for such fees. beneﬁts including travel and ofﬁce support. Fees are paid on a monthly basis Notes 1. Executive Directors are required to build a holding of shares in the Company to the value of 200% of salary. 2. The Committee operates incentive plans according to their respective rules and where relevant in accordance with the Listing Rules. Consistent with market practice, the Committee retains discretion over a number of areas relating to the operation and administration of the plan. These include, but are not limited to, determining who participates, the timing of awards, award levels, setting performance targets, amending performance targets (if an event occurs, in exceptional circumstances, to enable the targets to fulﬁl their original purpose), assessing performance targets, treatment of awards on a change of control, treatment of awards for leavers and adjusting awards (e.g. as a result of a change in capital structure). 3. 4. 5. 6. The annual bonus and PSP are based on performance against targets that are aligned with the Company's short, medium and long term strategic plan. Where appropriate, a sliding scale of targets is set for each metric to encourage continuous improvement and the delivery of stretch performance. There are currently no material differences in the broad structure of remuneration arrangements for the executive Directors and the general employee population, aside from participation rates in incentive schemes. While the appropriate benchmarks vary by role, the Company seeks to apply the philosophy behind this policy across the Company as a whole. To the extent that the Group’s pay policy for Directors differs from its pay policies for groups of staff, this reﬂects the appropriate market rate position and/or typical practice for the relevant roles. The Company takes into account pay levels, bonus opportunity and share awards applied across the Group as a whole when setting the executive Directors’ remuneration policy. For the avoidance of doubt, in approving this Directors' Remuneration Policy, authority was given to the Company to honour any commitments entered into with current or former Directors (such as the payment of the prior year's annual bonus or the vesting/exercise of share awards granted in the past). Details of any payments to former Directors will be set out in the Annual Report on Remuneration as they arise. The Regulations and related investor guidance encourages companies to disclose a cap within which each element of the Directors’ remuneration policy will operate. Where maximum amounts for elements of remuneration have been set within the Directors’ remuneration policy, these will operate simply as caps and are not indicative of any aspiration. 7. While the Committee does not consider it to form part of beneﬁts in the normal usage of that term, it has been advised that corporate hospitality, whether paid for by the Company or another, and business travel for Directors and in exceptional circumstances their families, may technically come within the applicable rules and so the Committee expressly reserves the right for the Committee to authorise such activities within its agreed policies. 8. The Committee may make minor amendments to the policy set out above for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation, without obtaining shareholder approval for that amendment. How the views of shareholders are taken into account The Remuneration Committee considers shareholder feedback received each year following the AGM. This feedback, plus any additional feedback received during any meetings from time to time, is then considered as part of the Company's annual review of the operation of our remuneration practices. In addition, the Remuneration Committee will seek to engage directly with major shareholders and their representative bodies should any material changes be proposed to the remuneration policy. Details of votes cast for and against the resolution to approve this Remuneration Policy and 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 the Committee takes 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 Group'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. 2018 Report and Financial Statements McKay Securities PLC 51 Remuneration Directors’ Remuneration Policy Report - continued 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 basic (i.e. ﬁxed pay only), target and maximum levels. Value of the gross remuneration packages at different levels of performance. 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 0 0 £ ’ £1,292k 30% Total Fixed Annual Bonus PSP £798k 12% 25% 31% 63% 39% £502k 100% £854k 30% 31% £531k 12% 24% 64% 39% £279k 100% £732k 31% 31% £449k 13% 25% 62% 38% £337k 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 2018/19. – Benefits measured as benefits provided in the year ended 31st March 2018 as set out in the single figure table. – Pension measured as the defined contribution or cash allowance in lieu of Company contributions of up to 20% of salary. £,000 S. Perkins G. Salmon T. Elliott Base Salary 395 258 227 Benefits Pension 28 32 25 79 47 27 Total Fixed 502 337 279 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 100% of salary used for illustrative purposes). – PSP: consists of the threshold level of vesting (25% vesting) of awards of 100% of salary under PSP. Maximum Based on the maximum remuneration receivable (excluding share price appreciation and dividends): – Annual Bonus: consists of maximum bonus of 100% of base salary. – PSP: consists of the face value of awards of 100% of salary under PSP. 52 McKay Securities PLC Report and Financial Statements 2018 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 Group’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 T. Elliott 8th July 2016 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 R. Grainger 1st May 2014 N. Aslin1 2nd May 2006 Viscount Lifford2 29th August 2006 N. Shepherd 21st January 2015 J. Austen 13th April 2016 J. Bates 17th January 2017 1Nigel Aslin retired from the Board on 22nd May 2017. 2Viscount Lifford retired from the Board on 18th September 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 prorated 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 prorating if it considers it appropriate to do so. Deferred share awards would normally vest on cessation (save where “good leaver” status is not conferred). 2018 Report and Financial Statements McKay Securities PLC 53 External advisors During the year the Committee received independent advice from FIT Remuneration Consultants LLP (“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 £50,072. 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. 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 J. Austen J. Bates R. Grainger N. Aslin (to 22nd May 2017) Viscount Lifford (to 18th September 2017) 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 3 out of 3 J. Austen 3 out of 3 J. Bates 3 out of 3 R. Grainger 3 out of 3 N. Aslin1 1 out of 1 Viscount Lifford2 2 out of 2 1Nigel Aslin retired from the Committee on 22nd May 2017. 2Viscount Lifford retired from the Committee on 18th September 2017. 54 McKay Securities PLC Report and Financial Statements 2018 Directors’ remuneration for the year ended 31st March 2018 (audited) The remuneration of the Directors for the years 2018 and 2017 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 2018 384 28 77 259 154 902 2017 376 27 66 106 115 690 G. Salmon 2018 251 32 45 170 99 597 2017 246 31 40 69 71 457 T. Elliott 2018 220 25 26 149 77 497 2017 — — — — — — Non-executive R. Grainger 2018 80 — — — — 80 2017 54 — — — — 54 J. Austen 2018 44 — — — — 44 2017 28 — — — — 28 J. Bates 2018 39 — — — — 39 2017 8 — — — — 8 N. Shepherd 2018 44 — — — — 44 2017 37 — — — — 37 N. Aslin1 2018 6 — — — — 6 2017 37 — — — — 37 Viscount Lifford2 2018 19 — — — — 19 2017 37 — — — — 37 1Nigel Aslin retired from the Board on 22nd May 2017. 2Viscount Lifford retired from the Board on 18th September 2017. 2018 Report and Financial Statements McKay Securities PLC 55 Remuneration Directors’ Annual Remuneration Report - continued 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 2018 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 40% RPI + 3% RPI + 10% RPI + 8% 23% of salary (maximum: 30%) EPS growth 60% 90% 110% >110% 45% of salary (maximum: 45%) Total 68% Bonus payments (cash or shares) are subject to clawback. Overpayments may be reclaimed in the event of performance achievements being found to be materially misstated or erroneous, or in the event of misconduct. 3. Long term incentives The PSP award granted on 18th June 2015 was subject to performance to the year ended 31st March 2018. The performance conditions attached to this award and actual performance against these conditions were as follows: Performance Threshold Maximum Actual Vesting Metric Weighting condition target target performance level NAV growth 40% Average NAV per share RPIX + 6% RPIX + 25% >RPIX + 25% 40% growth of RPIX + 6% to 25% (full vesting) over three ﬁnancial years Relative TSR 60% Relative TSR performance Median Upper quartile

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