CAPC.L Regulatory News (CAPC)

27 FEBRUARY 2019

CAPITAL & COUNTIES PROPERTIES PLC ("CAPCO")

AUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018

Henry Staunton, Chairman of Capco, commented:

"In my first year as Chairman of the Company, I am pleased to report positive performance from Covent Garden which now represents 80 per cent of the portfolio. Despite broader market uncertainty, Covent Garden continues to deliver income and value growth. At Earls Court progress has been made with the land available for development and value realised through disposals.

Our balance sheet allows the Board to consider the future of its two estates from a position of financial strength. Preparations for a possible demerger are well advanced and could be implemented promptly, and the Board is also considering other options for Earls Court. The Company continues to focus on long-term value creation for shareholders with prudent capital management, taking into account the uncertain economic and political environment." 

Ian Hawksworth, Chief Executive of Capco, commented:

"Covent Garden is firmly established as a leading retail and dining destination and has had another strong year delivering rental and value growth in line with the strength of the prime central London retail market. 2018 was a record year for openings across the estate which contributed to strong net rental growth of over 17 per cent. Our creative approach to asset management and investment into the estate continues to attract positive leasing demand and provides an attractive consumer environment which has led to increased footfall and tenant sales.

The West End and Covent Garden have demonstrated resilience however economic and political uncertainty have continued to impact the London residential market, resulting in a further valuation decline in our investments at Earls Court. The land benefits from an in-place planning consent and is now available for development which is expected to be brought forward through the introduction of third-party capital. We have realised significant proceeds from the sale of the Empress State Building and continued sales at Lillie Square.

Backed by a strong balance sheet, with low leverage and access to significant liquidity, Capco is in a strong financial position to navigate market uncertainty and remains focused on delivering long-term value for shareholders."

Key financials

- Equity attributable to owners of the Parent of £2.7 billion (2017: £2.8 billion)

- EPRA NAV 326 pence per share, a decrease of 2.4 per cent (2017: 334 pence per share)

- Total property value £3.3 billion, a decrease of 2.4 per cent (like-for-like) (2017: £3.3 billion adjusted for the sale of the Empress State Building)

- Underlying EPS 0.9 pence per share (2017: 0.9 pence per share from continuing operations)

- Proposed final 2018 dividend of 1.0 pence per share resulting in a full-year dividend of 1.5 pence per share

Covent Garden - driving rental growth and capturing reversion

- Total property value of £2.6 billion, an increase of 1.6 per cent (like-for-like) (2017: £2.5 billion)

- Strong income growth, with net rental income up 9.6 per cent (like-for-like) and 17.5 per cent in absolute terms

- Record year for openings across the estate with 21 new brands

- Good demand across all uses; 103 new leases and renewals transacted at 7.5 per cent above 31 December 2017 ERV

- ERV increased by 3.0 per cent (like-for-like) to £108 million (2017: £105 million)

- High quality concepts and flagship names secured including Tiffany & Co., Peloton and Lacoste

- High occupancy, renewal rates and strong demand for office and residential portfolio

- Development of Floral Court complete; new connecting courtyard enhancing pedestrian flow on northern side of estate

Earls Court - realising value

- Earls Court property interests valued at £658 million in total (of which ECPL & Other £499 million, Lillie Square £159 million), a decrease of 15.6 per cent (like-for-like) (2017: £759 million)

- ECPL land available for development, incoming interest from potential occupiers and investors

- Successful sale of the Empress State Building for £250 million

- Excellent progress at Lillie Square, Phase 1 substantially complete, completion of Phase 2 expected in 2020

Strong financial position with significant financial flexibility

- Group loan to value of 18 per cent (2017: 21 per cent)

- Group undrawn facilities and cash of £854 million (2017: £691 million)

- Modest capital commitments of £53 million (2017: £61 million)

- Weighted average debt maturity of 6 years (2017: 6.9 years)

- Weighted average cost of debt of 2.9 per cent (2017: 2.8 per cent)

KEY FINANCIALS

1. On a Group share basis. Refer to Property Data on page 48 for the Group's percentage ownership of property.

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

3. From continuing and discontinued operations. Refer to Consolidated Underlying Profit Statement on page 50.

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

I am delighted to have been appointed as Chairman of Capital & Counties Properties PLC during the year. This year the external environment has been challenging, yet against this backdrop management has delivered encouraging operational progress across our prime central London portfolio. Covent Garden, which represents 80 per cent of the Group's portfolio by gross value, continues to deliver positive performance. However, the ongoing political and macro-economic uncertainty continues to impact the London residential market resulting in a decline in the value of our investments at Earls Court. 

Update on possible demerger

The changing income profile and scale of Covent Garden, together with the readiness of the Earls Court land for development and successful disposals of the Empress State Building and Venues, means that it is an appropriate time for the Board to consider the structure of the Group. 

During the course of 2018, Capco advanced its preparations for a possible demerger which could result in two separately-listed businesses based around its prime central London estates. Covent Garden could be launched as an independent, prime central London retail-focused REIT and Earls Court, a land enablement and development company centred around the Earls Court masterplan. Preparations for a possible demerger are well advanced and could be implemented promptly.

The Company has received a number of proposals in relation to the sale of certain of Capco's interests in Earls Court. Capco has held discussions with a number of parties to establish the likely value and deliverability of the proposals. The Company will evaluate the merits of various options, having regard to market conditions, long-term shareholder value and prudent capital management.

Backed by a strong balance sheet, low leverage, high liquidity and modest capital commitments, Capco is in a position of financial strength to navigate market uncertainty and remains focused on creating long-term value for shareholders.

Performance 

2018 was another active year for Covent Garden, delivering positive performance, generating further rental growth and capturing income. The challenges to the broader retail market are well documented, but the quality of our assets and our approach to management of the estate continues to drive positive leasing demand creating a highly attractive destination for Londoners and visitors to the capital. The estate had a record year for openings with brands such as SushiSamba, Tiffany & Co. and Cora Pearl further strengthening Covent Garden's attractiveness as a leading global retail and dining destination. The completion of the Floral Court development, which is the largest undertaken at Covent Garden to date, was an important milestone and demand for the residential accommodation has been encouraging.

Economic and political uncertainty continue to impact the London residential market contributing to a further decline in the valuation of our investments at Earls Court. However the consented Masterplan is located amongst central London's most valued postcodes with the potential to deliver a new district for the capital. With the Earls Court Partnership Limited ("ECPL"), our investment vehicle with Transport for London ("TfL") land available for development, ECPL has received interest from potential occupiers and investors. The disposal of the Empress State Building for £250 million enabled Capco to realise significant cash proceeds. The Lillie Square development continues to progress with Phase 1 now complete and Phase 2 construction progressing with over 80 per cent of units pre-sold.

Despite good operational performance, Capco's total shareholder return for the year, which comprises share price performance plus the dividends paid during the year, was negative 27.3 per cent. Total return for the year, which represents the change in net assets plus the dividends paid during the year, was negative 2.0 per cent. The total value of Capco's property portfolio fell by 2.4 per cent on a like-for-like basis to £3.3 billion.

Financial position and dividends

Capco maintains a strong balance sheet, with low leverage, high liquidity and modest capital commitments. Responsible capital management and funding from diversified sources ensure Capco maintains a strong financial position. During the year, Capco's liquidity was strengthened through the successful execution of the sale of the Empress State Building for £250 million, a premium to the 31 December 2017 valuation. Capco is well-positioned to support the current capital requirements of both estates as well as 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 2018 to 1.5 pence per share.

The Board and employees

Following Ian Durant's decision to retire from the Board during the year, I was delighted to be appointed as Chairman of the Company. Ian led the Board as Chairman for eight years from Capco's inception, and the Company benefited greatly from his judgement and experience. The Board is grateful for his significant contribution over this time.

At the same time, Gerry Murphy became Chair of the Audit Committee and Senior Independent Director, and Charlotte Boyle became Chair of the Remuneration Committee. I am pleased to report that they are already making a positive contribution in their new roles, and the Board continues to operate effectively.

The Board has continued to consider its current composition. Recognising the need to maintain significant property experience on the Board, we are delighted to announce the appointment of Jonathan Lane as a Non-executive Director with effect from 1 March 2019. A former Chief Executive and Chairman of Shaftesbury, Jonathan brings a wealth of West End property experience to the Board, and we look forward to his contribution as we unlock the potential of Capco and its assets. On appointment, Jonathan will also become a member of the Audit and Nomination Committees. Andrew Strang has decided to stand down from the Audit, Nomination and Remuneration Committees with effect from 1 March 2019. Anthony Steains will join the Remuneration Committee with effect from 1 March 2019. Graeme Gordon has informed the Board that he will not be seeking re-election at the Company's forthcoming AGM. The Directors and I thank Graeme for his long and supportive service to the Company, and his wise counsel.

Given the current market conditions and options under consideration, 2018 was undoubtedly a challenging year for our employees, and the Board would like to thank each of them and management for their continued work and commitment.

Shareholders

Capco is listed in London and Johannesburg, and a significant amount of the Company's shares are held by South African investors. At times there are 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 continues to feel 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 again 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 always seeks shareholder views before deciding the levels of authority to be sought, and will continue to maintain regular dialogue with our South African shareholders on this topic.

Along with the Executive team's comprehensive programme of investor briefings, I continue to be willing to engage with shareholders as appropriate.

Board oversight

The Directors receive updates on performance of the Company's assets from Executive Directors and senior management at each of our formal Board meetings and the more informal Board updates. We also visit our assets in Covent Garden and Earls Court and meet operational management regularly, which ensures that we are well aware of the business' opportunities and challenges, as well as the views of a range of stakeholders including shareholders, local communities, partners, lenders, government and employees. 

This year the Board and management devoted a significant amount of time to evaluating the merits of the options available to the Company and ensuring that the business will be well-positioned across a range of scenarios.

The Board has also spent time considering the new 2018 UK Corporate Governance Code to ensure that we are ready to operate under its principles over the course of the coming year. This includes an emphasis on culture, trust and consideration of stakeholder views.

Looking ahead

The macro-economic and political environment remains uncertain, however we are confident in London's status as a truly global city with the ability to attract investment, visitors and talent from around the world. Our strategy is to deliver long-term value creation for shareholders with an increased focus on Covent Garden and realisation of value from Earls Court. The Company will evaluate the merits of various options, having regard to the market and political environment as well as prudent capital management. Backed by a strong balance sheet Capco is very well-positioned to deliver long-term value for shareholders.

Henry Staunton

Chairman

26 February 2019

Chief Executive's review

Update on possible demerger

During 2018 the Board has been considering the most appropriate structure for the Group. Preparations for a possible demerger are well advanced and could be implemented promptly. Capco will consider the merits of all options, having regard to market conditions, long-term value creation for shareholders and prudent capital management. Capco is in a position of financial strength and in an uncertain economic and political environment the Board intends to decide carefully on the most appropriate outcome.

Prime central London portfolio

Although the uncertainty surrounding the implications of the UK leaving the EU is having an adverse impact on business and consumer confidence, London continues to attract investment as well as talent and visitors from around the world. Retail conditions have been challenging in the broader market, nevertheless the West End is very attractive to the international and domestic consumer and Covent Garden has continued to attract good demand, securing high quality brands.

Representing 80 per cent of the property portfolio by gross value, Capco continues to focus on Covent Garden as we implement our strategy of creating a highly attractive destination. This continues to be achieved by managing the estate creatively and investing strategically. Having carefully assembled an exceptional portfolio of properties around the Piazza, Covent Garden provides a fantastic environment for retailers and visitors. 2018 represents a record year for retail and restaurant openings across the estate with 21 new brands introduced. Covent Garden stores continue to trade well with footfall across the estate up. Rents and values recorded an increase and there has been continued income growth as we secure embedded reversion from the portfolio. 

The West End and Covent Garden have demonstrated resilience, however economic and political uncertainty have continued to impact the London residential market, resulting in a further decline in the valuation of our investments at Earls Court. As a result, EPRA net asset value fell by 2.4 per cent over the year to 326 pence per share.

At Earls Court, we continue to implement our strategy of realising value over time as evidenced by the sale of the Empress State Building and completion of Phase 1 of Lillie Square. The ECPL land is available for development and continues to attract interest from potential investors and occupiers for various parts of the site. While political sentiment around large-scale residential development is challenging, ECPL's implemented planning consent, high quality location and connectivity provide a strong basis for future value realisation.

Capco maintains a prudent approach to its balance sheet, with a strong financial position, low leverage and access to significant liquidity. Capco is disciplined in its investment approach, with a weighting towards Covent Garden as we continue to expand our ownership on the estate. Capco continues to manage capital commitments prudently, drive income generation at Covent Garden and realise value at Earls Court. The business is well-positioned to support its future activities, navigate market uncertainties, and take advantage of opportunities as they arise.

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 by 2.4 per cent (like-for-like) in the year to 31 December 2018 to £3.3 billion.

The valuation of Covent Garden has risen by 1.6 per cent (like-for-like) to £2.6 billion, driven by ERV growth of 3.0 per cent, like-for-like, 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 15.6 per cent (like-for-like) to £658 million at 31 December 2018. A number of adjustments have been made to the component parts of the valuation of ECPL. The valuer's more conservative view on gross development value and delivery costs, together with an increased developer's margin have resulted in a net decline of 12.1 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.

Covent Garden - a world-class retail and dining destination 

Although Central London retail is not immune to the challenged environment experienced at a national level; Covent Garden has performed well delivering income and value growth. Our ambition to create a highly attractive destination supported by our creative asset management strategy has driven positive leasing momentum with good demand for all uses across the estate. Visitors to Covent Garden are offered a differentiated experience, which is fundamental to Capco's vision for the district. Covent Garden's global positioning continues to appeal to brands. Attracting the best brands and new concepts ensures that Covent Garden is able to meet evolving consumer demand, secure rental value growth and continue to capture its reversionary income potential. The completion of significant capital initiatives, including Floral Court, has resulted in a record number of openings across the estate contributing to overall growth in net rental income of 17.5 per cent or 9.6 per cent like-for-like against December 2017.

The estate is valued at £2.6 billion as at 31 December 2018, a like-for-like increase of 1.6 per cent. As a result of positive demand across all uses, 103 new lettings and renewals were agreed, securing £12.9 million of rental income at 7.5 per cent above December 2017 ERV. The ERV of the estate is £108 million, up 3.0 per cent on a like-for-like basis. Contracted income of the estate is £83 million now representing 77 per cent of current ERV. Occupancy on the estate remains high at 97 per cent.

We continue to strengthen our core categories which include jewellery, luxury gifting and accessories and health and well-being. The repositioning of the Royal Opera House Arcade continues with the addition of leading travel brand Tumi and contemporary jewellery brand APM Monaco. There has been strong demand for the Market Building this year, and introductions include Olivia Burton, Africology and For Art's Sake. Lettings to Peloton and The Alkemistry continue the repositioning of Floral Street as a lifestyle and fashion destination.

The range of dining concepts on the estate continues to expand, with the opening of 10 new high quality and differentiated concepts including SushiSamba, RedFarm, The Petersham and Cora Pearl. The latest additions further enhance Covent Garden's attractiveness as one of London's most desirable dining destinations.

The Floral Court development completed successfully during the year. Anchored by a high quality restaurant offering, the courtyard, which connects King Street to Floral Street opened in May 2018, and has facilitated a significantly enhanced pattern of pedestrian flow across this part of the estate. The residential component has been well received with all 16 heritage apartments let successfully and strong buyer demand for the new build collection with £19 million of sales proceeds having been received by year end with a further £12 million secured since 31 December 2018. We have continued to invest in the estate through acquisitions which offer value creation opportunities. £19 million was invested in acquisitions during the year and a further £13 million subsequent to year end as we continue to expand the footprint of the estate.

Earls Court Properties - prime central London development opportunity

We continue to implement our strategy of realising value at Earls Court over time, most notably in 2018 through the successful sale of the Empress State Building to the long-term occupier of the building. The disposal, which was at a premium to valuation, reflects Capco's disciplined approach to investment and capital management. Over the past 24 months in excess of £670 million of gross proceeds have been generated through the sale of Venues and the Empress State Building as well as handover of Lillie Square Phase 1. ECPL continues to focus on enabling development of the consented masterplan through the introduction of third-party capital. However, the current political and economic environment presents challenges. We note the hardening political tone towards large-scale residential development activity in London. As we are a counterparty to a number of public sector stakeholders it is possible that our objectives diverge. The London Borough of Hammersmith & Fulham ("LBHF") has suggested publicly that it would like to terminate the Conditional Land Sale Agreement ("CLSA") and also recently suggested it is considering the use of Compulsory Purchase Orders.

The Lillie Square joint venture continues to make positive progress. 90 per cent of the committed project (Phase 1 & 2) has now been reserved, exchanged or completed. Handover of Phase 1 sold units is substantially complete and hand over of sold units in Phase 2 is expected in 2020.

Outlook

Economic uncertainty resulting from the UK's decision to leave the EU could impact the property market further. Covent Garden is firmly established as a world-class retail and dining destination in the heart of central London and is well-positioned to continue to deliver rental growth and capture embedded reversionary income. We will continue to enhance the customer environment and invest strategically in assets which offer value creation opportunities. Earls Court is one of the most important mixed-use development opportunities in London. The ECPL land, which represents the majority of Capco's investment in Earls Court, is available for development. While the environment for large-scale residential development remains challenging, Earls Court's in place planning consent, high-quality location and connectivity underpin its desirability and prospects for future value realisation.

Preparations for a possible demerger are well advanced and Capco will consider the merits of various options, having regard to market conditions, long-term value creation for shareholders and prudent capital management. Our disciplined investment approach, with a weighting towards Covent Garden positions Capco to continue driving income generation at Covent Garden and realising value at Earls Court. The business is well-positioned to support its future activities, navigate market uncertainties and take advantage of opportunities as they arise.

Ian Hawksworth

Chief Executive

26 February 2019

Strategic Report

COVENT GARDEN

A word-class retail and dining destination in the heart of London's West End

Covent Garden is firmly established as a leading global destination for Londoners and visitors to the capital. Capco's distinct approach to management of the estate with emphasis on creativity and differentiated customer experiences ensures Covent Garden continues to attract target brands and consumers.

The Covent Garden estate comprises high quality retail and dining concepts as well as offices and premium residential apartments. In aggregate, the estate provides approximately 1.2 million square feet of lettable space. As one of central London's most iconic destinations, Covent Garden is now home to over 150 British, global and independent brands with many choosing the estate as a flagship, first or only London presence. Emphasis on the customer is essential to ensuring that the estate continues to thrive as a leading destination for Londoners, domestic and international visitors as well as office occupiers and residents.

Overview

Covent Garden is continuing to build on its success as a world-class retail and dining destination and is well-positioned to deliver long-term income and value growth. The team's proactive approach is designed to sustain and enhance demand from occupiers and consumers. Capco adopts a thoughtful approach to selecting leading retail and dining brands and targeting concepts to satisfy consumer expectations.

Consumer needs are constantly evolving, therefore the environment and management of a high quality destination are key in securing demand across all uses, particularly retail. Capco actively engages with its audiences through multi-channel marketing activities such as events, brand partnerships and digital outreach, as well as investment in high quality public realm to enhance the overall customer experience on the estate. Covent Garden has a very significant social media presence with approximately 400,000 followers across Instagram, Facebook and Twitter. Covent Garden is attractive to both online and physical retailers as brands use the estate as well as the strong social media presence to launch products and events, evidencing the strength of not only Covent Garden's location but also the potential value of the brand.

The luxury component continues to expand with the introduction of brands such as Tiffany & Co. and there is an increasing representation from brands generating higher sales densities.

2018 was another active year delivering positive performance. The retail portfolio continues to flourish, with good demand for offices and residential as occupiers are attracted to the overall offer at Covent Garden. The estate has made a number of signings and 2018 was a record year for openings with brands such as SushiSamba and The Shop at Bluebird further strengthening the estate's attractiveness as a leading global destination. The completion of Floral Court and subsequent opening of the courtyard, connecting Floral Street with King Street anchored by retail and dining concepts have enhanced the pedestrian flow on the northern side of the estate.

The Covent Garden estate is highly reversionary, and demand for space in this setting continues to be positive, highlighted by 21 new brands opening this year. 103 leasing transactions including new leases and renewals were completed representing £12.9 million of rental income per annum transacted at 7.5 per cent above 31 December 2017 ERV (H1 2018: 26 transactions representing £4.2 million of rental income, H2 2018: 77 transactions representing £8.7 million of rental income).

Net rental income ("NRI") is £57.5 million, up 9.6 per cent (like-for-like) or 17.5 per cent in absolute terms compared to 2017. NRI growth continues to outperform ERV growth as the reversionary income potential of the portfolio is captured. The value of the estate increased by 1.6 per cent on a like-for-like basis to over £2.6 billion. ERV is £108 million, a like-for-like increase over the year of 3.0 per cent. Contracted income of the estate is £83 million which now represents 77 per cent of the current ERV. Occupancy on the estate remains high at 97 per cent.

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

Retail

Luxury jewellery brand Tiffany & Co. has opened a new concept store on James Street offering an innovative and distinctive retail experience. Its new store complements Covent Garden's growing luxury retail offer which includes Bucherer, Chanel and Mulberry.

The ongoing repositioning of Floral Street as a fashion and lifestyle destination continues to progress. During the year, fitness technology company Peloton agreed terms to open its first flagship studio outside the US at 11 Floral Street. The Grade II listed former Victorian seed warehouse will be Peloton's training studio, covering over 20,000 square feet spread over four floors, and will live stream classes to members worldwide.

Premium womenswear brand ba&sh has agreed terms to open a flagship store which completes the retail leasing activity within Floral Court on King Street.

The Shop at Bluebird has opened in Carriage Hall, housing two dedicated retail floors. The multi brand concept store stocks more than 100 brands such as Victoria Beckham, Marni, Acne Studios and Alexander McQueen.

US fashion brand Free People has opened its first permanent store outside the US, at 28 Floral Street. The Philadelphia-founded ethical-lifestyle brand connects with the customer by sharing the stories behind the latest collections and designs.

Jewellery, gifting and accessories continue to strengthen with the introduction of luxury jewellery brand The Alkemistry to Floral Court as well as the opening of contemporary jewellery brand APM Monaco in the Royal Opera House Arcade offering a collection of hand-crafted designs. In addition, leading travel brand Tumi was introduced to the Royal Opera House Arcade.

During the year strong demand for the Market Building was recorded; new leasing deals were agreed with Whittards and Atelier Cologne, along with the introduction of new British watch brand Olivia Burton and spa brand Africology. Eyewear brand For Art's Sake launched its first standalone retail store. The store incorporates a host of customer features, including a selfie station, personal shopping in multiple languages, a concierge option, tax-free shopping as well as Click and Collect.

Shortly after year end, French luxury sportswear brand Lacoste agreed terms to open a new store on James Street. The opening of Lacoste will continue to position Covent Garden as one of London's fashion and lifestyle destinations for a wide range of international, luxury brands.

Dining

Introducing high quality innovative food concepts has been central to the dining strategy for Covent Garden. Ten new restaurant formats have opened during 2018 adding to the depth of quality on the estate, establishing Covent Garden as one of London's best dining destinations.

Global restaurant SushiSamba opened its fusion dining restaurant on the Opera Terrace above the Market Building, offering a unique blend of Japanese, Brazilian and Peruvian cuisine. The Market Building's dining offering has been enhanced with the opening of acclaimed US fast casual restaurant Buns & Buns. The Miami based 'breadery' and grill is another London first for Covent Garden and offers an all-day casual dining destination. 

Petersham Nurseries opened two new restaurants in Floral Court, La Goccia, a vibrant all-day restaurant, offering an extensive menu of small sharing plates, and The Petersham, a sophisticated, a la carte restaurant. Tables flow out onto Floral Court, where al fresco dining is offered.

New York restaurant RedFarm opened alongside Balthazar on Russell Street, bringing modern Chinese cuisine and dim sum to Covent Garden. The 96-seat restaurant features modern rustic decor across three floors, offering a casual dining experience.

Mariage Frères, a Parisian tea house, opened its UK flagship and first standalone store outside Paris on King Street comprising over 8,000 square feet, set across retail space, a restaurant specialising in tea gastronomy, a tea museum and two private event spaces. 

Adding to the offering on Henrietta Street is Cora Pearl, a new restaurant from the team behind Kitty Fisher's in Mayfair. Henrietta Street has also welcomed another UK first, Avobar, London's first permanent avocado bar serving avocado based dishes.

Southampton Street welcomed the opening of Abuelo, an Australian-meets-South-American coffee house and kitchen. Pancs has joined the Market Building, offering handcrafted pancakes and Egg'cellent, serving a breakfast only menu using fresh and organic eggs will open shortly. So Soufflé has opened its first branch in Europe offering delicious soufflé desserts.

Covent Garden now has its best line up to date attracting large numbers of Londoners as well as visitors to the capital. Footfall across the estate is up and particularly positive on the feeder streets which act as entrances to the estate. In addition, there are a number of openings scheduled for 2019. Vyta Santa Margherita is fitting out space in the Market Building and is expected to open in the spring. Wahlburgers, the casual dining burger restaurant and bar, will open its first restaurant outside the US on James Street, offering a menu of high quality homemade burgers and sandwiches, fresh salads and shakes.

Offices

The office portfolio is performing well with high occupancy and good demand as Covent Garden has become an attractive office location for professional services, creative industries and SMEs. A number of office lettings have been achieved during the year; including Tower House and Regal House which is now fully let. Office space represents 13 per cent of the portfolio by value.

Residential

Covent Garden's prime residential address continues to strengthen with strong leasing demand for residential accommodation across the estate. The residential portfolio is operating close to full occupancy with a high rate of renewals recorded above previous passing rent.

The residential component of Floral Court comprises 16 heritage apartments on King Street and Rose Street and 29 new apartments on Floral Street. The entire heritage component has been leased to Sonder, a single operator which provides flexible short-term accommodation. Strong buyer interest has been received for the new build collection with 11 units now sold representing £32 million of sales proceeds of which £19 million occurred during 2018.

Hospitality

Encouraging first steps have been taken in introducing hotel accommodation to the estate. There has been encouraging demand across various price points. Z Hotels has opened on Bedford Street providing accommodation for visitors with a new 111 room hotel. Existing tenant, The Henrietta Hotel, has upsized its offering into a neighbouring building reflecting positive performance on the estate.

Acquisitions and developments

Covent Garden's largest development to date, Floral Court, completed successfully during the year. Floral Court provides over 85,000 square feet (NIA) of space with eight retail and two restaurant units as well as 45 apartments. The new connecting courtyard between Floral Street and King Street is now open and substantially all of the commercial space is now let or under offer. 

Capco continues to expand its ownership of the estate, acquiring three properties for £19 million consideration including purchasers' costs. Most notably, Capco completed the 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 for £10 million. Repositioning of the Wellington block presents an interesting investment opportunity; Capco is reviewing options, which include proposals for office and retail space as well as hospitality.

Subsequent to year end we acquired 39-40 Bedford Street which presents a repositioning opportunity on an important entrance to the estate. There are a number of further properties on or around the estate being tracked for acquisition and repositioning opportunities.

Future Priorities 

Capco continues to implement its strategy for Covent Garden through creative asset management and investment, and attracting excellent retail brands and dining concepts to the estate. By introducing a differentiated mix of British, global and independent brands to address the evolving needs of the consumer, Capco aims to continue capturing the reversionary income potential of the portfolio while continuing to drive ERV progression.

Further to this, Capco aims to continue enhancing the customer environment and make investments to expand its ownership of the estate. As the new openings across the estate trade and pedestrian flow changes this will present further repositioning opportunities. In addition, the southern side of the estate offers a number of embedded growth opportunities, including the repositioning of the Wellington block.

Building on the successful openings in 2018 including Tiffany & Co., The Shop at Bluebird, and SushiSamba, 2019 will see a number of retail and dining openings across the estate with brands such as Wahlburgers, Lacoste and ba&sh which are expected to further strengthen the estate's attractiveness as a leading retail and dining destination.

EARLS COURT PROPERTIES

One of London's most important development opportunities

Overview

Earls Court is one of the most important mixed-use development opportunities in central London. It is located within two desirable boroughs, with the potential to be transformed into a new district for London.

Capco continues to implement its strategy of realising value at Earls Court over time as evidenced by the sale of Venues, the Empress State Building and handover of Lillie Square Phase 1. Having deployed its expertise to carry out land assembly, establish and manage partnerships, achieve and implement a planning consent and undertake complex enabling works, the land is now available for development. Capco has also successfully established a high quality address for this part of London through the development of Lillie Square with its joint venture partner Kwok Family Interests ("KFI") as well as establishing a pop-up local high street at West Brompton Crossing.

The Company's strategy is to realise value from the ECPL land and bring forward development of the consented Masterplan through the introduction of third-party capital to deliver this important opportunity for London. The current political and economic environment however presents challenges. Whilst many difficult milestones have been achieved over the life of the investment we note the hardening political tone towards large-scale residential development activity which provides the backdrop for evolving policies of the Greater London Authority ("GLA") and many local authorities across London. As we are invested alongside TfL and are a counterparty to a number of public sector stakeholders it is possible that our objectives diverge. For instance LBHF has suggested publicly that it would like to terminate the CLSA. This approach has been echoed by the GLA which has commented on the future of the CLSA and alternative planning proposals for the wider Masterplan area. LBHF has also recently suggested that it is considering the use of Compulsory Purchase Orders. The Company will continue to take a constructive approach to all stakeholders to advance this important scheme for London, whilst protecting its commercial interests, and advance the existing planning consent through the introduction of third-party capital.

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.

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

- 50 per cent interest in the Lillie Square joint venture with KFI

- In addition, in 2013, Capco exercised its option under the Conditional Land Sale Agreement ("CLSA"), a legally binding agreement in relation to the West Kensington and Gibbs Green Estates ("The Estates").

Capco's investment in Earls Court Properties declined by 15.6 per cent (like-for-like) to £658 million at 31 December 2018. This comprises £499 million in relation to ECPL and other interests, and £159 million for Capco's share in the Lillie Square joint venture. 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 delivery costs, together with an increased developer's margin have resulted in a net decline of 12.1 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.

ECPL

ECPL owns 999 year leases (granted in April 2015) over the EC1 & EC2 land together with certain adjacent properties primarily located on or around Lillie Road. Capco continues to lead the venture in its role as business manager.

Following the successful completion of the final phase of the demolition of the former Earls Court Exhibition Centres in early 2018, the ECPL land is available for development. The objective of ECPL is to maximise economic value by enabling development of the consented Masterplan, development of which is expected to be brought forward through the introduction of third-party capital.

To date, a number of approaches have been received from potential investors and occupiers in relation to a broad range of end uses including senior living, diplomatic, education and institutional in respect of certain individual parts of ECPL land.

Sale of the Empress State Building

The disposal of the Empress State Building ("ESB") reflects Capco's disciplined approach to capital management, enabling Capco to realise significant gross cash proceeds of £250 million compared to the 31 December 2017 valuation of £220 million. ESB has been sold to The Mayor's Office for Policing and Crime ("MOPAC"), the long-term occupier of the building under a lease which was due to expire in June 2019. ESB is a 451,000 square foot (NIA), 31 storey, office building located in Earls Court. The consented Earls Court Masterplan is a mixed-use development and is based on retention of ESB's current structure.

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. Development of Lillie Square is very well progressed with over £450 million of cumulative sales contracted across Phase 1 and 2.

Delivery of Phase 1 is substantially complete, and over 220 units have been handed over to residents representing £129 million (Capco share) of sales proceeds.

In Phase 2, over 80 per cent of the units (154 of the 186), have now been reserved or exchanged, 66 of these transacted in 2018, including the exchange of contracts with an international investor for all 49 apartments and 31 parking spaces at '9 Lillie Square', one of the four blocks within Phase 2. Total consideration for this transaction will be approximately £66 million (£33 million Capco share). Pricing was in line with Phase 2 sales to date at a modest premium to comparable units in Phase 1. The main construction contract for Phase 2 was awarded in June 2018. Completion of construction and hand over of sold units is expected in 2020. 

CLSA

To date, Capco has paid £90 million of the £105 million cash consideration payable to LBHF including four of the five annual instalments of £15 million. Under the CLSA, the residents of The Estates would have the opportunity to be rehoused by the council within the Earls Court Opportunity Area, some potentially within Block D of the Lillie Square development, in which the basement and foundation works have completed.

LBHF has expressed interest in pursuing alternative options for The Estates including termination of the CLSA, which is a legally binding agreement. Capco continues to meet its contractual obligations in respect of the CLSA and under the existing outline planning consent. Most recently, in November 2018, Capco submitted a Reserved Matters Application for part of the land that is subject to the CLSA. The detailed proposals cover 1.3 million square feet of the Earls Court Masterplan and include residential, office and retail space. LBHF has not yet validated the application; Capco will continue to follow due process in respect of this submission as well as seek to engage with relevant stakeholders in relation to future plans for The Estates, as part of the wider masterplan.

Capco notes recent comments from LBHF in relation to the internal investigation into the decision of LBHF to enter into the CLSA. The CLSA is a legally binding agreement and was entered into by LBHF, following approval by LBHF's cabinet and the Secretary of State. Capco also notes recent comments from LBHF suggesting that it is considering the use of Compulsory Purchase Orders on various parts of the Earls Court masterplan.

West Brompton Crossing: temporary retail and leisure use

In 2018, ECPL expanded West Brompton Crossing, a pop-up local high street for Earls Court, by opening additional retail units alongside The Prince. The Prince, which opened in late 2017 has been very successful, comprising two bars, four restaurants and a shared garden exterior with the capacity for up to 400 people. Three new retail units have opened to showcase emerging brands and new local talent.

Future Priorities

Capco's strategy is to realise value from its interests at Earls Court. The objective of ECPL is to maximise economic value by enabling development of the consented Masterplan, development of which is expected to be brought forward through the introduction of third-party capital.

The team will continue to progress Lillie Square through the delivery of Phase 2, ensuring successful completion and hand over to all purchasers and continued sales of the remaining inventory.

FINANCIAL REVIEW

Our profile of growing income at Covent Garden and strong capital structure provides financial resilience, enabling the Group to withstand prevailing market conditions, take advantage of opportunities as they arise, and deliver long-term value to shareholders. The Group has strengthened its financial position further during 2018, including through the sale of the Empress State Building, reducing loan to value to 18 per cent and increasing Group undrawn facilities and cash to £854 million.

The Group has continued to invest in the Covent Garden business through £19 million of acquisitions and £42 million of capital expenditure in the Covent Garden portfolio, predominantly at Floral Court. At the year end Covent Garden accounted for 80 per cent of the Group's property portfolio by value. The value of the Covent Garden estate increased by 1.6 per cent (like-for-like) as a result of rental growth achieved during the year and stable yields, with ERV up by 3.0 per cent on a like-for-like basis.

The Empress State Building was sold at a £30 million premium to valuation. Market uncertainty continued to impact the London residential market and has resulted in a further decline in land valuations at Earls Court. The market value of Earls Court Properties, which represents the Group's interests at Earls Court, has decreased by 15.6 per cent on a like-for-like basis.

Overall, the Group share of total property value has decreased by 2.4 per cent (like-for-like). EPRA net asset value per share also decreased by 2.4 per cent during the year, from 333.8 pence at 31 December 2017 to 325.7 pence. Combined with the 1.5 pence dividend paid to shareholders during the year, the total return for 2018 is -2.0 per cent.

Underlying earnings from continuing activities increased by 9.6 per cent to £8.0 million with continued net rental income growth at Covent Garden and reduced underlying administration expenses.

Basis of preparation

As required by IFRS 11 'Joint Arrangements' the Group presents its joint ventures under the equity method in the consolidated financial statements. 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.

The Group uses Alternative Performance Measures ("APMs"), financial measures which are not specified under IFRS, 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. A summary of EPRA performance measures and key Group measures included within these financial statements are shown on pages 51 and 52.

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, as this represents the economic value attributable to the Company's shareholders. 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.

FINANCIAL POSITION

At 31 December 2018 the Group's EPRA net asset value was £2.8 billion (31 December 2017: £2.8 billion) representing 326 pence per share (31 December 2017: 334 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 2018 was 852.6 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 2017 was 850.6 million.

Investment, development and trading property

The revaluation loss on the Group's property portfolio was £84.7 million for the year, representing a 2.4 per cent decrease in value on a like-for-like basis compared with the MSCI Capital Return for the equivalent period of a 2.1 per cent gain. The Group revaluation loss consists of a £37.3 million gain at Covent Garden and a £122.0 million loss at Earls Court.

Total property return for the year was -0.4 per cent. The MSCI Total Return Index recorded a 7.5 per cent return for the corresponding period.

The revaluation loss of £84.7 million occurred on investment 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 £146.1 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 £4.4 million of the unrealised trading property surplus has been realised. At 31 December 2018, the unrecognised surplus on trading property was £25.7 million (31 December 2017: £31.8 million) which arises solely on the Group's share of trading property at Lillie Square.

Debt and gearing

During the year the Group agreed terms for two 12 month extensions to the Lillie Square LP facility at the borrower's option. As a result, assuming that the second extension is exercised, the Group's earliest repayment date on its facilities would be May 2021.

The Group's cash and undrawn committed facilities at 31 December 2018 were £854.4 million (31 December 2017: £690.8 million). A reconciliation between Group share and IFRS is shown below:

1. Primarily Lillie Square.

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

Net debt decreased by £161 million to £573 million, principally as a result of the disposal of the Empress State Building, 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 £585 million.

The gearing measure most widely used in the industry is loan to value ("LTV"), which 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 17.9 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 2018 the proportion of gross debt with interest rate protection was 88 per cent (31 December 2017: 91 per cent).

The Group remains compliant with all of its debt covenants, details of which are set out on page 50, and has significant levels of headroom against its covenants across all of its debt facilities. 

At 31 December 2018 the Group had capital commitments of £53.4 million (£61.3 million at 31 December 2017). Capital commitments consist of £3.8 million for Covent Garden and £49.6 million for Earls Court Properties (including the £15.0 million of CLSA instalments and £32.4 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 investment property 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 the final payment is due to be paid in 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 £90 million paid to date, £15 million relates to the acquisition of two properties, held as investment and development property, and £75 million relates to options over The Estates which is held as a prepayment within other receivables. The remaining future payment totalling £15 million is disclosed as a capital commitment as referred to above.

The prepayment balance will be transferred to investment and development property once the recognition criteria for 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 2018 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 £1.9 million.

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.

Operating cash outflows of £17.5 million are as a result of changes in net working capital requirements.

During the year, £57.4 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 £51.3 million primarily relates to enablement works on ECPL land including the acquisition of the final residential unit at Empress Place and the construction of Lillie Square Phase 2.

The disposal of the Empress State Building, effected through the sale of subsidiaries, resulted in a net inflow of £248.9 million after 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 proceeds from subsidiaries also includes £1.8 million relating to deferred consideration on the disposal of the Brewery by EC&O Limited on 9 February 2012.

Net sales proceeds from property of £51.1 million (Group share) relates to the disposal of seven units at Floral Court and 41 units at Lillie Square.

IFRS net borrowings repaid during the year were £162.2 million. Adjusted for net borrowings repaid in joint ventures and the Group's non-controlling interest the reduction was £166.4 million.

Dividends paid of £8.2 million reflect the final dividend payment made in respect of the 2017 financial year and the interim dividend paid in September 2018. This was higher than the previous year due to a lower take up of the scrip dividend alternative, 35 per cent versus 47 per cent for the final dividend in 2017.

IFRS cash and cash equivalents has increased by £3.9 million to £32.5 million. Lillie Square Phase 1 completions has reduced the cash held for deposits and as a result the Group's share of cash and cash equivalents has decreased by £2.4 million to £49.9 million.

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.

3. Further details regarding the EPRA and Company specific adjustments are disclosed within note 12 'Earnings Per Share and Net Assets Per Share'.

1. Lillie Square and Innova Investment.

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

3. Further details regarding the EPRA and Company specific adjustments are disclosed within note 12 'Earnings Per Share and Net Assets Per Share'.

Income

Covent Garden net rental income has increased by £8.6 million due to £4.4 million of like-for-like growth and £4.2 million through current and prior year acquisitions and developments. The Group continues to convert reversionary potential into contracted rents resulting in a like-for-like net rental income growth at Covent Garden of 9.6 per cent. ERV at Covent Garden increased by 3.0 per cent, like-for-like, from £104.8 million to £107.7 million.

Earls Court net rental income has decreased by £11.5 million, primarily as a result of the Empress State Building sale.

On an overall basis, increased net rental income at Covent Garden has been offset by the loss of income from the Empress State Building resulting in a decrease in Group net rental income of £2.7 million (IFRS: £2.5 million).

Loss on revaluation and sale of investment and development property

The loss on revaluation of the Group's investment and development property was £80.9 million. Covent Garden recorded a gain on revaluation of £37.3 million as a result of rental growth. The loss on revaluation at Earls Court of £118.2 million was driven by changes in valuers' assumptions. The IFRS loss on revaluation, which includes the non-controlling interest share of ECPL losses, was £148.2 million.

The sale of seven apartments at Floral Court resulted in a £2.1 million gain above the previous recognised valuation gain.

Administration expenses

Underlying administration expenses have been reduced by £2.0 million due to efficiency initiatives. £4.9 million of costs were incurred during the year in relation to the possible demerger and related activity.

Net finance costs

Net finance costs have decreased to £19.2 million due to the lower 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 £4.3 million.

Tax on underlying profits of the Group was £1.4 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 reduce further to 17 per cent from 1 April 2020.

Contingent tax, being the amount of tax that would become payable on a theoretical disposal of all investment property held by the Group, as at 31 December 2018 was nil (31 December 2017: nil). A disposal of the Group's trading properties at their market value, before utilisation of carried forward losses, would result in a corporation tax charge to the Group of £4.9 million (19 per cent of £25.7 million).

IAS 12 provides for the recognition of a deferred tax asset where it is probable that 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 impact adversely 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 having regard to key 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 16 May 2019 to shareholders on the register at 12 April 2019. Subject to SARB approval, the Board intends to offer a scrip dividend alternative.

Going concern

At 31 December 2018 the Group's cash and undrawn committed facilities were £854.4 million and its capital commitments were £53.4 million. With a weighted average debt maturity of six years, loan to value of 17.9 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 2018 Annual Report & Accounts.

Situl JobanputraChief Financial Officer

26 February 2019

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.

Risk is a standing agenda item at 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 Group 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 each 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, within 'Critical accounting judgements and key sources of estimation and uncertainty'.

Since the EU Referendum, there has been ongoing heightened economic and political uncertainty. As the date at which the UK is set to depart from the EU approaches, there may be an increased level of volatility in consumer, occupier and broader corporate behaviour and decision-making. This risk is heightened by the possibility of a disorderly Brexit. To date, we have not identified an adverse impact on occupier demand for the Covent Garden estate, which has seen strong rental growth.

At Earls Court, valuation of residential-led development land has been impacted by the overall economic and political backdrop. Whilst the impact on our business and the market remains uncertain, the Board continues to monitor progress in this area and wider activity and has assessed risks to the business that may result from the UK leaving the EU, including the implications of a 'no deal' scenario. The main areas that may affect the Group directly are:

- the impact on the London and UK economy, including exchange rate volatility and potential disruption in the financial markets

- the impact on current and prospective tenants, whether it be on management of their inventory, workforce labour, tariffs or other barriers, and the impact on consumer demand (for example due to travel disruption) leading to reduced rents and capital values

- the impact on the supply chain, such as delay to delivery of materials and foreign exchange exposure on development materials

- the impact on the demand from prospective purchasers as a result of market uncertainty and foreign exchange exposure leading to reduced capital values

Brexit uncertainty has continued after the year end date. Whilst it is not possible to predict the overall outcome, the Board is continuing to monitor external events and appropriate action is being undertaken to prepare for short-term risk during and after a political decision is reached to ensure that the business remains resilient and well-positioned for the long-term.

London, as a highly desirable global city, continues to attract both domestic and international 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.

The political framework for large scale residential development has become more difficult and there is an increased risk of political intervention. The Government continues to review housing and planning policy which may result in beneficial or adverse change for landowners.

In May 2018 the Group announced that it was considering a demerger, which would result in two separately-listed businesses based around its prime central London estates. In November 2018 the Group noted press speculation and confirmed that it continued to advance preparations for a possible demerger, however that it had received a number of proposals in relation to the Group's interests in Earls Court which it was considering. If a demerger or a sale of a significant proportion of the Group's interests in Earls Court Properties interests were to occur this would have an impact on the Group's principal risks.

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 2018. 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 26 February 2019

Ian Hawksworth

Chief Executive

26 February 2019

Situl Jobanputra

Chief Financial Officer

26 February 2019 

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2018

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 2018

CONSOLIDATED Balance sheet

As at 31 December 2018

CONSOLIDATED STATEMENT OF changes in equity

For the year ended 31 December 2018

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 £4.5 million (2017: £6.0 million) of ordinary shares issued relating to the bonus issued in lieu of cash dividends. Refer to note 11 'Dividends' for further information.

CONSOLIDATED STATEMENT OF cash flowS

For the year ended 31 December 2018

1. Sale of subsidiaries includes £248.9 million relating to the sale of the Empress State Building and £1.8 million (2017: £0.5 million) relating to deferred consideration on the disposal of The Brewery by EC&O Limited on 9 February 2012. The 2017 comparative also includes cash outflows of £5.0 million related to additional costs on the loss of control of former subsidiary Lillie Square GP Limited in 2012.

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 2018 or 2017, but is derived from those financial statements. Statutory financial statements for 2017 have been delivered to the Registrar of Companies and those for 2018 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 section 498 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 2019.

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 2017, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year.

During 2018, the following accounting standards and interpretations have been adopted by the Group:

IFRS 2 'Share-based Payment' (amendment)IFRS 9 'Financial Instruments'IFRS 15 'Revenue from Contracts with Customers'IAS 40 'Investment Property' (amendment)Amendments to IFRS (Annual improvements cycle 2014-2016)

IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' were adopted by the Group from 1 January 2018. The standards have been applied in full, with the exemption of comparative periods as permitted under IFRS 1.

The Group has made changes to its accounting policies however the adoption did not have a material impact on the consolidated financial statements of the Group.

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.

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 was not materially impacted due to property rental income not being within the scope of IFRS 15. The impact on all other revenue streams is not material.

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 3 'Business combinations' (amendment)

IFRS 9 'Financial Instruments' (amendment)

IFRS 16 'Leases'

IAS 1 'Presentation of financial statements' (amendment)

IAS 8 'Accounting policies, changes in accounting estimates and errors' (amendment)

IAS 19 'Employee benefits' (amendment)

IAS 28 'Investments in associates' (amendment)

Amendments to IFRS (Annual improvements cycle 2015-2017)

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.

Critical accounting judgements and key sources of estimation and uncertainty continued

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.

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 (up until disposal on 26 March 2018) and a number of smaller properties in the Earls Court area; and

- Other comprises Innova, the discontinued activity of Venues (up until disposal on 7 April 2017) 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. Empress State was 100 per cent owned until 26 March 2018. Subsequent to this the Group share ownership is nil.

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

2. 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.

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

Reportable segments

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

2. 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.

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

3 PROFIT ON SALE OF TRADING PROPERTY

4 LOSS ON REVALUATION AND SALE OF INVESTMENT AND DEVELOPMENT PROPERTY

5 IMPAIRMENT OF OTHER RECEIVABLES

Following an impairment review of amounts receivable from joint ventures by the Group, a net impairment of £19.4 million has been recognised (2017: £1.3 million). The Lillie square joint venture incurs amortisation charges on deep discount bonds that were issued to the Group and Kwok Family Interests ("KFI") which has contributed to the cumulative losses. The Group has recognised £12.0 million (2017: £11.7 million) finance income on these deep discount bonds.

An impairment assessment was performed in accordance with IFRS 9 'Financial instruments' comparing the carrying amount of the intercompany debtor and deep discount bonds to the present value of the estimated future cash flows. This has resulted in a write down of £19.4 million, of which £1.8 million has been recognised against the intercompany debtor (2017: write back of £8.2 million) and £17.6 million against the deep discount bonds (2017: £9.5 million).

The impairment of amounts receivable from joint ventures recognised by the Group in the year of £19.4 million (cumulative £67.0 million) and the finance income on the Lillie Square deep discount bonds of £12.0 million have been calculated based on the requirements under IFRS 9 'Financial instruments'. Had the impairments been calculated taking into consideration the Group's economic position with reference to the Group's share of losses in the Lillie Square joint venture the impairment of amounts receivable from joint venture would have been £5.5 million (cumulative £53.2 million) and the finance income on the deep discount bonds would have been £10.4 million in the year. The total current year difference between the IFRS 9 basis and economic position basis of £12.3 million (cumulative £12.3 million) are adjusted from EPRA adjusted earnings and EPRA NAV measures as the difference does not reflect the operational performance or the assets and liabilities expected to crystallise in normal circumstances.

During the year costs of £3.8 million relating to intensifying the planning consent of the CLSA have been written off due to uncertainty surrounding the inclusion of the CLSA within an intensified scheme.

6 PROFIT ON SALE OF SUBSIDIARIES

On 26 March 2018, the Group completed the sale of the Empress State Building for total cash consideration of £250.0 million. The disposal was effected by way of a sale of the entire issued share capital of Empress Holdings Limited and its subsidiaries ("Empress Holdings Group") which held the freehold interest in the Empress State Building. The disposal was in line with the Group strategy of realising value at Earls Court over time. After transaction related costs, net proceeds received were £248.9 million. Based on the net assets at the date of disposal a profit has been recognised on the sale of £29.5 million.

Net assets at the date of disposal were as follows:

1. Sale of subsidiaries per the consolidated statement of cash flows at 31 December 2018 is £250.7 million. This differs to the net consideration above of £248.9 million by £1.8 million due to deferred consideration relating to the disposal of The Brewery by EC&O Limited on 9 February 2012.

7 FINANCE INCOME

1. Excluded from the calculation of underlying earnings as deep discount bonds eliminate on a Group share basis.

8 FINANCE COSTS

Interest is capitalised, before tax relief, on the basis of the weighted average cost of debt of 2.9 per cent (2017: 2.8 per cent) applied to the cost of property under development during the year.

9 TAXATION