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