RAVEN PROPERTY GROUP LIMITED 2019 Annual Report RAVEN PROPERTY GROUP LIMITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019 CONTENTS Results Highlights Chairman’s Message The Portfolio STRATEGIC REPORT Chief Executive’s Report Business Model Portfolio Review Finance Review Risk Report Viability Statement GOVERNANCE REPORT Directors Corporate Governance Corporate Responsibility Letter from the Remuneration Committee Directors’ Remuneration Report Audit Committee Report Directors’ Report Independent Auditor’s Report FINANCIAL STATEMENTS Group Income Statement Group Statement of Comprehensive Income Group Balance Sheet Group Statement of Changes in Equity Group Cash Flow Statement Notes to the Financial Statements Advisers Enquiries 3 PAGE 4 5 6 28 29 30 35 40 44 45 46 52 54 56 60 64 67 74 75 76 79 80 82 119 120 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 4 RESULTS HIGHLIGHTS NET OPERATING INCOME UNDERLYING EARNINGS AFTER TAX IFRS EARNINGS AFTER TAX £126.5 MILLION £43.2 MILLION £46.0 MILLION BASIC EARNINGS PER SHARE 8.16 PENCE DILUTED NAV PER SHARE 75 PENCE PORTFOLIO OCCUPANCY TODAY 92% INVESTMENT PROPERTY VALUATION CASH BALANCES TODAY OF £1.34 BILLION £104.4 MILLION RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 5 CHAIRMAN’S MESSAGE I am pleased to report that, in the 12 months to 31 December 2019, we have enjoyed a strengthening in all aspects of our business. High average occupancy, improving asset valuations, increasing market rents, reducing Central Bank rates and stable average Rouble exchange rates in 2019 have all contributed to improved results. Together, they have supported an increase in underlying earnings to £43.2 million (2018: £20.0 million), a significant swing in IFRS earnings to £46.0 million (2018: loss of £120.7 million) and a jump in basic net asset value per share from 48p at the end of 2018 to 76p at 31 December 2019. As you will read in this Annual Report, the executive team focus in the last 12 months has been diverted to deal with shareholder issues. We have purchased and contracted to purchase 38% of our ordinary shares from our two largest institutional holders. It has been a distracting and stressful period for our senior executive team, but the enhancements are well worth the effort and I’d like to congratulate them all on their determination to secure these transactions. As I write, the issues with Coronavirus are on all personal and business agendas. This has now been exacerbated by the oil price crash and the impact that has had on Rouble exchange rates. We have agreed an extension to the back stop date to acquire our shares from Invesco as a direct consequence of this. We have yet to see any tangible effect on our trading operations but we are progressing with caution. As we continue with our Board succession planning, I am sorry to say that Christopher Sherwell will be stepping down as a Non Executive Director at the AGM. Christopher has been an exemplary Senior Independent Director and Chair of the Remuneration Committee and will be missed. We are actively searching for new members of the non executive team and hope to make an announcement soon. All in all, a good year but with mixed emotions on the loss of two long term shareholders and supporters of the Company and we will continue into 2020 with a cautious approach given the wider issues in play today. Sir Richard Jewson Chairman 15 March 2020 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 6 THE PORTFOLIO RUSSIAN FEDERATION INVESTMENT PROPERTY LAND BANK ST PETERSBURG MOSCOW NIZHNY NOVGOROD ROSTOV-ON-DON OMSK NOVOSIBIRSK RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 7 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT KAD M10 KAD KAD 8 THE PORTFOLIO Moscow SEVER LOBNYA SHOLOKHOVO SHEREMETIEVO AIRPORT PUSHKINO ISTRA NOVA RIGA NOGINSK KREKSHINO SOUTHERN VNUKOVO AIRPORT DOMODEDOVO AIRPORT KLIMOVSK Warehouse Office RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT THE PORTFOLIO 9 St Petersburg KAD M10 KAD PRIMIUM KELLERMANN KONSTANTA KAD SHUSHARY PULKOVO GORIGO PULKOVO AIRPORT Warehouse Office RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 10 WAREHOUSE Sever, Moscow DESCRIPTION GLA Grade A Logistics Warehouse Complex 254,000 sqm KEY TENANTS • X5 Retail Group • R-Pharm • OBI • Miratorg • O’Key • Major Terminal • Zara LOCATION The property is located north of Moscow city centre, 35km from the MKAD, 0.5km from the Betonka A107 motorway and 1.5km from the new Moscow-St Petersburg toll highway. 11 WAREHOUSE Pushkino, Moscow DESCRIPTION GLA Grade A Logistics Warehouse Complex 214,000 sqm KEY TENANTS • DHL • Itella • Makita • Megapolis • Axioma • Perrino LOCATION The property is located on the Yaroslavskoe Highway, approximately 15km from the MKAD in the northeastern part of Moscow Region. 12 WAREHOUSE Istra, Moscow DESCRIPTION GLA Grade A Logistics Warehouse Complex 206,000 sqm KEY TENANTS • DSV Solutions • Azbuka Vkusa • Major Terminal • Santens • Bacardi • Kerry • Splat • Amway LOCATION The property is directly adjacent to the Nova Riga highway, approximately 50km from Moscow city centre, 41km from the MKAD and 8km from the Betonka A107 motorway. 13 WAREHOUSE Noginsk, Moscow DESCRIPTION Grade A Logistics Warehouse Complex with 26ha of land suitable for construction KEY TENANTS • X5 Retail Group • Dixy • Cotton Club • ID Logistics • UPM • Roto Frank GLA 204,000 sqm LOCATION The property is located approximately 55km from the city centre, 44km from the MKAD and 3km from the Betonka A107 motorway. Access is from the Volga highway, which links Moscow to Nizhny Novgorod. A rail spur serves the site. 14 WAREHOUSE Klimovsk, Moscow DESCRIPTION GLA Grade A Logistics Warehouse Complex 158,000 sqm KEY TENANTS • Kupi VIP • Marvel • Danone • FARM • Mir Instrumenta • AccordPost • Gates • Fischer Clinical • Rhenus Automotive LOCATION The property is located to the south of Moscow, approximately 21km from the MKAD in the town of Klimovsk. The project is a short distance from the M2 Simferopolskoye highway, a major route to the south of Moscow. 15 WAREHOUSE Shushary, St Petersburg DESCRIPTION LOCATION Grade A Logistics Warehouse Complex KEY TENANTS • RosLogistics • Dixy • Officemag Sbp • Bbraun • Amway GLA 148,000 sqm The property is located in the Shushary District of St. Petersburg, approximately 15km south of the city centre and 5km from the St Petersburg ring road (KAD) on a motorway linking St. Petersburg to Moscow, close to Pulkovo International airport. 16 WAREHOUSE Novosibirsk DESCRIPTION GLA Grade A Logistics Warehouse Complex 121,000 sqm KEY TENANTS • Pepsi • Sportmaster • OSG • Metro • Oriflame • Toyota • FM Logistics • Wildberries • Ozon LOCATION The property is located on Petukhova Street in the south of the city of Novosibirsk, close to the M51 highway to Moscow, with a rail spur serving the site. 17 WAREHOUSE Krekshino, Moscow DESCRIPTION LOCATION Grade A Logistics Warehouse Complex KEY TENANTS • Gorenje • Simple Wines • Diageo GLA 118,000 sqm The property is located in Moscow about 40km to the south west of the city centre, 24km from the MKAD, between the Minsk and Kiev highways. Vnukovo airport, one of the largest airports in Moscow, is located within 15km of the complex. 18 WAREHOUSE Rostov-on-Don DESCRIPTION Grade A Logistics Warehouse Complex with 27ha of land suitable for construction GLA 102,000 sqm LOCATION The scheme is located on the Federal Highway M4 to Moscow, approximately 10km from the city centre and 7km from the airport. KEY TENANTS • Auchan • Electrosystem • Mars • KDV Group • Mir Instrumenta • Mobis Parts CIS • FM Logistics • Havi Logistics 19 WAREHOUSE Gorigo, St Petersburg DESCRIPTION GLA Grade A Logistics Warehouse Complex 88,000 sqm KEY TENANTS • DB Schenker • Logisan • DNS Retail • Major Terminal • 220 Volt • KDV Group • Kiilto • Greenland LOCATION The property is located south of St Petersburg close to Pulkovo International Airport, just 2 km away from the Ring Road and Tallin highway, which provides easy access to the city. 20 WAREHOUSE Nova Riga, Moscow DESCRIPTION LOCATION The property is directly adjacent to the Nova Riga highway allowing easy access to the centre of Moscow, 25km from the MKAD and 5km from the Betonka A107 motorway. Grade A Logistics Warehouse Complex with 25ha of land suitable for construction KEY TENANTS • Pernod Ricard • Maunsfeld • BGLC Group • ORB GLA 68,000 sqm 21 WAREHOUSE Volga, Nizhny Novgorod DESCRIPTION LOCATION Grade A warehouse complex with additional 21.5ha of land KEY TENANT • X5 Retail Group • Bristol Alcohol GLA 64,000 sqm Volga Logistics Park is located on 33 ha land plot 7 km away from Nizhny Novgorod in Kstovo town. There is a direct access provided from the complex to M7 highway (Moscow-Kazan). 22 WAREHOUSE Lobnya, Moscow DESCRIPTION LOCATION Grade A Logistics Warehouse Complex KEY TENANTS • Nippon Express • RosLogistics • ProStore GLA 52,000 sqm The property is located on the Rogachevckoe highway approximately 35km to the north of the Moscow city centre, 20km from the MKAD and 10km north-east of Sheremetyevo airport. 23 WAREHOUSE Sholokhovo, Moscow DESCRIPTION LOCATION Grade A Logistics Warehouse Complex KEY TENANT • BVK Group • Perspektiva • Godovalov GLA 45,000 sqm The property is located in Myitischensky District of the Moscow Region, on the Dmitrovskoe highway, approximately 16km from the MKAD, and 15km from Sheremetyevo airport. 24 WAREHOUSE Pulkovo, St Petersburg DESCRIPTION GLA Grade A Logistics Warehouse Complex 37,000 sqm KEY TENANTS • SKL Group • OSG • UPM • Melon Fashion Group • Holodilnik.ru LOCATION The property is located to the south of the city centre on Pulkovskoe highway forming part of the Finland-Russia-Ukraine corridor and in close proximity to the Ring Road (KAD) and 2km from Pulkovo International airport. Southern, Moscow DESCRIPTION GLA Grade A Logistics Warehouse Complex 14,000 sqm KEY TENANTS • Lindex • A&D Rus • L’Occitane LOCATION The property is located in an industrial area of the Southern administrative district of Moscow, approximately 10km from the city centre, around 1km from the Varshavskoye highway and 5km from the MKAD. 25 OFFICE Kellermann, St Petersburg DESCRIPTION LOCATION The property is located in historical centre of St Petersburg in Admiralteyskiy district, 15 min drive from the Nevskiy prospect. High quality Office Complex KEY TENANTS • Baltiyskiy Leasing • Melon Fashion Group • MAERSK • Saint-Gobain • Gefco GLA 22,000 sqm 26 OFFICE Primium, St Petersburg DESCRIPTION Class A Office Complex KEY TENANT • YIT • TELE 2 • Valio • PIK Group GLA 11,000 sqm LOCATION The property is located north-west of St Petersburg in Primorskiy district, close to the new Gazprom headquarters. Konstanta, St Petersburg DESCRIPTION Grade B+ office building KEY TENANT • LenEnergo GLA 16,000 sqm LOCATION The Konstanta office is located on Leninsky Prospekt in the Moskovskiy district of St. Petersburg, approximately 8km to the south of the city centre. The property is a modernised administrative building, which was converted in 2005 to provide an eight storey, self contained office building for Lenenergo. Fountain at Manezh Square, Moscow 27 28 CHIEF EXECUTIVE’S REPORT Dear Shareholders, The normal process for producing these statements involves an early discussion draft some weeks ahead of the results date. This draft gets fine tuned up to the announcement date but rarely changes much. This year external events have meant two redrafts, one for coronavirus and the second following the oil price collapse. We are yet to see any immediate impact on our operating business due to the Coronavirus situation but we have delayed the acquisition of IAML’s various shareholdings until we can see some stability returning. As with the majority of international businesses we have implemented a number of preventative measures, stopping all non essential travel, increasing the use of our VCU facilities, monitoring of all staff that do travel and implementing back up plans for working 2019 was a very good year although not in the way we originally remotely. The mayor of Moscow has also introduced strict rules for planned. Our market continued to improve. Vacancy rates in the companies. This covers the monitoring of employees, including market are down, rents are up and Russian Central Bank (“CBR”) mandatory temperature tests each day, and he has also introduced rates continued to fall. This is now impacting positively on a isolation periods for travellers from numerous countries arriving in business with no exposure to Dollar debt and only 15% of our space Moscow which only reinforces our own travel restrictions. now with Dollar pegged leases. The continuation of this Dollar income is benefitting us during this current period of market and currency turmoil. We know that the Russian economy is heavily influenced by the oil market. Recent movements have impaired external sentiment but at this early stage our day to day business of renting warehouses has not E-commerce has arrived and is an expanding force in our market. been affected. E-commerce tenants now occupy 6% (2018: 3%) of our portfolio and we expect this increase to continue. Inevitably the Coronavirus and a volatile oil market will lead us to adopt a more financially cautious approach which is a frustration Due to completely non-related circumstances in the fund given the positive trends we were seeing across all aspects of our management industry, 2019 was an extraordinary year for the business. company. Shareholder liquidity issues meant we were offered the opportunity to purchase 38% of our ordinary shares from two large institutional investors, Woodford Investment Management (“WIM”) and Invesco Asset Management Limited (“IAML”), at a near 50% discount to net asset value per share. We completed the purchase of 16% in 2019 including all of WIM’s holding, and have contracted to purchase the remainder from IAML, together with their holding of preference and convertible preference shares, before 31 July 2020, Despite an excellent 2019 current market turbulence necessitates a cautious approach to distributions particularly given our tender offers which are sensitive to market movements . With that in mind we intend to make a final distribution of 2.25p per share which amounts to 3.5p for the year. However the timing and structure of this distribution will be determined at a later date when market volatility has calmed down. subject to certain shareholder approvals. Although this has led to a Finally, I and my colleagues, delight in congratulating our Chairman, diversion of our cash resources away from property acquisitions it is Sir Richard Jewson, on being awarded his knighthood during the year. an opportunity too good to miss. An honour highly reflective of a man marrying great integrity and The announcement of the share buy backs did have an impact on share price performance and we had seen an improvement prior to the recent market sell off. We hope that when markets return to normal, this will again have a positive effect on price performance. compassion with strong leadership. Bravo Sir Richard. Glyn Hirsch Chief Executive Officer Net asset value per share at 31 December 2019 increased to 76p 15 March 2020 (2018: 48p) following the year end valuations and the prospects were looking very good from here prior to the Coronavirus outbreak. At today’s date we have £104.4 million in cash. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 29 BUSINESS MODEL Purpose and Culture The original purpose of our business in 2005 was to act as a conduit for international funds into an underdeveloped and undersupplied logistics property market in Russia at an exciting time of expansion and opportunity for the country. The nascent business encapsulated the entrepreneurial spirit of a small group of pioneers entering a new, untapped market. That spirit remains in the business today and We have acquired our investment portfolio, typically with yields of between 11% and 14% and have bank financing costs across the Group of 6.52%. The majority of our operating business is Rouble denominated, with a small number of legacy US Dollar pegged leases remaining and secured debt of Rouble and Euro denomination. We intend to continue our move to Rouble denominated debt in the coming year. underpins our culture. This has allowed us to be dynamic and quick At the year end, US Dollar leases accounted for 16% of the Gross in reacting to the many obstacles that we have been presented with, Lettable Area (“GLA”) of our warehouse portfolio (2018: 26%). from the global crisis of 2009, through international sanctions to the Our office portfolio now has no currency exposure (2018: Euro 20%; shock of the oil price collapse and Rouble float at the end of 2014. US Dollar 9%). The majority of leases are “triple net” meaning property Today, we have 179 employees in three countries. We have a management team that promotes our entrepreneurial and operating expenses are recharged to tenants, leakage of cost only occurring on vacant space. meritocratic spirit with integrity and openness. The growth of the The Group’s secured banking facilities are 57.6% (2018: 31.1%) Rouble business also brings the requirement to professionalise, the need for denominated, 42.4% (2018: 34.8%) Euro and we now have no US a robust internal control framework and appropriate systems and Dollar liabilities (2018: 34.1%). Debt amortisation is weighted toward procedures. The last year has seen a focus on all of these areas, from the Euro element of our financing facilities to reduce the foreign the introduction of an internal audit function to a review of all internal exchange exposure over the facility term. procedures and IT systems to improve integration. Other than our St Petersburg office portfolio, each of the secured Our Cyprus Board have run two forums for all senior management facilities sits in a special purpose vehicle (“SPV”) structure to minimise this year, to discuss the way the business is managed and controlled. recourse to the overall portfolio. At the year end, asset specific debt This is fostering a better flow of information and understanding of represented 50.1% loan to value (2018: 54.1%). the control environment amongst employees. It has also precipitated a number of initiatives that are being implemented, covering areas such as data management, IT integration and group structure. At the outset of those meetings however, was a reminder not to lose sight of that original entrepreneurial spirit. Business Model and Strategy Our strategy of holding an investment portfolio of Grade A logistics warehouses in Russia for the long term, with the aim of producing rental income that delivers progressive distributions to our shareholders has not changed. The market remains fragmented with a number of developers and single asset owners as our main competitors. Until recently, there had not been an investment property competitor with a sole focus on the logistics market. However, with market fundamentals improving and logistics seen as a Our average letting size by tenant is 8,722sqm (2018: 9,000sqm). We do not have one tenant with more than 9% (2018: 8%) of our portfolio’s GLA and the top ten tenants, including Roslogistics, account for 43% (2018: 42%) of our portfolio in GLA terms and 49% (2018: 53%) in income terms. Key Performance Indicators (‘KPIs’) Occupancy levels and average Rouble rents achieved are our primary operating focus. Our measure of average Rouble rents incorporates the running rent for all parts of a lease: the indexed dry warehouse rent; mezzanine; related office space; ancillary items such as parking; and “rentalised” tenant improvements on high specification space. We also aim to refinance at least our secured debt amortisation each year, which approximates to a four year refinancing cycle for each key property sector globally, interest in portfolio building does seem asset. to be on the agenda for some international funds. Having built our infrastructure and with a strong team of property, finance and legal specialists we do believe we have a strong competitive advantage but with such an immature property investment market we would welcome additional players in the sector. It could only benefit the market and support further growth in property valuations. The ability to distribute to ordinary shareholders from cash covered underlying earnings and operating cash flows after interest remains our focus when determining distribution policy. All of the above underpin financial targets set for annual bonus incentives. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 30 PORTFOLIO REVIEW Geographical analysis Warehouse 15% 15% 14% 9% 70% 77% Space NOI Office The Group's office portfolio is located in St Petersburg. Leasing and maturities Moscow St Petersburg Regions During a year without acquisitions we have focussed on maintaining occupancy, investing in our properties for the long term and positioning ourselves to benefit from the upswing in tenant demand and rents. Occupancy began and ended the year at 90% but has improved since the year end and now stands at 92% with a further 2% covered by letters of intent (“LOIs”). ‘000 sqm Maturity profile at 1 January 2019 Renegotiated and extended Maturity profile of lease extensions Vacated/terminated New lettings Maturity profile at 31 December 2019 2019 255 (111) 5 (154) 5 – 2020 2021 2022 2023-2032 265 (46) 18 (26) 28 239 359 (33) 1 (21) 11 317 237 (25) 57 (5) 5 269 616 (66) 200 (6) 176 920 Total 1,732 (281) 281 (212) 225 1,745 280,700sqm of existing leases have been renegotiated and extended in the financial year and 225,500sqm of new leases signed. Significant new lettings include 11,500sqm to Inditex, 14,400sqm to Diageo and 19,200sqm for IKEA. A number of major tenants have also increased their space with us including Bacardi taking an extra 17,100sqm, Pernod Ricard 9,300sqm and Cotton Club 11,500sqm. Space vacated on maturity, breaks exercised and early terminations totalled 212,200sqm during the year. Vacant warehouse space at the year end totalled 195,000sqm and the office portfolio had only 3,000sqm of vacancy. There are potential breaks in the portfolio of 189,000sqm in 2020 and 241,000sqm in 2021. We currently expect tenants who occupy only circa 19,000sqm and 29,750sqm to exercise their breaks and vacate in 2020 and 2021 respectively. Since the year end we have signed a further 104,000sqm of deals of which 63,000sqm were new lettings and 41,000sqm were renewals or extensions. We currently have 218,000sqm of LOIs for renewals, extensions or expansions and 31,000sqm of new lettings. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT PORTFOLIO REVIEW 31 Lease Expiries at 31 December 2019 920 317 269 239 Space (’000 sqm) 2020 2021 2022 2023-2032 Our leasing strategy remains one of attracting the best tenants for the long term whilst keeping a diversified tenant mix across sectors and business types. We also target tenants who require significant capital investment into their premises and seek to “rentalise” these improvements over the term of the lease, creating enhanced returns. Across the portfolio we are implementing a number of initiatives to reduce our energy consumption and use more sustainable sources of energy. In 2019, as part of our rolling capital maintenance programme, we have completed the replacement of roof membranes and associated insulation on 89,000sqm of buildings and also replaced outdated lights in 53,000sqm of our portfolio, installing LED fittings. Both of these measures have reduced energy consumption. At Noginsk in Moscow, our electricity is now supplied from a sustainable source (hydro electricity) and we intend to roll this out to other properties where appropriate. In Rostov, in the south of Russia, we are currently evaluating an option to create a solar power plant to generate electricity for our property in the city, and subject to obtaining any necessary permits will start these works during 2020. At the year end, 16% (2018: 26%) of our warehouse GLA had US Dollar denominated leases with an average warehouse rental level of $158 per sqm (2018: $148 per sqm) and a weighted average term to maturity of 1.9 years (2018: 2.1 years). Rouble denominated leases account for 71% (2018: 61%) of our total warehouse space with an average warehouse rent of Roubles 4,922 per sqm (2018: 4,900 per sqm) and weighted average term to maturity of 4.1 years (2018: 4.5 years). Rouble leases have an average minimum annual indexation of 5.7% (2018: 5.9%). Currency exposure of warehouse leases 10% 3% 71% 4% 16% 68% 28% Space NOI USD RUB EUR Vacant RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 32 PORTFOLIO REVIEW Investment Portfolio Warehouse portfolio Moscow We have ten warehouse projects in Moscow totalling 1.3million sqm with 87% (2018: 88%) of space let at the year end. 1% 3% 4% 5% 9% 12% 19% *Excludes space let to Roslogistics Space Pushkino Istra 0.5% 1.5% 1% 2% 8.5% 14% 15% 16% 16% 15% 16% 21% Noginsk Sever Klimovsk Krekshino Nova Riga Lobnya* Sholokhovo Southern NOI 20.5% Occupancy in Moscow year on year remained broadly flat, but this hides the fact that one of our largest leases expired in June releasing 91,300sqm of space at Krekshino. At that point we took the opportunity to invest in the property undertaking some technical improvements and a cosmetic refurbishment. At the date of writing only 21,000sqm remains vacant with new tenants including Diageo, Wildberries and Ball Corp with one LOI on a further 5,600sqm. Currently we only have 116,800sqm available for rent in Moscow, although this will rise in the second half when Itella returns a further 65,000sqm to us at Pushkino. We are already in discussions with a number of prospective tenants to relet this space. St Petersburg 14% 32% 54% 19% 32% 49% Shushary* Gorigo Pulkovo Space NOI *Excludes space let to Roslogistics Regions 22% 28% 42% 40% Novosibirsk* Rostov* Nizhny Novgorod 36% 32% Space NOI *Excludes space let to Roslogistics Warehouse occupancy in the regional markets of St Petersburg, Rostov and Novosibirsk has remained strong and we have increased rents in all locations. The lack of supply in the market generally means we could see further rental increases in 2020. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT PORTFOLIO REVIEW 33 Tenant Mix 4% 31% 16% Space 18% 31% Warehouse Tenant Type Distribution Retail Manufacturing Third Party Logistics operators E-commerce Our tenant mix has remained diverse during the year. The proportion of space leased to the e-commerce sector increased to 4% at the year end and is 6% today. The influence of e-commerce on the letting market still remains small compared to other European markets but it is growing. Office portfolio St Petersburg Rents have continued to improve in St Petersburg where our office portfolio is situated. This has allowed us to virtually fully relet Primium where the sole tenant’s lease expired in the summer. New occupiers include Tele2 and PIK as well as YIT, the original occupier, retaining 27% of the building. Since acquisition we had benefitted from a very high Euro rent and this has now re-based down to the market rental level, although the rents we have achieved are 20% above the ERV at the date of purchase. The picture at Kellerman is very similar with the last hard currency lease coming to an end last year. It is now 87% let with LOIs on a further 3%. The office portfolio is now entirely let in Roubles. 23% 32% 30% 45% 43% Kellermann Konstanta Primium 27% Space NOI Portfolio yields Warehouse 2018 2019 Office 2018 2019 Moscow (%) St Petersburg (%) 10.75 - 12.60 10.80 - 12.10 12.30 - 12.50 12.10 - 12.30 Regions (%) 12.25 - 12.50 11.80 - 12.30 Moscow (%) St Petersburg (%) Regions (%) – – 12.00 - 12.25 11.75 - 12.00 – – The investment properties and additional phases of existing projects were valued by Jones Lang LaSalle (“JLL”) at the year end, in accordance with the RICS Valuation and Appraisal guidelines, and are carried at a market value of £1.4 billion (see notes 11 & 12 to the financial statements). This has resulted in a net profit on revaluation of £46.6 million in portfolio value during the year. In Rouble terms the value of the properties has increased by 4.2%. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 34 PORTFOLIO REVIEW JLL reduced both the cap and discount rate inputs during the second half of the year by 25 basis points, reflecting the improving market, CBR rates and market evidence. JLL still quote a range of yields across all sectors to reflect the difference in quality of assets, leases and differing currencies. The figures in the table above are the discount rates applied to the cash flows from the properties. These are derived from the prime cap rates that JLL publish adjusted for individual property factors. The property investment market improved in 2019 with the total value of transactions increasing by 41% to $4.1 billion. Domestic buyers remain the largest part of the market with western capital almost non existent, foreign investment instead coming from China and the Middle East. Land Bank Regions Moscow 32% 68% 55% 22% 16% 7% Regions Rostov-On-Don Omsk Omsk 2 Novgorod Space In Moscow, after some delays caused by changes in the planning system we have now renewed our construction permit at Nova Riga, and could start to build out up to 75,000sqm if we secure a sizeable prelet. The Market In our main market of Grade A warehouses in Moscow where we hold 70.5% of our portfolio, demand has remained strong and market vacancy has reduced to circa 4%. In real terms this means there is only circa 500,000sqm of space available in the market. At last year’s take up levels this amounts to only five months supply. The robust level of demand and limited new supply has forced rents upwards and we are generally seeing average rents of Rub4,000 per sqm in Moscow and the Moscow region. There are variations in different sub markets, with the range of rents being from Rub3,500-Rub4,250, however the vast majority are now above Rub4,000 per sqm. In St Petersburg and our two regional hubs of Rostov and Novosibirsk rental levels are broadly the same as in Moscow. In 2019, 1.1million sqm of warehouse space was delivered. This is the highest volume since 2016 and 7% higher than in 2018. Only 21% of new supply was speculative, the majority being build to suit or pre-leased, one third of the level of two years ago. Overall take-up amounted to 1.3million sqm which was the driving factor in reducing vacancy. Demand was strongest from the retail, logistics and manufacturing businesses which accounted for 35%, 28% and 18% respectively. E-commerce companies continued to expand, and although their share of take up was down in the year this can partly be explained by the very high level of take up in 2018. For the coming year it is estimated that a further 918,000sqm will be delivered and take up will be circa 1.2milllion sqm. Of the space under construction 352,000sqm or 38% is pre committed as build to suit for lease or sale, leaving 566,000sqm of speculative space coming to the market. Construction costs have increased by approximately 5% during the year and may continue to rise as a result of Rouble weakness. Investment volumes in the year increased to $4.1 billion, with 67% of this in Moscow. Over 74% of all deals were funded by Russian capital, and only 7% of the total capital or $290 million went into the warehouse sector. JLL predict prime yields in the range of 10.50-12.00% for Moscow warehouses. We continue to look at a number of new acquisition ideas in our preferred sector of Grade A warehouses and would have made acquisitions in 2019, if the opportunity to buy back our ordinary shares had not arisen. Tenant demand has started the year very strongly and we are now 92% let. What the medium term effects of the Coronavirus will be are as yet unknown, but we are well placed with high occupancy, a diversified tenant mix and with little vacancy in the broader market. In a favourable scenario where the effect of Coronavirus is muted then 2020 should be another year of high occupancy and rising rents. Even though the CBR reduced rates by 1.75% in 2019, cap rates have only fallen by 25 basis points so we expect there to be further positive movement in cap rates as the cost of borrowing falls. As we have said before, in any other European market yields would be considerably lower than we see today and in the medium to long term the relative high yields and low rents should attract more capital. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 35 FINANCE REVIEW Increased occupancy and a stronger Rouble have supported our income and profitability in the year. Improving asset valuations have also given a boost to IFRS earnings. Our net asset value per share has benefitted from a stronger year end Rouble, property valuation uplifts and the purchase and cancellation of 99 million ordinary shares at a discount to net asset value per share in the year. Income Statement We assess our ability to make covered distributions with reference to underlying earnings and operating cash flows after interest. The former also allows a comparison of operating results before mark to market valuation movements. The reconciliation between underlying and IFRS earnings is given in note 9 to the accounts. Underlying Earnings (Adjusted non IFRS measure) Net rental and related income Administrative expenses Share based payments Foreign exchange gains/(losses) Share of profits of joint ventures Operating profit Net finance charge Underlying profit before tax Tax Underlying profit after tax Basic underlying earnings per share 2019 £’000 126,504 (23,130) (4,927) 27,462 792 126,701 (72,966) 53,735 (10,510) 43,225 7.67p 2018 £’000 118,285 (22,714) – (2,480) 1,630 94,721 (68,510) 26,211 (6,197) 20,014 3.12p Net rental and related income benefits from a full year of income from acquisitions completed in 2018. The average Rouble/Sterling rate of 82.6 (2018: 83.7) has had minimal effect on translating the income statement to presentation currency. The stronger year end Rouble/Euro exchange rate of 69.3 (2018: 79.3) results in an unrealised profit on foreign exchange when our Russian subsidiaries account for their Euro debt liability. Underlying Administrative Expenses Underlying administrative expenses increase as a result of bonus provisions. The 2019 results include £1.2 million paid in relation to 2018 performance but also carry an accrual for 2019 bonuses of £1.3 million together with an estimate of share based bonus payments of £4.6 million, therefore accounting for the impact of two years. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 36 FINANCE REVIEW Underlying Net Finance Charge Our underlying interest expense increases as acquisitions completed towards the end of 2018 were refinanced in the year. Interest receivable dropped on lower average cash balances following the use of funds to acquire the company’s ordinary shares and on reducing CBR rates. IFRS Earnings Net rental and related income Administrative expenses Share based payments and other long term incentives Foreign exchange profit/(loss) Share of profits of joint ventures Profit on disposal of joint ventures Operating profit Profit/(loss) on revaluation Net finance charge IFRS (loss)/profit before tax Tax IFRS profit/(loss) after tax 2019 £’000 126,504 (25,433) (5,468) 27,462 792 490 124,347 48,271 (107,559) 65,059 (19,041) 46,018 2018 £’000 118,285 (25,150) (2,853) (2,480) 1,630 – 89,432 (121,009) (83,311) (114,888) (5,793) (120,681) The principal movements between underlying earnings and IFRS earnings relate to mark to market changes, with a profit on revaluation of investment properties of £48.3 million (2018: loss of £121.0 million) and the write down of the value of CBR rate caps of £20.4 million (2018: £4.6 million) being the largest. The latter a factor of the CBR monetary easing over the year, interest rates dropping from 7.75% at 1 January 2019 to 6% today. Taxation Tax paid increases in line with increased profits. The largest element of the charge for the year relates to deferred taxes with a reduction in deferred tax losses and a charge for the gain in revaluation compared to the depreciated cost of our assets in the Russian operating companies. Investment Properties Investment properties Investment properties under construction 2019 £m 1,338 34 1,372 2018 £m 1,175 31 1,206 The carrying value of our investment property and investment property under construction benefits from both improving valuations and a stronger Rouble. Revaluation gains of £46.6 million have been recognised in the year on the back of improving yields and ERVs. The stronger year end Rouble/Sterling rate of 81.15 compared to 88.35 at 31 December 2018 also adds £108.8 million on the retranslation of the opening balances to Sterling. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT Debtors and Creditors Debtors Other receivables (non current) Derivative financial instruments Trade and other receivables FINANCE REVIEW 37 2019 £’000 3,414 2,621 41,595 2018 £’000 15,535 21,953 43,658 Non current asset movements in the year relate principally to financing. Other receivables reduce as restricted cash of £12 million retained for repayment of a loan was discharged early in the year. As noted above, the carrying value of interest rate caps on our Rouble debt reduced significantly as CBR rates fell, reflected in the change in derivative financial instruments’ carrying value. Points of note in trade and other receivables include the recovery of a VAT asset of £4 million which arose on the acquisition of the Sever asset in 2018 and the inclusion of deferred consideration of £3 million in other receivables on the sale of the Coln joint venture. Creditors Trade and other payables Other payables (non current) 2019 £’000 51,691 18,623 2018 £’000 66,192 17,797 The largest movement in trade and other payables relates to the payment of £12 million of deferred consideration on the Sever acquisition in the year. Advanced rentals drop in the year on the loss of NLC at Krekshino. Other payables increase with the inclusion of the 2019 bonus provision as explained above. Cash and Debt Cash Flow Summary Net cash generated from operating activities Net cash used in investing activities Net cash used in financing activities Net decrease in cash and cash equivalents Effect of foreign exchange rate changes Decrease in cash Closing cash and cash equivalents 2019 £’000 93,100 (16,196) (80,062) (3,158) (2,154) (5,312) 68,138 2018 £’000 96,086 (72,203) (139,827) (115,944) (7,743) (123,687) 73,450 Cash flows for the year were relatively neutral, the main investment in the period being the buy back of our ordinary shares, costing £53.3 million in total, matched by net debt financing of £50.9 million after debt amortisation of £22.7 million. £3.65 million was received as the first tranche consideration on the sale of our share in the Coln joint venture, with a further £3 million payable later this year. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 38 FINANCE REVIEW Bank Debt Fixed rate debt Debt hedged with caps Unhedged debt Unamortised loan origination costs and accrued interest Total debt Weighted average cost of debt Weighted average term to maturity The currency profile of secured debt at 31 December 2019 was: 58% 42% 31% USD EUR RUB 2019 £m – 545 545 145 690 (7) 683 6.52% 4.7 2018 £m – 543 543 106 649 (6) 643 7.69% 4.0 34% 2019 35% 2018 The debt maturity profile at the year end is: Percentage of total debt maturing (%) 5 2 1 1 – 17 60 Number of maturing facilities – 2 9 6 1 11 1 450 400 350 300 250 200 150 100 50 0 411 33 2020 8 2021 – 2022 120 78 40 2023 2024 2025 2026 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT Debt maturing (£m) FINANCE REVIEW 39 The Group has now converted all US Dollar debt to a mixture of Rouble and Euro facilities and extended terms on the majority of facilities. There are five facilities of Euro only totalling €126.1 million, one facility of Rouble only and ten facilities with a Rouble/Euro mix. The amortisation profile of the mixed facilities is weighted towards the Euro element to reduce foreign exchange risk over the term of the facility. It is the intention to convert the Euro only facilities into a Rouble/Euro mix during this year, continuing to increase our Rouble debt weighting. At the year end Rouble debt accounted for 57.6% (2018: 31.1%) of secured facilities and Euro 42.4% (2018: 34.8%). The weighted cost of debt reduced during the year as CBR rates fell. The majority of our facilities are hedged with interest rate caps. Of the unhedged amount £78.4 million relates to debt drawn late in December 2019 which was subsequently hedged with interest caps in January this year. The remainder relates to the near term maturities which are in the process of being extended and two Euro facilities where hedging is only required if EURIBOR exceeds 100 basis points. Net Asset Value Net asset value per share has increased from 48p at 31 December 2018 to 76p at 31 December 2019. The 2018 figure was depressed by a weak Rouble at the balance sheet date. 2019 increases on a stronger Rouble, investment property valuation gain and the accretive impact of buying ordinary shares at a significant discount to net asset value per share during the year. Subsidiaries In December 2019 we completed on the sale of our share in the Coln Park joint venture for a total consideration of £6.65 million. £4 million was received in December 2019, including the repayment of a loan of £0.35 million, with the £3 million balance payable by December 2020. This gave a small profit on sale of £0.5 million. Roslogistics has continued to trade at a similar level to 2018. We expect it to reduce its let space during the year but maintain profitability levels. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 40 RISK REPORT Risk Appetite Risk Management and Internal Controls The 2019 financial year saw a marked improvement in our sector with Risk assessment is built into the Group’s operating model and market rents increasing, vacancy dropping and property valuations performed throughout the organisation as part of day to day improving. We have now extinguished all of our US Dollar liabilities operations. The Board is ultimately responsible for the management and asset secured debt is currently a Rouble/Euro mix, reducing our of risk and regularly carries out a robust assessment of the principal foreign exchange balance sheet risk. If favourable terms for Rouble risks and uncertainties affecting the business, including new and secured facilities continue then we will further reduce our exposure to emerging risks, discusses how these may impact on operations, Euro financing in the current year. As we stated in last year’s Risk Report, we intended to continue with our acquisition driven growth strategy in the current year but instead have been distracted by some unforeseen developments. The most significant risk we were presented with in 2019 was a significant overhang in our ordinary shares as firstly WIM and then latterly, IAML, two of our largest shareholders, faced liquidity issues. We diverted funds we had earmarked for property acquisitions to purchase WIM’s ordinary shares in August 2019 and subsequently contracted to purchase IAML’s. We have secured a credit committee approved financing line for the IAML transaction. However, we now have the Coronavirus situation and the subsequent oil price collapse. Given the uncertainty surrounding the potential impact this may have on our business we have temporarily reduced our risk appetite. The immediate effect of this is a decision to maintain our current liquidity levels and postpone the IAML share buy back until we have a better understanding of the fall out, if any, from the crisis. Already we have seen a fall in oil prices precipitating a weakening of the Rouble. In a worst case scenario, this could lead to a suspension of investment decisions by our tenants, a disruption in supply chains performance and solvency and what mitigating actions, if any, can be taken. The Audit Committee is responsible for ensuring that the internal control procedures are robust and that risk management processes are appropriate. A fuller explanation of the process is given in the Audit Committee Report. Our Cypriot holding company board has been working with our other jurisdictions reviewing and codifying the group’s internal control infrastructure and has overseen the first year of our internal audit function. The weekly operational committee meetings for each department within the Group allow operational and management information to flow through the Group’s risk matrix in a timely manner. The risk management process is designed to identify, evaluate and mitigate any significant risk the Group faces. The process aims to manage rather than eliminate risks and can only provide reasonable and not absolute assurance. The Risk Committee has met four times during the year and reports are also reviewed by the Audit Committee. The Cypriot Board have reported to the Audit Committee on progress made with their internal control procedures with and without the internal auditors in attendance. impacting on the demand for new warehouse space and potential No significant failings or weaknesses in the internal control and risk defaults by existing tenants whose businesses are affected most. assessment procedures have been identified during the year. However, given the experience the business had in 2015 and 2016 following the last oil price collapse we have adapted our balance sheet Principal Risks and Uncertainties to reduce the impact of market shocks such as this and we believe we We have set out in the following tables the principal risks and are in a significantly stronger position than we were during that period. uncertainties that face our business, our view on how those risks have changed during the year and a description of how we mitigate or manage those risks. We have also annotated those risks that have been considered as part of the viability assessment. For now though, other than the Rouble weakening, we are not seeing any impact on our operations but we will proceed with caution. The principal risk factors that follow reflect our opinion of how they have changed in 2019 and how the oil price volatility may impact on our business. The impact of Coronavirus on our local market is as yet unknown. We are also cognisant of our responsibility for our impact on the environment and sustainability. We are looking at a number of potential projects at the moment. These range from introducing greater energy efficiency in our buildings as part of our rolling capital expenditure programme, through managing international travel with greater use of VCU technology and carbon offsets to the assessment of the impact of building a solar panel farm and the introduction of bee hives at one of our regional asset sites. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT RISK REPORT 41 Political and Economic Risk Risk Impact Mitigation Change in 2019 Oil and Gas dependent economy V Oil price volatility leads to a weakening of the Rouble. The weak Rouble increases the cost of servicing Euro debt and puts pressure on banking covenants. A low oil price dampens infrastructure spending which leads to a drop in consumer demand. This in turn impairs demand for warehouse space and a contraction in demand from existing tenants. As the majority of our financing is Rouble denominated our banking covenants are less sensitive to the servicing of the Euro element of our debt. The amortisation profile of our facilities is weighted towards the Euro element of the facility to reduce the foreign exchange risk over the term of the loans. With little or no speculative development in the market and low vacancy levels research indicates that the warehouse sector should be resilient in the short to medium term. Sanctions The use of economic sanctions by the US and EU continues for the foreseeable future. Continued isolation of Russia from international markets and a return to a declining Russian economy. The local market has accepted the inevitability of long term economic sanctions and this has played its part in the fundamental changes to the Russian economy. We have adapted our business model to secure our position in the market including extinguishing all US Dollar liabilities. However, the risk of increased sanctions remains. Æ Æ Financial Risk Risk Impact Mitigation Change in 2019 Foreign Exchange V At the year end 42% of secured debt was denominated in Euros and all of our preference shares in Sterling. A weakening of the Rouble against those foreign currencies reduces our ability to service debt and preference share coupons and reduces our profitability. We have significantly reduced our exposure to foreign currency secured debt facilities and will continue to do so. As noted above, bank covenants are now less sensitive to the servicing of the Euro element of facilities. The improvement in our secured debt foreign exchange risk benefits the servicing of our preference shares as the overall foreign exchange risk of subordinated debt reduces. However, the recent weakening of the Rouble does increase this risk in the current year. Æ V V Interest rates Increases in Central Bank rates and financing benchmarks. Share Buy Backs We have purchased 16.5% of our ordinary shares in the year and contracted to purchase a further 28.5% in the current year. The cost of debt increases and Group profitability and debt service cover reduce. We are operating in a low or reducing interest rate environment for Euro and Rouble facilities. Our variable cost of debt is hedged with the use of caps with terms matching the debt maturity profile. Æ We reduce our equity base and increase group gearing. The overhang of ordinary shares has been impeding share performance and the acquisitions are NAV per share enhancing. Our gearing levels are more an indicator of low asset valuations. The increase in values over the past 12 months partly compensates for the impact of last year’s buy backs on our gearing levels. NEW RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 42 RISK REPORT Property Investment Risk Acquisitions V Impact Mitigation Change in 2019 We operate in an Legacy issues may erode We have a strong senior management team immature investment earnings enhancement and in both our Cyprus and Moscow offices with market where legacy issues integration into our existing international and Russian experience in real estate are common with Russian systems may involve excessive acquisitions. Ç acquisitions. management resource. External advisors undertake full detailed due diligence on any acquisition projects. Leases V Market practice This can lead to uncertainty of We have a proactive property management team increasingly incorporates on going annualised income and continued open dialogue with tenants. lease break requirements and due to lease break clauses. We have a dedicated project management landlord fit-out obligations. There is additional landlord resource assigned to construction and fit-out risk attached to the delivery of obligations under leases. tenant fit-out requirements. Market conditions are improving with rents increasing and vacancy dropping. Lease breaks are less likely to be exercised in this market and tenants are signing longer leases on new lettings given the lack of available space. Ç Capital Expenditure V As 75% of our warehouse Properties become less We have put in place a rolling five year capital portfolio was built between attractive to prospective expenditure programme to maintain our 2007 and 2009 some tenants or lower rental values properties at a Grade A level. These works should elements of the buildings are achieved. protect and potentially enhance levels of rent Ç require replacement or modernisation. Russian Domestic Risk achievable. Risk Impact Mitigation Change in 2019 Legal Framework The legal framework in Russia The large volume of new We have an experienced in house legal team continues to develop, with legislation from various including a litigation specialist. We use a variety of new and proposed laws state bodies is open to external legal advisors when appropriate. regularly being introduced. interpretation, puts strain on the judicial system and can be open to abuse. Our lease agreements have been challenged and have proven to be robust in both ICAC arbitration and in Russian Courts. Russian Taxation Russian tax code is changing Tax treaties may be Our business is a significant contributor to in line with global taxation renegotiated and new inward investment in the Russian logistics sector. trends in areas such as transfer legislation or clarification of Our structure has developed to deal with the pricing, beneficial ownership existing practice may increase commercial risks of operating in Russia rather than of cross border cash flows and the Group’s tax expense. to take advantage of tax benefits. Management capital gains tax. and control is exerted as appropriate in each jurisdiction and the skills and experience of staff in each office reflect that commercial requirement. Ultimately, Russia remains a relatively low tax jurisdiction with 20% Corporation tax. Æ Æ RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT RISK REPORT 43 Personnel Risks Risk Impact Mitigation Change in 2019 Key Personnel Failing to retain key personnel. Strategy becomes more The Remuneration Committee and Executives difficult to flex or implement. review remuneration packages against comparable market information where available; Employees have regular appraisals and documented development plans and targets; and We are continually addressing succession issues where they arise. Æ Change Key V Viability statement risk Ç Increased risk in the period Æ Stable risk in the period Decreased risk in the period RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 44 VIABILITY STATEMENT In accordance with provision 31 of the UK Corporate Governance Based on the results of the procedures outlined above, the Board of Code, the Directors have assessed the prospects of the Company Directors has a reasonable expectation that the Company and Group and Group over a longer period than the twelve months prescribed will be able to continue in operation and meet their liabilities as they for the “Going Concern” review in the financial statements. fall due over the period of assessment. The Board has reviewed the suitability of the three year viability Signed for and on behalf of the Board period. The average term of leases including breaks remains around three years. Bank facilities have an average outstanding term of around 4 years. Together with an inherent uncertainty in the Russian economy tied to factors such oil prices and international sanctions and latterly, the global impact of Coronavirus, the Board considers the three year period to be appropriate. Mark Sinclair Director 15 March 2020 Key considerations for the Board on solvency this year have been the effect of exchange rates on earnings and the servicing of the foreign currency denominated element of debt facilities, the likelihood of new debt financings and the potential impact of entering into an additional facility to fund the acquisition of the Company’s shares. The reduction in balance sheet foreign currency exposure, increasing portfolio occupancy and committed secured financing facilities has given the Board greater certainty of cash flows over the viability period and hence greater comfort in the forecasts. The viability model assumes current market norms remain stable but is then sensitised for those principal risks and uncertainties highlighted earlier in the “Risks and Uncertainties” section, the key sensitivities applied to the Group being: Increased vacancy assumptions on lease maturities or breaks; • • Depreciation in the average Rouble exchange rate against the Euro, Sterling and US Dollar; • Increases in debt facility interest rate benchmarks and the effect on the interest cost over the forecast period; • The impact of a tightening in available debt finance; • The introduction of a new finance facility to purchase the Company’s shares; and • The combined impact of all sensitivities on cash balances and banking covenants. Following the application of these sensitivities, the key mitigating factors supporting the Company’s viability and solvency are the ability to place funds on deposit with banking counterparts to satisfy any marginal breaches in banking covenants hence avoiding defaults, the ability to control ordinary share distributions and minimising uncommitted capital expenditure. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT DIRECTORS 45 Sir Richard Jewson (aged 75) Non Executive Chairman Christopher Sherwell (aged 72) Senior Independent Non Executive Director Richard Jewson joined Jewson, the timber and building merchant, in Christopher Sherwell is a former Managing Director of Schroders in 1965 becoming the Managing Director, then Chairman of its holding the Channel Islands. Before joining Schroders in 1993, he was Far group, Meyer International plc, from which he retired in 1993. Since East Regional Strategist in London and Hong Kong for Smith New then he has served as Non Executive Director and Chairman of a Court Securities and prior to that spent 15 years as a journalist, much number of public companies. He retired in 2004 after 10 years as of them as a foreign correspondent for the Financial Times. He has Chairman of Savills plc and in 2005, after 14 years as a Non Executive considerable public company experience and since 2004 has acted as Director and Deputy Chairman of Anglian Water plc. He is currently a Non Executive Director on a number of publicly listed investment Chairman of Tritax Big Box REIT Plc, and a Non Executive Director of companies. Currently he is a director of Trian Investors 1 Limited. Temple Bar Investment Trust plc. He is Chairman of the Remuneration Committee and a member of He is Chairman of the Nominations Committee and a member of the the Audit and Nominations Committees. Christopher intends to step Remuneration Committee. Anton Bilton (aged 55) Executive Deputy Chairman down as a Non Executive Director at the AGM. Michael Hough (aged 59) Non Executive Director Anton Bilton is an economics graduate from The City University in Michael Hough previously worked at Goldman Sachs and Drexel London. Anton was the founder of The Raven Group. He has also been Burnham Lambert as well as Apax Partners and Altium Capital. He a founder and director of three other companies that have floated on subsequently co-founded two private Equity firms; Iceni Capital and AIM. He is Non Executive Chairman of Sabina Estates Limited. Aurora Russia. He was also, for 5 years, the CEO and President of Henry He is a member of the Nominations Committee. Glyn Hirsch (aged 58) Chief Executive Officer Technologies, a global manufacturing and technology business. In addition, he was Chairman of OSG, Russia’s largest document storage business for 5 years prior to its successful sale. He is Chairman of the Audit Committee and a member of the Glyn Hirsch qualified as a Chartered Accountant with Peat, Marwick Remuneration Committee. Mitchell & Co in 1985. Until 1995, he worked in the corporate finance department of UBS (formerly Phillips & Drew) latterly as an Executive Director specialising in UK smaller companies. From 1995 until 2001, David Moore (aged 59) Non Executive Director he was Chief Executive of CLS Holdings plc, the listed property David Moore is an advocate of the Royal Court of Guernsey and investment company, a former Director of Citadel Holdings plc, the is currently a consultant with Collas Crill. He is a former partner of specialist French property investor and former Chairman of Property Guernsey law firm Mourant Ozannes, where he had practised since Fund Management plc, the listed property fund management 1993 and before that spent 10 years practising in the City of London, business. He is a Non Executive director of Sabina Estates Limited. predominantly with Ashurst Morris Crisp. He specialises in corporate Mark Sinclair (aged 54) Chief Financial Officer Mark Sinclair is a chartered accountant, and spent 18 years at BDO Stoy Hayward, a leading professional services firm in the UK. He was a partner in the London real estate group, responsible for a portfolio of large property companies, both listed and private. He joined Raven Mount in June 2006 as Finance Director of Raven Russia Property Management Ltd, the former Property Adviser to the Company and joined the Board of Raven in March 2009. Colin Smith (aged 50) Chief Operating Officer Colin Smith qualified as a Chartered Accountant with BDO Stoy Hayward. Prior to joining the Company, he was a Director in the audit and assurance division of the chartered accountant practice of BDO in Guernsey, having joined BDO in 1994. Colin has also been a Non Executive director of a number of investment funds and companies. and financial matters and is a Non Executive Director of a number of investment, insurance and finance sector-related companies. He is a member of the Audit and Remuneration Committees. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 46 CORPORATE GOVERNANCE Chairman’s introduction Statement of Compliance with the Code I am pleased to present our corporate governance report for this Responsibility for governance matters lies with the Board. It is year end. This is our first report under the new 2018 revision of the accountable to shareholders for the activities of the Group. The Board UK Corporate Governance Code (the “Code”). The Board and its consider that the Company complies fully with the principles of the Committees together with management have been working on Code, and all provisions save for 5, 10, 11, and 19. Each of these is implementing the principles and provisions of the Code over the discussed in more detail below setting out our reasons for divergence past 18 months. The Strategic and Governance sections of the Annual from the Code and why, in certain cases, we believe our approach Report set out how we have applied the principles and complied with upholds the spirit of the provisions within the Code. the provisions of the Code. There are a number of areas of the Code provisions where we have not complied for various reasons which 5 – Workforce engagement are set out in this report. Some of these divergences from the Code Given the size of the Group and closeness of the Executive Directors may be temporary while we continue to embed the new Code in the to senior management and operational areas of the Group, we do operations of the Board, its Committee’s and wider Group. Others not consider that any one of the three methods of engagement with may not be in compliance as we believe that our approach, whilst the workforce proposed in the Code will generate a more effective not following the letter of the provisions as set out in the Code, still means to consider the workforce's views as stakeholders of the Group. adheres to the spirit in which the Board considers they are intended There is always a member of senior management in attendance at and are more appropriate for the Company and wider Group at the the formal Board meetings. The senior management team meet on a current time. Each of these is set out more fully below. weekly basis with the executive Directors. Our operational committee As explained in our 2018 report, Stephen Coe retired at the conclusion of the 2019 AGM. Michael Hough, who joined the Board in October 2018 became Chair of the Audit Committee from this point. Christopher Sherwell will be retiring at the 2020 AGM. Christopher was appointed on 1 April 2008 and was the Senior Independent Director and Chair of the Remuneration Committee since 2009. Michael will become our Senior Independent Director, Chair of the Remuneration Committee and will also join the Nominations Committee from the 2020 AGM. Christopher has been an invaluable member of the non executive team acting objectively, independently structure and the role of the board of our Cypriot subsidiary group means that employees from all facets of the Group have weekly meetings with at least one member of the Executive Directors or senior management. This, along with the team leadership structures in place across the Group, allows a conduit for engagement and multiple touch points for our workforce to engage with Executive Board members and senior management and provides an open and informal approach, which in our opinion, is more appropriate for the Group at the current time than one of the three methods set out in the Code. and providing challenge to the executive team in pursuit of the 10 – Director independence Group’s strategy. I, along with the Board, wish Christopher all the best and thank him for his contribution. Sir Richard Jewson 15 March 2020 Provision 10 sets out the Code requirements for Non Executive Directors to be considered independent from the Company. David Moore and Christopher Sherwell have each served as Non Executive Directors for more than nine years. The Board and the Nominations Committee have specifically considered their independence as in past years. The Board is still of the opinion that length of service is not necessarily a complete or accurate measure of a Director’s independence. In the Board’s opinion, David and Christopher continue to fulfil the requirements acting as independent directors and are part of the essential team with experience of the Group’s operations and history over their term which is fundamental in assisting the executives in delivering the Group’s strategy. As noted above, Christopher Sherwell will retire from the Board following this year’s AGM and the Nominations Committee continues to review the structure and constituents of the Board and its Committee’s. Further information on the Group’s succession planning is set out in the Nominations Committee report. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT CORPORATE GOVERNANCE 47 11 – Non Executive Directors During 2019, the Board consisted of four Executive Directors, three Non Executive Directors, following Stephen Coe’s retirement, and one Chairman. The requirements of the Code set out that at least half of the Board, excluding the Chair, should be made up of Non Executive Directors. This is a change from the prior iteration of the code that allowed for smaller companies, to be exempt from this provision. Whilst we understand the importance of Non Executive Directors’ skills, experience, knowledge, diversity and the challenge that they may bring to the Board, we believe that the current composition is appropriate for a business of our size. Your Board will continue to review this requirement. 19 – Tenure of the Chair As discussed in last year’s annual report and explained further below in the Nominations Committee report, the Board is undertaking a phased approach to succession planning to ensure that any new Non Executive Director can be properly integrated. The Nominations Committee is now focusing on the replacement for Christopher Sherwell and that will be followed by the continuation of the succession plan. Board leadership and company purpose The Board is responsible for achieving the Group’s strategic objectives and creating value for shareholders through sustainable and continued performance. The strategic goals of the Group are set out in more detail in the business model and strategic report which includes information on the Company’s purpose, values and culture. The Board had seven scheduled meetings throughout the year as well as conference calls for specific matters as required. A committee of the Board comprising any two or more Directors meet on an ad hoc basis to consider transactional and related matters concerning the Company’s business. During 2019, there were 17 such committee meetings. The Board’s scheduled meetings are generally held in Guernsey at the Group’s head office, however meetings may also be held in Russia or Cyprus to review the Group’s operations, culture and meet local management. Matters reserved specifically for the Board’s consideration form the basis of the scheduled meeting agendas. The main elements of this policy include Group strategy, material transactions, financial reporting, capital structure and dividend policy, corporate governance and internal controls and risk management. The table below sets out the activities of the Board during the year. Key activities of the Board during 2019 Activities specific for the year Q1 • Review of investment portfolio performance • Consideration of the internal audit program with the • Review of medium term forecasts and strategy Cypriot subsidiary board • Approval of 2018 annual report • Approval of distribution to shareholders • Approval of principal risks and risk appetite Q2 • Review of investment portfolio performance • Consideration of environmental impacts and strategies to • Review of Q1 2019 reforecast reduce/mitigate carbon footprint • Review of investor feedback from investor/broker • Consideration of the share buy back program and exit of meetings following results • Review and consideration of strategy • Approval of notice of meeting for 2019’s AGM cornerstone investor Q3 • Review of investment portfolio performance • Consideration of further share buy back • Review of medium term forecasts and strategy • Approval of 2019 interim results • Approval of distribution to shareholders • Approval of principal risks • Review of Q2 2019 reforecast • Review of corporate and regulatory changes and reporting requirements • Review of AGM results RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 48 CORPORATE GOVERNANCE Key activities of the Board during 2019 Activities specific for the year Q4 • Review of investment portfolio performance • Consideration of potential new Non Executive • Review of Q3 2019 reforecast • Approval of 2020 Budget • Review of medium to longer term forecasts • Consideration of Board constitution, balance of skills and experience • Review of internal controls and risk environment • Review of investor feedback from investor/broker meetings following results • Review and consideration of strategy appointment and Christopher Sherwell’s retirement • Consideration and approval of updated policies and terms of reference in regards to the Code • Consideration of the share buy back program and exit of cornerstone investor The Chairman is responsible for the continued smooth operations of the Board and ensures appropriate discussion, challenge and robust practices are integral in the Board’s deliberations and activities. The Chief Executive is responsible for the implementation of the Group’s strategy as agreed by the Board. Terms of reference for the Chairman, Chief Executive and Senior Independent Director are set out in writing and reviewed as necessary. The Chief Executive, together with the Executive Directors, the Board of the Cypriot holding company and wider management team, is charged to deliver the strategic goals of the Group. The Non Executive Directors assist the executive team in developing this strategy whilst providing a sounding board, challenge and rigour to the decisions of the Board. Board composition The Board contains eight directors, four Executive, three Non Executive and the Chair, who was considered independent on appointment. Biographies for each of the Directors are included elsewhere in this Annual Report. The Board and its Committees The Board has established Audit, Remuneration and Nominations Committees and delegated certain activities through their terms of reference. Terms of reference for each committee can be found on the Company’s website (www.theravenpropertygroup.com). Together, the committees and the schedule of reserved matters assist the Board in discharging its duties effectively. The Board and its Committees have regular scheduled meetings. An overview of the activities of the Board and its Committees is contained within this report and that of the Audit and Remuneration Committees. As well as the members of the Board and its Committees, other Board members, the Company’s advisors and operational directors are invited to attend where appropriate to present on a particular matter at hand. Material and briefing papers are supplied in advance of any meeting to all attendees along with regular management information which is circulated to the Board throughout the year. Minutes of all Board and committee meetings are circulated to the Board. Should, in the rare occasion, a director be unable to attend a scheduled meeting, they have the opportunity to discuss matters with the chairman of the Board/committee or the Chief Executive. There is an open dialogue between the Chairman, Non Executive Directors, Executive Directors and senior management with regular informal meetings held outside of the scheduled Board meetings to discuss business matters. All Directors also have access to the Group’s professional advisors should they be required. Attendance at Board or Committee meetings during the year to 31 December 2019 (where ‘N/A' is shown, the Director listed is not a member of the committee) R Jewson A Bilton G Hirsch M Sinclair C Smith C Sherwell S Coe* M Hough** D Moore No. of meetings during the year Board Audit Committee Nominations Committee Remuneration Committee 7 7 6 6 7 7 2 7 6 7 N/A N/A N/A N/A N/A 3 1 3 2 3 2 2 N/A N/A N/A 2 N/A N/A N/A 2 3 N/A N/A N/A N/A 3 2 2 2 3 * Stephen Coe retired at the AGM held on 31 May 2019. There were 2 Board, 1 Audit and 2 Remuneration Committee meetings held prior to his retirement ** Michael Hough joined the Remuneration Committee 14 March 2019. There were 2 Remuneration Committee meetings held during 2019 since his appointment date RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT CORPORATE GOVERNANCE 49 The structure of the Board, its Committees and group operational committees is set out below. Each operational committee includes a member of the Executive Board, Cypriot board and senior management. Weekly meetings are held by each committee which then reports into an operational oversight committee. Members of the oversight committee include Executive Board members, senior managers who sit on the operational committees and Cyprus holding company directors. The Board • Responsible to shareholders and wider stakeholders for the long term success of the Company • Develops the strategic direction of the Group • Responsible for determining significant risks and risk appetite • Responsible for leadership of the Group, Governance arrangements and culture Chairman • Responsible for the efficient operations of Non Executive Directors • Independent judgement and challenge of the Board the executive directors • Maintains culture of openness, debate and • Broad range of experience to provide balance rigour to board decisions to the skills and experience of the Board Chief Executive and Executive Directors • Responsible for delivering the Company's strategy Nominations Committee • Making recommendations for succession planning • Considers size, structure, skills, experience and composition of the Board and its committees Audit Committee • Oversees the financial and narrative reporting • Reviews and monitors the integrity of the Group's internal controls and risk management processes Remuneration Committee • Sets the remuneration policy for the executive directors and senior management • Development of long term incentive schemes aligned to strategic goals of the Group • Responsible for auditor engagement, nomination and retention Risk Committee • Delegated responsibility from the Audit Committee for risk management and internal controls monitoring, processes and implementation Chief Executive Executive Team Charged with delivering the Group's strategic objectives set by the Board Raven Russia Holding Cyprus Limited - Board of Directors Day to day operational control and risk management Operational Oversight Committee Executive Team and Cyprus holding company directors Charged with the day to day running of the business to deliver the strategic objectives Investment Committee Financial Committee Asset Management Joint Ventures Roslogistics Information Technology Raven Mount RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 50 CORPORATE GOVERNANCE The Nominations Committee The Committee comprises Anton Bilton, Christopher Sherwell and Richard Jewson, who is Chairman. Key tasks of the Committee include reviewing the size, structure and composition of the Board and its committees to ensure appropriate skill, experience, diversity and independence, lead processes for new Board and senior management appointments, and finally to review the effectiveness of the Board and its committee structure in light of the requirements of the Group, Code and regulations. As set out earlier in the corporate governance report, Stephen Coe retired following the 2019 AGM, he was replaced by Michael Hough as Chair of the Audit Committee at that point. Michael also joined the Remuneration Committee during the year. Christopher Sherwell will retire at the conclusion of the 2020 AGM and will be succeeded by Michael as the Company’s Senior Independent Director and Chair of the Remuneration Committee. Christopher has been with the Board since 2008 and during his term, an invaluable member of the non executive team. As explained in last year’s report, the Committee considered the changes to the provisions of the Code following its publication in 2018, and in particular the additional requirements being implemented that impact the work of the Committee and make up of the Board. The Board’s overriding aim is that its composition and that of its Committees are fit for purpose, with the appropriate constituents, balance of skills, knowledge, experience and diversity. The Committee is charged with ensuring this requirement is observed with and where necessary will recommend changes. The introduction of new Code provisions around tenure of the Chair and balance of executive to non executive directors for all companies, not just limited to larger companies as it used to be under the previous iteration of the code, should be considered against the requirements of the Board, it’s Committees, the Company’s current position and wider Group needs. The Committee will continue to consider the requirements of the Code and where appropriate make recommendations to the Board about future appointments. Diversity The Committee consider the experience, background, age and tenure of each individual to contribute to the diversity of the Board, its Committees and the wider Group. The Committee has intentionally not adopted a policy on recruitment which may impose certain restrictions when considering applicants for roles within the Group. Information about the diversity of the Group’s workforce at 31 December 2019 is set out below. Gender 68% 32% 30% 70% 100% Employees Tenure 42% Senior Management Female Male Board 46% 50% 40% 87.5% 12.5% Employees 12% Senior Management 10% Board* Up to 3 Years 3 to 6 Years 6+ Years *Length of service for Board members is from date of appointment. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT CORPORATE GOVERNANCE 51 Age profile 19% 2% 4% 75% 50% 50% 25% 75% Employees Senior Management Board Less than 24 Years 25 to 44 Years 45 to 60 Years More than 60 Years Board performance evaluation The Board undertakes annual performance evaluations of its own and of its Committees’ activities. These are led by the Chairman and where dealing with his own performance, by the Senior Independent Director. The performance evaluations for the year ended 2019 were undertaken internally, which included group discussions and individual reviews of performance throughout the year. It was concluded that the performance of the Board, its Committees and individual Directors was effective and that the Board has the necessary balance of skills, expertise, independence and knowledge required to direct the business. The Board and Committee consider the composition of the Board and its Committees with reference to the Group’s needs and also the requirements of the Code and any regulations. In accordance with the Code, all Directors will be put forward for re-election at the AGM save for Christopher Sherwell who will be retiring this year as mentioned earlier. Having considered the balance of skills, expertise and performance of the Board, its committees and individual Directors, the Board recommends the reappointment of each Director standing for re-election at the forthcoming AGM. Engagement with Shareholders The Board considers regular contact with shareholders to be an important aspect of our corporate governance program. The Chief Executive, Executive Deputy Chairman and Chief Financial Officer perform regular road shows, investor and analysts briefings and shareholder meetings throughout the year. These generally occur after the annual and interim results are published but also when corporate actions, such as fund raisings, take place. The views of our major institutional shareholders are a key consideration in the development and support of the Group’s strategy. We regularly canvass this group of investors on matters such as distributions, fund raising and remuneration policy. Their views are always taken into consideration prior to the implementation of any such policies. In addition to face to face shareholder meetings the Group communicates with investors and wider stakeholders through its website. Results presentations, report and accounts, shareholder circulars as well as the Group’s governance material is all published on the site. The AGM of the Company provides shareholders with the opportunity to meet the Board and discuss any matters of interest or concern. We continue to encourage shareholders to engage with the Company directly where they have any concerns rather then relying on proxy voting agencies which, in our experience, do little to understand the intricacies of the Group’s operations and governance practices. The notice of the Company’s AGM is included separately along with a form of proxy to lodge your votes. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 52 CORPORATE RESPONSIBILITY Social and Environmental Report Corporate responsibility covers many different aspects of our business, from the activities undertaken within our head office in Guernsey to Siberia where our Novosibirsk warehouse is located, our focus is on the environmental impact of our activities and properties and the social impact in the jurisdictions in which the Group operates. It is the responsibility of the Board to manage the environmental, economic and social impact of the Group’s activities. The Board considers the social impact of its operations in each of its key jurisdictions, Russia, Guernsey and Cyprus. In Russia, this is particularly evident in the employment opportunities that are created in the communities where the Group’s properties are located. The Group’s employees are encouraged to participate in community and charitable activities and the Board has established a fund to support local causes or charities, which meet the corporate values of the Group. During 2019 the Group invested £67,662 in supporting various causes including national and local charities and local community sports groups. No political donations were made during the year. The Board recognises that the way its investment properties are designed, built, managed and occupied can significantly influence their impact on the environment and the community in which they are located and it seeks to manage these issues. The Company has been reporting its green house gases usage now since the introduction of the regulations in 2013. Over this time we have enhanced our reporting to include all scopes of energy usage including own offices occupied and flight information. The energy consumption of our portfolio has over this time increased due to the energy demands of our clients, particularly with regard to energy intensive activities such as temperature controlled space and manufacturing rather then dry warehouse space. Although tenants are the end users of the energy consumed, we consider this an important metric to measure. Energy efficiency makes our properties more attractive to tenants as well as being more environmentally responsible. As our relations with key tenants become more established we are working with them to anticipate their requirements, with specifically designed buildings. In the case of energy intensive uses, such as cold storage, this allows a more efficient building to be constructed compared to the reconfiguration of a standard warehouse unit. We are reviewing the means of energy production across the portfolio and where possible moving towards less carbon intensive methods of production. At our Noginsk site we have recently switched supplier to provide energy derived from hydro generation, moving away from natural gas. We are undertaking a review across the portfolio to consider further changes to suppliers to lessen the environmental impact of energy production. We have a rolling capital improvement program which includes implementation of more efficient low energy lighting and changes to insulation materials in our warehouses. New developments are being assessed by BREEAM (Building Research Establishment Environmental Assessment Methodology), the world’s longest established and most widely used method of assessing, rating and certifying the sustainability of buildings. Our aim is to reduce the environmental impact of our developments and use the results of BREEAM assessments to provide practical ideas for future and existing development projects. During the year the Board agreed to adopt a carbon offsetting program for all business travel. We are working with a provider of carbon offsetting to agree a methodology and approach to follow during 2020. Other initiatives being considered include the introduction of a solar farm and bee hives to increase bio diversity at our project in Rostov-on-Don. Further information on our initiatives will be presented in our 2020 Annual Report. Details of our energy consumption are set out below. Greenhouse Gases We commissioned Trucost to assist in compiling our report to comply with the Mandatory Greenhouse Gases Reporting Regulations (GHG). Energy consumption information was collated from all sixteen warehouses and three offices in the portfolio and our four offices in Moscow, St Petersburg, Cyprus and Guernsey. We also collected office car mileage and business travel for the Group’s employees to report on Scope 1, Scope 2 and Scope 3 emissions. The report encompasses the impact of the entire property portfolio and not just those elements over which we have direct control. In 2016 we started to report Scope 2 on a dual-reporting basis using location-based and market based approaches in accordance with the GHG Protocol Scope 2 Guidance released in January 2015. Since market-based emission factors are not available for any of our locations, residual emission factors were adopted for offices in Guernsey and Cyprus. Location-based emission factors were used for Russia due to unavailability of residual emission factors. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT CORPORATE RESPONSIBILITY 53 The table below sets out the emissions data collated and the intensity ratio agreed at tonnes per square metre of floor area for the last seven years. In absolute terms, energy consumption has increased over the reporting period which coincides with growth of the property portfolio through acquisitions and construction, however the intensity measures have remained consistent over time. Data Point Scope 1 Units Quantity 2019 Quantity 2018 Quantity 2017 Quantity 2016** Quantity 2015 Quantity 2014* Quantity 2013 tonnes CO2e 36,226 30,976 22,569 19,948 19,289 20,778 18,138 GHG Emissions SCOPE 2 63.6% SCOPE 3 0.2% SCOPE 1 36.2% Scope 2 (location- based) tonnes CO2e Scope 2 (market- based) tonnes CO2e Scope 1 + 2 Intensity (location based) tonnes CO2e / floor space (sqm) Scope 3 tonnes CO2e 63,643 62,605 56,420 54,008 56,914 53,664 44,589 63,642 62,604 56,423 54,347 56,919 53,666 n/a 0.05 0.05 0.05 0.05 0.05 0.05 0.05 200 231 194 184 219 342 n/a *Quantity 2014 were restated in 2016 report given more accurate data available for the Guernsey office. **Quantity 2016 were restated to include Konstanta. Data collection and methodology protocol The group used the Greenhouse Gas Protocol methodology for compiling its GHG data, and includes the following material GHG’s: CO2, N2O and CH4. The Group used the following emission conversion factor sources: • Direct energy: IPCC 2006 Guidelines for National Greenhouse Gas Inventories • Natural gas: DEFRA 2019 conversion factor for cubic meters natural gas • Diesel: DEFRA 2019 conversion factor for litres diesel • LPG: DEFRA 2019 conversion factor for litres LPG • Purchased electricity: UK Defra 2019, Russia and Cyprus, IEA Fuel Combustion 2018 and Foreign Electricity Emission Factors • European market emission factors for electricity: AIB, European Residuals Mixes for 2018 • Office car: DEFRA 2019 conversion factor for kilometers of unknown fuel (average car) • District heating: electricity factors were adjusted using same ratio as between UK electricity and district heating (from DEFRA 2019 conversion factors for UK electricity, and district heat and steam) • Business travel: • DEFRA 2019 GHG Conversion Factors for flights and rail travel • Sawdust emissions calculated by Trucost using FAO and IPCC RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 54 LETTER FROM THE REMUNERATION COMMITTEE Dear Shareholders, On behalf of the Committee, I present our report on Directors’ remuneration for the year ended 31 December 2019. Overview The Company’s results for the year have seen a significant improvement on 2018 but upper levels of the performance targets proved stretching. The result is that 39.5% of the total award in this category was achieved. Other Operating and Strategic Targets This will be my last letter as Remuneration Committee Chairman Measurement of these involves discretion from the Committee and, in as I will step down from my role as Non Executive Director at the particular, an assessment of the executive team’s ability to deal with upcoming AGM. It has been a challenging responsibility but I have unforeseen events as well as the execution of planned objectives. had the support of a strong non executive team during my period as The Committee aimed to focus mainly on balance sheet risk Chairman. Michael Hough will take over as a temporary Committee management, acquisition and joint venture strategies and long term Chairman while the Board finalise new non executive appointments. tenant management. As a reminder, the current remuneration scheme incorporates an In practice, the team’s priorities in 2019 were somewhat derailed Annual Performance Incentive scheme (“API”) for the years 2018 to by shareholder issues, firstly with the problems arising at WIM and 2020 and a Five Year Performance Plan for the period to 31 March 2023. latterly at IAML. They successfully dealt with the potential overhang The API is measured against targets set at the beginning of each year with a maximum award of 50% of salary if the participant elects to take the award in cash and a maximum equivalent to 175% of salary if the award is taken in any of the Company’s listed securities. If securities are taken then a retention period of three years applies. of the WIM shareholding, negotiating the purchase by the Company of their entire ordinary shareholding at a significant discount to net asset value per share. Similarly, the Company has contracted to purchase IAML’s holdings of the company’s shares again at a significant discount to net asset value per share in relation to the ordinary shares. The team also secured the financing required to The Five Year Performance Plan (“FYPP”) allows executives to place complete the latter transaction which is now subject to various existing holdings of the Company’s securities into the Plan, and shareholder approvals. requires a further five year retention period from the commencement of the plan. The Company agrees to match that holding up to a maximum of three times the value of shares held, where the calculation is based on compound Total Shareholder Returns of between 4% and 12% over the performance period. Any awards made under the Plan will be satisfied by the issue of ordinary shares. In the Committee’s view, this has been an involved and stressful exercise for the executive team. Importantly, it is net asset per share enhancing and deals with a significant overhang in the Company’s traded instruments and thus is of benefit to the Company and its various stakeholders. Details of the executives’ contributions to the plan are given later in In addition, and in line with objectives established at the start of the this report. Performance Outcomes year, the team has overseen the successful transition out of US Dollar debt and continues to reduce the balance sheet foreign exchange risk on secured debt and is also altering its tenant concentration, with At the beginning of the year, the Committee agreed targets for the a greater spread of tenants and increasing exposure to e-commerce API, equally weighted between financial and other operating and tenants. The rolling capital expenditure programme and the initiation strategic measures. Financial Targets These were set against the following measures: • Year end occupancy levels; of other energy efficiency measures reflect our understanding of our impact on the environment and the sustainability of our business. Given these strategic achievements the Committee determined that a full 50% be awarded in respect of the operating and strategic targets. • Average Rouble rents per square metre achieved; Five Year Performance Plan • Underlying earnings; and • Completed asset specific refinancings. These measures primarily support the Company’s ability to fund ongoing shareholder distributions. Each has a performance weighting applied and a floor below which no performance related award is available. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT As total shareholder returns were below the lower award level no accrual for awards is required for the plan. LETTER FROM THE REMUNERATION COMMITEE 55 Remuneration Decisions These decisions in sum mean that a total award of 89.5% will be made under of the Annual Performance Incentive for 2019. Each executive has elected to receive their award in ordinary shares. Based on the current share price, the number of shares that would be awarded would be: Anton Bilton Glyn Hirsch Mark Sinclair Colin Smith 2,603,125 2,603,125 1,625,313 1,439,375 Awards vest on the issue of this Annual Report and the share price at that date will be used in calculating the award. 2020 Performance Criteria The Committee do not intend changing the make up of the performance criteria for the API in 2020 and have again agreed targets weighted equally between financial and other operating and strategic measures. The same KPIs and weightings will be used for the basis of the financial metrics, being: • Year end occupancy levels - 10% to 30%; • Average Rouble rents per square metre – 10% to 30%; • Underlying earnings – 10% to 20%; and • Asset specific refinancing – 20%. The first three criteria have a spread of outcomes with the reward weighted on a sliding scale and a floor below which no credit is given. Asset specific refinancing is an absolute target with no contribution to the award if the target is not met. Larger percentages are weighted to the occupancy and average rental levels as they support the longer term returns of the business. The last two criteria support the ability to pay distributions in the coming year. Other operating and strategic measures will again be discretionary and dependent on the implementation of the strategic objectives of the business and the development of the infrastructure to support those objectives. It is to be hoped that the business and economic environment will be less turbulent in 2020. Based on recent years’ experience, caution will be essential. In the meantime I wish the Raven team every success as they continue their journey. Christopher Sherwell Chairman Remuneration Committee 15 March 2020 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 56 DIRECTORS’ REMUNERATION REPORT (UNAUDITED) Introduction Composition The Remuneration Committee comprises Michael Hough, Richard Jewson, David Moore and Christopher Sherwell, who is Chairman. Policy Our Directors’ Remuneration Policy (the “Policy”) is unchanged from that approved by shareholders at the 2017 Annual General Meeting on 12 July 2017. A summary of the key elements of executive remuneration for 2019, as set out under the Policy are as follows: Fixed elements Basic salary Benefits Pension contributions 2016 Retention Scheme – final payment made on 31 March 2019 Variable elements Annual Performance Incentive Five Year Performance Plan Full details of the Policy were included in the 2017 Annual Report and can also be found on our website. Summary of Remuneration for the Financial Year Ended 31 December 2019 In this section we summarise the remuneration packages for the Executive Directors. Year ended 31 December 2019 Salary £’000 Benefits (1) £’000 Pension (2) £’000 Total cash remuneration £’000 Annual performance incentive No of Ordinary shares (3) G Hirsch A Bilton M Sinclair C Smith 595 595 372 329 42 47 21 24 59 59 37 33 696 701 430 386 2,603,125 2,603,125 1,625,313 1,439,375 Year ended 31 December 2018 Salary £’000 Benefits (1) £’000 Pension (2) £’000 Total cash remuneration £’000 Annual performance incentive No of Ordinary shares (3) G Hirsch A Bilton M Sinclair C Smith 584 584 364 323 38 40 22 22 58 58 36 32 680 682 422 377 – – – – 1. Benefits include health cover and insurance, subscriptions and sports memberships. These are not performance related. They have been calculated based on premiums and subscriptions payable. 2. Pensions are cash payments made to executive directors, either directly or to their pension scheme. 3. Estimate based on closing ordinary share price on 13 March 2020. The annual performance incentive is payable on issue of the 2019 Annual Report and the number of ordinary shares will be recalculated based on the ordinary share price on that date. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT DIRECTORS’ REMUNERATION REPORT 57 Five Year Performance Plan (“FYPP”) The FYPP is a long term incentive scheme with 6 participants; the 4 executive directors and 2 senior managers. The scheme allows each participant to invest into the FYPP a number of listed securities in the Company that they hold. All securities invested in the FYPP must continue to be retained by the participant until 31 March 2023. On 31 March 2023, based on annual compound total shareholder return (“TSR”) calculations, the participants will be entitled to receive up to three times the initial prescribed value of the securities in the FYPP. Vested entitlements will be settled in the Company’s ordinary shares, with a value based on the average price of the Company’s ordinary shares for March 2023. The performance period for the FYPP runs from 31 March 2018 to 31 March 2023. Below an annual compound equivalent TSR of 4% the FYPP will lapse, at an annual compound TSR of 12% the Plan will vest in full and a sliding scale will apply for a TSR between 4% and 12%. The table below sets out the directors’ interests in the FYPP. Director G Hirsch A Bilton M Sinclair C Smith Securities invested (1) 66,618 preference shares 1,639,404 convertible preference shares 66,618 preference shares 1,639,404 convertible preference shares 619,500 ordinary shares 556,907 preference shares 754,162 convertible preference shares 723,298 ordinary shares 503,719 preference shares 681,604 convertible preference shares Initial prescribed value £'000 2,000 2,000 2,000 1,900 (1) Includes ordinary, preference and convertible preference shares held by trusts or pensions schemes where the individual or close family members are beneficiaries. Ordinary shares invested are after participation in tender offer buy backs. 2016 Retention Scheme The final payment was made on 31 March 2019 and the following shares transferred to the executive Directors: Director G Hirsch A Bilton M Sinclair C Smith Number of Convertible Preference Shares 767,412 767,412 479,419 424,334 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 58 DIRECTORS’ REMUNERATION REPORT Interests of Executive and Non-Executive Directors in Ordinary Shares, Preference Shares, Convertible Preference Shares and Warrants The beneficial interests of the Directors in office at 31 December 2019 in the Ordinary Shares, Preference Shares and, Convertible Preference Shares of the Company, both at the beginning and the end of the year, are set out below. There have been no changes since 31 December 2019. Director R Jewson G Hirsch (1) A Bilton (1) M Sinclair (1) C Smith (1) C Sherwell D Moore M Hough Director R Jewson G Hirsch (1) A Bilton (1) M Sinclair (1) C Smith (1) C Sherwell D Moore M Hough Number of Ordinary Shares 31/12/19 Number of Preference Shares 31/12/19 Number of Convertible Preference Shares 31/12/19 218,429 6,959,390 41,620,058 2,761,976 831,504 237,239 222,501 – 75,460 2,219,595 4,953,355 762,462 505,530 79,728 14,172 – – 2,496,556 2,496,556 904,162 681,604 – – – 52,851,097 8,610,302 6,578,878 Number of Ordinary Shares 31/12/18 Number of Preference Shares 31/12/18 Number of Convertible Preference Shares 31/12/18 232,626 7,496,027 43,071,170 2,939,761 944,574 237,239 222,501 – 75,460 2,219,595 5,953,355 762,462 503,719 79,728 14,172 – – 1,729,144 1,729,144 425,013 257,270 – – – (1) Includes ordinary, preference and convertible preference shares and warrants held by trusts or pensions schemes where the individual or close family members are beneficiaries. 55,143,898 9,608,491 4,140,571 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT DIRECTORS’ REMUNERATION REPORT 59 Non Executive Directors The fees for Non Executive Directors are determined by the executives. No Non Executive Director is entitled to any form of performance related remuneration, including share options. Fees paid in the year were as follows: Director R Jewson C Sherwell D Moore M Hough S Coe Salaries and fees for 2020 The contractual arrangements for 2020 are: 2019 £’000 113 50 48 49 21 281 Salary or Fee £’000 Appointment date Unexpired term Notice periods 113 48 50 50 604 604 377 334 29.06.07 04.07.05 01.04.08 09.10.18 27.11.08 27.11.08 23.03.09 14.11.08 Rolling contract 3 months Rolling contract 12 months Director R Jewson D Moore C Sherwell M Hough G Hirsch A Bilton M Sinclair C Smith Christopher Sherwell Chairman Remuneration Committee 15 March 2020 2018 £’000 113 50 48 11 50 272 Contractual termination payment No provision for payment on termination Payment of 12 months salary and benefits on termination RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 60 AUDIT COMMITTEE REPORT Audit Committee Chairman’s Introduction Dear Shareholders, This is the first Audit Committee Report under my tenure as Committee Chairman. I was fortunate enough to have a handover period with Stephen Coe during the 2018 financial statements process prior to his stepping down at last year’s AGM and sit with the executive team through the process. On taking over the role I met with the external audit partner and the client relationship partner to discuss the audit process and their thoughts on the working relationship with the management team and begin to familiarise myself with the dynamics of both teams. Since then I have visited the Company’s Moscow office, met with the Cyprus board and again met the external audit team with and without the management team present, for updates on the audit approach, audit independence and the impact of the changes the external audit environment is going through. These changes will no doubt lead to rising costs for audit clients as regulatory scrutiny increases. The management team and the auditors are working closely to identify efficiencies in the external audit process that can go some way to offsetting any potential increase in audit fees. The Committee’s role continues to be the: • monitoring of the integrity of the Group’s financial statements; • review of significant areas of judgement included in the financial statements; • review of the role of the external auditors, including independence and remuneration; and • monitoring of the quality of the Group’s internal controls and risk management functions. We have reported to the Board on whether the Committee believes that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy, including advising the Board on the viability and going concern statements including the potential impact of recent market events on both. We met the Group’s independent valuers whilst visiting our Moscow office to discuss the market and the valuation process. The operational boards and management teams in Cyprus and Russia have kept us updated on the framework of controls and procedures. That has included reports from the internal auditors from BDO on reviews of procurement, authorisation and anti money laundering and bribery procedures in the period, recommendations arising from those reports and the implementation plan for those recommendations. The Cypriot team also presented the proposed internal audit plan for the next 24 months at the audit committee meeting in November last year. In all cases with the external professionals, we believe that the working relationship continues to be independent and management assumptions appropriately challenged. Michael Hough Chairman Audit Committee 15 March 2020 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT AUDIT COMMITTEE REPORT 61 The Audit Committee The Committee met with the key members of the audit team The Committee is responsible for ensuring that the financial throughout the year and EY has formally confirmed its continued performance of the Group is properly monitored and reported on. independence as part of the interim and final financial statements The Committee reviews the annual and interim financial statements, process. The Chairman of the Committee also met with the lead audit the accounting policies of the Group, key areas of accounting partner outside of the formal meetings to discuss any issues arising judgement, management information statements, financial in the course of the audit and to confirm no restrictions on scope announcements, internal control systems, risk management, the are placed on them by management. The Chairman also has regular continuing appointment of the Group auditor and the model meetings with the CFO and COO to discuss the audit approach, underpinning the viability statement. It also monitors the whistle relationship with auditors and fee structure. blowing policy and procedures for fraud and bribery. The external auditor prepares a detailed audit plan for the Committee The Committee comprises David Moore, Christopher Sherwell and which includes their assessment of the key risks impacting the Michael Hough (Chairman). Stephen Coe, the previous Chairman financial statements. The Committee actively monitors these risks of the Committee stood down as a Non Executive Director during and obtains updates from the external auditor on the status of their the year. Christopher Sherwell will step down as a Non Executive procedures covering these risks throughout the year. Director at the upcoming AGM and the Board are in the process of making new Non Executive Director appointments. The Chairman is considered to have recent and relevant financial experience for the purposes of the Code. The Committee’s members have considerable commercial experience relevant to the property and financial services sector to properly discharge their duties. The Committee meets at least twice a year. There are a number of regular attendees at meetings of the Audit Committee, including other members of the Board, senior management and the Group’s external auditor. The Committee discussed the possibility of putting the audit out to tender in 2017, as required by the EU Audit Directive, even though, as a Guernsey registered Company, this is not a requirement. At that time, it was decided that, as a new audit partner had just taken over the engagement and there had also been changes in other senior roles within the audit team, the Committee was comfortable with EY’s on-going independence. The Committee has no reason to change that decision in the current year but monitors on an annual basis. The Chairman of the Committee also meets with the external Group Local statutory audits of individual subsidiary companies are also auditor without management present. The Committee met three times during 2019 and addressed: • The recommendation to the Board to approve the annual and interim financial statements following consideration of the key areas of judgement; • The appropriateness of the current forecast model as the basis for the viability statement; • The appointment, remuneration and continued independence of the external auditor; • The results and recommendations of the Group’s Cypriot Board and the internal auditor on reports issued during the year and agreement of the plan of work for 2019; and • The monitoring of the Group’s internal control and risk management procedures including a review of risk committee submissions. required in the jurisdictions in which the Group operates, being Guernsey, Cyprus, Russia and the UK. EY carry out these audits in Guernsey and Cyprus but the trading entities in Russia and the UK are audited locally by Baker Tilly and Crowe U.K. LLP respectively. The Committee believes that this gives additional balance to our overall audit provision and added assurance to the audit process. Non Audit Services EY has also provided non-audit services to the Group where they are assessed to be best placed to provide the particular service. The Committee has policies in place for the provision of non audit services and the external auditor will not be permitted to carry out services such as property valuation or accounting services. The non- audit services provided are typically assignments, such as the review of the interim financial statements or transaction advisory services. As shown in note 6(b) to the financial statements, total fees payable to EY in the year to 31 December 2019 amounted to £0.9 million, of Action taken on these areas is expanded on below where appropriate. which £0.2 million was for non-audit services. External Audit and Valuations External Audit The Committee is sensitive to the level of non audit fees and the Group has actively engaged other firms in due diligence, tax and During the year, the Committee has considered the appointment, other advisory projects, including PWC, KPMG, BDO Stoy Hayward compensation, performance and independence of the Group’s and local Russian tax counsel. Fees paid to these other firms totalled auditor, Ernst & Young LLP (“EY”). £0.4 million in the year (2018: £0.5 million). EY was appointed in 2008 following a tender process and this is their eleventh year of tenure as Group auditor. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 62 AUDIT COMMITTEE REPORT Committee Conclusions Valuers The Committee has recommended a resolution for the re- As with the external audit process, the Committee monitors the appointment of EY to be proposed to shareholders at the Annual objectivity of the Group’s external valuers, Jones Lang LaSalle (“JLL”). General Meeting. Proposed EU legislation on audit appointments The external auditor has direct access to JLL as part of the audit including the approach to non-audit services has been considered process and has met with them independently of management. We and relationships with other suppliers of non audit services have also have the opportunity to see comparable valuations of part of been established. the portfolio each year, where independent valuations are required for banking purposes and these are undertaken by other external independent valuers. Significant Issues Considered by the Audit Committee In recommending the approval of the 2019 financial statements, the Committee considered the following: Matter Arising Property Valuations Action Valuations of investment property and investment property under The Committee discussed the valuation approach with management, construction are undertaken by external valuers. The land bank is the external valuers and the external auditors. carried at directors’ valuation. The auditor’s valuation specialist met with the independent valuer The external valuers continue to use a discounted cash flow separately and various calls and meetings between the valuer, methodology for the valuations. external audit team and management have been held during the Valuation movements can have a significant impact on the Group’s year. net asset value. The Committee is satisfied that the valuation process and conclusions drawn are appropriate. Foreign Exchange The Group’s exchange rate risk profile has continued to diminish The Group’s sensitivity to changing foreign exchange rates has as foreign currency denominated liabilities reduce. All US Dollar reduced in the year and the impact is covered in the viability liabilities have been extinguished in the year and the primary risk now statement. The Committee is satisfied that the impact of the risk is relates to Euro debt and the servicing of Sterling preference shares adequately addressed in the Group’s forecasting procedures. from a predominately Rouble income base. Taxation There were no significant changes to the Russian tax regime in the The Group’s business continues to focus on commercial requirements year and the Committee met with the management teams in each rather than tax benefits. The Committee discussed the position with of the jurisdictions to discuss their approach to management and management in each jurisdiction and the auditors. It is satisfied that control. The Committee considered the adequacy of the level of uncertain tax the Group conducts its operations appropriately for the transactions it undertakes and tax provisioning is sufficient. provisions made by the Group. Viability Statement The viability statement stress tests the Group’s business model and The Committee discussed the sensitivities applied to the Group’s we have reviewed this in the context of the potential buy back of forecasts for the three year period. It was agreed that the current shares by the Company, the impact of the Coronavirus and the impact global situation could very well present the Group with a severe but of oil price volatility and the uncertainty that is causing. credible scenario. After discussion with management we are satisfied that sensitivities applied to the business model adequately test the Group’s resilience to a situation such as this. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT AUDIT COMMITTEE REPORT 63 Internal Control and Risk Management The Risk Committee reports regularly to the Audit Committee on The Board has overall responsibility for the systems of internal its deliberations and findings. The risks and uncertainties to which control and for reviewing their effectiveness throughout the Group. the Group is subject are reviewed and considered by the Audit In accordance with the guidance of the Turnbull Committee on Committee and the Board at regular intervals, particularly with internal controls, this is a continual process which identifies, evaluates reference to the strategic objectives of the business. The principal and manages the principal risks and uncertainties that may affect risks and uncertainties facing the Group are included elsewhere in the the achievement of the Group’s strategic objectives. This system Annual Report. is designed to manage or reduce the effects of the possible risks to which the Group’s activities are subject, rather than providing absolute assurance against material misstatement or loss. The Audit Committee has reviewed the effectiveness of these systems of internal control and has reported its findings to the Board throughout the year and up to the date of the Annual Report and Consideration of risks and risk management form an integral part of financial statements. the Board’s deliberations and are key to its decision making processes. There are risks which the Board has no control over. These are mainly overriding external risks such as the wider economic environment, sanctions and the current Coronavirus situation. However, the impact of such risks and effect that they have on the Group are considered and mitigated to the extent possible. The strategic decisions of the Group are adjusted to address these issues ensuring that threats are reduced and opportunities are exploited. Key features of the risk management process in place during the year and up to the date of the annual report and financial statements include: • A comprehensive system of reporting and business planning; • A defined schedule of matters reserved for the Board; • An organisational structure chart with clearly defined levels of authority and division of responsibilities; • Formal documented policies and procedures throughout the Group; • An internal audit function with an approved annual programme; • The close involvement of the Executive Directors, the Cypriot holding company board and senior management in all aspects of the day-to-day operations, including regular meetings to review all operational aspects of the business and risk management systems; • The role of the board of the Group’s Cypriot holding company in exerting proper management and control over the Group’s Russian trading subsidiaries; • The Board’s review of Group strategy and progress against objectives throughout the year; • A formal whistle blowing policy; • A comprehensive and robust system of financial reporting which includes regular management information, such as budgets, re- forecasts, cash flows, treasury reporting and management accounts with a review of financial KPIs; and • A regular assessment of risks within the business at all operational levels. The Audit Committee has established a Risk Committee to carry out the review and assessment of risks associated with the business. This Committee comprises Executive Directors, Cypriot holding company directors and senior management involved in each operating jurisdiction and department of the Group. This engenders a culture of risk assessment within the Group and reinforces the strategic objectives communicated by the Board. During the year ended 31 December 2019, the Risk Committee met four times. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 64 DIRECTORS’ REPORT The Directors present their report and the audited financial statements of the Group for the year ended 31 December 2019. Principal activity The Company is a Guernsey registered company with registration number 43371 and during the year carried on business as a property investment company. Business review A review of the development of the Group’s business during the year, the principal risks and uncertainties facing the Group and its future prospects are included in the Chairman’s Message and the Strategic Report which should be read in conjunction with this report. Results and dividends The results for the year are set out in the attached financial statements. In October 2019, the Company undertook a tender offer as an interim distribution for 1 in every 44 shares at 55p, equivalent to a dividend of 1.25p per share (2018: Distribution of 1.25p by way tender offer 1 share in every 44 at 52p). The Directors are intending to recommend a final distribution of 2.25p by way of a tender offer. However the timing and structure of this distribution will be determined at a later date (2018: distribution of 1.75p by way of tender offer of 2 shares in every 51 at 45p). Directors The Directors, who served throughout the year, were as follows: Sir Richard Jewson (Non Executive Chairman) Anton Bilton (Executive Deputy Chairman) Glyn Hirsch (Chief Executive Officer) Mark Sinclair (Chief Financial Officer) Colin Smith (Chief Operating Officer) Christopher Sherwell (Senior Independent Non Executive Director) Stephen Coe (Independent Non Executive Director) – resigned at the 2019 Annual General Meeting held on 31 May 2019 David Moore (Independent Non Executive Director) Michael Hough (Independent Non Executive Director) Following the provisions of the UK Corporate Governance Code, all the Directors shall be subject to annual re-appointment by shareholders at the Annual General Meeting of the Company. Details of the Directors’ remuneration and shareholdings are included within the Remuneration Report. Substantial shareholdings The Company has been notified of shareholders, other than Directors, holding 3% or more of the ordinary shares as follows: Ordinary Shares of £0.01 Name of holder Invesco Perpetual Schroder Investment Management JO Hambro Capital Management Quilter Investors Progressive Capital Partners Number held 31 December 2019 % of share capital Number held 28 February 2020 % of share capital 139,678,106 57,234,141 55,372,153 40,404,752 15,716,846 28.52 11.69 11.31 8.25 3.21 139,678,106 57,467,122 54,722,153 40,404,752 15,716,846 28.52 11.73 11.17 8.25 3.21 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT DIRECTORS’ REPORT 65 Relationship Agreement In accordance with Listing Rule 9.8.4 (14), the Company can confirm that on 20 November 2015, it entered into a relationship agreement with its principal shareholder, Invesco Asset Management Limited (“Invesco”). The purpose of this agreement was to ensure that the Company is capable at all times of carrying on its business independently of Invesco. If the holding of Invesco (together with its associates and/or those it acts in concert with) falls below 30% of the voting rights over the Company’s ordinary shares, the relationship agreement shall terminate. The Company has and, in so far as it is aware, Invesco and its associates have, complied with the independence provisions set out in the relationship agreement during the period. The ordinary shares controlled by Invesco rank pari passu with the other ordinary shares in all respects. Following the share buy backs that occurred during 2019, Invesco’s holding in the Company dropped below 30% and the agreement has terminated. Purchase of own shares The Company was granted authority at the 2019 AGM to make market purchases of its own ordinary and preference shares. This authority will expire on 31 August 2020. A resolution will be proposed at the 2020 AGM to renew this authority. Auditor Ernst & Young LLP have expressed their willingness to continue in office and a resolution to re-appoint them will be proposed at the forthcoming Annual General Meeting. Going Concern The financial position of the Group, its cash flows, liquidity position and borrowings are described in the Financial Review and the notes to the accompanying financial statements. In addition, in note 34 to the financial statements there is a description of the Group’s objectives and policies for managing its capital, financial instruments and hedging activities and its exposure to credit and liquidity risk. The Board receives monthly updates on future cash flow projections and has regular working capital reports presented, in particular as part of the half and full year reporting process and for any fund raising and acquisition activity. After making appropriate enquiries and examining sensitivities that could give rise to financial exposure the Board has a reasonable expectation that the Company and the Group have adequate resources to continue operations for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparation of these financial statements. Directors’ responsibilities Guernsey company law requires the Directors to prepare financial statements for each financial year, which give a true and fair view of the state of affairs of the Group at the end of the year and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates that are reasonable and prudent; • State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • Prepare the financial statements on the going concern basis unless it is inappropriate to assume that the Group will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008 and IFRS as adopted by the EU. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. So far as each of the Directors is aware, there is no relevant audit information of which the Company’s auditor is unaware and each has taken the appropriate steps expected of a Director to ensure that this is the case. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 66 DIRECTORS’ REPORT Directors’ Responsibility Statement The Statement of Directors’ Responsibilities below has been prepared in connection with the Company’s full Annual Report and Accounts for the year ended 31 December 2019. The Board confirms to the best of its knowledge: The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole; The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and The Annual Report and Accounts, taken as a whole, are fair balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy. This responsibility statement was approved by the Board of Directors on 15 March 2020 and is signed on its behalf by: Mark Sinclair Chief Financial Officer Colin Smith Chief Operating Officer RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 67 INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report to the Members of Raven Property Group Limited Opinion In our opinion: • Raven Property Group Limited’s Group financial statements (the “financial statements”) give a true and fair view of the state of the Group’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended; • the financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; and • the financial statements have been properly prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008. We have audited the financial statements of Raven Property Group Limited which comprise: • The Group Balance Sheet as at 31 December 2019; • The Group Income Statement for the year then ended; • The Group Statement of Comprehensive Income for the year then ended; • The Group Statement of Changes in Equity for the year then ended; • The Group Cash Flow Statement for the year then ended; and • Related notes 1 to 38 to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the annual report set out on pages 40 to 43 that describe the principal risks and explain how they are being managed or mitigated; • the directors’ confirmation set out on page 40 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the directors’ statement set out on page 65 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the directors’ statement in relation to going concern required under the Listing Rules is materially inconsistent with our knowledge obtained in the audit; or • the directors’ explanation set out on page 44 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 68 INDEPENDENT AUDITOR’S REPORT Overview of our audit approach Key audit matters • Economic and financial uncertainties in Russia and their impact. • Misstatement of the fair value of investment properties and investment properties under construction. • Revenue recognition with respect to rental revenue, service charge income and logistics income. Audit scope • We performed an audit of the complete financial information of the Russian and Guernsey components and audit procedures on specific balances for the Cyprus and United Kingdom components. • The components where we performed full or specific audit procedures accounted for 100% of Revenue and 100% of Total assets. Materiality • We set overall materiality of £15.2m based on 1% of total assets and specific materiality of £4.8m based on 5% of underlying operating profit. Key audit matters • Undertaking press searches in Russia and the UK and reviewing Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Economic and financial uncertainties in Russia and their impact (as described in the Strategic Report) The current geopolitical situation remains an important area of focus for the Group and our audit. Continuing political and economic tension between the US, EU and Russia, together with movements in the oil price and foreign exchange rate, have resulted in continuing economic uncertainty. Business practice in Russia may differ from business practices in more developed economies. There is a risk that inappropriate inducements may be sought by third parties which may be undetected by the board and management. Areas where inappropriate payments may be made include: payments to secure favourable development land; payments for planning permits; construction payments; payments to resolve ongoing litigations; or payments in connection with the acquisition or disposal of assets. Overall this risk level is consistent with the prior year in terms of the impact on the Group’s financial statements. Given the uncertainty surrounding the potential impact of the coronavirus and the subsequent oil price collapse we have also economic forecasts. We evaluated whether the assumptions underpinning the Group’s property valuations (separately addressed below) and going concern assessment are consistent with our above understanding. For going concern, this included validating key assumptions such as rental rates and interest rates to publicly available information. We evaluated the impact that the coronavirus could potentially have on the company by considering going concern assumptions and sensitivities and related disclosures. We performed the following audit procedures around the potential risk of inducement payments to third parties: • We held fraud discussions with Raven staff of various levels and also with the audit committee, throughout the audit. We enquired with management as to whether they were aware of any evidence of fraud, or were aware of any whistle blowing or instances of any non-compliance with laws and regulations; • We confirmed our understanding of the controls in place to • prevent and detect transactions involving inducements payments by performing walkthroughs; In order to address the remaining risk over inappropriate payments, we tested on a sample basis (based on material items and a random sample): • payments made in respect of capital expenditure; and • that journal transactions have a valid business purpose and are on an arm’s length basis. We performed procedures to assess the Group’s compliance with applicable laws and regulations: • We performed a search for sanctions and assessed whether they impacted the Group, management or counterparties of the Group including banks or customers; considered the impact of coronavirus on the company in regards to • We obtained and read correspondence with regulatory bodies and going concern position. We have seen a fall in oil prices precipitating the Group during the year. a weakening of the Rouble. In a worst case scenario, this could lead to a suspension of investment decisions by company’s tenants, a disruption in supply chains impacting on the demand for new warehouse space and potential defaults by existing tenants whose businesses are affected most. Our response to the risk: We performed the following audit procedures around the impact of We performed the following audit procedures around the uncertain tax positions arising from the tax laws in Russia: • We obtained and read correspondence with the tax authorities regarding recent inspections in Russia; • Considered the results from recent tax inspections; • Enquired with management about their response to the tax authorities and their assessment of the potential exposure; uncertainties over the current economic environment in Russia: • Obtained management’s calculation of the provision for uncertain We updated our understanding of the current economic environment in Russia through: • Discussions with management, EY real estate valuation specialists and EY tax specialists in Russia and the UK; tax positions; • Using our tax specialists in Russia and the UK, we discussed and challenged management’s provision. We inspected recent court cases and challenges by the tax authority to determine if the risk assessment made by management is appropriate. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT 69 • We have reviewed the disclosures made in notes 2, 3 and 8 • We assessed the competence, capabilities and objectivity of the regarding the uncertain tax provision. We performed full scope audit procedures over this risk area in the one location, Russia, affected by this risk, which covered 100% of the risk amount. external valuer. This included having meetings with JLL, with management absent, and understanding the internal control quality procedures under taken by JLL to ensure quality and independence in their reporting to management. • For a sample of the Group’s investment property and investment Key observations communicated to the Audit Committee property under construction, we performed detailed testing on We have completed the additional procedures we designed in order to respond to the heightened political and economic uncertainty in Russia. We have no significant findings to report from the completion of these procedures. We conclude that the balances and disclosures in the financial statements and notes thereto, appropriately reflect the risk factors identified. As a result of the procedures performed in relation to the provision for uncertain tax positions we concluded that the uncertain tax provisions and related disclosures have been appropriately recognised in accordance to the Group’s accounting policy and IFRS. Misstatement of the fair value of investment properties and investment properties under construction (as described in the Audit Committee Report and notes 2, 3, 11, 12 and 13 of the financial statements) Material misstatements that could occur in relation to this risk would primarily affect the investment property and investment property under construction balance at year end. This account has a £1,372m balance in the 2019 annual report (2018: £1,206m). the valuations performed by the external valuer. This sample represented 74% of the total value of investment property and investment property under construction. • With the support of EY’s real estate valuation experts in Russia and the UK, we assessed the valuation approach and the assumptions made by the external valuer and the directors in performing their valuation of each property against industry benchmarks. The key assumptions include estimated rental values, discount rates, yields, indexations, vacancy/void periods and other assumptions that impact the fair value; • For the remaining properties comprising 26% of the valuation, we conducted analytical procedures on the movement in the valuation of each property compared to the prior year by reference to external market data to evaluate the appropriateness of the valuations adopted by the Group. • The audit team, performed site visits of certain assets in the Group’s portfolio inspecting their condition and level tenancy. • We assessed the adequacy of the disclosures of estimates in note 2 and valuation assumptions in note 13 that were made in accordance with IFRS 13 – Fair Value Measurement. • We performed full scope audit procedures over this risk area in the one location affected by this risk, which covered 100% of the risk amount. The valuation of investment property and investment property under construction requires significant judgements and estimates by management and the external valuer (Jones Lang LaSalle (JLL)). There is a risk that management may manipulate the property valuations by exerting influence over the valuers in order to meet Key observations communicated to the Audit Committee We have completed our planned audit procedures over the valuation of investment property and investment property under construction. We have no significant findings to report from the completion of shareholder expectations. these procedures. This estimate is impacted by the uncertainties over the current economic environment in Russia, as described above. We conclude that the balances and disclosures in the financial statements and notes appropriately reflect the risk factors identified. The current real estate market in Russia is characterised by limited capital transactions, and the valuation of investment properties remains an area of significant estimation. Our response to the risk: We performed the following audit procedures around the valuation of investment properties and investment properties under construction: We have concluded that the assessment of fair values performed by JLL and the directors are within an acceptable range and the carrying values of investment property and investment property under construction are fairly stated at 31 December 2019. Revenue recognition (as described in note 2 and 5 of the financial statements) • We documented and assessed the adequacy of the Group’s Total revenue was £175.3m in the 2019 annual report (2018: 162.6m). valuation process and controls over data used in the valuation of its We have identified the following risks related to the recognition of property portfolio. revenue: • We performed testing over source documentation provided by the Group to the external valuer. On a sample basis, we inspected lease agreements and agreed the key terms to the tenancy schedule provided to the valuer; • For a sample of properties we performed site visits to see if the Rental revenue & service charge income from the investment property portfolio: risk that the revenue is not recorded correctly, including the effect of tenant incentives and contracted rent uplift balances. occupancy matches that presented in the tenancy schedule. Roslogistics: risk that the logistics revenue is not recorded in the We also inspected the asset to determine if the overall condition of correct period. the asset aligns to that stated in the external valuer’s report. The risk is unchanged from the prior year. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 70 INDEPENDENT AUDITOR’S REPORT Our response to the risk: We performed the following audit procedures around revenue recognition: In establishing our overall approach to the Group audit we determined the type of work that needed to be undertaken at each of the components by us, as the Group engagement team, or by component auditors from another EY global network firm operating • We documented the Group’s revenue recognition process and under our instructions. Audits of the Russia, United Kingdom and assessed the adequacy of the controls in place to prevent and Guernsey components, which address all of the material risks detect fraud and errors in revenue recognition. of misstatement noted above, were performed by the Group • We performed analytical procedures over rental, service charge and engagement team. The Group audit partner is based in the UK but, logistics income to identify significant fluctuations and trends. since the Group has operations in Russia and Guernsey, the Group We corroborated any significant fluctuations to the terms within audit team includes members from the UK, Guernsey and Russia. lease agreements or to invoices. Members of the Group team in these jurisdictions work together as • On a sample basis, we recomputed the revenue recognised in the an integrated team throughout the audit process. The Group audit year, based on the contractual lease terms, including the treatment procedures relating to the valuation of investment property and of rent incentives. income taxes were also supported by EY Russia experts. • We obtained and examined the trade receivables ageing. We assessed the recoverability of material debts past due by testing subsequent cash receipts and verifying if there were tenant deposits in place. • We agreed the calculation of the IFRS rent straight-lining For the Group entities incorporated in the United Kingdom, including the investment in the equity accounted joint venture, specific scope procedures on revenue, cash and goodwill were performed by the Group team. adjustment to underlying lease and tenancy data and tested the For the Group entities incorporated in Cyprus, specific scope arithmetical accuracy of the calculation. procedures on cash, intercompany, debt, derivatives and tax balances • We performed cut-off procedures on all revenue streams to confirm were performed by EY Cyprus. We determined the appropriate level of they had been recorded in the correct period. involvement to enable us to determine that sufficient audit evidence • Lease and service charge income from investment properties in had been obtained as a basis for our opinion on the Group as a whole. Russia, and the Roslogistics business were full scope locations and contributed 100% of the Group’s revenue. The reporting components where we performed audit procedures accounted for 100% of the Group’s Profit before tax, Revenue and Key observations communicated to the Audit Committee Total assets for both the current and prior years. For the current As a result of the procedures performed we concluded that revenue has been appropriately recognised in accordance to the Group’s accounting policy and IFRS. An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the group and effectiveness of group-wide controls, changes in the business environment and other relevant factors when assessing the level of work to be performed at each entity. year, the full scope components contributed 88% (2018: 94%) of the Group’s Profit before tax, 90% (2018: 90%) of the Group’s Revenue and 87% (2018: 96%) of the Group’s Total assets, with the remainder being addressed by specific scope procedures. Involvement with component teams During the current year’s audit cycle a visit was undertaken by the Group team, including the Group audit partner, to the component team in Cyprus. This visit involved discussing the audit approach with the component team and local management and any issues arising from the work. The Group audit team interacted regularly with the component team during various stages of the audit, reviewed key working papers and was responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate audit evidence for our The Group has operations in Russia, Cyprus, the United Kingdom opinion on the Group financial statements. and Guernsey. Our testing is performed on a consolidated basis using thresholds which are determined with reference to the Group performance materiality and the risks of material misstatement identified. In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 4 reporting components of the Group, we performed an audit of the complete financial information of 2 components (“full scope components”) which were selected based on their size or risk characteristics. Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. For the remaining 2 components (“specific scope components”), We determined materiality for the Group to be £15.2 million (2018: we performed audit procedures on specific accounts within that £7.0 million), which is 1% (2018: 0.5%) of total assets. We believe that component that we considered had the potential for the greatest the basis of materiality that is the primary measure of performance for impact on the significant accounts in the financial statements either shareholders is a capital measure total assets. For underlying earnings because of the size of these accounts or their risk profile. related accounts (revenue, cost of sales, administrative expenses, and related working capital balance sheet accounts), for which we deem RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT 71 smaller misstatements could influence decisions of the users of the material inconsistencies or apparent material misstatements, we financial statements, we determined materiality to be £4.8m (5% of are required to determine whether there is a material misstatement underlying operating profit). Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. the probability that the aggregate of uncorrected and undetected We have nothing to report in this regard. misstatements exceeds materiality. In this context, we also have nothing to report in regard to our On the basis of our risk assessments, together with our assessment responsibility to specifically address the following items in the other of the Group’s overall control environment, our judgement was information and to report as uncorrected material misstatements of that performance materiality was 75% (2018: 75%) of our planning the other information where we conclude that those items meet the materiality, namely £11.4 million (2018: £5.3 million) for balance following conditions: sheet accounts. For accounts impacting underlying operating profit (revenue, cost of sales, admin expenses, and related working capital balance sheet accounts), we used £3.6 million. • Fair, balanced and understandable set out on page 66 – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced Audit work at component locations for the purpose of obtaining and understandable and provides the information necessary for audit coverage over significant financial statement accounts is shareholders to assess the group’s performance, business model undertaken based on a percentage of total performance materiality. and strategy, is materially inconsistent with our knowledge The performance materiality set for each component is based on the obtained in the audit; or relative scale and risk of the component to the Group as a whole and • Audit committee reporting set out on pages 60 to 63 – the our assessment of the risk of misstatement at that component. In the section describing the work of the audit committee does not current year, the range of performance materiality allocated to EY appropriately address matters communicated by us to the audit Cyprus is £5.7 million (2018: £2.6 million) for Balance Sheet accounts committee; or and £1.8m for accounts impacting underlying operating profit • Directors’ statement of compliance with the UK Corporate (revenue, cost of sales, admin expenses, and related working capital Governance Code set out on page 46 – the parts of the balance sheet accounts). Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate We agreed with the Audit Committee that we would report to Governance Code. them all uncorrected audit differences in excess of £0.76 million (2018: £0.35 million) for balance sheet accounts and £0.24 million Matters on which we are required to report by exception for accounts impacting underlying operating profit (revenue, cost We have nothing to report in respect of the following matters in of sales, admin expenses, and related working capital balance relation to which the Companies (Guernsey) Law, 2008 requires us to sheet accounts); which is set at 5% of planning materiality, as well report to you if, in our opinion: as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. • proper accounting records have not been kept by the company, or proper returns adequate for our audit have not been received from branches not visited by us; or • the financial statements are not in agreement with the company’s accounting records and returns; or Other information • we have not received all the information and explanations we The other information comprises the information included in the require for our audit. annual report including Results highlights, the Chairman’s message, Responsibilities of directors the Portfolio review, the Strategic Report and the Governance Report set out on pages 4 through 66, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. As explained more fully in the directors’ responsibilities statement set out on page 66, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine Our opinion on the financial statements does not cover the other is necessary to enable the preparation of financial statements that are information and, except to the extent otherwise explicitly stated in this free from material misstatement, whether due to fraud or error. report, we do not express any form of assurance conclusion thereon. In preparing the financial statements, the directors are responsible In connection with our audit of the financial statements, our for assessing the group and parent company’s ability to continue as responsibility is to read the other information and, in doing so, a going concern, disclosing, as applicable, matters related to going consider whether the other information is materially inconsistent concern and using the going concern basis of accounting unless the with the financial statements or our knowledge obtained in the audit directors either intend to liquidate the group or the parent company or otherwise appears to be materially misstated. If we identify such or to cease operations, or have no realistic alternative but to do so. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 72 INDEPENDENT AUDITOR’S REPORT Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the company’s members, as a body, in accordance with Article 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Peter McIver for and on behalf of Ernst & Young LLP London 15 March 2020 Notes: 1. The maintenance and integrity of the Raven Property Group Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT Bolshoi Theatre in Moscow 73 74 GROUP INCOME STATEMENT For the year ended 31 December 2019 Underlying earnings £’000 Notes 4 / 5 175,373 (48,869) 126,504 2019 Capital and other £’000 – – – Underlying earnings £’000 Total £’000 175,373 162,639 (48,869) (44,354) 126,504 118,285 2018 Capital and other £’000 – – – Total £’000 162,639 (44,354) 118,285 Gross revenue Property operating expenditure and cost of sales Net rental and related income Administrative expenses 4 / 6 (23,130) (2,303) (25,433) (22,714) (2,436) (25,150) Share-based payments and other long term incentives 31 (4,927) (541) (5,468) – (2,853) Foreign currency profits / (losses) 27,462 – 27,462 (2,480) – (2,853) (2,480) Operating expenditure (595) (2,844) (3,439) (25,194) (5,289) (30,483) Share of profits of joint ventures Profit on disposal of joint ventures Operating profit / (loss) before profits and losses on investment property Unrealised profit / (loss) on revaluation of investment property Unrealised profit on revaluation of investment property under construction Operating profit / (loss) Finance income Finance expense Profit / (loss) before tax Tax Profit / (loss) for the year Earnings per share: Basic (pence) Diluted (pence) Underlying earnings per share: Basic (pence) Diluted (pence) 15 15 11 12 4 7 7 8 9 9 792 – – 490 792 490 1,630 – – – 1,630 – 126,701 (2,354) 124,347 94,721 (5,289) 89,432 – – 47,820 47,820 451 451 – – (121,764) (121,764) 755 755 126,701 45,917 172,618 94,721 (126,298) (31,577) 2,011 – 2,011 3,286 1,583 4,869 (74,977) (34,593) (109,570) (71,796) (16,384) (88,180) 53,735 11,324 65,059 26,211 (141,099) (114,888) (10,510) (8,531) (19,041) (6,197) 404 (5,793) 43,225 2,793 46,018 20,014 (140,695) (120,681) 8.16 7.50 (18.81) (18.81) 7.67 6.35 3.12 3.08 The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS as adopted by the EU. The "underlying earnings" and "capital and other" columns are both supplied as supplementary information. Further details of the allocation of items between the supplementary columns are given in note 9. All items in the above statement derive from continuing operations. All income is attributable to the equity holders of the parent company. There are no non-controlling interests. The accompanying notes are an integral part of this statement. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 75 GROUP STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2019 Profit / (loss) for the year Other comprehensive income, net of tax Items to be reclassified to profit or loss in subsequent periods: Foreign currency translation on consolidation Total comprehensive income for the year, net of tax All income is attributable to the equity holders of the parent company. There are no non-controlling interests. 2019 £’000 2018 £’000 46,018 (120,681) 77,018 49,854 123,036 (70,827) The accompanying notes are an integral part of this statement. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 76 GROUP BALANCE SHEET As at 31 December 2019 Non-current assets Investment property Investment property under construction Plant and equipment Investment in joint ventures Other receivables Derivative financial instruments Deferred tax assets Current assets Inventory Trade and other receivables Derivative financial instruments Cash and short term deposits Total assets Current liabilities Trade and other payables Derivative financial instruments Interest bearing loans and borrowings Non-current liabilities Interest bearing loans and borrowings Preference shares Convertible preference shares Other payables Deferred tax liabilities Total liabilities Net assets RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT Notes 2019 £’000 2018 £’000 11 12 15 16 18 25 17 18 19 20 18 21 21 22 23 24 25 1,337,682 1,175,440 33,846 30,548 6,150 189 3,414 2,621 24,290 3,574 6,566 15,535 21,953 24,405 1,408,192 1,278,021 358 356 41,595 43,658 – 349 68,138 73,450 110,091 117,813 1,518,283 1,395,834 51,691 66,192 – 1 60,173 75,565 111,864 141,758 623,168 567,865 110,324 109,271 217,482 206,116 18,623 71,024 17,797 57,400 1,040,621 958,449 1,152,485 1,100,207 365,798 295,627 GROUP BALANCE SHEET 77 Notes 2019 £’000 2018 £’000 26 27 28 23 4,898 6,233 51,463 103,144 – 98 (4,582) (5,965) 11,212 11,212 (234,519) (281,001) 28,188 (48,887) 509,138 510,793 29 / 30 365,798 295,627 Equity Share capital Share premium Warrants Own shares held Convertible preference shares Capital reserve Translation reserve Retained earnings Total equity Net asset value per share (pence): 30 Basic Diluted 76 75 48 48 The financial statements were approved by the Board of Directors on 15 March 2020 and signed on its behalf by: Mark Sinclair Chief Financial Officer Colin Smith Chief Operating Officer The accompanying notes are an integral part of this statement. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 78 Saint Basil's Cathedral, Moscow 79 Total £’000 GROUP STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2019 Share Share Capital Premium Warrants £’000 £’000 £’000 Notes Own Convertible Shares Held £’000 Preference Capital Translation Retained Reserve Earnings £’000 Shares Reserve £’000 £’000 £’000 6,606 124,568 438 (3,652) 11,212 (166,494) (98,741) 517,901 391,838 For the year ended 31 December 2018 At 1 January 2018 Loss for the year Other comprehensive income Total comprehensive income for the year – – – – – – – – – – – – – Warrants exercised 26 / 27 85 2,380 (340) Own shares acquired Own shares allocated 28 28 – – – – Ordinary shares cancelled 26 / 28 (458) (23,804) Transfer in respect of capital losses – – – – – – (4,235) 1,886 36 – – – – – – – – – – – – – – – – (114,507) – (120,681) (120,681) 49,854 – 49,854 49,854 (120,681) (70,827) – – – – – – – 2,125 (4,235) (934) 952 – (24,226) 114,507 – At 31 December 2018 6,233 103,144 98 (5,965) 11,212 (281,001) (48,887) 510,793 295,627 For the year ended 31 December 2019 At 1 January 2019 6,233 103,144 98 (5,965) 11,212 (281,001) (48,887) 510,793 295,627 On adoption of IFRS 16 Leases – – – – – – 57 (390) (333) Restated as at 1 January 2019 6,233 103,144 98 (5,965) 11,212 (281,001) (48,830) 510,403 295,294 Profit for the year Other comprehensive income Total comprehensive income for the year – – – Warrants exercised 26 / 27 17 Warrants lapsed 27 Conversion of convertible preference shares Own shares acquired Own shares allocated 23 / 26 28 28 – – – – – – – 486 – 12 – – Ordinary shares cancelled 26 / 28 (1,352) (52,179) Transfer in respect of capital profits – – At 31 December 2019 4,898 51,463 – – – (69) (29) – – – – – – – – – – – – (106) 1,338 151 – – – – – – – – – – – – – – – – – – – – 46,482 – 46,018 46,018 77,018 – 77,018 77,018 46,018 123,036 – – – – – – – – 29 – – 434 – 12 (106) (830) 508 – (53,380) (46,482) – (4,582) 11,212 (234,519) 28,188 509,138 365,798 The accompanying notes are an integral part of this statement. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 80 GROUP CASH FLOW STATEMENT For the year ended 31 December 2019 Cash flows from operating activities Profit / (loss) before tax Adjustments for: Depreciation Provision for bad debts Loss on disposal of plant and equipment Share of profits of joint ventures Profit on disposal of joint ventures Finance income Finance expense (Profit) / loss on revaluation of investment property Profit on revaluation of investment property under construction Foreign exchange (profits) / losses Non-cash element of share-based payments and other long term incentives Changes in operating working capital Decrease in operating receivables Increase in other operating current assets Decrease in operating payables Receipts from joint ventures Tax paid Net cash generated from operating activities Cash flows from investing activities Payments for property improvements Refunds of VAT on acquisition of investment property Acquisition of subsidiaries Cash acquired with subsidiaries Acquisition of investment property / payment of deferred consideration on acquisition of investment property Loans granted Loans repaid Purchase of plant and equipment Proceeds on disposal of plant and equipment Investment in joint ventures Proceeds on disposal of joint ventures Interest received Net cash used in investing activities RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT Notes 2019 £’000 2018 £’000 6 6 15 15 7 7 11 12 31 15 38 38 11 15 15 65,059 (114,888) 1,782 (2) 19 (792) (490) (2,011) 109,570 811 (58) – (1,630) – (4,869) 88,180 (47,820) 121,764 (451) (27,462) 5,468 (755) 2,480 2,853 102,870 93,888 4,491 (2) (6,152) 8,212 (43) (1,627) 101,207 100,430 1,043 (9,150) 3,000 (7,344) 93,100 96,086 (11,939) 3,920 (8,611) 12,754 (169) (33,826) – 1,235 (11,924) (44,054) (101) 447 (194) 34 (2,140) (2,262) 113 (13) 3,650 1,960 – (533) – 3,254 (16,196) (72,203) GROUP CASH FLOW STATEMENT 81 Cash flows from financing activities Proceeds from long term borrowings Repayment of long term borrowings Loan amortisation Bank borrowing costs paid Exercise of warrants Ordinary shares purchased Dividends paid on preference shares Dividends paid on convertible preference shares Proceeds from disposal of derivative financial instruments Premium paid for derivative financial instruments Net cash used in financing activities Net decrease in cash and cash equivalents Opening cash and cash equivalents Effect of foreign exchange rate changes Closing cash and cash equivalents Notes 2019 £’000 2018 £’000 26 / 27 26 / 28 357,966 155,628 (284,431) (153,152) (22,652) (23,279) (54,689) (50,000) 434 2,125 (53,310) (28,258) (11,285) (11,327) (12,486) (12,716) 3,259 – (2,868) (18,848) (80,062) (139,827) (3,158) (115,944) 73,450 197,137 (2,154) (7,743) 19 68,138 73,450 The accompanying notes are an integral part of this statement. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 82 NOTES TO THE FINANCIAL STATEMENTS 1. General information Changes in accounting policies Raven Property Group Limited (the "Company") and its subsidiaries The accounting policies adopted are consistent with those of the (together the "Group") is a property investment group specialising in previous financial year except for new standards adopted. The Group commercial real estate in Russia. The Company is incorporated and domiciled in Guernsey under the provisions of the Companies (Guernsey) Law, 2008. The Company's registered office is at La Vieille Cour, La Plaiderie, St Peter Port, Guernsey GY1 6EH. The audited financial statements of the Group for the year ended 31 December 2019 were authorised by the Board for issue on 15 March 2020. 2. Accounting policies Basis of preparation The Company has taken advantage of the exemption conferred by the Companies (Guernsey) Law, 2008, section 244, not to prepare company financial statements as group financial statements have been prepared for both current and prior periods. The Group financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000) except where otherwise indicated. has adopted new and amended IFRS and IFRIC interpretations as of 1 January 2019. The Group applies for the first time, IFRS 16 Leases and IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. IFRS 16 has been adopted using the modified retrospective method for the Group's office leases and elected to use the recognition exemptions for lease contracts that have a lease term of 12 months or less and lease contracts for which the underlying asset is of low value. The "right of use assets" are included within plant and equipment and the "lease liabilities" in other payables. The Group has assessed the impact of IFRS 16 and concluded it does not have a material impact as it only affects the leases for the Group's three administrative offices and lessor accounting has not materially changed. IFRIC Interpretation 23 Uncertainty over Income Tax Treatments addresses the accounting for income taxes when treatments involve uncertainty that affects the application of IAS 12. As set out in note 3, the Group applies significant judgement in identifying uncertainties over income tax treatments. As the Group operates in a number of jurisdictions it has assessed each individually. Whilst the methodology The principal accounting policies adopted in the preparation of used for assessing the provision has changed, it has not had a the group financial statements are set out below. The policies have material impact on the financial statements. been consistently applied to all years presented, unless otherwise indicated. The Group has assessed the impact of IFRS 16 and IFRIC 23 and concluded that they do not have a material impact on the financial The preparation of financial statements in conformity with IFRS performance or financial position of the Group or the disclosures requires the use of certain critical accounting estimates. It also made in its financial statements. requires management to exercise its judgement in the process of applying the accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Going concern Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for later accounting periods and which have not been adopted early. Of these the two thought to have a possible impact on the Group are: Definition of Material - Amendments to IAS1 and IAS 8 (effective The financial position of the Group, its cash flows, liquidity position 1 January 2020) and borrowings are described in the Financial Review and the notes The Conceptual Framework for Financial Reporting (effective to these financial statements. After making appropriate enquiries 1 January 2020) The Group has assessed the impact of these changes and does not expect them to significantly impact on the financial position or performance of the Group. There may, however, be changes to disclosures within the financial statements. The standards, amendments or revisions are effective for annual periods beginning on or after the dates noted above. and examining sensitivities that could give rise to financial exposure, the Board has a reasonable expectation that the Group has adequate resources to continue operations for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in the preparation of these financial statements. Statement of compliance The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards adopted for use in the European Union ("IFRS") and the Companies (Guernsey) Law, 2008. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 83 Basis of consolidation Revenue recognition The consolidated financial statements incorporate the financial (a) Property investment statements of the Company, its subsidiaries and the special Rental income from operating leases is recognised in income on a purpose vehicles ("SPVs") controlled by the Company, made up to straight-line basis over the lease term. Rental increases calculated 31 December each year. Control is achieved where the Company is with reference to an underlying index and the resulting rental income exposed, or has rights, to variable returns from its involvement with ("contingent rents") are recognised in income as they are earned. or ownership of the investee entity and has the ability to affect those returns through its power over the investee. Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on The Group has acquired investment properties through the purchase such a basis. The lease term is the non-cancellable period of the lease, of SPVs. In the opinion of the Directors, these transactions did not together with any further term for which the tenant has the option to meet the definition of a business combination as set out in IFRS 3 continue the lease, where, at the inception of the lease, the directors "Business Combinations". Accordingly the transactions have not are reasonably certain that the tenant will exercise that option. been accounted for as an acquisition of a business and instead the financial statements reflect the substance of the transactions, which is considered to be the purchase of investment property and investment property under construction. The results of subsidiaries acquired or disposed of during the year are included in the Income Statement from the effective date of Premiums received to terminate leases are recognised in the Income Statement as they arise. (b) Roslogistics Logistics revenue, excluding value added tax, is recognised as services are provided. acquisition or up to the effective date of disposal, as appropriate. (c) Raven Mount Where necessary, adjustments are made to the financial statements of entities acquired to bring the accounting policies into line with those used by the Group. The sale of completed property and land is recognised on legal completion. Taxation All intra-group transactions, balances, income and expenditure are The Company is a limited company registered in Guernsey, Channel eliminated on consolidation. Joint ventures A joint venture is a contractual arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of Islands, and is exempt from taxation. The Group is liable to Russian, Cypriot and UK tax arising on the results of its Russian, Cypriot and UK operations. The tax expense represents the sum of the tax currently payable and deferred tax. control of an arrangement, which exists only when decisions about (a) Current tax the activities require unanimous consent of the contracting parties for The tax currently payable is based on taxable profit for the year. strategic financial and operating decisions. The Group's investments in joint ventures are accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying value of the investment is adjusted to recognise changes in the Group's share of net assets of the joint venture since the acquisition date. Any Taxable profit differs from net profit (or loss) as reported in the Income Statement because it excludes items of income and expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. premium paid for an interest in a joint venture above the fair value (b) Tax provisions of the Group's share of identifiable assets, liabilities and contingent Management periodically evaluate positions taken in the Group's tax liabilities is determined as goodwill. Goodwill relating to a joint returns with respect to situations where the applicable tax regulations venture is included in the carrying amount of the investment and is are subject to interpretation and establishes provisions where neither amortised nor individually tested for impairment. appropriate. The resulting provision for uncertain tax positions is The aggregate of the Group's share of profit or loss of joint ventures is shown on the face of the Income Statement within Operating Profit and represents the profit or loss after tax. recorded within current tax payable (see note 20). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 84 NOTES TO THE FINANCIAL STATEMENTS (c) Deferred tax Investment property is measured initially at its cost, including related Deferred tax is the tax expected to be payable or recoverable on transaction costs. After initial recognition, investment property is differences between the carrying amount of assets and liabilities in carried at fair value. The Directors assess the fair value of investment the financial statements and the corresponding tax bases used in the property based on independent valuations carried out by their computation of taxable profit, and is accounted for using the balance appointed property valuers or on independent valuations prepared sheet liability method. Deferred tax liabilities are generally recognised for banking purposes. The Group has appointed Jones Lang LaSalle for all taxable temporary differences and deferred tax assets are as property valuers to prepare valuations on a semi-annual basis. recognised to the extent that it is probable that taxable profits will Valuations are undertaken in accordance with appropriate sections be available against which deductible temporary differences can be of the current Practice Statements contained in the Royal Institution utilised. Such assets and liabilities are not recognised if the temporary of Chartered Surveyors Valuation - Global Standards, 2017 (the "Red difference arises from goodwill or from the initial recognition (other Book"). These are internationally accepted standards of valuation. than in a business combination) of other assets and liabilities in a Gains or losses arising from changes in the fair value of investment transaction that affects neither the taxable profit nor the accounting property are included in the Income Statement in the period in which profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the they arise. For the purposes of these financial statements, in order to avoid double counting, the assessed fair value is reduced by the present value of any tenant incentives and contracted rent uplifts that are spread over the lease term and increased by the carrying amount of any liability under a head lease that has been recognised in the Balance Sheet. extent that it has become probable that future taxable profit will Borrowing costs that are directly attributable to the construction of allow the deferred tax asset to be recovered. investment property are included in the cost of the property from Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based the date of commencement of construction until construction is completed. on tax rates that have been enacted or substantively enacted at the Leasing (as lessors) reporting date. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Leases where the Group does not transfer substantially all the risks and benefits incidental to ownership of the asset are classified as operating leases. All of the Group's properties are leased under operating leases and are included in investment property in the Deferred tax assets and deferred tax liabilities are offset, if a legally Balance Sheet. enforceable right exists to set off current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable Financial assets entity and the same taxation authority. (d) Value added tax Revenue, expenditure, assets and liabilities are recognised net of the amount of value added tax except: • Where the value added tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the value added tax is recognised as part of the cost of acquisition of the asset or as part of the expenditure item as applicable; and • Receivables and payables that are stated with the amount of value added tax included. The net amount of value added tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables, as appropriate, in the Balance Sheet. Investment property and investment property under construction Investment property comprises completed property and property under construction held to earn rentals or for capital appreciation or both. Investment property comprises both freehold and leasehold land and buildings. The Group classifies its financial assets into one of the categories discussed below, depending upon the purpose for which the asset was acquired. (a) Fair value through profit or loss This category comprises only in-the-money derivatives (see financial liabilities policy for out-of-the-money derivatives), which are carried at fair value with changes in the fair value recognised in the Income Statement in finance income or finance expense. (b) Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the case of the Group, loans and receivables comprise trade and other receivables, loans, security deposits, restricted cash and cash and short term deposits. Loans and receivables are initially recognised at fair value, plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for Expected Credit Loss ("ECL"). The Group assesses on a forward looking basis the ECL for its financial assets measured at amortised cost. The Group measures the ECL and recognises a credit loss allowance at each reporting date. Cash and short term deposits include cash in hand, deposits held at call with banks and other short term highly liquid investments with original maturities of three months or less. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 85 Financial liabilities and equity instruments Awards not linked to or settled by ordinary shares Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. These awards are accounted for in accordance with IAS 19 Employee Benefits whereby the Group estimates the cost of awards using the projected unit credit method, which involves estimating the future The Group classifies its financial liabilities into one of the categories value of the preference shares or convertible preference shares, as listed below. (a) Fair value through profit or loss This category comprises only out-of-the-money derivatives, which are carried at fair value with changes in the fair value recognised in the appropriate, at the vesting date and the probability of the awards vesting. The resulting expense is charged to the Income Statement over the performance period and the liability is remeasured at each Balance Sheet date. Income Statement in finance income or finance expense. The cash component of the 2016 Retention Scheme has been (b) Other financial liabilities accounted for in this way. Other financial liabilities include interest bearing loans, trade payables Foreign currency translation (including rent deposits and retentions under construction contracts), preference shares, convertible preference shares and other short-term monetary liabilities. Trade payables and other short-term monetary liabilities are initially recorded at fair value and subsequently carried at amortised cost using the effective interest rate method. (a) Functional and presentation currency Items included in the financial statements of each Group entity are measured in the currency of the primary economic environment in which the entity operates (the "functional currency"). For the Company the directors consider this to be Sterling. The group Interest bearing loans, convertible preference shares and preference financial statements are presented in Sterling and all values are shares are initially recorded at fair value net of direct issue costs and rounded to the nearest thousand pounds (£'000) except where subsequently carried at amortised cost using the effective interest otherwise indicated. rate method. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the Income Statement using the effective interest rate method. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the An equity instrument is any contract that evidences a residual transactions. Foreign exchange gains and losses resulting from the interest in the assets of the Group after deducting all of its liabilities. settlement of such transactions and from the translation at the year- The Group considers the convertible preference shares to be a end exchange rates of monetary assets and liabilities denominated compound financial instrument, that is they have a liability and equity in foreign currencies are recognised in the Income Statement. component. On the issue of convertible preference shares the fair Non-monetary assets and liabilities are translated using exchange value of the liability component is determined and the balance of the rates at the date of the initial transaction or when their fair values are proceeds of issue is deemed to be equity. The Group's other equity reassessed. instruments are its ordinary shares and warrants. Own shares held Own equity instruments which are acquired are recognised at cost and deducted from equity. No gain or loss is recognised in the Income (c) On consolidation The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: Statement on the purchase, sale, issue or cancellation of the Group's (i) assets and liabilities for each Balance Sheet are translated at the own equity instruments. Any difference between the carrying amount closing rate at the date of the Balance Sheet; and the consideration is recognised in retained earnings. (ii) income and expenditure for each Income Statement are Share-based payments and other long term incentives The Group rewards its key management and other senior employees by a variety of means many of which are settled by ordinary, preference shares or convertible preference shares of the Company. Awards linked to or that may be settled by ordinary shares The share component of the 2016 Retention Scheme may be settled in any of the Company's listed securities, including ordinary shares, and as a consequence falls within the scope of IFRS 2 Share-based payments. The instalments have been settled by preference shares and convertible preference shares and therefore are cash-settled transactions. The cost of cash-settled transactions is recognised as an expense over the vesting period, measured by reference to the fair value of the corresponding liability, which is recognised on the Balance Sheet. The liability is remeasured at fair value at each balance sheet date until settlement, with changes in the fair value recognised in the Income Statement. Also, to the extent the Five Year Performance Plan vests in March 2023, the resulting entitlements will be settled in ordinary shares and thus will fall within the scope of IFRS 2. translated at the average exchange rate prevailing in the period unless this does not approximate to the rates ruling at the dates of the transactions in which case they are translated at the transaction date rates; and (iii) all resulting exchange differences are recognised in Other Comprehensive Income. The exchange differences arising from the translation of the net investment in foreign entities are recognised in Other Comprehensive Income. When a foreign entity is sold, such exchange differences are recognised in the Income Statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 86 NOTES TO THE FINANCIAL STATEMENTS The results and financial position of all the Group entities that have a (b) Recognition of deferred tax assets functional currency different from the Group's presentation currency The recognition of deferred tax assets is based upon whether it is (Sterling) are translated into the presentation currency using the probable that sufficient and suitable taxable profits will be available following rates: Balance Sheet – Roubles – United States Dollar – Euro Income Statement* – Roubles – United States Dollar – Euro 2019 2018 81.1460 88.3524 1.3108 1.1703 1.2736 1.1142 2019 2018 in the future, against which the reversal of temporary differences can be deducted. Recognition, therefore, involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised. Estimates (a) Valuation of investment property and investment property under construction The best evidence of fair value are current prices in an active market for similar properties. In the absence of such information, the Group 82.6282 83.6890 determines the amount within a range of reasonable, fair value 1.2765 1.1398 1.3350 1.1304 estimates. In making its estimation the Group considers information from a variety of sources and engages external, professional advisers * These are the average rates for the twelve months ended 31 December 2018 and 2019, which are used unless this does not approximate the rates ruling at the dates of the relevant transactions in which case the item of income or expenditure is translated at the transaction date rate. Dividends Dividends to the Company's ordinary shareholders are recognised when they become legally payable. In the case of interim dividends, this is when declared by the directors. In the case of final dividends, this is when they are approved by the shareholders at an AGM. 3. Critical accounting estimates and judgements The Group makes certain estimates and judgements regarding the future. Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. Judgements other than estimates In the process of applying the Group's accounting policies the following are considered to have the most significant effect on the amounts recognised in the consolidated financial statements: (a) Acquisitions Properties can be acquired through the corporate acquisition of a subsidiary company. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for the acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, consideration is made of the extent to which significant processes are acquired and the extent of ancillary services provided by the subsidiary. to carry out third party valuations of its properties. The external valuations are completed in accordance with appropriate sections of the current Practice Statements contained in the Royal Institution of Chartered Surveyors Valuation - Global Standards, 2017 (the "Red Book"). These are internationally accepted standards of valuation and are consistent with the requirements of IFRS 13. In our market, where transactional activity is minimal, the valuers are required to use a greater degree of estimation or judgement than in a market where comparable transactions are more readily available. The significant methods and assumptions used in estimating the fair value of investment property and investment property under construction are set out in note 13, along with detail of the sensitivities of the valuations to changes in the key inputs. (b) Income tax As part of the process of preparing its financial statements, the Group is required to estimate the provision for income tax in each of the jurisdictions in which it operates. This process involves an estimation of the actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Balance Sheet. Russian tax legislation is subject to varying interpretations and changes, which may occur frequently. New legislation and clarifications have been introduced over recent years, but it remains unclear as to how these will be applied in practice. The interpretation of the legislation that the Group adopts for its transactions and activities may be challenged by the relevant regional and federal authorities from time to time. Additionally, there may be inconsistent interpretation of tax regulations by each local authority, creating uncertainties in the correct application of the taxation regulations in Russia. Fiscal periods remain open to review by the authorities for the three calendar years preceding the years of review and in some circumstances may cover a longer period. Additionally, When the acquisition of a subsidiary does not represent a business, there have been instances where new tax regulations have been it is accounted for as an acquisition of a group of assets and liabilities. applied retrospectively. The level of tax reviews and court activity is The cost of the acquisition is allocated to the assets and liabilities increasing. The Group is, and has been, subject to tax reviews which acquired based on their relative fair values, and no goodwill or are worked through with the relevant authorities to resolve. deferred tax liabilities are recognised. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 87 The Group, in making its tax provision judgements, is confident that an appropriate level of management and control is exerted in each of the jurisdictions in which it operates, all companies are tax resident in their relevant jurisdictions and are the beneficial owners of any income they receive. Local management use their in house tax knowledge and previous experience as well as independent professional experts when assessing tax risks and the resultant provisions required. For the current year, the Group has specifically reviewed the potential impact that new regulations may have on its financing arrangements and the provision reflects the expected value method of calculation. It is reasonably possible that outcomes within the next financial year are different from the assumptions made and could require an adjustment to the carrying amount of the provision. 4. Segmental information The Group has three reportable segments, which are managed and report independently to the Board. These comprise: Property Investment - acquire or develop and lease commercial property in Russia Roslogistics - provision of warehousing, transport, customs brokerage and related services in Russia - IFRS 15 revenue - services are provided to customers over time and invoiced at appropriate intervals in accordance with the relevant contract terms, with payment typically due within 10 to 45 days of invoicing; and Raven Mount - sale of residential property in the UK - IFRS 15 revenue - the transfer of land or property to the purchaser occurs on legal completion of the sale contract, with payment typically due upon completion, though in some cases a deferral may be agreed. Financial information relating to Property Investment is provided to the Board on a property by property basis. The information provided comprises gross rentals, operating costs, net operating income, revaluation gains and losses and where relevant the profit or loss on disposal of an investment property. The individual properties have similar economic characteristics and are considered to be a single reporting segment. Information about Raven Mount provided to the Board comprises the gross sale proceeds, inventory cost of sales and gross profit, including the share of profits or losses of its joint venture. Roslogistics is an independently managed business and the Board is presented with turnover, cost of sales and operating profits or losses after deduction of administrative expenses. Administrative expenses and foreign currency gains or losses are reported to the Board by segment. Finance income and finance expense are not reported to the Board on a segment basis. Sales between segments are eliminated prior to the provision of financial information to the Board. For the Balance Sheet, segmental information is provided in relation to investment property, inventory, cash balances and borrowings. Whilst segment liabilities include loans and borrowings, segment profit does not include the related finance costs. If such finance costs were included in segment profit or loss, the profit from Property Investment would have decreased by £56.0 million (2018: £51.1 million). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 88 NOTES TO THE FINANCIAL STATEMENTS (a) Segmental information for the year ended and as at 31 December 2019 Year ended 31 December 2019 Gross revenue Operating costs / cost of sales Net rental and related income Administrative expenses Property Investment Roslogistics £’000 £’000 Raven Mount £’000 Segment Total £’000 Central Overhead £’000 158,547 16,663 (40,664) 117,883 (8,285) 8,378 163 80 243 175,373 (48,869) 126,504 – – – Total £’000 175,373 (48,869) 126,504 Running general and administration expenses (15,584) (1,997) (406) (17,987) (5,143) (23,130) Abortive project costs Depreciation Share-based payments and other long term incentives Foreign currency profits / (losses) Unrealised profit on revaluation of investment property Unrealised profit on revaluation of investment property under construction Share of profits of joint ventures Profit on disposal of joint ventures (521) (1,417) (815) 27,460 – (364) – 5 – (1) – (3) (521) (1,782) – – (815) (4,653) 27,462 – (521) (1,782) (5,468) 27,462 127,006 6,022 (167) 132,861 (9,796) 123,065 47,820 451 – – – – (213) – – – 1,005 490 47,820 451 792 490 – – – – 47,820 451 792 490 Segment profit / (loss) 175,277 5,809 1,328 182,414 (9,796) 172,618 Finance income Finance expense Profit before tax As at 31 December 2019 Assets Investment property Investment property under construction Investment in joint ventures Inventory Cash and short term deposits Segment assets Other non-current assets Other current assets Total assets Segment liabilities Interest bearing loans and borrowings Capital expenditure Corporate acquisitions Other acquisition Property improvements RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 2,011 (109,570) 65,059 Property Investment Roslogistics £’000 £’000 Raven Mount £’000 Total £’000 1,337,682 33,846 – – 62,449 1,433,977 – – 189 – 1,069 1,258 – – – 358 4,620 1,337,682 33,846 189 358 68,138 4,978 1,440,213 36,475 41,595 1,518,283 683,341 169 11,924 11,939 24,032 – – – – – 683,341 169 11,924 11,939 24,032 – – – – – NOTES TO THE FINANCIAL STATEMENTS 89 (a) Segmental information for the year ended and as at 31 December 2018 Year ended 31 December 2018 Gross revenue Operating costs / cost of sales Net rental and related income Administrative expenses Property Investment Roslogistics £’000 £’000 Raven Mount £’000 Segment Total £’000 Central Overhead £’000 146,106 16,402 (36,322) 109,784 (8,278) 8,124 131 246 377 162,639 (44,354) 118,285 – – – Total £’000 162,639 (44,354) 118,285 Running general and administration expenses (14,535) (1,989) (419) (16,943) (5,771) (22,714) Abortive project costs Depreciation Share-based payments and other long term incentives Foreign currency (losses) / profits (1,625) (491) (350) (2,483) – (318) – 3 - (2) – – (1,625) (811) – – (350) (2,503) (2,480) – (1,625) (811) (2,853) (2,480) 90,300 5,820 (44) 96,076 (8,274) 87,802 Unrealised loss on revaluation of investment property Unrealised profit on revaluation of investment property under construction Share of profits of joint ventures (121,764) 755 – – – – Segment (loss) / profit (30,709) 5,820 – – 1,630 1,586 (121,764) 755 1,630 – – – (121,764) 755 1,630 (23,303) (8,274) (31,577) Finance income Finance expense Loss before tax As at 31 December 2018 Assets Investment property Investment property under construction Investment in joint ventures Inventory Cash and short term deposits Segment assets Other non-current assets Other current assets Total assets Segment liabilities Interest bearing loans and borrowings Capital expenditure Corporate acquisitions Other acquisition Property improvements 4,869 (88,180) (114,888) Property Investment Roslogistics £’000 £’000 Raven Mount £’000 Total £’000 1,175,440 30,548 – – 69,605 1,275,593 – – 369 – 1,358 1,727 – – 6,197 356 2,487 1,175,440 30,548 6,566 356 73,450 9,040 1,286,360 65,467 44,007 1,395,834 643,430 33,249 27,239 2,741 63,229 – – – – – 643,430 33,249 27,239 2,741 63,229 – – – – – RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 90 NOTES TO THE FINANCIAL STATEMENTS 5. Gross revenue Rental and related income Proceeds from the sale of inventory property Logistics 2019 £’000 2018 £’000 158,547 146,106 163 131 16,663 16,402 175,373 162,639 The Group's leases typically include annual rental increases ("contingent rents") based on a consumer price index in Russia, Europe or the USA, which are recognised in income as they arise. Contingent rents, being amounts recorded in excess of minimum contracted increases, are included in rental income for the year amounted £139k (2018: £12k). Details of the Group's contracted future minimum lease receivables are detailed in note 36. In 2019 there were no single customers accounting for more than 10% of Group revenues. In 2018 the Group recognised revenue of £19 million from a single tenant of the property investment segment that amounted to more than 10% of Group revenue. 6. Administrative expenses (a) Total administrative expenses Employment costs Directors’ remuneration Bad debts Office running costs and insurance Travel costs Auditors’ remuneration Legal and professional Loss on disposal of plant and equipment Abortive project costs Depreciation Registrar costs and other administrative expenses (b) Fees for audit and other services provided by the Group’s auditor Audit services Audit related assurance services Other fees: Taxation services Other services Total fees 2019 £’000 13,615 2,523 2018 £’000 12,079 2,900 (2) (58) 2,480 1,164 671 2,416 19 521 1,782 244 3,261 1,321 596 2,070 – 1,625 811 545 25,433 25,150 2019 £’000 532 50 582 89 – 89 2018 £’000 461 50 511 47 38 85 671 596 In 2018 the Group engaged Ernst & Young LLP to undertake due diligence in respect of the investment property acquisitions in the year, incurring £103k of fees, which were included in the cost of the relevant investment property and a further £537k incurred in respect of aborted projects. There were no equivalent fees for 2019. Ernst & Young LLP also provide audit and taxation services for various SPVs that form part of the property operating costs. Charges for the audit of SPVs in the year amounted to £132k (2018: £265k) and the fees for taxation services were £93k (2018: £147k). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 91 7. Finance income and expense Finance income Total interest income on financial assets not at fair value through profit or loss Income from cash and short term deposits Interest receivable from joint ventures Other finance income Change in fair value of open interest rate derivative financial instruments Finance income Finance expense Interest expense on loans and borrowings measured at amortised cost Interest expense on preference shares Interest expense on convertible preference shares Other interest expense 2019 £’000 2018 £’000 1,960 51 – 2,011 55,956 12,338 19,731 1,153 3,254 32 1,583 4,869 51,092 12,335 19,963 – Total interest expense on financial liabilities not at fair value through profit or loss 89,178 83,390 Change in fair value of open forward currency derivative financial instruments Change in fair value of open interest rate derivative financial instruments Change in fair value of foreign currency embedded derivatives Finance expense 20 20,372 – 83 4,566 141 109,570 88,180 Included in the interest expense on loans and borrowings is £6.59 million (2018: £3.93 million) relating to amortisation of costs incurred in originating the loans. Included in the interest expense on preference shares is £0.36 million (2018: £0.42 million) relating to the accretion of premiums payable on redemption of preference shares and amortisation of costs incurred in issuing preference shares. Included in the interest expense on convertible preference shares is £6.95 million (2018: £6.95 million) relating to the accretion of premiums payable on redemption and amortisation of costs incurred in issuing the convertible preference shares of £0.30 million (2018: £0.30 million). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 92 8. Tax The tax expense for the year comprises: Current taxation Deferred taxation (note 25) On the origination and reversal of temporary differences On unrealised foreign exchange movements in loans Tax charge The charge for the year can be reconciled to the loss per the Income Statement as follows: Profit / (loss) before tax Tax at the Russian corporate tax rate of 20% Tax effect of financing arrangements Tax effect of fair value movement on open interest rate derivative financial instruments Tax effect of non deductible preference share coupon Tax effect of foreign exchange movements Movement in provision for uncertain tax positions Tax effect of other income not subject to tax and non-deductible expenses Tax effect of property depreciation on revaluations Tax on dividends and other inter company gains Movement on previously unprovided deferred tax assets 2019 £’000 2018 £’000 8,210 5,731 10,766 65 72 (10) 19,041 5,793 2019 £’000 2018 £’000 65,059 (114,888) 13,012 (22,978) 1,326 3,743 6,414 (4,480) (543) 4,625 (1,964) 327 6,460 (2,186) (1,924) 4,983 (7,422) 17,179 2,423 (57) 19,041 2,571 3,325 5,793 The tax effect of financing arrangements reflects the impact of intra group funding in each jurisdiction. Foreign exchange movements on intra group financing are taxable or tax deductible in Russia but not in other jurisdictions. In accordance with its accounting policy, the Group is required to estimate its provision for uncertain tax positions and the movement in the provision is reflected above. Other income and expenditure not subject to tax arises in Guernsey. 9. Earnings measures In addition to reporting IFRS earnings the Group also reports its own underlying earnings measure. The Directors consider underlying earnings to be a key performance measure, as this is the measure used by Management to assess the return on holding investment assets for the long term and the Group's ability to declare covered distributions. As a consequence the underlying earnings measure excludes investment property revaluations, gains or losses on the disposal of investment property, intangible asset movements; gains and losses on derivative financial instruments, share-based payments and other long term incentives (to the extent not settled in cash), the accretion of premiums payable on redemption of preference shares and convertible preference shares, depreciation and amortisation of loan origination costs (as these represent non-cash expenses that do not affect the ability to declare covered distributions); and material non-recurring items, together with any related tax. The Group is also required to report Headline earnings per share as required by the listing requirements of the Johannesburg Stock Exchange. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 93 The calculation of basic and diluted earnings per share is based on the following data: Earnings Net profit / (loss) for the year prepared under IFRS Adjustments to arrive at underlying earnings: Administrative expenses Depreciation (note 6a) Aborted project costs (note 6a) Share-based payments and other long term incentives (note 31b) Profit on disposal of joint ventures Unrealised (profit) / loss on revaluation of investment property Unrealised profit on revaluation of investment property under construction Finance income 2019 2018 £’000 £’000 £’000 £’000 46,018 (120,681) 1,782 521 811 1,625 2,303 541 (490) (47,820) (451) 2,436 2,853 – 121,764 (755) Change in fair value of open interest rate derivative financial instruments (note 7) – (1,583) Finance expense Change in fair value of open forward currency derivative financial instruments (note 7) Change in fair value of open interest rate derivative financial instruments (note 7) Change in fair value of foreign currency embedded derivatives (note 7) Premium on redemption of preference shares and amortisation of issue costs (note 22) Premium on redemption of convertible preference shares and amortisation of issue costs (note 23) Amortisation of loan origination costs (note 7) Tax Movement on deferred tax arising on depreciation and revaluation of investment property Tax on unrealised foreign exchange movements in loans Underlying earnings Calculation of Headline earnings Net profit / (loss) for the year prepared under IFRS Adjustments to arrive at Headline earnings: Unrealised (profit) / loss on revaluation of investment property Unrealised profit on revaluation of investment property under construction Movement on deferred tax arising on revaluation of investment property Headline earnings 20 20,372 – 362 7,245 6,594 8,547 (16) 83 4,566 141 417 7,246 3,931 34,593 16,384 (619) 215 8,531 43,225 (404) 20,014 2019 £’000 2018 £’000 46,018 (120,681) (47,820) 121,764 (451) 2,280 27 (755) (6,502) (6,174) RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 94 NOTES TO THE FINANCIAL STATEMENTS IFRS Basic Effect of dilutive potential ordinary shares: Warrants (note 27) LTIP (note 31) 2016 Retention scheme (note 31) Five Year Performance Plan (note 31) Convertible preference shares (note 23) Diluted Underlying earnings Basic Effect of dilutive potential ordinary shares: Warrants (note 27) LTIP (note 31) 2016 Retention scheme (note 31) Five Year Performance Plan (note 31) Convertible preference shares (note 23) Diluted Headline earnings Basic Effect of dilutive potential ordinary shares: Warrants (note 27) LTIP (note 31) 2016 Retention scheme (note 31) Five Year Performance Plan (note 31) Convertible preference shares (note 23) 2019 Weighted average shares No. ‘000 Earnings £’000 EPS Pence Earnings £’000 2018 Weighted average shares No. ‘000 EPS Pence 46,018 563,890 8.16 (120,681) 641,588 (18.81) – – – – 236 103 2,349 – 19,731 65,749 310,090 876,668 2019 Weighted average shares No. ‘000 Earnings £’000 – – – – – – – – – – 7.50 (120,681) 641,588 (18.81) EPS Pence Earnings £’000 2018 Weighted average shares No. ‘000 EPS Pence 3.12 43,225 563,890 7.67 20,014 641,588 – – – – 236 103 2,349 – 12,486 55,711 310,090 876,668 2019 Weighted average shares No. ‘000 Earnings £’000 – – – – – 2,641 612 4,535 – – 6.35 20,014 649,376 3.08 EPS Pence Earnings £’000 2018 Weighted average shares No. ‘000 EPS Pence 27 563,890 0.00 (6,174) 641,588 (0.96) – – – – – 236 103 2,349 – – – – – – – – – – – – Diluted 27 566,578 0.00 (6,174) 641,588 (0.96) In 2018, the finance expense relating to the convertible preference shares was greater than IFRS, underlying and headline basic earnings per share and thus the convertible preference shares were not dilutive. This was not the case in the current year and thus the convertible preference shares are dilutive for IFRS and underlying earnings per share. 10. Ordinary dividends In the place of a final dividend for 2018 the Company implemented a tender offer buy back of ordinary shares on the basis of 2 in every 51 shares held at a tender price of 45 pence per share, the equivalent of a final dividend of 1.75 pence per share. Instead of an interim dividend for 2019 the Company implemented a tender offer buy back of ordinary shares on the basis of 1 in every 44 shares at a tender price of 55 pence per share, the equivalent of a dividend of 1.25 pence per share. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 95 11. Investment property Asset class Location Fair value hierarchy* Market value at 1 January 2019 Property improvements Unrealised profit / (loss) on revaluation On translation to presentation currency Logistics Moscow Level 3 £’000 Logistics St Petersburg Level 3 £’000 Logistics Regions Level 3 £’000 Office St Petersburg Level 3 £’000 2019 Total £’000 840,613 147,978 144,843 60,402 1,193,836 4,214 25,771 74,728 751 10,104 13,157 3,115 10,532 12,870 274 8,354 (304) 46,103 5,414 106,169 Market value at 31 December 2019 945,326 171,990 171,360 65,786 1,354,462 Tenant incentives and contracted rent uplift balances (12,031) (3,792) (1,167) (1,011) (18,001) Head lease obligations (note 24) 1,221 – – – 1,221 Carrying value at 31 December 2019 934,516 168,198 170,193 64,775 1,337,682 Revaluation movement in the year ended 31 December 2019 Gross revaluation Movement of tenant incentives and contracted rent uplift balances Less impact of translation to presentation currency 25,771 1,643 179 10,104 10,532 254 (44) 89 97 (304) (535) 34 46,103 1,451 266 Revaluation reported in the Income Statement 27,593 10,314 10,718 (805) 47,820 Asset class Location Fair value hierarchy* Market value at 1 January 2018 Corporate acquisitions (note 38) Other acquisition Property improvements Unrealised loss on revaluation On translation to presentation currency Logistics Moscow Level 3 £’000 Logistics St Petersburg Level 3 £’000 Logistics Regions Level 3 £’000 Office St Petersburg Level 3 £’000 2018 Total £’000 854,288 144,910 117,871 60,682 1,177,751 – 27,239 1,430 (97,641) 55,297 – – 293 30,805 – 504 – – 514 30,805 27,239 2,741 (6,468) (10,795) (4,686) (119,590) 9,243 6,458 3,892 74,890 Market value at 31 December 2018 840,613 147,978 144,843 60,402 1,193,836 Tenant incentives and contracted rent uplift balances (13,674) (4,046) (1,256) (476) (19,452) Head lease obligations (note 24) 1,056 – – – 1,056 Carrying value at 31 December 2018 827,995 143,932 143,587 59,926 1,175,440 Revaluation movement in the year ended 31 December 2018 Gross revaluation (97,641) (6,468) (10,795) (4,686) (119,590) Movement of tenant incentives and contracted rent uplift balances 41 Less impact of translation to presentation currency Revaluation reported in the Income Statement (1,626) (99,226) 203 (532) 8 (150) (70) (48) 182 (2,356) (6,797) (10,937) (4,804) (121,764) *Classified in accordance with the fair value hierarchy, see note 35. There were no transfers between fair value hierarchy in 2018 or 2019. During 2018 the Group acquired two new investment properties. As a corporate acquisition it acquired Volga Logistics Park (see note 38) and, as a direct purchase of real estate, it acquired a further phase of Logopark Sever. At 31 December 2019 the Group has pledged investment property with a value of £1,345 million (2018: £1,153 million) to secure banking facilities granted to the Group (see note 21). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 96 NOTES TO THE FINANCIAL STATEMENTS 12. Investment property under construction Asset class Location Fair value hierarchy* Market value at 1 January 2019 Costs incurred On translation to presentation currency Unrealised profit on revaluation Market value at 31 December 2019 Head lease obligations (note 24) Carrying value at 31 December 2019 Asset class Location Fair value hierarchy* Market value at 1 January 2018 Costs incurred Corporate acquisition (note 38) On translation to presentation currency Unrealised (loss) / profit on revaluation Market value at 31 December 2018 Head lease obligations (note 24) Carrying value at 31 December 2018 Assets under construction Moscow Level 3 £’000 Regions Level 3 Sub–total £’000 £’000 Land Bank Regions Level 3 £’000 2019 Total £’000 19,342 8,335 27,677 2,537 30,214 138 1,721 424 44 740 27 182 2,461 451 – 182 177 2,638 – 451 21,625 9,146 30,771 2,714 33,485 361 – 361 – 361 21,986 9,146 31,132 2,714 33,846 Assets under construction Moscow Level 3 £’000 Regions Level 3 Sub–total £’000 £’000 Land Bank Regions Level 3 £’000 2018 Total £’000 19,736 5,618 25,354 2,873 28,227 18 – (268) (144) 10 28 2,444 2,444 – – 28 2,444 (636) (904) (336) (1,240) 899 755 – 755 19,342 8,335 27,677 2,537 30,214 334 – 334 – 334 19,676 8,335 28,011 2,537 30,548 *Classified in accordance with the fair value hierarchy, see note 35. There were no transfers between fair value hierarchy in 2018 or 2019. No borrowing costs were capitalised in the year (2018: £nil). At 31 December 2019 the Group has pledged investment property under construction with a value of £30.8 million (2018: £25.3 million) to secure banking facilities granted to the Group (see note 21). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 97 13. Investment property and investment property under construction - Valuation It is the Group's policy to carry investment property and investment property under construction at fair value in accordance with IFRS 13 "Fair Value Measurement" and IAS 40 "Investment Property": • • investment property consists of the completed, income producing, portfolio; and investment property under construction consists of potential development projects and land bank. The latter is sub-categorised as: • assets under construction - current development projects and the value of land on additional phases of existing investment property; and • land bank - land held for potential development. For the purposes of IFRS 13 disclosure, we have analysed these categories by the geographical market they are located in being Moscow, St Petersburg and the Regions (the other Russian regional cities). These form distinct markets for valuation purposes as the fundamentals differ in each. The fair value of the Group's investment property and assets under construction at 31 December 2019 has been arrived at on the basis of market valuations carried out by Jones Lang Lasalle ("JLL"), external valuers to the Group. JLL have consented to the use of their name in these financial statements. The Group's land bank in the Regions is valued by the Directors. Valuation process The Group has four qualified RICS members on the management team, one of whom was a former Chairman of RICS in Russia and the CIS. Three have relevant valuation and market experience and are actively involved in the valuation process. They also regularly meet with agents and consultants to obtain additional market information. The effectiveness and independence of the external valuers is reviewed each year. The criteria considered include market knowledge, reputation, independence and professional standards. The Audit Committee also meets the external valuers at least once a year. The Group's management team have determined that the external valuers are experienced in the Russian market and acts as an "External Valuer" as defined in the RICS Valuation - Global Standards, 2017. The Group has continued to use the income capitalisation approach in assessing its opinion of value based on a discounted cash flow methodology in line with in market practice internationally and in Russia, and is accepted practice under RICS Valuation - Global Standards, 2017. The RICS Valuation - Global Standards, 2017 are internationally accepted standards of valuation and are consistent with the principles of IFRS 13. For investment properties and assets under construction, the executive team members consult with the external valuers and the valuers then determine: • whether a property's fair value can be reliably determined; • which valuation method should be applied for each asset; and • the assumptions made for unobservable inputs that are used in valuation methods. The land bank is valued by the Directors. The process followed includes site inspections, meetings with local real estate experts, comparison to any local land sale information and comparison to transactions in other regional cities including those where the Group has income producing assets. Updated acquisition appraisals and any indication of value for alternative use are also considered. Valuations are prepared on a biannual basis. At each valuation date the executive team members review the information prepared by the property department for valuation purposes being submitted to the external valuers. Each property valuation is then reviewed and discussed with the external valuers in detail and adjustments made as necessary. The executive management also present the valuation results to the Audit Committee and hold discussions with the Group's auditors. Both the Audit Committee and the auditors also have discussions with the external valuers. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 98 NOTES TO THE FINANCIAL STATEMENTS Valuation assumptions and key inputs Class of property Carrying amount 2019 £’000 2018 £’000 Valuation technique Input Range 2019 2018 Completed investment property Moscow - Logistics 934,516 827,995 Discounted cash flow St Petersburg - Logistics 168,198 143,932 Discounted cash flow Regional - Logistics 170,193 143,587 Discounted cash flow St Petersburg - Office 64,775 59,926 Discounted cash flow ERV per sqm ERV growth Discount rate Exit cap rate Vacancy rate Passing rent per sqm Passing rent per sqm Passing rent per sqm ERV per sqm ERV growth Discount rate Exit cap rate Vacancy rate Passing rent per sqm Passing rent per sqm Rub 3,700 to Rub 4,500 5.00% to 7.00% 10.80% to 12.10% 10.25% to 11.25% 1% to 59% $100 to $174 Rub 3,150 to Rub 8,999 $122 Rub 3,900 to Rub 4,150 5.00% to 7.00% 12.10% to 12.30% 11.50% 1% to 15% $111 to $137 Rub 3,276 to Rub 5,628 ERV per sqm ERV growth Discount rate Exit cap rate Vacancy rate Passing rent per sqm Passing rent per sqm Passing rent per sqm Rub 3,800 to Rub 4,200 5.00% to 7.00% 11.80% to 12.30% 11.50% 0% to 10% $143 Rub 3,850 to Rub 21,153 – Rub 3,500 to Rub 3,800 4.00% to 7.00% 10.75% to 12.60% 10.50% to 11.50% 1% to 50% $113 to $170 Rub 3,000 to Rub 12,315 $118 Rub 3,800 6.00% 12.30% to 12.50% 11.75% 0% to 29% $109 to $133 Rub 2,456 to Rub 5,260 Rub 3,800 6.00% 12.25% to 12.50% 11.75% 0% to 9% $107 to $138 Rub 3,750 to Rub 7,300 £88 ERV per sqm ERV growth Discount rate Exit cap rate Vacancy rate Passing rent per sqm Passing rent per sqm Passing rent per sqm Rub 11,789 to Rub 12,491 2.00% to 4.00% 11.75% to 12.00% 11.00% to 12.00% 0% to 13% – – Rub 7,596 to Rub 18,319 Rub 10,976 to Rub 12,366 2.00% to 4.00% 12.00% to 12.25% 11.25% to 12.25% 1% to 8% £408 £410 to £413 Rub 4,384 to Rub 17,570 Other key information Moscow - Logistics St Petersburg - Logistics Regional - Logistics St Petersburg - Office Description Land plot ratio Age of building Outstanding costs (£’000) Land plot ratio Age of building Outstanding costs (£’000) Land plot ratio Age of building Outstanding costs (£’000) Land plot ratio Age of building Outstanding costs (£’000) RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT Range 2019 2018 34% - 65% 2 to 15 years 1,262 48% - 57% 5 to 11 years 97 48% - 61% 10 years 663 148% to 496% 11 to 13 years 57 34% - 65% 1 to 14 years 2,290 48% - 57% 4 to 10 years 282 48% - 61% 9 years 363 148% to 496% 10 to 12 years 23 NOTES TO THE FINANCIAL STATEMENTS 99 Carrying amount 2019 £’000 2018 £’000 Valuation technique Input Range 2019 2018 Investment property under construction Moscow - Logistics 21,986 19,676 Comparable Value per ha Regional - Logistics 9,146 8,335 Comparable Value per ha Rub 19.5m - Rub 33.8m Rub 17.9m - Rub 33.6m Rub 9.5m - Rub 20.6m Rub 9.7m - Rub 20.6m The fair value of investment property is determined using the income capitalisation method where a property's fair value is estimated based on the present value of net cash flows generated from each property, plus the reversionary value based on the final year's income capitalised using an all-risks exit yield. Allowance is made for a potential letting void and an assessment is made of the estimated rental value on re-letting (ERV). These elements are determined based on current market conditions and values. Assets under construction (development projects) are valued on a residual value basis using the future anticipated costs to complete construction, a provision for letting costs, a letting void period and an assessment of ERV, which is capitalised at the prevailing market yield. Depending on the status of the development, and how much of development process has been completed an allowance will also be made for developer's profit. There were no active development projects at 31 December 2019 or 2018. Assets under construction (additional phases of existing sites) are valued on a comparable basis. The value of the land plots (as shown above) is estimated based on comparable transactions in the same market. This approach is based on the principle that a buyer will not pay more for an asset than it will cost to buy a comparable substitute property. The unit of comparison applied is the price per square metre. All of the above valuations are completed by JLL. The land bank is valued by the Directors using the comparable basis. Sensitivity analysis of significant changes in unobservable inputs within Level 3 of the hierarchy The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property are: • ERV; • ERV growth; • Void period on re-letting; • Discount rate; • Exit capitalisation yield; and • Specific to property under development: construction costs, letting void, construction period and development profit. Further significant increases (or decreases) in any of the main inputs to the valuation, being discount rate, exit capitalisation yield, ERV (per sqm p.a.), ERV growth and letting void, would result in a significantly lower (or higher) fair value measurement. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 100 NOTES TO THE FINANCIAL STATEMENTS 14. Investment in subsidiary undertakings The principal subsidiary undertakings of Raven Property Group Limited, all of which have been included in these consolidated financial statements, are as follows: Name Raven Russia Holdings Cyprus Limited Dorfin Limited Roslogistics Holdings (Russia) Limited Raven Mount Group Limited Raven Russia Property Advisors Limited Raven Russia (Service Company) Limited Avalon Logistics Company LLC Delta LLC EG Logistics LLC Fenix LLC Gorigo LLC Kstovo Industrial Park 1 LLC CJSC Kulon Development CJSC Kulon Istra Kulon Spb LLC League LLC Logopark Don LLC Logopark Ob LLC CJSC Noginsk Vostok Pervomayskay Zarya LLC Petroestate LLC Primium LLC Resource Economia LLC Sever Estate LLC Soyuz-Invest LLC CJSC Toros Country of Incorporation Cyprus Cyprus Cyprus England England Guernsey Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Proportion of ownership interest 2019 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2018 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% The Group's investment property and investment property under construction are held by its subsidiary undertakings. 15. Investment in joint ventures The principal joint ventures of the Group are as follows: Name Coln Park LLP Coln Park Construction LLP Ruconnect Holding Cyprus Limited Country of Incorporation England England Cyprus Proportion of ownership interest 2019 – – 40% 2018 50% 50% 40% Coln Park LLP and Coln Park Construction LLP were the entities through which the Group undertook its second home development activity in the UK. In addition, the Group had a number of other small joint ventures primarily associated with the second home development activity. The Group's interest in each joint venture has been accounted for using the equity method. None of the Group's joint ventures are individually material. In December 2019 the Group sold its interest in the Coln Park LLP and Coln Park Construction LLP to its joint venture partner for £6.65 million, giving rise to a profit on disposal of £0.49 million. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 101 Summarised aggregated financial information of the joint ventures, prepared under IFRS, and a reconciliation with the carrying amount of the investments in the consolidated financial statements are set out below: Summarised Balance Sheet Non-current assets Inventory Cash and short term deposits Other current assets Current liabilities Non-current liabilities Net assets Investment in joint ventures Goodwill on acquisition Share of net (liabilities) / assets Carrying value Carrying value at 1 January Investment in the year Share of total comprehensive income for the year Share of distributions paid Disposals On translation to presentation currency Carrying value at 31 December Summarised Statement of comprehensive income Gross revenue Cost of sales Administrative expenses Finance expense Profit before tax Tax Profit for the year Other comprehensive income Total comprehensive income Group’s share of total comprehensive income for the year 2019 £’000 432 – 159 348 (595) (486) (142) 246 (57) 189 6,566 13 792 (1,043) (6,160) 21 189 2018 £’000 3,634 3,425 3,597 1,874 (3,659) (3,051) 5,820 3,694 2,872 6,566 7,380 533 1,630 (3,000) – 23 6,566 2019 £’000 2018 £’000 19,158 27,708 (15,326) (22,329) (1,983) (2,017) (258) 1,591 (25) 1,566 (88) 1,478 792 (216) 3,146 20 3,166 53 3,219 1,630 The joint ventures had no contingent liabilities or capital commitments as at 31 December 2019 and 2018. The joint ventures cannot distribute their profits until they obtain the consent from the joint venture partners. The Group charged its joint ventures £167k (2018: £244k) for services rendered to them during the year, of which £67k (2018: £81k) was included in receivables at the balance sheet date. The joint ventures recharged certain costs back to Group that for the year amounted to £29k (2018: £51k) of which £4k (2018: £7k) was included in payables at the balance date. The Group has advanced loans to its joint ventures of £306k (2018: £491k) generating interest income of £52k (2018: £32k). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 102 NOTES TO THE FINANCIAL STATEMENTS 16. Other receivables Loans receivable Restricted cash VAT recoverable Prepayments and other receivables 2019 £’000 67 – 3,059 288 3,414 2018 £’000 676 12,249 2,538 72 15,535 VAT recoverable arises from the payment of value added tax on construction or purchase of investment property, which will be recovered through the offset of VAT paid on future revenue receipts or repayment direct from the taxation authority. VAT recoverable has been split between current and non-current assets based on the Group's assessment of when recovery will occur. 17. Trade and other receivables Trade receivables Prepayments Restricted cash VAT recoverable Loans receivable Other receivables Tax recoverable 18. Derivative financial instruments Interest rate derivative financial instruments Non-current assets Current assets Forward currency derivative financial instruments Current assets Foreign currency embedded derivatives Current liabilities 2019 £’000 2018 £’000 26,475 27,803 3,608 3,026 2,651 345 3,158 2,332 3,524 1,792 7,084 – 317 3,138 41,595 43,658 2019 £’000 2,621 – – – 2018 £’000 21,953 329 20 (1) The Group has entered into a series of interest rate derivative financial instruments to manage the interest rate and resulting cash flow exposure from the Group's banking facilities. At 31 December 2019 the instruments have a notional value of £545 million (2018: £543 million) and a weighted average capped rate of 5.36% (2018: 3.90%). At 31 December 2019 the Group did not hold any forward currency derivative financial instruments nor any embedded derivatives incorporated into leases. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 103 19. Cash and short term deposits Cash at bank and on call Short term deposits 2019 £’000 46,008 22,130 2018 £’000 45,153 28,297 68,138 73,450 Cash at bank and on call attracts variable interest rates, whilst short term deposits attract fixed rates but mature and re-price over a short period of time. The weighted average interest rate at the balance sheet date is 4.65% (2018: 5.50%). 20. Trade and other payables Trade and other payables Construction payables Advanced rentals and rent deposits Deferred consideration on property acquisitions Other payables Current tax payable Other tax payable Head leases (note 24) Other lease liabilities (note 24) 21. Interest bearing loans and borrowings Bank loans Loans due for settlement within 12 months Loans due for settlement after 12 months The Group’s borrowings have the following maturity profile: On demand or within one year In the second year In the third to fifth years After five years 2019 £’000 6,847 2,232 15,343 – 5,162 7,418 2018 £’000 4,900 2,958 20,840 12,197 4,392 8,081 14,131 12,806 21 537 18 – 51,691 66,192 2019 £’000 2018 £’000 60,173 75,565 623,168 567,865 683,341 643,430 60,173 28,656 75,565 20,730 497,578 333,862 96,934 213,273 683,341 643,430 The amounts above include unamortised loan origination costs of £6.8 million (2018: £7.1 million) and interest accruals of £0.9 million (2018: £1.3 million). The Group's interest bearing loans and borrowings have a weighted average interest rate of 6.52% (2018: 7.69%) and a weighted average term to maturity of 4.7 years (2018: 4.0 years). The interest rates shown above are the weighted average cost, including the relevant benchmark rate, as at the Balance Sheet dates. There have been a number of changes to the Group's financing arrangements in the year. The Group drew down €129.1 million and Rub 19.9 billion on new and existing debt facilities, repaying $100.8 million, €184.5 million and Rub 4.8 billion of existing debt. In addition existing facilities of $185.3 million, €26.6 million and Rub 6.0 billion were extended and / or converted to facilities of €191.6 million and Rub 6.0 billion. As at 31 December 2019 the Group had interest rate hedges for £545 million of borrowings (2018: £543 million) capped at a weighted average rate of 5.36% (2018: 3.90%) for a weighted average of 4.4 years (2018: 4.0 years). None of the Group's borrowings have fixed interest rates (2018: £nil). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 104 NOTES TO THE FINANCIAL STATEMENTS 22. Preference shares Issued share capital: At 1 January Premium on redemption of preference shares and amortisation of issue costs Scrip dividends At 31 December Issued share capital: At 1 January Scrip dividends At 31 December Shares in issue Held by the Company’s Employee Benefit Trusts At 31 December 2019 £’000 2018 £’000 109,271 108,263 362 691 417 591 110,324 109,271 2019 Number 2018 Number 99,556,534 99,143,192 511,684 413,342 100,068,218 99,556,534 100,125,086 99,613,402 (56,868) (56,868) 100,068,218 99,556,534 The preference shares entitle the holders to a cumulative annual dividend of 12 pence per share. The Company has entered into a conditional contract to purchase 38,936,295 preference shares for 115p per share from Invesco Asset Management Limited (acting as agent for its underlying funds). The purchase is conditional on shareholder approval and the completion of the Company's purchase of ordinary shares from the same investors (see note 26). The contract has a long stop date to complete of 31 July 2020. 23. Convertible preference shares Issued share capital: At 1 January Reissued in the year Converted to ordinary shares (note 26) Premium on redemption of preference shares and amortisation of issue costs At 31 December 2019 £’000 2018 £’000 206,116 198,870 4,132 (11) 7,245 – – 7,246 217,482 206,116 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 105 Issued share capital: At 1 January Reissued in the year Converted to ordinary shares (note 26) At 31 December Shares in issue Held by the Company’s Employee Benefit Trusts At 31 December 2019 Number 2018 Number 192,388,886 192,388,886 3,552,907 (12,146) – – 195,929,647 192,388,886 198,176,868 198,189,014 (2,247,221) (5,800,128) 195,929,647 192,388,886 The convertible preference shares entitle the holders to a cumulative annual dividend of 6.5 pence per share and are redeemable by the Company on 6 July 2026 at £1.35 per share. The convertible preference shares are convertible to ordinary shares at the holder's request at any time prior to redemption at a rate that is currently 1.517 ordinary shares for each convertible preference share. The Company has entered into a conditional contract to purchase 42,118,860 convertible shares for 92.5p per share from Invesco Asset Management Limited (acting as agent for its underlying funds). The purchase is conditional on shareholder approval and the completion of the Company's purchase of ordinary shares from the same investors (see note 26). The contract has a long stop date to complete of 31 July 2020. In applying its accounting policies the Group has determined that the convertible preference shares are a compound financial instrument in that it has a liability component and an equity component. The Group has determined the fair value of the liability component, which is reflected above, and the residual amount of the fair value of the consideration received on issue is equity. The fair value of the liability component has been calculated using a discounted cash flow model. 24. Other payables Rent deposits Head leases Other lease liabilities 2019 £’000 15,779 1,561 1,283 2018 £’000 16,425 1,372 – 18,623 17,797 The Group has leasehold properties that it classifies as investment property and investment property under construction. Minimum lease payments due over the remaining term of the leases totalled £4.4 million (2018: £3.9 million). The carrying value of the liability is shown above and in note 20 as head leases and totalled £1.6 million (2018: £1.4 million). The Group leases its administrative offices and has minimum lease payments due over the remaining term of the leases totalling £2.3 million. The carrying value of the liability is shown above and in note 20 as other lease liabilities and totalled £1.5 million. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 106 NOTES TO THE FINANCIAL STATEMENTS 25. Deferred tax (a) Deferred tax assets Balance at 1 January 2018 On translation to presentation currency Credit / (charge) for the year On acquisition (note 38) Balance at 31 December 2018 On translation to presentation currency (Charge) / credit for the year Balance at 31 December 2019 Tax losses £’000 Other £’000 24,751 (2,852) 237 1,490 23,626 1,968 (2,511) 860 (40) (41) - 779 69 359 Total £’000 25,611 (2,892) 196 1,490 24,405 2,037 (2,152) 23,083 1,207 24,290 The Group has tax losses in Russia of £268 million (2018: £265 million) and tax losses in the UK of £49 million (2018: £53 million) for which deferred tax assets have not been recognised. The losses in the UK do not have an expiry date. The losses in Russia can also be carried forward indefinitely, however there is a restriction on the use of losses in that taxable profits cannot be reduced by more than 50% in any one year. (b) Deferred tax liabilities Balance at 1 January 2018 On translation to presentation currency Charge / (credit) for the year Balance at 31 December 2018 On translation to presentation currency Charge for the year Balance at 31 December 2019 26. Share capital Issued share capital: At 1 January Issued in the year for cash on warrant exercises (note 27) On conversion of convertible preference shares (note 23) Repurchased and cancelled in the year by tender offer Repurchased and cancelled in the year on purchase from WIM / IAM (note 33) At 31 December Issued share capital: At 1 January Issued in the year for cash on warrant exercises (note 27) On conversion of convertible preference shares (note 23) Repurchased and cancelled in the year by tender offer Repurchased and cancelled in the year on purchase from WIM / IAM (note 33) At 31 December Details of own shares held are given in note 28. Accelerated Revaluation tax of investment property £’000 allowances £’000 Total £’000 59,845 (2,703) 258 23,448 1,458 (6,502) 18,404 57,400 1,659 2,280 4,945 8,679 36,397 (4,161) 6,760 38,996 3,286 6,399 48,681 22,343 71,024 2019 £’000 2018 £’000 6,233 6,606 17 – (361) (991) 85 – (458) – 4,898 6,233 2019 Number 2018 Number 623,269,434 660,571,843 1,734,577 8,500,126 18,425 – (36,131,442) (45,802,535) (99,144,978) – 489,746,016 623,269,434 The Company has entered into a conditional contract to purchase 139,678,106 ordinary shares for 36p per share from Invesco Asset Management Limited (acting as agent for its underlying funds). The purchase is conditional on shareholder approval and the contract has a long stop date to complete of 31 July 2020. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 27. Warrants At 1 January Exercised in the year (note 26) Lapsed in the year At 31 December At 1 January Exercised in the year (note 26) Lapsed in the year At 31 December NOTES TO THE FINANCIAL STATEMENTS 107 2019 £’000 98 (69) (29) – 2018 £’000 438 (340) – 98 2019 Number 2018 Number 2,448,226 10,948,352 (1,734,577) (8,500,126) (713,649) – – 2,448,226 The Company had issued warrants, which entitled each holder to subscribe for ordinary shares in the Company at an exercise price of 25 pence per share. The warrants expired on 25 March 2019. 28. Own shares held At 1 January Acquired under a tender offer Other acquisitions Allocation to satisfy Annual Performance Incentives / other staff bonuses (note 31) Cancelled Allocation to satisfy LTIP options exercised (note 31a) At 31 December At 1 January Acquired under a tender offer Other acquisitions Allocation to satisfy Annual Performance Incentives / other staff bonuses (note 31) Cancelled Allocation to satisfy LTIP options exercised (note 31a) At 31 December 2019 £’000 (5,965) – (106) 647 151 691 2018 £’000 (3,652) (4,160) (75) 1,278 36 608 (4,582) (5,965) 2019 Number 2018 Number 10,760,656 5,150,122 – 8,000,000 253,679 173,958 (876,000) (1,704,000) (298,039) (48,613) (922,110) (810,811) 8,918,186 10,760,656 Allocations to satisfy LTIP options exercised are transfers by the Company's Employee Benefit Trusts upon the exercise of fully vested options. The amounts shown for share movements are net of the Trustees' participation in tender offers during the period from grant to exercise. Details of outstanding LTIP options, which are vested but unexercised, are given in note 31a. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 108 NOTES TO THE FINANCIAL STATEMENTS 29. Equity The following describes the nature and purpose of each component within equity: Component Share capital Share premium Warrants Description and purpose The amount subscribed for ordinary share capital at nominal value. The amount subscribed for ordinary share capital in excess of the nominal value. The consideration attributed to the subscription of warrants less associated costs of issuance. Own shares held The cost to the Company of acquiring the own shares held by the Company and its subsidiary undertakings or Employee Benefit Trusts. Convertible preference shares The amount subscribed for convertible preference shares which the Directors consider to be Equity. Capital reserve The amount of any capital profits and losses, including gains and losses on the disposal of investment properties Translation reserve Retained earnings (after taxation), increases and decreases in the fair value of investment properties held at each period end, foreign exchange profits and losses on capital items, profits and losses on forward currency financial instruments relating to capital items and deferred taxation on the increase in fair value of investment properties. The amount of any gains or losses arising on the retranslation of net assets of overseas operations. The amount of any profit or loss for the year after payment of dividend, together with the amount of any equity- settled share-based payments, and the transfer of capital items described above. Retained earnings also includes distributable reserves created when in 2005 and 2006 the Company applied to the Royal Court of Guernsey to cancel its share premium at that time and create a reserve which is distributable. 30. Net asset value per share Number of ordinary shares (note 26) Less own shares held (note 28) 2019 Number 489,746,016 (8,918,186) 480,827,830 2019 Ordinary shares No. ‘000 Net asset value £’000 2018 Number 623,269,434 (10,760,656) 612,508,778 Net asset value per share Pence Net asset value £’000 2018 Ordinary shares No. ‘000 Net asset value per share Pence Net asset value per share 365,798 480,828 76 295,627 612,509 48 Effect of dilutive potential ordinary shares: Convertible preference shares (note 23) 217,482 297,225 Warrants (note 27) LTIP (Note 31) 2016 Retention Scheme (note 31) Five Year Performance Plan (note 31) – – – – – – – – – 612 266 2,095 – – 2,448 1,062 4,998 – Fully diluted net asset value per share 583,280 778,053 75 298,600 621,017 48 At 31 December 2018, the balance sheet carrying value of the liability portion of the convertible preference shares divided by the number of ordinary shares that would be issued on their conversion was greater than the NAV per share and thus the convertible preference shares were not dilutive. The number of potential ordinary shares is the total number of ordinary shares assuming the exercise of all potential ordinary shares less those not expected to vest. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 109 31. Share-based payments and other long term incentives The Group has utilised a number of different share schemes to reward and incentivise the Group's executives and senior staff. The two active schemes are the Annual Performance Incentive and the Five Year Performance Plan. All other schemes have now ended and the final amounts vested. Details of these are provided below to the extent there was a vesting or exercise of rights in 2018 or 2019. Annual Performance Incentive ("API") The API is an annual bonus payable in cash or listed securities of the Company, based on performance targets set annually. The maximum amount payable to an individual is capped at 50% of basic salary if paid in cash or 175% of basic salary if paid in the Company's listed securities, which are required to be held for three years. As a condition of the scheme there was no API payable for 2018. An accrual has been made for the 2019 API and it assumes that it will be settled in ordinary shares of the Company. Five Year Performance Plan ("FYPP") The FYPP is a long term incentive scheme which is open to the executive directors and other senior managers. The scheme allows each participant to invest into the FYPP a number of list securities in the Company that they hold. All securities invested in the FYPP must continue to be retained by the participant until 31 March 2023. On 31 March 2023, based on annual compound total shareholder return ("TSR") calculations, the participants will be entitled to receive up to three times the initial prescribed value of the securities in the FYPP. Vested entitlements will be settled in the Company's ordinary shares, with a value based on the average price of the Company's ordinary shares for March 2023. The performance period for the FYPP runs from 31 March 2018 to 31 March 2023. Below an annual compound equivalent TSR of 4% the FYPP will lapse, at an annual compound TSR of 12% the FYPP will vest in full and a sliding scale will apply for a TSR between 4% and 12%. Investments with an initial prescribed value totalling £11.9 million have been made into the FYPP out of a maximum of £12 million. The Company's TSR for the performance period to date is less than the minimum threshold for vesting and thus no provision has been made for ordinary shares that may ultimately vest in March 2023. Long Term Incentive Plan ("LTIP") The LTIP options related to performance criteria for the period 24 March 2009 to 24 March 2014. The options had an exercise price of 25p per option and vested in full. The last remaining options were exercised in the year. 2016 Retention Scheme During 2016 the Group terminated an incentive scheme, the Combined Bonus and Long Term Incentive Scheme 2015, and the Company's shareholders approved the introduction of the 2016 Retention Scheme. Awards under the 2016 Retention Scheme were made to the executive directors of the Company and two senior managers of the Group. The awards entitled the participants to three equal payments each equivalent to150% of their basic salary. The final instalment was paid on 31 March 2019. The sole condition for each instalment was the continuing employment of the individual at the relevant payment date. In respect of the final instalment, and as a condition to be eligible to participate in the FYPP, payment was made entirely in the Company's convertible preference shares, based on the average price prior to 31 March 2019. As a consequence the Company's EBT transferred 3,552,907 convertible preference shares in respect of the third and final instalment. (a) Movements in LTIP options 2019 No. of options Weighted average exercise price 2018 No. of options Weighted average exercise price Outstanding at the beginning of the period 1,062,162 25p 1,872,973 Exercised during the year – LTIP Outstanding at the end of the period (1,062,162) – 25p – p (810,811) 1,062,162 25p 25p 25p RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 110 NOTES TO THE FINANCIAL STATEMENTS (b) Income Statement charge for the year 2016 Retention scheme Other staff bonuses Annual Performance Incentive 2019 Annual Performance Incentive 2018 Annual Performance Incentive 2017 Five Year Performance Plan To be satisfied by allocation of: Ordinary shares (IFRS 2 expense) Convertible preference shares / preference shares (IFRS 2 expense) Cash 2019 £’000 541 664 4,263 – – – 2018 £’000 2,103 – – – 750 – 5,468 2,853 4,927 541 – 5,468 750 2,103 – 2,853 Of the IFRS 2 expense for the year £4.6 million (2018: £2.1 million) is included in current liabilities. Certain bonuses awarded to employees below executive level for performance in 2018 were settled in ordinary shares of the Company. 32. Capital commitments The Group had no significant capital commitments at 31 December 2018 and 2019. 33. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Further disclosures concerning transactions with the Company's directors are made in the Remuneration Report and note 6. There are no loan balances with directors. Remuneration of Directors and other key management personnel Short term employee benefits Post employment benefits Share-based payments and other long term incentives 2019 £’000 3,579 229 4,805 8,613 2018 £’000 4,247 224 2,853 7,324 On 20 August 2019 the Company acquired 72,144,978 ordinary shares from Woodford Investment Management Limited and 17,000,000 ordinary shares from Invesco Asset Management Limited, in each case acting on behalf of certain underlying funds, at a price of 36 pence per share in cash. These are related party transactions, as defined by the UKLA's Listing Rules and were approved by the Company's ordinary shareholders at a general meeting. On 25 October 2019 the Company acquired a further 10,000,000 ordinary shares from Invesco Asset Management Limited at a price of 40 pence per share in cash. This second acquisition from Invesco Asset Management Limited constitutes a smaller related party transaction under the UKLA’s Listing Rules. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 111 34. Financial instruments – risk management The Group's activities expose it to a variety of financial risks in relation to the financial instruments it uses: market risk (including currency risk, price risk and cash flow interest rate risk), credit risk and liquidity risk. The Group has the following financial instruments on its balance sheet: loans receivable, restricted cash, trade receivables, cash and short term deposits, trade and other payables, interest bearing loans and borrowings, preference shares, convertible preference shares and derivative financial instruments. Risk management parameters are established by the Board and overseen by management in conjunction with professional advisers. Reports are provided to the Board weekly basis and also when changes in risk parameters are required. (a) Market risk Currency risk The Group operates internationally and is exposed to foreign exchange risk arising from a variety of currency exposures, primarily with respect to Euro, Sterling and US Dollar against the predominate functional currency of its subsidiaries of Roubles. Foreign exchange risk arises from future commercial transactions (including lease receivables), recognised monetary assets and liabilities and net investments in foreign entities. The majority of the Group's transactions are denominated in Roubles. The functional currency of the Company is Sterling, which is also the presentation currency of the Group. The analysis that follows considers the impact of these currencies on the Group. Rouble The majority of the Group's transactions in Russia are undertaken in Roubles. The Group's debt profile however is a mix of currencies and a weakening in the Rouble exchange rate can put pressure on the Group's ability to service foreign currency debt facilities. This risk has reduced over the last year as the Group moves to a greater proportion of Rouble denominated debt. A weak Rouble also has an impact on reported earnings per share and net asset value per share when translated to the Group's presentation currency of Sterling. Sterling The Group's exposure to Sterling relates to the Company's preference shares, convertible preference shares and ordinary shares, together with head office administrative expenses. As the presentation currency of the Group, there will also be foreign currency movements through the Group's translation reserve when retranslating opening balances on consolidation. Euro The Group has exposure to Euro debt facilities and a small number of Euro pegged leases. As noted above, a weak Rouble may reduce the Group's ability to service that debt. A weak Rouble will however increase Rouble income on Euro pegged leases. US Dollar Currency risk to US Dollars is now significantly reduced as the Group moves away from US Dollar debt facilities. There are no US Dollar facilities as at 31 December 2019. The Group still has a proportion of its leases pegged to the US Dollar and these will mature over the next two years. A weakening Rouble relative to the US Dollar will generate increased Rouble income on US Dollar pegged leases. Accounting standards require disclosure of monetary assets and liabilities that are denominated in currencies different from the functional currency of the specific subsidiary or entity in the Group. These are set out in the tables below. As at 31 December 2019 Non-current assets Restricted cash Derivative financial instruments Current assets Rent receivable Restricted cash Derivative financial instruments Other current receivables Cash and short term deposits Non-current liabilities Interest bearing loans and borrowings Rent deposits Current liabilities Interest bearing loans and borrowings Rent deposits Other payables Rouble £’000 Euro £’000 US Dollar £’000 Sterling £’000 ZAR £’000 – – – – – – – 261 261 – – – – – 60 60 – 274 274 – 701 – 564 5,121 6,386 163,003 – 163,003 38,612 64 721 39,397 – 41 41 1,673 – – 1 445 2,119 – 6,171 6,171 – 4,984 – 4,984 – – – – – – 26 252 278 – – – – – 105 105 – – – – – – – 75 75 – – – – – – – RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 112 NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 Non-current assets Restricted cash Derivative financial instruments Current assets Rent receivable Restricted cash Derivative financial instruments Other current receivables Cash and short term deposits Non-current liabilities Interest bearing loans and borrowings Rent deposits Current liabilities Interest bearing loans and borrowings Rent deposits Other payables Rouble £’000 Euro £’000 US Dollar £’000 Sterling £’000 ZAR £’000 – 7,236 7,236 – – – 15 8,835 8,850 122,717 – 122,717 27,250 – 68 27,318 – 4,782 4,782 1 – – 971 3,236 4,208 95,821 – 95,821 27,122 88 436 27,646 630 – 630 2,476 1,006 20 84 984 4,570 – 9,935 9,935 – 5,799 40 5,839 – – – – – – 37 26 63 – – – – – 349 349 – – – – – – – 100 100 – – – – – – – The sensitivity analyses below are based on a change in an assumption while holding all other assumptions constant. In practice this is unlikely to occur and changes in some of the assumptions may be correlated, for example a change in interest rate and a change in foreign currency exchange rates. The Group principally manages foreign currency risk on a project by project basis. The table below shows the impact on profits if US Dollar, Euro, Rouble or Sterling weakened or strengthened by 10% against the functional currency of the specific subsidiary or entity in the Group, with all other variables in each case remaining constant, then: Post tax profit or loss would change by: US Dollar Russian Rouble Sterling Euro ZAR 2019 £’000 899 20 17 2018 £’000 1,104 13,395 28 19,574 11,699 8 – The Group's interest rate risk arises from its long-term borrowings (note 21), preference shares (note 22) and convertible preference shares (note 23). Borrowings issued at variable rates expose the Group to cash flow interest rate risk, whilst borrowings issued at a fixed rate expose the Group to fair value risk. The Group's cash flow and fair value risk is reviewed monthly by the Board. The cash flow and fair value risk is approved monthly by the Board. The Group analyses its interest rate exposure on a dynamic basis. It takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest costs may increase as a result of such changes. They may reduce or create losses in the event that unexpected movements arise. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios the Group calculates the impact on profit and loss of a defined interest rate shift. The simulation is run on an on-going basis to verify that the maximum potential impact is within the parameters expected by management. Formal reporting to the Board on cash flows is made on a monthly basis. To date the Group has sought to fix its exposure to interest rate risk on borrowings through fixed rate debt facilities, the use of a variety of interest rate derivatives and the issue of preference shares and convertible preference shares at a fixed coupon. This gives certainty over future cash flow but exposure to fair value movements, which amounted to an accumulated unrealised loss of £20.0 million at 31 December 2019 (2018: loss of £5.1 million). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 113 We have diversified our debt exposure and, hence, interest rate exposure. The Group is no longer exposed to US LIBOR and instead is sensitive to EURIBOR and Central Bank of Russia Key rate movements. Sensitivity to all benchmark rates is presented in the table below. US LIBOR EURIBOR Central Bank of Russia Key rate (b) Credit risk 2019 Increase 100 bps £’000 Decrease 100 bps £’000 2018 Increase 100 bps £’000 Decrease 100 bps £’000 – (1,774) (3,496) – 399 3,673 (81) (1,499) (704) 344 – 1,680 Credit risk refers to the risk that a counterparty will default on their contractual obligations resulting in financial loss to the Group. The Group's principal financial assets are cash and short term deposits and trade receivables. Cash and short term deposits are placed with a variety of financial institutions in order to spread the counterparty risk and in accordance with limits approved by the Board. The Group considers the credit rating of its counterparties when assessing whether a particular financial institution is suitable. Deposits and liquidity requirements are considered by management weekly. The Group reviews the creditworthiness of potential tenants prior to entering into a lease. Based on this assessment the Group will require a cash deposit or guarantee as collateral for the tenant's obligations under the lease. The collateral typically represents three months rent but may be shorter or longer as required. The Group has a relatively large number of different tenants and as disclosed in note 5 there is only a single tenant that accounts for in excess of 10% of Group revenue. Taking these factors into account and having examined the Group's historical credit loss ratio, the risk to the Group of individual tenant default is considered low. An allowance for impairment of trade receivables is made with reference to the Group's assessment of expected credit loss or where there is objective evidence that the Group will not be able to collect all amounts due. Details of the movements in provision for impairment of trade receivables is provided in the table below. At 1 January Effect of foreign exchange rate changes Charge for the year Utilised in the year Unused amounts reversed At 31 December 2019 £’000 2,880 191 (2) (41) – 2018 £’000 3,416 (240) – (238) (58) 3,028 2,880 At 31 December 2019 there were no significant amounts of unimpaired trade receivables that were past due for collection (2018: £ nil). RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 114 NOTES TO THE FINANCIAL STATEMENTS (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Board and its advisers seek to have appropriate credit facilities in place on a project by project basis, either from available cash resources or from bank facilities. Management monitor the Group's liquidity position on a daily basis and formal liquidity reports are issued from all jurisdictions on a weekly basis and are reviewed monthly by the Board, along with cash flow forecasts. A summary table with maturity of financial liabilities is presented below. All amounts shown are gross undiscounted cash flows. Financial liabilities As at 31 December 2019 Interest bearing loans and borrowings Preference shares Convertible preference shares Head leases Other lease liabilities Trade and other payables As at 31 December 2018 Interest bearing loans and borrowings Preference shares Convertible preference shares Derivative financial instruments Head leases Trade and other payables Total £’000 888,461 120,082 347,284 1,253 2,000 24,941 Current £’000 103,473 12,008 12,735 132 659 9,162 Year 2 £’000 69,390 12,008 12,735 132 227 2,606 Years 3 to 5 £’000 Years 6 to 10 £’000 608,344 107,254 36,025 38,206 328 577 9,346 60,041 283,608 661 537 3,827 1,384,021 138,169 97,098 692,826 455,928 Total £’000 814,184 119,537 353,514 1 1,150 28,927 Current £’000 124,230 11,954 12,505 1 115 12,503 Year 2 £’000 64,568 11,954 12,505 – 115 5,396 Years 3 to 5 £’000 Years 6 to 10 £’000 401,318 224,068 35,861 37,516 – 345 8,147 59,768 290,988 – 575 2,881 1,317,313 161,308 94,538 483,187 578,280 Details of the interest rates applicable to the Group's long term borrowings and preference shares are given in notes 21 and 22. The Group is subject to interest costs in perpetuity in respect of preference shares, which have no contractual maturity date. The table above does not show cash flows beyond 10 years. The Group monitors its risk to a shortage of funds by forecasting cash flow requirements for future years. The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of short term borrowing facilities, bank loans and equity fund raisings. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS 115 Fair values Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments in the financial statements. Non-current assets Loans receivable Restricted cash Derivative financial instruments Current assets Trade receivables Restricted cash Other current receivables Derivative financial instruments Cash and short term deposits Non-current liabilities Interest bearing loans and borrowings Preference shares Convertible preference shares Derivative financial instruments Rent deposits Deferred consideration Other payables Current liabilities Interest bearing loans and borrowings Derivative financial instruments Rent deposits Deferred consideration Other payables 2019 2018 Carrying Value £’000 Fair Value £’000 Carrying Value £’000 67 – 63 – 2,621 2,621 26,475 26,475 3,026 3,653 – 3,026 3,653 – 676 12,249 21,953 27,803 1,792 907 349 Fair Value £’000 627 12,249 21,953 27,803 1,792 907 349 68,138 68,138 73,450 73,450 623,168 110,324 217,482 – 15,779 – 2,844 632,014 131,590 202,787 – 12,403 – 2,844 567,865 109,271 206,116 – 16,425 – 1,372 561,076 130,494 226,057 – 13,130 – 1,372 60,173 60,173 75,565 75,565 – 6,364 – 3,356 – 6,364 – 3,356 1 7,242 12,197 5,262 1 7,242 12,197 5,262 The fair values of loans receivable and borrowings have been calculated based on a discounted cash flow model using a discount rate based on the Group's weighted average cost of capital. The valuation technique falls within level 3 of the fair value hierarchy (see note 35 for definition). The fair value of short term deposits, other assets, trade and other receivables, trade and other payables is assumed to approximate to their book values. The fair value of preference shares and convertible preference shares are assumed to be their last quoted price on 31 December 2019, which is considered to be level 1 of the fair value hierarchy. The fair value of derivatives is determined by a model with market based inputs. (d) Capital risk management The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. For capital risk management, the Directors consider both the ordinary and preference shares to be permanent capital of the Company, with similar rights as to cancellation. To maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, under take tender offers, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total liabilities but excluding provisions, head lease obligations and preference shares, which for capital risk management is considered to be capital rather than debt, less cash and short term deposits. Total capital is calculated as equity, as shown in the balance sheet, plus preference shares and net debt. Where the Group has a net cash position, the gearing ratio will be zero. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 116 NOTES TO THE FINANCIAL STATEMENTS Non-current liabilities Current liabilities Total borrowings Less: cash and short term deposits Less: restricted cash Net debt Equity Preference shares Total capital Gearing ratio 35. Fair value measurement The following table provides the fair value measurement hierarchy* of the Group's assets and liabilities. 2019 £’000 2018 £’000 928,736 847,806 111,843 141,740 1,040,579 989,546 68,138 3,026 73,450 14,041 969,415 902,055 365,798 295,627 110,324 109,271 1,445,537 1,306,953 67.06% 69.02% As at 31 December 2019 Assets measured at fair value Investment property Investment property under construction Derivative financial instruments Liabilities measured at fair value Derivative financial instruments As at 31 December 2018 Assets measured at fair value Investment property Investment property under construction Derivative financial instruments Liabilities measured at fair value Derivative financial instruments * Explanation of the fair value hierarchy: Level 1 £’000 Level 2 £’000 Level 3 £’000 Total Fair Value £’000 1,337,682 1,337,682 – – – – – – 2,621 – 33,846 – – 33,846 2,621 – Total Fair Value £’000 Level 1 £’000 Level 2 £’000 Level 3 £’000 – – – – – – 22,302 1 1,175,440 1,175,440 30,548 – – 30,548 22,302 1 Level 1 - Quoted prices in active markets for identical assets or liabilities that can be accessed at the balance sheet date. Level 2 - Use of a model with inputs that are directly or indirectly observable market data. Level 3 - Use of a model with inputs that are not based on observable market data. The Group's foreign currency derivative financial instruments are call options and are measured based on spot exchange rates, the yield curves of the respective currencies as well as the currency basis spreads between the respective currencies. The Group's interest rate derivative financial instruments comprise swap contracts and interest rate caps. These contracts are valued using a discounted cash flow model and where not cash collateralised consideration is given to the Group's own credit risk. There have been no transfers between level 1 and level 2 during the year or the prior year. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 2019 £’000 2018 £’000 109,769 124,107 80,037 92,553 117,758 133,265 65,218 66,757 372,782 416,682 Other £’000 7,630 1,053 11,366 2019 £’000 683,373 110,324 217,482 – (2,621) 20,049 1,008,558 Other £’000 3,494 1,008 7,246 2018 £’000 643,430 109,271 206,116 NOTES TO THE FINANCIAL STATEMENTS 117 36. Operating lease arrangements The Group earns rental income by leasing its investment properties to tenants under non-cancellable operating leases, which are discussed in detail in the Strategic Report and note 13. At the Balance Sheet date the Group had contracted with tenants for the following future minimum lease payments:- Within one year In the second year In the third to fifth year (inclusive) After five years 37. Reconciliation of liabilities arising from financing activities Year ended 31 December 2019 Interest bearing loans and borrowings Preference shares Convertible preference shares Derivative financial instruments 2018 £’000 643,430 109,271 206,116 (22,302) 936,515 34,334 Year ended 31 December 2018 Interest bearing loans and borrowings Preference shares Convertible preference shares 2017 £’000 626,242 108,263 198,870 (10,588) – – Non-cash changes Fair value £’000 Foreign exchange £’000 Cash flows £’000 33,943 – – 391 – – – 20,392 20,392 (1,630) – – (1,102) (2,732) Non-cash changes Fair value £’000 Foreign exchange £’000 Cash flows £’000 24,282 – – – – – 3,066 3,066 Derivative financial instruments (6,040) (18,848) 927,335 (29,436) (480) – (22,302) 23,802 11,748 936,515 Cash flows relating to interest bearing loans and borrowings comprise: Proceeds from long term borrowings Repayment of long term borrowings Movements in restricted cash Loan amortisation Bank borrowing costs paid Add: Interest paid Loan origination costs incurred 2019 £’000 2018 £’000 (284,431) (11,173) (54,689) 48,922 357,966 155,628 (153,152) 13,056 (50,000) 47,159 (140,096) (23,279) (2,841) (10,588) (295,604) (22,652) (5,767) 33,943 Other non-cash changes include amortisation of origination costs, movements in interest accruals, accretion of premiums payable on redemption of preference and convertible preference shares, scrip dividends and the reissue of convertible preference shares in the year to settle share-based payments. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 118 NOTES TO THE FINANCIAL STATEMENTS 38. Acquisitions Acquisitions in the year There were no acquisitions in the year. Acquisitions in prior year The Group made one corporate acquisition in the prior year, the purchase of Volga Logistics Park. The Group purchased the property by acquiring all of the issued share capital of the corporate vehicles that owned the property. In accordance with its accounting policy, the Group considered the acquisition assessing whether an integrated set of activities had been acquired in addition to the property. It was concluded a business had not been purchased but rather the acquisition of a group of assets and related liabilities. Analyses of the consideration payable for the properties and the incidental assets and liabilities are provided below: 2018 £’000 30,805 2,444 1,490 642 1,235 (2,621) 33,995 32,958 868 169 33,995 Non-current assets Investment property (note 11) Investment property under construction (note 12) Deferred tax assets (note 25a) Current assets Trade and other receivables Cash and short term deposits Current liabilities Trade and other payables Discharged by: Cash consideration paid Acquisition costs Payable RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 119 ADVISERS Registered Office: UK Solicitors: Registrars: P.O. Box 522 Second Floor La Vieille Cour La Plaiderie St. Peter Port Guernsey GY1 6EH Company Secretary: Benn Garnham Joint Broker & Financial Adviser: Nplus1 Singer Advisory LLP One Hanover Street London W1S 1AX Joint Broker: Numis Securities Limited 10 Paternoster Square London EC4M 7LT Primary and Secondary listings: Bryan Cave Leighton Paisner Link Market Services (Guernsey) Limited Adelaide House London Bridge London EC4R 9HA Guernsey Advocates: Carey Olsen Carey House Les Banques St. Peter Port Guernsey GY1 4BZ Valuer: Jones Lang LaSalle 2 Letnikovskaya St. Bldg. 1 Business centre Vivaldi Plaza Moscow Mont Crevelt House Bulwer Avenue St. Sampson Guernsey GY2 4LH UK Transfer Agent: Link Market Services Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Independent Auditors: Ernst & Young LLP 1 More London Place London SE1 2AF The Company’s ordinary shares and preference shares are listed on the Main Market of the London Stock Exchange and admitted to the Official List of the UK Listing Authority and the Official List of The International Stock Exchange (“TISE”). Its ordinary shares also have a secondary listing on the main board of the Johannesburg Stock Exchange and the Moscow Stock Exchange. Its convertible preference shares are admitted to the Official List of TISE and to trading on the SETSqx market of the London Stock Exchange. RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT 120 ENQUIRIES Raven Property Group Limited Tel: + 44 (0) 1481 712955 Anton Bilton Glyn Hirsch Novella Communications Tel: +44 (0) 203 151 7008 Tim Robertson Fergus Young N+1 Singer Tel: +44 (0) 20 7496 3000 Corporate Finance - James Maxwell / James Moat Sales - Alan Geeves / James Waterlow Numis Securities Limited Tel: +44 (0) 20 7260 1000 Alex Ham / Jamie Loughborough / Alasdair Abram Renaissance Capital (South Africa) Tel: +27 (11) 750 1448 Yvette Labuschagne Renaissance Capital (Moscow) Tel: +7 495 258 7770 David Pipia Ravenscroft Emma Ozanne Tel: +44 (0) 1481 729100 RAVEN PROPERTY GROUP LIMITED 2019 ANNUAL REPORT RAVEN PROPERTY GROUP LIMITED www.theravenpropertygroup.com Registered Office P.O. Box 522, Second Floor, La Vieille Cour, La Plaiderie, St. Peter Port, Guernsey, GY1 6EH
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