CAPC.L Regulatory News (CAPC)

21 FEBRUARY 2018

CAPITAL & COUNTIES PROPERTIES PLC ("CAPCO")

AUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017

Ian Durant, Chairman of Capco, commented:

"Both of our central London estates had a very active year in which Capco made good operational progress. The Covent Garden estate, which now represents over 70 per cent of property value, delivered strong performance and value growth. Economic and political uncertainty has impacted the London residential market, resulting in a decline in the valuation of our Earls Court interests.

Capco's strategy remains clear and focused on delivering long-term value for shareholders from our two prime central London estates, backed by a strong balance sheet."

Ian Hawksworth, Chief Executive of Capco, commented:

"Covent Garden, now valued at over £2.5 billion, delivered another strong year of rental and value growth. Positive leasing demand for our world-class retail and dining destination continues, with 90 leasing transactions securing a record £15 million of rental income at a premium of 10 per cent to December 2016 ERV. Our creative asset management strategy and investment into the estate have produced a high quality and vibrant environment for the consumer, driving growth of 18 per cent in rental income. ERV increased to £105 million, demonstrating progress towards the target of £125 million by December 2020.

The Earls Court Masterplan is one of the most important mixed-use development opportunities in London, with the potential to create a new district, delivering homes, jobs and investment at scale. This strategic scheme has a planning consent in place, existing transport infrastructure and the ability to grow with the needs of London. Whilst political and macroeconomic conditions have impacted the residential market resulting in a further valuation decline, a number of operational milestones have been achieved and as a long-term investor, Capco will continue to engage with partners and stakeholders to evolve and bring forward the Masterplan.

The successful sale of Venues and financing activities undertaken during the year have further enhanced Capco's strong financial position. With low leverage and high liquidity, Capco is well-positioned to deliver long-term value creation from its two prime central London estates and to take advantage of opportunities as they arise." 

Key financials

- Equity attributable to owners of the Parent £2.8 billion (2016: £2.8 billion)

- EPRA NAV 334 pence per share, a decrease of 1.7 per cent (2016: 340 pence per share)

- Total property value £3.5 billion, a decrease of 0.9 per cent (like-for-like) (2016: £3.7 billion)

- Underlying EPS 1.3 pence per share (2016: 1.4 pence per share)

- Proposed final 2017 dividend of 1.0 pence per share resulting in a full-year dividend of 1.5 pence per share

Another strong year at Covent Garden

- Total property value of £2.5 billion, an increase of 4.3 per cent (like-for-like) (2016: £2.3 billion)

- Net rental income up 11.3 per cent like-for-like or 17.8 per cent in total to £48.9 million (2016: £41.5 million)

- 90 new leases and renewals transacted representing £14.6 million of income at 10.4 per cent above 31 December 2016 ERV

- ERV increased by 4.6 per cent (like-for-like) to £105 million (2016: £96 million); progress towards ERV target of £125 million by December 2020

- £99 million invested in strategic acquisitions expanding ownership of the estate

Operational progress at Earls Court

- Earls Court interests valued at £1.0 billion in total, a decrease of 11.8 per cent (like-for-like) (2016: £1.1 billion)

- Completion of complex demolition works on ECPL land in preparation for future development

- Lillie Square Phase 1 substantially handed over and 50 per cent of Phase 2 reserved or exchanged

Sale of Venues

- Sale of Venues at a slight premium to net asset value, realising £230 million net proceeds for deployment in prime central London estates

Strong financial position with significant financial flexibility

- Group loan to value ratio 21 per cent (2016: 23 per cent) with substantial headroom across all covenants

- £225 million Private Placement completed and £705 million Covent Garden bank facility extended to 2022

- Cash and available facilities of £691 million (2016: £556 million)

- Modest capital commitments of £61 million (2016: £157 million)

- Weighted average maturity extended to 6.9 years (2016: 5.9 years)

- Weighted average cost of debt of 2.8 per cent (2016: 2.7 per cent)

KEY FINANCIALS

1. On a Group share basis. Refer to Property Data on page 53 for the Group's percentage ownership of property.

2. On a Group share basis. Refer to the Financial Review.

ENQUIRIES

Capital & Counties Properties PLC:

Media enquiries:

A presentation to analysts and investors will take place today at 09:30am at UBS, 5 Broadgate, London, EC2M 2QS. The presentation will also be available to international analysts and investors through a live audio call and webcast and after the event on the Group's website www.capitalandcounties.com.

A copy of this announcement is available for download from our website at www.capitalandcounties.com and hard copies can be requested via the website or by contacting the Company (feedback@capitalandcounties.com or telephone +44 (0)20 3214 9184).

CHAIRMAN'S STATEMENT

Overview

Both of our prime central London estates had a very active year in which management made good operational progress. The Covent Garden estate, which now represents more than 70 per cent of the Group's portfolio by value, delivered positive performance and value growth. The value of our investments at Earls Court has however been impacted by challenges in the London residential market.

Performance

Capco's total shareholder return for the year, which comprises share price performance plus the dividends paid during the year, was 8.1 per cent, and total return for the year, which represents the change in net assets plus the dividends paid during the year, was -1.3 per cent. The total value of Capco's property portfolio fell by 0.9 per cent on a like-for-like basis to £3.5 billion, with gains at Covent Garden being offset by a reduction in the Earls Court valuation.

Covent Garden is established as a renowned retail and dining destination and continues to attract target brands. The Covent Garden estate is benefiting from a period of significant investment made over recent years, creating an inviting environment with a wide variety of British heritage, independent and global brands offering a broad selection of retail and dining experiences across the estate. Net rental income has increased significantly in 2017. Capco's distinct approach to creative asset management continues to drive leasing activity and in turn ERV progression.

Initiatives to enhance the estate have been very successful. Examples include the establishment of Henrietta Street as a menswear and dining destination and the successful repositioning of the Royal Opera House Arcade. In addition, a number of acquisitions have extended our presence on Floral Street. The Floral Court development is nearing completion with the courtyard and restaurant openings expected over the coming months.

Economic and political uncertainty has impacted the residential market in London, resulting in a further decline in the valuation of our investments at Earls Court. The consented Masterplan remains one of the largest Opportunity Areas in central London with the ability to evolve with the needs of the Capital. The political and economic environment has made discussions on enhancing the Masterplan more difficult, however Capco will continue to seek to positively engage with all stakeholders to evolve the Masterplan over time.

At Earls Court Partnership Limited ("ECPL"), our investment vehicle with Transport for London ("TfL"), the final phase of the complex demolition of the former Earls Court Exhibition Centres has been successfully completed in preparation for future development. Handover of the first phase of the Lillie Square residential development nears completion and half of Phase 2 has been pre-sold at a modest premium to comparable units in Phase 1.

In April 2017, Capco completed the sale of the Venues business at a slight premium to net asset value, in keeping with our established strategy of recycling capital through the disposal of non-core assets.

Financial position and dividends

Capco continues to maintain a strong balance sheet, with low leverage, high liquidity and modest capital commitments. During the year, Capco extended its debt maturities, further diversified its sources of funding with a Private Placement and successfully executed the sale of Venues. The business is well-positioned to support its future activities, and take advantage of opportunities as they arise.

The Directors are proposing a final dividend of 1.0 pence per share, which brings the total dividend for 2017 to 1.5 pence per share.

People

The Company has evolved during the year and the Board and I would like to thank our employees for their work and commitment.

There were a number of changes to the Board in 2017. At the beginning of the year Situl Jobanputra was promoted to Chief Financial Officer, following Soumen Das' departure at the end of 2016. Charlotte Boyle was appointed as a Non-executive Director and member of the Nomination and Remuneration Committees in October 2017, following Demetra Pinsent's decision to step down from the Board in July 2017.

I am pleased to report that Situl and Charlotte have both settled into their new roles well, and I was delighted to see the recognition of internal talent. Demetra's departure unfortunately sets back our gender diversity aspirations at Board level. The Board will consider this along with wider diversity for any future appointments and is committed to encouraging diversity, inclusiveness and the development of our people across the business.

Shareholders

Capco is listed on the London Stock Exchange and the JSE, and over 50 per cent of the Company's shares are held by South African investors. There are sometimes different market expectations in the UK and South Africa, and one example of this is the level of authority to issue new shares that shareholders expect to grant to Boards. The Board feels that, to preserve flexibility, it is appropriate to seek the conventional level of authorities expected by shareholders in UK listed companies where possible. This has resulted in significant votes against two of our AGM resolutions and Capco's inclusion in The Investment Association's public register of shareholder dissent. The Board will maintain dialogue with our South African shareholders on this topic.

Board Oversight

Non-executive Directors are encouraged to visit our assets in Covent Garden and Earls Court and meet operational management regularly. This is achieved through individual visits and Board update meetings sometimes held on site, and helps the Board keep abreast of the business' challenges and opportunities and to contribute to strategic debate. This has been a year of considerable change in the macroeconomic and political context in which Capco operates and I am grateful for the Directors' diligence and engagement throughout the year.In reaching its conclusions regarding key business decisions, the Board takes account of the different stakeholders relevant to Capco and its activities, including local communities where we operate, partners, lenders, government and our own people as well as shareholders.

The Board also regularly reviews the changing risks affecting Capco and takes account of changes to risks when discussing strategy and reviewing operations. Health and Safety receives particular attention at Board meetings and across the business.  

Looking ahead

London is an outstanding global city and remains a very attractive investment arena. Our strategy remains clear and focused on delivering long-term value for shareholders from our two prime central London estates. The Board remains alert to broader economic and political uncertainty and its potential impact on market conditions, however Capco's strong financial position enables the Group to support its future activities and provides the financial flexibility to take advantage of opportunities as they arise.

Ian Durant

Chairman

20 February 2018

Chief Executive's review

A year of good operational progress

Capco has made good operational progress across its two prime central London estates. Covent Garden, which now accounts for 72 per cent of the Group's portfolio by value, has had another strong year creating value and positive rental performance. We continue to implement our strategy by focusing on asset management, investment and managing the estate creatively. Covent Garden is a world-class destination in the heart of central London offering a vibrant mix of British heritage, independent and global brands and continues to evolve to meet consumer demand. Investments made in recent years including on Henrietta Street, Floral Street, King Street and the Royal Opera House Arcade have positioned the estate well. This has resulted in strong demand from occupiers and as new concepts open, we are capturing the reversionary income potential of the portfolio.

At Earls Court, good operational progress has been made. ECPL, the investment vehicle with TfL, which represents our principal investment in Earls Court, successfully completed the final phase of the complex demolition of the former Exhibition Centres, which prepares the land for development. At Lillie Square, Phase 1 handover has substantially completed. By the end of 2017 the residents of 182 new homes had been welcomed to the scheme. A pop-up high street for Earls Court was successfully launched on Lillie Road.

Whilst the West End and Covent Garden have continued to thrive, economic and political uncertainty has continued to impact the residential market in London, resulting in a further valuation decline in our investments at Earls Court. The growth in Covent Garden was offset by a decline in the value at Earls Court. As a result, EPRA net asset value fell by 1.7 per cent over the year to 334 pence.

While the environment for large-scale residential development has become more difficult, the Earls Court Masterplan has an existing planning consent in place and remains one of the largest Opportunity Areas in central London, capable of delivering new homes, jobs and investment. Earls Court has the ability to evolve with the needs of London and its potential will be realised over time. As a long-term investor in London, Capco will continue to seek to engage positively with our partners and all stakeholders in order to evolve the Masterplan, which has the flexibility to be brought forward through the introduction of third-party capital and selective development.

Over the year, the Group successfully realised value from the sale of its Venues business, crystallising £230 million of net proceeds which will be recycled into Capco's central London estates.

Capco's prudent approach to its balance sheet continues. We maintain a strong financial position with low leverage, high liquidity and modest capital commitments. The business is well-positioned to support its future activities, navigate market uncertainties, while taking advantage of opportunities as they arise. Capco remains disciplined in its investment approach, with a weighting towards Covent Garden as we continue to expand our ownership on the estate.

Valuations

1. Valuation change takes account of amortisation of tenant lease incentives, capital expenditure, fixed head leases and unrecognised trading surplus.

2. Represents the Group's 63 per cent interest in ECPL.

3. Represents the Group's 50 per cent share of the Lillie Square joint venture.

4. A reconciliation of carrying value of investment, development and trading property to the market value is shown in note 13 'Property Portfolio' within the consolidated financial statements.

The total property value of the Group declined 0.9 per cent (like-for-like) in the year to 31 December 2017 to £3.5 billion. The valuation of Covent Garden has risen by 4.3 per cent (like-for-like) to £2.5 billion, driven by ERV growth of 4.6 per cent achieved over the year. The equivalent yield remains broadly unchanged, reflecting the valuer's current view of the strength of demand for prime central London real estate. 

Capco's investment in Earls Court Properties declined by 11.8 per cent (like-for-like) to £1.0 billion at 31 December 2017. A number of adjustments have been made to the component parts of the valuation of our interest in ECPL. The valuer's more conservative view on gross development value and the cost of delivery, together with recent transactional evidence in the land market, have resulted in a net decline of 14.4 per cent (like-for-like) for ECPL in the second half of the year. Similarly the valuation of our other interests at Earls Court has declined reflecting changes in valuation assumptions.

The Group has a 63 per cent controlling interest in ECPL, the investment vehicle with TfL, which owns the land formerly occupied by the Earls Court Exhibition Centres ("EC1 & EC2"). As a result, it is fully consolidated in the financial statements and TfL's interest is represented as a non-controlling interest. See the Financial Review on page 12 for further information.

Covent Garden - a world-class retail and dining destination 

Covent Garden is continuing to build on its success as a world-class retail and dining destination. Our creative asset management strategy has driven positive leasing momentum with good demand for all uses across the estate. We continue to strengthen the core categories of luxury gifting and accessories, cosmetics and differentiated dining concepts.

The estate is valued at £2.5 billion as at 31 December 2017, a like-for-like increase of 4.3 per cent. During the year, 21 new retail and restaurant brands were signed to the estate, the most in any year to date. As a result of positive demand across all uses, 90 new lettings and renewals were agreed, securing £14.6 million of rental income at 10.4 per cent above December 2016 ERV. Net rental income has increased significantly, by 17.8 per cent in absolute terms or 11.3 per cent like-for-like for the year. The ERV of the estate is £105 million, up 4.6 per cent on a like-for-like basis, with positive progress being made towards the ERV target of £125 million by December 2020.

The range of dining concepts on the estate continues to expand, with the introduction of a number of high quality and differentiated concepts including The Oystermen, Avobar and The Henrietta. The latest additions further enhance Covent Garden's attractiveness as one of London's most desirable dining destinations.

Covent Garden's retail offering has gone from strength to strength. The Market Building has introduced Daniel Wellington, Tom Ford and Deciem. The repositioning of the Royal Opera House Arcade continues with the addition of leading travel brand Tumi which is set to join British heritage brands N. Peal and Tom Davies which opened stores during the year. Lettings to Kent & Curwen and The Shop at Bluebird represent an excellent start to the repositioning of Floral Street.

Development of Floral Court nears completion. Anchored by Petersham Nurseries, the courtyard is expected to open in the coming months and will improve the circulation of pedestrian flows on the northern part of the estate. The residential component, comprising 45 new apartments, is expected to complete by summer 2018.

We have continued to invest in the estate through acquisitions which offer value creation opportunities. £99 million was invested in acquisitions during the year, most notably consolidating our presence on Floral Street.

Earls Court Properties - large-scale strategic opportunity in central London

During the year, ECPL successfully completed the final phase of the complex demolition of the former Earls Court Exhibition Centres in preparation for future development.

Handover of Phase 1 of Lillie Square nears completion with £98 million (Capco share) of proceeds received by the end of the year. Cumulative proceeds of £125 million (Capco share) are expected to have been received on Phase 1 over the coming months. Negotiations are at an advanced stage for the main construction contract for Phase 2. 50 per cent of the 186 apartments in the phase have now been reserved or exchanged. 34 of these transacted during 2017, seven of which occurred during the second half of the year. Sales prices achieved in Phase 2 are at a modest premium to comparable units in Phase 1. 

The consented Earls Court Masterplan is a strategic development for London and is identified as a Greater London Authority ("GLA") Opportunity Area. It is referenced in the draft London Plan issued in December 2017 as 'ready to grow'. The political environment has made discussions on enhancing the Masterplan more difficult, however Capco will continue to seek to engage positively with the GLA, our partners at Transport for London and other stakeholders to evolve the Masterplan over time. This includes discussions with London Borough of Hammersmith & Fulham ("LBHF") regarding the possibility of the Council taking the lead on future plans for the West Kensington and Gibbs Green Estates ("The Estates").

Capco is in discussions with MOPAC (the Mayor's Office for Policing and Crime) regarding its ongoing occupational requirements at the Empress State Building which may include a lease extension or sale of the building. There is no certainty that any transaction will be agreed. 

Innova Investment

In 2015, Capco acquired a 50 per cent interest in Innova Investment (formerly Solum Developments), a joint venture with Network Rail, which is exploring potential opportunities for future redevelopments at significant railway station sites across London.

Sale of Venues

On 7 April 2017, Capco completed the sale of Venues to a consortium of German institutional investors for £296 million. Profit on disposal of Venues was £2 million. Having extracted significant value from the venue since acquisition, Capco took the decision to exit this non-core asset realising value for shareholders through sale. Cash proceeds were used initially to repay bank debt and will be deployed in Capco's prime central London estates over time.

Outlook

Covent Garden is a world class retail and dining destination in the heart of London, offering a differentiated mix of global, British heritage and independent brands addressing the needs of the consumer. Through creative asset management and by attracting excellent retail brands and dining concepts, the reversionary income potential of the portfolio will be captured. Capco will continue to invest in strategic acquisitions, interventions and in enhancing the customer environment. Following a year of positive leasing activity, 2018 will be another active year for openings across the estate, which are expected to further strengthen Covent Garden's reputation as a leading global destination. The estate remains well-placed for continued success and ERV progression towards the target of £125 million by December 2020.

The consented Earls Court Masterplan represents one of the most important mixed-use developments in London. The GLA's draft London Plan issued in December 2017 references Earls Court as 'ready to grow' demonstrating the site's potential to deliver more housing and optimise this important London scheme. Whilst the economic and political environment presents challenges to the London residential market and large scale developments, Capco will continue to seek to positively engage with all of its partners and stakeholders to evolve the Masterplan. The consented Masterplan has the flexibility to be brought forward through the introduction of third-party capital and selective development.

Capco has a clear strategy to deliver long-term value creation for our shareholders from our two prime central London estates. Backed by a strong balance sheet with low leverage, high liquidity and modest capital commitments, Capco is well-positioned to support its future activities, navigate market uncertainties and take advantage of opportunities as they arise. 

Ian HawksworthChief Executive

20 February 2018

Strategic Report

COVENT GARDEN

A world-class destination in London's West End

Covent Garden is a leading retail and dining destination and is one of the most vibrant estates in the heart of central London. Capco's distinct approach to management of the estate with emphasis on enhancing customer experiences continues to attract target brands.

Following another active year of leasing and investment, a total of 21 new brands were contracted during 2017, the most in any year, taking the total number of new brands introduced since Capco's ownership of the estate in 2006 to 140, with over 100 new retailers introduced.

Overview

Covent Garden, which represents 72 per cent of Capco's portfolio by value, is a world-class retail and dining destination providing over 1.1 million square feet of lettable space across all uses in the heart of London's West End. Underpinned by a vision to establish the estate as a leading destination for Londoners and visitors to the Capital, Capco drives value creation at Covent Garden through asset management, strategic investment and creativity. The estate is home to a wide variety of British, global and independent brands including Kent & Curwen, Petersham Nurseries and Tom Ford.

Demand for space in this iconic setting continues to be positive, highlighted by the 21 new brands introduced this year. 90 leasing transactions including new leases and renewals were completed representing £14.6 million of rental income per annum transacted at 10.4 per cent above 31 December 2016 ERV (H1 2017: 43 transactions representing £6.6 million of rental income, H2 2017: 47 transactions representing £8.0 million of rental income). A new Zone A rent of £750 per square foot for the Market Building was achieved this year.

Net rental income is £48.9 million, up 11.3 per cent (like-for-like) or 17.8 per cent in absolute terms compared to 2016. Occupancy on the estate remains high at 98 per cent.

2017 was another active year for Covent Garden as the business continued to implement its leasing and investment strategy. The value of the estate increased by 4.3 per cent on a like-for-like basis to over £2.5 billion. ERV is £104.8 million, a like-for-like increase over the year of 4.6 per cent. Good progress has been made towards the ERV target of £125 million by December 2020, reflecting the growth prospects of the estate.

Capco continues to work closely with the community stakeholders including Westminster City Council ("WCC") and Covent Garden Area Trust ("CGAT") to maintain and celebrate the attributes which make the area unique.

Retail

Strong demand for space at Covent Garden from retailers continues with new rental tones being set. The repositioning of Floral Street as a fashion and lifestyle destination is underway. British heritage sportswear brand, Kent & Curwen, opened its first concept store under the partnership of creative director Daniel Kearns and business partner David Beckham at 12 Floral Street. In addition, multi-brand concept store, The Shop at Bluebird, has been signed to Carriage Hall. The store is scheduled to open in spring 2018, with the 15,000 square foot space housing two dedicated retail floors and a restaurant.

In July, Petersham Nurseries opened its retail space, offering handpicked collections of homeware, furniture and gifts. The store is set in the Grade II listed building within the Floral Court development beneath three Victorian atria and surrounded by greenery. Petersham Nurseries has commenced fit-out of its restaurants in the courtyard of Floral Court which are scheduled to open in the coming months.

The successful transformation of Henrietta Street has established a new menswear and dining destination in London. British men's shoe brand Cheaney and outerwear clothing concept K-Way opened stores at the beginning of 2017. Australian eyewear brand, Bailey Nelson, opened its only UK store on Henrietta Street in September offering high quality opticals and sunglasses. The store complements the existing community of independent, British and global brands, representing the finest aspects of men's retail, alongside high quality dining concepts on the street.

Over 25 standalone beauty and fragrance boutiques form 'The Beauty Quarter' at Covent Garden which continues to expand. Tom Ford and Deciem opened in the Market Building joining premium standalone beauty boutiques from Chanel and Dior. Floral Street Fragrance is the latest signing to Floral Court where customers can create their own four-piece fragrance in store. In addition, Bose has also taken space on King Street, offering innovative sound systems.

Capco has further strengthened the offering of gifting and premium accessories at the Royal Opera House Arcade signing leading travel accessory brand Tumi. This exciting addition joins the line-up of premium retailers which opened this year including luxury sunglasses brand Linda Farrow, British cashmere brand N.Peal and eyewear brand, Tom Davies. The British watch and accessories brand Olivia Burton is the latest signing to Covent Garden, joining watch brand Daniel Wellington which opened its first UK store in the Market Building earlier this year. 

Dining

Focusing on high quality and unique food concepts has been core to the dining strategy for Covent Garden. The restaurant leasing activity in 2017 further strengthened Covent Garden's reputation as one of London's best dining destinations.

The latest signing on James Street is a UK first, Wahlburgers, the casual dining burger restaurant and bar, offering a menu of high-quality homemade burgers and sandwiches, fresh salads and shakes at competitive prices. The signing sets a new rental tone for food and beverage on James Street and is expected to open towards the end of the year.

The Experimental Group have partnered with Michelin-starred chef Ollie Dabbous to open their latest concept in London on Henrietta Street at The Henrietta Hotel. The concept includes a bar and restaurant offering a French seasonal menu as well as an 18-bedroom boutique hotel.

Another successful addition to Henrietta Street is the highly rated seafood restaurant The Oystermen which provides a relaxed, affordable and fun dining experience offering oysters and seafood from the British Isles. British artisanal coffee shop Host has opened in the space alongside The Oystermen.

Cora Pearl, a new 60 cover restaurant from the team behind renowned Mayfair establishment Kitty Fishers, is expected to open in spring 2018 within the ground and lower-ground floors of 30 Henrietta Street.

Pancs have joined the Market Building, offering handcrafted pancakes, and the estate is set to welcome another UK first, Avobar, London's first permanent avocado bar that will serve avocado based dishes. Egg'cellent serving a breakfast only menu using fresh and organic eggs will open shortly. These signings are in line with the strategy at Covent Garden to introduce high quality and interesting concepts to the estate.

Adding to the leisure offering is Z Hotels which has taken space on Bedford Street and will provide compact yet luxurious accommodation for visitors and is set to open in summer 2018. In addition, Capco has completed assembly of the Wellington block, which is a scarce island site in central London, through the acquisition of the last remaining unit, 23 Wellington Street in January 2018. Development of the Wellington block presents a unique opportunity to continue Covent Garden's transformation on the southern side of the estate.

Other uses

Covent Garden has become an attractive office location for professional services, creative industries and SMEs. Office space represents 11 per cent of the portfolio by value. A number of office lettings have been achieved successfully during the year and we continue to see strong interest from occupiers. 

Capco continues to restore the estate's residential heritage. The most recent conversion at 26-27 Southampton Street, a premium residential development with 10 apartments completed earlier this year and units were successfully let in line with expectations. The final two units at The Beecham, a luxury development overlooking the Piazza, were sold in the first half of the year. The average sales price achieved across the scheme was £2,800 per square foot. Leasing demand for residential accommodation across the estate remains positive with a high rate of renewals recorded.

Acquisitions

Capco has continued to expand its presence on the estate through strategic acquisitions. During 2017, three new properties were acquired on Floral Street for a total consideration of £99.2 million (including purchaser's costs) and represent £4.7 million of ERV.

The acquisition of the long leasehold interest in 15-17 Long Acre & 27b Floral Street for £85.8 million (including purchaser's costs) further consolidates Capco's presence on Floral Street. This prominent property, located at the western end of Floral Street, opposite the Floral Court development, benefits from dual frontage on both Floral Street and Long Acre and presents long-term asset management opportunities.

37 and 39 Floral Street were acquired for £5.9 million and £7.5 million respectively. Both properties are well-located at key access points to Floral Street and are well-placed to benefit from the repositioning of this strategic street. In addition, the acquisition of 23 Wellington Street exchanged and completed in January 2018.

Developments

Floral Court will provide over 85,000 square foot (NIA) of space with eight retail and two restaurant units as well as 45 apartments. The development of the commercial space nears completion. A new connecting courtyard between Floral Street and King Street is set to open in the coming months which will transform the pedestrian flow on the estate. 65 per cent of the commercial space has been let representing £2.4 million of income. Development of the 45 apartments is progressing well and is set to complete by mid-2018.

At Carriage Hall, the refurbishment of 15,000 square feet (NIA) successfully completed and has been let to The Shop at Bluebird which is expected to open in spring 2018. 

The redevelopment of 11-12 Floral Street, the building formerly occupied by The Sanctuary, nears completion providing 27,000 square feet (NIA) and includes the creation of two new retail units with flagship potential, one of which has been let to British heritage sportswear brand, Kent & Curwen.

The development of Opera Terrace completed during the year. SushiSamba is currently fitting out the space and is scheduled to open later this year.

Future Priorities 

Capco continues to implement its strategy for Covent Garden by focusing on creative asset management and investment, and attracting excellent retail brands and dining concepts to the estate. By introducing an interesting mix of British, global and independent brands to address the needs of the consumer, Capco aims to continue to capture the reversionary income potential of the portfolio and achieve ERV growth towards its target of £125 million by December 2020.

Further to this, Capco is focused on making strategic investments to expand its ownership of the estate and enhancing the customer environment through creative asset management. As current capital initiatives including the Floral Court development near completion, the positioning of Floral Street as a fashion and lifestyle destination is an important priority. Pedestrianisation of King Street and the completion of Floral Court will continue to change the pedestrian flow on the estate, allowing for further repositioning opportunities. In addition, the southern side of the estate offers opportunities for repositioning including the Wellington block.

Building on the successful openings in 2017 including The Henrietta Hotel, The Oystermen, Tom Ford and Petersham Nurseries, 2018 will see even more retail and dining openings across the estate with brands such as SushiSamba, Mariage Frères, Wahlburgers and Cora Pearl which are expected to further strengthen the estate's attractiveness as a leading retail and dining destination.

EARLS COURT PROPERTIES

Large-scale strategic opportunity in central London

Overview

The Earls Court and West Kensington Opportunity Area represents one of the most important mixed-use development sites in London with the potential to create a new district, delivering thousands of homes and jobs. The Earls Court Masterplan is a strategic opportunity for London with planning consent for 10.7 million square feet, including the Empress State Building.

The consented Masterplan provides for 7,500 new homes, is anticipated to create 10,000 jobs and deliver over £450 million of community benefits. The site is located within two London Boroughs, the Royal Borough of Kensington and Chelsea ("RBKC") and the London Borough of Hammersmith & Fulham ("LBHF"), is supported by excellent transport infrastructure and has the potential to deliver substantially more housing.

Investments at Earls Court

Earls Court Properties represents Capco's investments within the Earls Court and West Kensington Opportunity Area and principally comprises:

- 63 per cent interest in ECPL: the investment vehicle with TfL in respect of EC1 & EC2, and including certain assets on and around Lillie Road. Capco's interests in ECPL were valued at £560.7 million at 31 December 2017. ECPL land has detailed planning consent for 3.4 million square feet (GEA) and, following successful completion of the final phase of complex demolition works, is available for development. 

- 100 per cent of the Empress State Building ("ESB") valued at £220.0 million at 31 December 2017. ESB has detailed planning consent to be converted from an office building into residential. ESB is let to MOPAC until June 2019 with a current passing rent of £17.0 million.

- 50 per cent interest in the Lillie Square joint venture, with Capco's 50 per cent interest valued at £156.5 million at 31 December 2017. Handover of Lillie Square Phase 1 is substantially complete and Phase 2 continues to progress.

In addition, in 2013, Capco exercised its option under the Conditional Land Sale Agreement ("CLSA"), a binding agreement in relation to the West Kensington and Gibbs Green Estates ("The Estates"). To date, Capco has paid £75 million of the £105 million cash consideration payable to LBHF including three of the five annual instalments of £15 million.

Demolition works

ECPL, the investment vehicle with TfL, owns 999 year leases over the EC1 & EC2 land together with certain adjacent properties primarily located on or around Lillie Road. Capco owns a 63 per cent share and is leading the venture in its role as business and development manager.

The final phase of demolition of the former Earls Court Exhibition Centres successfully completed on schedule in January 2018. The heavy lifting crane was the most visible part of the important site preparation. The crane successfully completed the lift of 61 concrete portal beams out from over the London Underground lines. Removal of the large portal beams, which supported the weight of the former Earls Court Exhibition Centres, concludes the complex demolition works, in preparation for future development, which has the flexibility to be brought forward through the introduction of third-party capital over time.

Planning

In January 2017, detailed planning consent was granted by RBKC for Exhibition Square which is located at the entrance of the Earls Court estate adjacent to Earls Court Underground station. The consented scheme will create an important gateway to Earls Court and its new high street, including a public square and gardens, a signature hotel, offices and an entrance to Earls Court Underground station.

The Earls Court Masterplan remains one of the largest Opportunity Areas in central London, capable of delivering new homes, jobs and investment. Additional density could deliver much-needed homes for all Londoners, including additional affordable housing and a broad range of residential tenures. The GLA's draft London Plan issued in December 2017 ("The Plan"), references the Earls Court Masterplan as 'ready to grow' demonstrating the site's potential to deliver more housing and optimise this important London opportunity. In addition, The Plan estimates that the population of London will increase by 70,000 per annum, reaching 10.5 million in 2041. According to The Plan, London will need at least 66,000 new homes annually. Opportunity Areas such as Earls Court are seen as vital in order to meet London's demands.

Capco notes with disappointment the statement released by LBHF regarding the deliverability of "the proposed level of density and affordable housing", however remains in discussions with LBHF including regarding the possibility of the Council taking the lead on future plans for the Estates, as part of the wider Masterplan. In the event that agreement is not reached with LBHF, the CLSA, a binding agreement in relation to the Estates, will remain in place. Capco will continue to seek to engage positively with all stakeholders in order to evolve the Masterplan to address the changing political landscape and prevailing market conditions. 

Due to the scale of the Earls Court Masterplan, there will remain a risk of protests and legal challenges (ranging from complaints about noise through to judicial reviews or applications for listing) against specific aspects of the development as it is progressed. It should be noted that all such challenges to date have been successfully defended however future challenges of this nature cannot be discounted.

West Brompton Crossing: temporary retail and leisure use

In November 2017, ECPL successfully launched a pop-up local high street for Earls Court, named West Brompton Crossing with anchor tenant The Prince. The Prince is located on the junction of Lillie Road and Empress Place within a number of buildings brought back into temporary use, and features eateries including Patty & Bun, The Begging Bowl, MAM and Rabbit. The project marks a first for temporary retail and leisure use in the area, offering a parade of restaurants, bars, and shops that have proved a very popular addition to the area.

Lillie Square

Lillie Square is a one million square foot (GEA) residential development located adjacent to the Earls Court Masterplan. The development can deliver over 600 private and 200 affordable homes across three phases.

Handover of Phase 1 of Lillie Square nears completion with £98 million (Capco share) of proceeds received by the end of the year. Cumulative proceeds of £125 million (Capco share) are expected to have been received on Phase 1 over the coming months. Phase 2 basement and frame works are underway, and the joint venture is in advanced negotiations with a contractor for the main construction contract. 50 per cent of the 186 apartments in the phase have been reserved or exchanged. 34 of these transacted during 2017, seven of which occurred during the second half of the year. Sales prices achieved in Phase 2 are at a modest premium to comparable units in Phase 1.

The Residents' Clubhouse opened over the summer and has been very well-received by residents. 

Future Priorities

Capco's strategy is to drive long-term value creation through planning, land assembly, land enablement and selective development activities on its investments at Earls Court.

Following a period of complex demolition works, the ECPL land is now available for development. Earls Court has the ability to evolve with the needs of London and its potential will be realised over time. Capco will continue to seek to engage positively with all stakeholders in order to evolve the Masterplan to address the changing political landscape and prevailing market conditions. The Masterplan has the flexibility to be brought forward through the introduction of third-party capital and selective development.

At the Empress State Building, discussions continue with the tenant regarding its occupational requirements and at Lillie Square, the focus is on delivery of the remaining homes of Phase 1, ensuring a successful handover to all residents. On Phase 2, the focus remains on continued sales and completion of negotiations on the main construction contract which is expected over the coming months.

VENUES

Sale of Venues

On 7 April 2017, Capco completed the sale of Venues to a consortium of German institutional investors for £296 million. Profit on disposal of Venues was £2 million. After repayment of debt, working capital adjustments and transaction-related costs, net proceeds were approximately £230 million. Cash proceeds were used initially to repay bank debt and will be deployed in Capco's prime central London estates over time.

FINANCIAL REVIEW

Our capital structure positions the Group to withstand prevailing market conditions, take advantage of opportunities as they arise, and deliver long-term returns to shareholders by driving value creation across our assets.

Capco further strengthened its financial position during 2017 reducing loan to value to 21 per cent and increasing available liquidity to £691 million. This has been achieved by the realisation of value through the disposal of the Venues business and further enhancing the unsecured debt platform at Covent Garden by raising a further £225 million in the private placement market and extending the £705 million revolving credit facility to 2022.

There was additional investment in Covent Garden of £177 million through developments, predominantly Floral Court, and £99 million of acquisitions which have served to increase the Group's weighting in Covent Garden to 72 per cent. The value of the Covent Garden estate increased by 4.3 per cent (like-for-like) due to the rental growth achieved during the year, with ERV up by 4.6 per cent on a like-for-like basis.

Uncertainties in the broader political and economic environment continue to impact London residential property. As a result the market value of Earls Court Properties, which represents the Group's interests at Earls Court, has decreased by 11.8 per cent (like-for-like).

Overall, the Group share of the total property value has decreased by 0.9 per cent (like-for-like). EPRA net asset value per share decreased by 1.7 per cent during the year, from 339.6 pence at 31 December 2016 to 333.8 pence. This 5.8 pence decline together with the 1.5 pence dividend paid to shareholders resulted in a total return of -1.3 per cent.

Underlying earnings from continuing activities increased to £7.3 million due to higher net rental income and reduced administration expenses.

Basis of preparation

In line with the requirements of IFRS 11 'Joint Arrangements', the Group is required to present its joint ventures under the equity method in the consolidated financial statements. Under the equity method, the Group's interest in joint ventures is disclosed as a single line item in both the consolidated balance sheet and consolidated income statement rather than proportionally consolidating the Group's share of assets, liabilities, income and expenses on a line-by-line basis.

Alternative Performance Measures ("APMs"), being financial measures which are not specified under IFRS, are used by the Group to monitor the performance of the business. These include a number of the Financial Highlights shown on page 2. Many of the APMs included are based on the EPRA Best Practice Recommendations reporting framework which aims to improve the transparency, comparability and relevance of published results of public real estate companies in Europe.

Internally, the Board focuses on and reviews information and reports prepared on a Group share basis, which includes the Group's share of joint ventures but excludes the non-controlling interest share of our subsidiaries. Therefore, to align with the way the Group is managed, this financial review presents the financial position, performance and cash flow analysis on a Group share basis.

Discontinued operation

On 7 April 2017 the Venues business was sold. As Venues has previously represented a separate major line of business, its results and cash flows have been reported for the period 1 January 2017 to 7 April 2017 as having arisen from a discontinued operation. This extends to the prior period comparative which has been re-presented to reflect the disposal. Further information on the disposal of the Venues business is set out in note 10 'Discontinued Operation'.

FINANCIAL POSITION

At 31 December 2017 the Group's EPRA net asset value was £2.8 billion (31 December 2016: £2.9 billion) representing 334 pence per share (31 December 2016: 340 pence).

SUMMARY ADJUSTED BALANCE SHEET

1. Primarily Lillie Square.

2. Non-controlling interest represents TfL's 37 per cent share of ECPL.

3. IFRS includes amounts receivable from joint ventures which eliminate on a Group share basis.

4. Adjusted, diluted number of shares in issue at 31 December 2017 was 850.6 million.

1. Primarily Lillie Square.

2. Non-controlling interest represents TfL's 37 per cent share of ECPL.

3. IFRS includes amounts receivable from joint ventures which eliminate on a Group share basis.

4. Adjusted, diluted number of shares in issue at 31 December 2016 was 847.6 million.

Investment, development and trading property

The revaluation loss on the Group's property portfolio was £37.6 million for the year, representing a 0.9 per cent decrease in value on a like-for-like basis compared with the IPD Capital Return for the equivalent period of 5.4 per cent. The Group revaluation loss consists of a £93.4 million gain at Covent Garden and a £131.0 million loss at Earls Court.

Total property return for the year was 1.0 per cent. The IPD Total Return index recorded a 11.2 per cent return for the corresponding period.

The total revaluation loss of £37.6 million consists of a £27.9 million loss on investment property and a £9.7 million loss on trading property. On an IFRS basis, which includes ECPL at 100 per cent and does not include Lillie Square on a line by line basis, loss on revaluation and sale of investment and development property was £90.9 million.

Trading property is carried on the consolidated balance sheet at the lower of cost and market value, therefore valuation surpluses on trading property are not recorded. Any unrecognised surplus is however reflected within the EPRA net asset value measure. During the year £6.6 million of the unrealised trading property surplus has been realised. At 31 December 2017, the unrecognised surplus on trading property was £31.8 million (31 December 2016: £48.1 million) which now arises solely on the Group's share of trading property at Lillie Square.

Debt and gearing

During the year the Group's share of total facilities increased by £24.5 million. During the first half of the year the Group terminated the £100 million Olympia Exhibitions Holdings Limited facility (of which £50 million was drawn prior to termination), the £85.5 million loan on the Empress State Building and £30 million (£15 million Group share) of the Lillie Square LP facility. In June, the Group signed an agreement with eight institutional investors for a private placement of £225 million with a range of maturities from 7 to 20 year senior unsecured notes, further enhancing the unsecured debt platform at Covent Garden. Closing occurred in August 2017 and proceeds were used to repay bank debt. In November 2017, the Group exercised the option under the £705 million Covent Garden debt facility to extend the full loan amount to 2022.

The Group's cash and undrawn committed facilities at 31 December 2017 were £690.8 million (31 December 2016: £556.3 million). A reconciliation between IFRS and Group share is shown below:

1. Primarily Lillie Square.

2. Non-controlling interest represents TfL's 37 per cent share of ECPL.

Net debt decreased by £114 million to £734 million, principally as a result of the disposal of the Venues business partly offset by further investment into our assets and the acquisitions at Covent Garden. As set out in the summary adjusted balance sheet, net debt on an IFRS basis was £748 million.

The gearing measure most widely used in the industry is loan to value ("LTV"). LTV is calculated on the basis of net debt divided by the carrying value of the Group's property portfolio. The Group focuses most on an LTV measure that includes the notional share of joint venture interests but excludes the share of the non-controlling interest. The LTV of 21.3 per cent remains comfortably within the Group's limit of no more than 40 per cent.

The Group's policy is to eliminate substantially the medium and long-term risk arising from interest rate volatility. The Group's banking facilities are arranged on a floating rate basis but are generally swapped to fixed rate or capped using derivative contracts. At 31 December 2017 the proportion of gross debt with interest rate protection was 91 per cent (31 December 2016: 86 per cent).

The Group remains compliant with all of its debt covenants, details of which are set out on page 55, and has substantial levels of headroom against its covenants across all of its debt facilities. 

At 31 December 2017 the Group had capital commitments of £61.3 million (£156.6 million at 31 December 2016) of which Covent Garden represents £19.5 million and Earls Court Properties £41.8 million (including the £30.0 million of CLSA instalments and £7.0 million in relation to Lillie Square).

1. Primarily Lillie Square.

2. Non-controlling interest represents TfL's 37 per cent share of ECPL.

Conditional Land Sale Agreement ("CLSA")

In November 2013 the Group exercised its option under the CLSA, which it entered into with LBHF, for the purchase of the West Kensington and Gibbs Green housing estates (the "Estates"). The overall consideration payable is expected to be £105 million cash plus the planning requirement to provide up to 760 replacement homes.

The CLSA remains unrecognised in the consolidated financial statements of the Group as its main underlying asset (the land relating to the Estates) does not currently meet the recognition criteria under IFRS required for investment and development property. Annual payments of £15 million commenced in December 2015 and will run through to December 2019. Where amounts are paid prior to the transfer of property, they will be carried on the Group's balance sheet as prepayments against future land draw down. Of the £75 million paid to date, £15 million relates to the acquisition of two properties, held as investment and development property, and £60 million relates to options over the Estates which is held as a prepayment within other receivables. The remaining future payments totalling £30 million are disclosed as a capital commitment as referred to above.

The prepayment balance will be transferred to investment and development property once the recognition criteria of investment and development property have been met. Once this occurs, in line with the Group's accounting policy, the land will become subject to bi-annual valuation with any changes reflected in the Group's reported net asset measure.

CASH FLOW

A summary of the Group's cash flow for the year ended 31 December 2017 is presented below:

SUMMARY CASH FLOW

1. Primarily Lillie Square.

2. Non-controlling interest represents TfL's 37 per cent share of ECPL.

3. Net cash flow is based on unrestricted cash and cash equivalents and therefore does not include the movement in Lillie Square deposits on a Group share basis of £14.6 million.

1. The 2016 summary cash flow has been re-presented to reflect the cash flows from continuing operations and therefore it excludes the discontinued operation of the Venues business. Net cash flows are presented on unrestricted cash on a Group share basis.

2. Primarily Lillie Square.

3. Non-controlling interest represents TfL's 37 per cent share of ECPL.

4. Net cash flow is based on unrestricted cash and cash equivalents and therefore does not include the movement in Lillie Square deposits on a Group share basis of £3.7 million.

Operating cash outflows of £24.0 million, of which £15.0 million relates to the CLSA annual payment, have decreased from £42.4 million for the year to 31 December 2016 as a result of changes in net working capital requirements.

During the year, £170.2 million was invested at Covent Garden for the purchase of three properties and subsequent expenditure for the development of property predominantly at Floral Court. At Earls Court, total expenditure of £55.4 million comprises enablement works on ECPL land, construction of Lillie Square Phase 1, the acquisition of two properties and other subsequent expenditure.

The disposal of the Venues business resulted in a net inflow of £226 million after repayment of the £50 million drawn debt on the £100 million Olympia Exhibitions Holdings Limited loan facility, working capital adjustments and transaction related costs. The proceeds were used to reduce the Group's net debt position and will be deployed in Capco's core central London estates.

Net sales proceeds from trading property comprise of £95.9 million, Group share, for the disposal of 177 units at Lillie Square (£92.0 million) and for the sale of the final two residential units at The Beecham, Covent Garden (£3.9 million). Disposal of investment property net of payments in relation to investments resulted in proceeds of £8.7 million being received during the year.

Net borrowings repaid during the period were £75.7 million.

Dividends paid of £6.7 million reflect the final dividend payment made in respect of the 2016 financial year and the interim dividend paid in September 2017. This was lower than the previous year due to a higher take up of the scrip dividend alternative, 47 per cent versus 41 per cent in 2016.

FINANCIAL PERFORMANCE

The Group presents underlying earnings and underlying earnings per share in addition to the amounts reported on a Group share basis. The Group considers this presentation to provide useful information as it removes unrealised and certain other items and therefore represents the recurring, underlying performance of the business.

SUMMARY INCOME STATEMENT

1. Lillie Square and Innova Investment.

2. Non-controlling interest represents TfL's 37 per cent share of ECPL.

1. The 31 December 2016 summary income statement has been re-presented to reflect the Venues business as a discontinued operation.

2. Lillie Square and Innova Investments.

3. Non-controlling interest represents TfL's 37 per cent share of ECPL.

Income

Net rental income has increased by £8.3 million (14.4 per cent) during the year mainly as a result of the positive performance at Covent Garden (up 11.3 per cent like-for-like). Of the increase, £5.4 million has been achieved on the like-for-like portfolio as the Group continues to convert the reversionary potential into contracted rents. A further £2.9 million has been added through prior and current year acquisitions with the remaining increase resulting from the net effect of disposals and properties classified as development. At Covent Garden gross income has increased by 15.4 per cent from £52.1 million in 2016 to £60.1 million whilst ERV has increased by 9.2 per cent from £96.0 million in 2016 to £104.8 million.

Loss on revaluation and sale of investment and development property

The loss on revaluation and sale of the Group's investment and development property was £28.0 million. Covent Garden recorded a gain on revaluation of £93.4 million as a result of rental growth. The loss on revaluation at Earls Court of £121.4 million was driven by changes in valuers' assumptions and is reflective of recent evidence.

Administration expenses

Administration expenses have decreased by £3.2 million on a headline basis. The prior year included a £2.0 million credit for performance related employment costs and an assumed allocation of £4.0 million of head office costs to the Venues business. Allowing for these items, like-for-like administration expenses of £38.7 million compared with £47.9 million in 2016, a decrease of 19.2 per cent.

Net finance costs

Net finance costs have increased marginally to £19.8 million due to the higher level of average borrowings during the year.

Taxation

The total tax charge for the year, made up of both underlying tax and non-underlying tax, is £6.7 million.

Tax on underlying profits of the Group was £2.7 million, which reflects a rate in line with the current rate of UK corporation tax. The main rate of corporation tax reduced from 20 per cent to 19 per cent from 1 April 2017. The corporation tax rate will further reduce to 17 per cent from 1 April 2020.

Contingent tax, the amount of tax that would become payable on a theoretical disposal of all investment property held by the Group, was nil (31 December 2016: nil). A disposal of the Group's trading properties at their market value net of available losses would result in a corporation tax charge to the Group of £1.6 million (19.25 per cent of £8.3 million).

The provisions of IAS 12 provide for the recognition of a deferred tax asset where it is probable there will be future taxable profit against which a deductible temporary difference can be utilised. As a result of the application of this provision, the Group has not recognised the deferred tax asset on decreases to the carrying value of investment property and certain losses carried forward.

The Group's tax policy, which has been approved by the Board and is available on the Group website, is aligned with the business strategy. The Group seeks to protect shareholder value by structuring operations in a tax efficient manner, with external advice as appropriate, which complies with all relevant tax law and regulations and does not adversely impact our reputation as a responsible taxpayer. As a Group, we are committed to acting in an open and transparent manner.

Consistent with the Group's policy of complying with relevant tax legislation and its goal in respect of its stakeholders, the Group maintains a constructive and open working relationship with HM Revenue & Customs which regularly includes obtaining advance clearance on key transactions where the tax treatment may be uncertain.

Dividends

The Board has proposed a final dividend of 1.0 pence per share to be paid on 23 May 2018 to shareholders on the register at 20 April 2018. Subject to SARB approval, the Board intends to offer a scrip dividend alternative.

Going concern

At 31 December 2017 the Group's cash and undrawn committed facilities were £690.8 million and its capital commitments were £61.3 million. With a weighted average debt maturity of 6.9 years, loan to value of 21.3 per cent and sufficient headroom against all financial covenants, there continues to be a reasonable expectation that the Company and Group will have adequate resources to meet both ongoing and future commitments for at least 12 months from the date of signing these financial statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the 2017 Annual Report & Accounts.

Situl JobanputraChief Financial Officer

20 February 2018

PRINCIPAL RISKS AND UNCERTAINTIES

Risk Management

The Board has overall responsibility for Group risk management. It determines its risk appetite and reviews principal risks and uncertainties regularly, together with the actions taken to mitigate them. The Board has delegated responsibility for the review of the adequacy and effectiveness of the Group's internal control framework to the Audit Committee.

Following a comprehensive review of risk management undertaken in 2015, risk is a standing agenda item at all management meetings. This gives rise to a more risk aware culture and consistency in decision making across the organisation in line with the corporate strategy and risk appetite. All corporate decision making takes risk into account, in a measured way, while continuing to drive an entrepreneurial culture.

The Executive Directors are responsible for the day-to-day operational and commercial activity across the Group and are therefore responsible for the management of business risk. The Executive Risk Committee, comprising of the Executive Directors, the General Counsel & Director of Corporate Services and the Financial Controller, is the executive level management forum for the review and discussion of risks, controls and mitigation measures. The corporate and business division risks are reviewed on a quarterly basis by the Executive Risk Committee so that trends and emerging risks can be identified and reported to the Board.

Senior management from every division and corporate function of the business identify and manage the risks for their division or function and complete and maintain a risk register. The severity of each risk is assessed through a combination of each risk's likelihood of an adverse outcome and its impact. In assessing impact, consideration is given to financial, reputational and regulatory factors, and risk mitigation plans are established. A full risk review is undertaken annually in which the risk registers are aggregated and reviewed by the Executive Risk Committee. The Directors confirm that they have completed a robust assessment of the principal risks faced by the business, assisted by the work performed by the Executive Risk Committee.

The Group's principal risks and uncertainties, which are set out on the following pages, are reflective of where the Board has invested time during the year. These principal risks are not exhaustive. The Group monitors a number of additional risks and adjusts those considered 'principal' as the risk profile of the business changes. See also the risks inherent in the compilation of financial information, as disclosed within note 1 'Principal Accounting Policies' to the consolidated financial statements, 'Critical accounting judgements and key sources of estimation and uncertainty'.

Since the EU Referendum, there has been economic and political uncertainty and this is expected to continue into the foreseeable future. To date, there has been no adverse impact on occupier demand for the Covent Garden estate, which has seen strong rental growth, although the valuation of residential-led development land has been impacted by the overall economic and political backdrop.

The political framework for large scale residential development has become more difficult. In the Autumn Statement government announced it will introduce planning reform that will aim for more land to become available for housing. A review is being undertaken by government, with an interim report targeted to be delivered for the Spring Statement, to evaluate the gap between planning permissions and housing starts which may result in beneficial or adverse policy change for landowners. London, as a highly desirable global city, continues to attract businesses and people and we would expect this leading position to be maintained over time. Uncertainty remains, however, around the exit mechanism and longer-term implications of Brexit, and this will continue to have a direct or indirect impact on a number of the principal risks set out on the following pages.

CORPORATE

PROPERTY

DIRECTORS' RESPONSIBILITIES

Statement of Directors' responsibilities

The statement of Directors' responsibilities has been prepared in relation to the Group's full Annual Report & Accounts for the year ended 31 December 2017. Certain parts of the Annual Report & Accounts are not included within this announcement.

We confirm to the best of our knowledge:

- the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and

- the Strategic Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Signed on behalf of the Board on 20 February 2018

Ian Hawksworth

Chief Executive

20 February 2018

Situl Jobanputra

Chief Financial Officer

20 February 2018

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2017

1. Earnings per share from discontinued operation are shown in note 12 'Earnings Per Share and Net Assets Per Share'.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2017

CONSOLIDATED Balance sheet

As at 31 December 2017

CONSOLIDATED STATEMENT OF changes in equity

For the year ended 31 December 2017

1. Represents non-qualifying consideration received by the Group following the share placing in May 2014 and previous share placements. The amounts taken to the Merger reserve do not currently meet the criteria for qualifying consideration and therefore will not form part of distributable reserves as they form part of linked transactions.

2. Share premium includes £6.0 million (2016: £0.9 million included within retained earnings) of ordinary shares issued relating to the bonus issued in lieu of cash dividends. Refer to note 13 'Dividends' for further information.

CONSOLIDATED STATEMENT OF cash flowS

For the year ended 31 December 2017

1. Sale of subsidiaries relate to cash inflows of £0.5 million (2016: £0.5 million) related to deferred consideration on the disposal of The Brewery by EC&O Limited on 9 February 2012 and cash outflows of £5.0 million (2016: £nil) related to additional costs on the loss of control of former subsidiary Lillie Square GP Limited in 2012. Further information on the loss of control of Lillie Square GP Limited can be found in note 6 'Other Costs'.

2. Relates to transactions between the Group's treasury function and discontinued operations. The Group operates a central treasury function which manages and monitors the Group's cash balances.

NOTES TO THE ACCOUNTS

1 PRINCIPAL ACCOUNTING POLICIES

The financial information set out in this announcement does not constitute the Group's consolidated financial statements for the years ended 31 December 2017 or 2016, but is derived from those financial statements. Statutory financial statements for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the Company's Annual General Meeting. The external auditor has reported on those financial statements; their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 of Companies Act 2006.

The Group's consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union, IFRS Interpretations Committee ("IFRS IC") interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Group expects to publish full financial statements that comply with IFRS in March 2018.

The consolidated financial statements have been prepared under the historical cost convention as modified for the revaluation of property and derivative financial instruments.

The accounting policies used by the Group in these condensed financial statements are consistent with those applied in the Group's financial statements for the year to 31 December 2016, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year.

During 2017, the following accounting standards and interpretations have been adopted by the Group:

IAS 7 'Statement of Cash Flows' (amendment)

IAS 12 'Income Taxes' (amendment)

These pronouncements had no significant impact on the consolidated financial statements and resulted in changes to disclosures only.

At the date of approval of the consolidated financial statements the following standards and interpretations which have not been applied in these financial statements were in issue but not effective, and in some cases have not been adopted for use in the European Union:

IFRS 2 'Share-based Payment' (amendment)IFRS 9 'Financial Instruments'IFRS 15 'Revenue from Contracts with Customers'IFRS 16 'Leases'

IAS 28 'Investments in Associates' (amendment)

IAS 40 'Investment Property' (amendment)

Amendments to IFRS (Annual improvements cycle 2014-2016)

Amendments to IFRS (Annual improvements cycle 2015-2017)

The Group has assessed the impact of these new standards and interpretations and does not anticipate any material impact on the financial statements.

IFRS 9 'Financial Instruments' modifies the classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting. There is no change to the Group in respect of classification of financial assets and liabilities and hedge accounting. All Group financial assets have been assessed for impairments under the 12 month and lifetime expected credit loss models considered by IFRS 9. The adoption of the new standard does not have a material impact on the consolidated financial statements of the Group.

In relation to IFRS 15 'Revenue from Contracts with Customers', the Group's material revenue stream relates to property rental income. On the adoption of the standard this revenue stream will not be materially impacted due to property rental income not being within the scope of IFRS 15. The assessment of this standard also indicated that the impact on all other revenue streams is not material.

As the Group is predominantly a lessor, IFRS 16 'Leases' will not have a material impact on adoption. Where the Group is currently a lessee, this relates only to immaterial contracts.

Critical accounting judgements and key sources of estimation and uncertainty

The preparation of consolidated financial statements in accordance with IFRS requires the Directors to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, income and expenses from sources not readily apparent. Although these estimates and assumptions are based on management's best knowledge of the amount, historical experiences and other factors, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period.

The significant areas of estimation and uncertainty are:

Property valuation: The most significant area of estimation and uncertainty in the consolidated financial statements is in respectof the valuation of the property portfolio, where external valuations are obtained. The valuation of the Group's property portfolio is inherently subjective due to the assumptions as outlined within note 13 'Property Portfolio' and this subjectivity may result in a material adjustment to the carrying amounts of the assets and liabilities year on year. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate and could therefore have a material effect on the Group's financial performance and position.

The key areas of accounting judgement are:

Property classification: Judgement is required in the classification of property between investment and development, trading and owner occupied. Management considers each property separately and reviews factors including the long-term intention for the property, in determining if trading, and the level of ancillary income, in determining if owner occupied, to ensure the appropriate classification.

Other less significant judgements and sources of estimation and uncertainty relate to revenue recognition, significant disposals, provisions, share-based payment and contingent liabilities.

Discontinued operation

On 7 April 2017 the Venues business was sold. As Venues has previously been presented as a separate major line of business, its results and cash flows have been reported for the year ended 31 December 2017 as having arisen from a discontinued operation. The requirement extends to the prior period comparatives which have been re-presented where appropriate, in line with reporting requirements.

Going Concern

The Directors are satisfied that the Group has adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of the financial statements and for this reason the consolidated financial statements have been prepared on a going concern basis.

2 SEGMENTAL REPORTING

Management has determined the operating segments based on reports reviewed by the Executive Directors, who are deemed to be the chief operating decision makers. The principal performance measures have been identified as net rental income and net asset value.

For management and reporting purposes the Group is organised into three divisions:

- Covent Garden;

- Earls Court Properties represents the Group's interests in the Earls Court area, comprising properties held in ECPL, Lillie Square, the Empress State Building and a number of smaller properties in the Earls Court area; and

- Other comprises Innova, the discontinued activity of Venues and The Great Capital Partnership, other head office companies and investments, including the payment of internal rent.

Management information is reported to the chief operating decision makers on a Group share basis. Outlined below is the Group share by segment:

1. Venues was 100 per cent owned until 7 April 2017. Subsequent to this the Group share ownership is nil.

Segmental reporting has been presented in line with management information and therefore consolidation adjustments are presented to reconcile segmental performance and position to the IFRS total.

The Group's operating segments derive their revenue primarily from rental income from lessees.

Unallocated expenses consist primarily of costs incurred centrally which are neither directly nor meaningfully attributable to individual segments.

Reportable segments

1. IFRS total continuing revenue of £87.7 million comprises rental income of £80.0 million, proceeds from sale of trading property of £3.9 million and other income of £3.8 million.

2. Comprises service charge and other non-recoverable costs.

3. The Group operates a central treasury function which manages and monitors the Group's finance income and costs on a net basis and the majority of the Group's cash balances.

4. Total segmental assets and total segmental liabilities exclude loans between and investments in Group undertakings.

Reportable segments