LondonMetric Regulatory News (LMP)

LONDONMETRIC PROPERTY PLC

("LondonMetric" or the "Group" or the "Company")

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2018

Alignment with modern shopping habits continues to

generate strong and growing returns

LondonMetric today announces its annual results for the year ended 31 March 2018.

1 Including share of Joint Ventures. Further details on Alternative Performance Measures and the presentation of financial information can be found in the Financial Review and definitions can be found in the Glossary.

2 Including cash from deferred sales that completed post year end

Income Statement

· EPRA earnings up 15.9% to £59.1m, up 3.7% on a per share basis

· Net rental income up 10.8% to £90.6m1, reflecting full benefit of equity raise and portfolio activity

· Reported profit of £186.0m driven by £121.6m1 revaluation surplus, reflecting a 7.1% valuation uplift

Dividend increased 5.3% to 7.9p, 108% dividend cover

· Fourth quarterly interim dividend declared of 2.35p

Balance Sheet

· EPRA NAV per share up 10.3% to 165.2p (2017: 149.8p)

· Portfolio valued at £1,842.0m1 with a 28bps equivalent yield compression

· Total Property Return of 13.7% against IPD All Property of 10.1%

· Total Accounting Return of 15.5%

Distribution weighting increased to 69%

· Distribution acquisitions of £306.4m at 5.9% yield

· Regional distribution sales of £88.2m at 5.3% yield

· Urban logistics grown to 45 assets, representing 29% of our end to end logistics portfolio

· Non distribution disposals of £163.4m, including sale of our last office investment

· Long income, convenience and leisure acquisitions of £78.5m at 6.2% yield

Income growth from asset management

· £3.1m pa income uplift from rent reviews and lettings. New leases signed with WAULT of 15.2 years

· £1.3m pa income uplift PPE, including four distribution rent reviews and lettings at 28% above passing

· 4.3% LFL income growth and 3.1% ERV growth

Short cycle developments creating future long income at attractive yields

· 1.0m sq ft in construction or pipeline at 6.5% yield on cost, of which 0.3m sq ft completed post year end

· Detailed terms on 350,000 sq ft at our Bedford development, underwriting a 7.0% yield on cost

Portfolio metrics reflect our focus on long income, contractual uplifts and low operational requirements

· WAULT of 12.4 years with only 6% of income expiring within three years

· 50.3% of income subject to contractual uplifts, 98.7% gross to net income ratio

Finances strengthened and improved

· Debt maturity of 4.8 years

· Average cost of debt fallen from 3.5% to 2.8%

· Cancellation and recouponing of interest rate swaps with short payback period

· EPRA cost ratio reduced to 15%

Andrew Jones, Chief Executive of LondonMetric, commented:

"Our objective of generating a repetitive and growing income stream continues to deliver strong returns, aided by our purposeful alignment towards modern shopping habits.

"Today's world is complex and increasingly dynamic. The impact of digital evolution and ongoing shifts in consumer shopping habits is being felt more than ever in the retail sector. Whilst the virtual tills are ringing, the physical ones are not. Many will tell you that we are entering the final act. We are not and there will be value destruction in parts of retail.

"Our early anticipation of these shifts and the global search for income led to our pivot towards distribution and long income assets which more accurately cater for modern shoppers' needs. Five years on from the merger that created LondonMetric, the Company and its shareholders continue to see the benefits of this focused strategy.

"Economic compounding is the essence of long term value creation. Our adoption of this principle, together with our occupier intelligence and property relationships has been instrumental in our success. Whilst we can never be totally immune, we believe that this approach gives us a competitive advantage to navigate these changing times, allows us to increase our earnings and, in turn, grow our dividends."

For further information, please contact:

LondonMetric Property Plc: +44 (0)20 7484 9000

Andrew Jones (Chief Executive)

Martin McGann (Finance Director)

Gareth Price (Investor Relations)

FTI Consulting: +44 (0)20 3727 1000

Dido Laurimore /Tom Gough /Richard Gotla

Meeting and audio webcast

A meeting for investors and analysts will be held at 9.00 am today at FTI Consulting. A conference call dial-in is available for the meeting: +44 (0)330 336 9105 (Participant Passcode: 6058260). For the live webcast see: https://webcasting.brrmedia.co.uk/broadcast/5ada026c7264e840320a5eef

An on demand recording will be available shortly after the meeting from the same link and also from: http://www.londonmetric.com/investors/reports-and-presentations

Notes to editors

LondonMetric is a FTSE 250 REIT (ticker: LMP) that specialises in distribution, convenience and long income property. It focuses on strong and growing income and adding value through asset management initiatives and short cycle developments. LondonMetric has 14 million sq ft under management. Further information is available at www.londonmetric.com

Neither the content of LondonMetric's website nor any other website accessible by hyperlinks from LondonMetric's website are incorporated in, or form part of this announcement nor, unless previously published by means of a recognised information service, should any such content be relied upon in reaching a decision as to whether or not to acquire, continue to hold, or dispose of shares in LondonMetric.

Forward looking statements: This announcement may contain certain forward-looking statements with respect to LondonMetric's expectations and plans, strategy, management objectives, future developments and performance, costs, revenues and other trend information. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Any forward-looking statements made by or on behalf of LondonMetric speak only as of the date they are made. LondonMetric does not undertake to update forward-looking statements to reflect any changes in LondonMetric's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this announcement should be construed as a profit forecast. Past share price performance cannot be relied on as a guide to future performance.

Alternative performance measures: The Group financial statements are prepared in accordance with IFRS where the Group's interests in joint ventures are shown as a single line item on the income statement and balance sheet. Management reviews the performance of the business principally on a proportionately consolidated basis which includes the Group's share of joint ventures on a line by line basis. Alternative performance measures are financial measures which are not specified under IFRS but are used by management as they highlight the underlying performance of the Group's property rental business and are based on the EPRA Best Practice Recommendations (BPR) reporting framework which is widely recognised and used by public real estate companies.

Chairman's statement

This year marked LondonMetric's fifth anniversary since its merger in 2013 and I am extremely proud of its progress and achievements. Over this period, we have doubled net rental income and EPRA earnings per share and delivered a total shareholder return of 119%, of which 43% was generated from dividends.

The Company has delivered a particularly strong financial performance in the year, resulting in a record reported profit of £186.0 million. On a per share basis, EPRA earnings were 3.7% higher, dividends increased by 5.3%, our third year of progression, and EPRA NAV rose by 10.3%, benefiting from a £121.6 million revaluation surplus. Total accounting return was 15.5%.

Critical to our long term success is our alignment to sectors supported by structural changes in shopping habits, which have been profound and, in our view, permanent. Distribution continues to benefit significantly from these changes and is one of the best performing real estate sectors. Over the year, our distribution assets increased by over £300 million to represent 69% of the portfolio, compared to 21% in 2013. They have delivered another strong performance which, together with a good performance from our convenience, leisure and long income assets, helped to deliver a total property return of 13.7% for the year, a 360 bps outperformance of IPD All Property. 

As a REIT, our priority is to generate income returns and pass onto our shareholders in the form of a covered and progressive dividend. The portfolio's alignment to strong sectors, assets and tenants and its unexpired lease term of 12 years provides highly reliable and repetitive income. Our disposal activity in the year, particularly the sale of shorter let and older distribution assets, reflects our disciplined approach to portfolio management and the value we attach to reliable income.

We firmly believe that income will be an increasingly important component of total returns. Therefore, our focus is on owning assets that can also generate rental growth. Through a combination of contractual and open market rent reviews as well as our asset management, we increased like for like income by 4.3% in the year. With half of the portfolio subject to contractual rental increases and strong prospects for organic rental growth, particularly from our growing urban logistics portfolio, we are confident in our ability to grow our earnings and continue to progress the dividend.

Our people remain fundamental to the ongoing success of the Company and I would like to take this opportunity to thank the Board and all of our employees for their hard work. I should also like to welcome Suzanne Avery as a Non Executive Director and to thank Andrew Varley for his contribution and dedication to LondonMetric following his retirement earlier in the year.

Our combined occupier and property relationships continue to provide us with a competitive advantage and put LondonMetric in a strong position for the future.

I look forward to the next year with confidence.

Patrick Vaughan

Chairman

30 May 2018

Chief Executive's review

OVERVIEW

Our objective is to deliver attractive and dependable income returns to our shareholders whilst preserving and enhancing capital through owning structurally supported real estate let to good tenants. In short, we aim to behave as a true REIT.

The advancement of technology continues to cause significant disruption to many industries and those that fail to adapt to change face an increasingly uncertain future. Over the past five years, we have successfully positioned the portfolio to navigate this disruption by pivoting away from multi‑let operational retail assets and office property. We have instead focused on fit for purpose distribution, long income and convenience assets where changing consumer shopping habits are providing structural support. 

Our occupier and property relationships improve our decision making and allow us to maintain our sector leading portfolio metrics. Whilst we can never be totally immune from all headwinds, we believe that these relationships and our robust approach give us a competitive advantage that allows us to increase our earnings, progress our dividend and see the value of our assets increase ahead of the market.

OUR PORTFOLIO IS ALIGNED TO MODERN SHOPPING HABITS

Digital evolution continues to cause significant disruption

Today's world is complex and more dynamic than ever with technological innovation impacting every aspect of society. 

The rapid and permanent shift in consumer shopping habits has seen a material growth in pure online and omni-channel retailing. This has seen online non food retail sales hit 20%, compared to 13% in 2011, and this is forecast to reach 26% by 2020. Traditional brands are being replaced by names which barely existed a decade ago, but are now considered very much part of retail's New World Order: Amazon, eBay, boohoo, ASOS and Ocado to name a few. These retailers rely on their efficient and well located distribution network to service their customers' demands with ever increasing speed. We are no longer a nation of shopkeepers.

Whilst the virtual tills are ringing, the physical ones aren't. Physical retail sales are growing at their slowest rate since 2012. The outlook for more traditional retailers is very challenging and they are having to adapt continuously to remain relevant. Recently, New Look, Mothercare and Carpetright admitted that their store portfolios no longer meet their needs and have sought to radically shrink the size and cost of their estates. We have also seen both Toys R Us and Maplin fall away altogether, and it is inevitable that they will not be the last victims and that the list of retail failures will grow.

The retail channel shift is real, material and permanent. Stores today are increasingly having to provide convenience, value or extraordinary entertainment. If they cannot, then what is their purpose?

Primark's value and store only proposition continues to succeed whilst the likes of John Lewis, Next and Argos have successfully adapted their businesses for omni-channel retailing by actively managing their store portfolios and investing heavily in new distribution warehouses and technology systems; it is no coincidence that they report online sales well above 40% of total sales. 

In food retail, the disruption from convenience operators such as Aldi and Lidl is forcing the established grocery market to drive further pricing and cost efficiencies as well as preparing for an onslaught from online competition. We have, therefore, consciously avoided large format food stores and distribution, instead focusing on convenience stores where changing habits have seen the growth of 'top up' shopping.

Distribution has strong structural support 

Despite years of being unfashionable, the channel shift in retail spending is providing a significant boost to the distribution property sector; and this is only expected to continue.

Even after many years of strong take up, occupier demand for new distribution and warehouse space remains well above long term averages. Retailers and logistics operators are constantly improving their distribution infrastructure and warehousing to increase speed of delivery and cost efficiencies through automation, better locations and higher quality space; and this cycle of improvement is happening at a faster rate than ever before. 

There remains a strong demand/supply imbalance, which is propelling rental growth across most parts of the UK. The best distribution space is highly sought after and occupiers are consequently prepared to pay record rents and sign long leases, often with contractual rental uplifts at review, as they look to protect their significant capital investments inside these warehouses. The search for greater efficiencies will, however, inevitably lead to the closure of some older, less fit for purpose logistics warehousing, which is something that we continue to address through our disposal activities. 

Consumers' expectations are always rising, meaning that yesterday's 'wow' quickly becomes tomorrow's 'norm'. This is illustrated by increased expectations around speed of delivery, a trend which has underpinned our further investment within the urban logistics sector, particularly in assets close to large population centres. The real estate fundamentals are strong and so we will continue to build critical mass in major UK geographies, attracted by growing income streams and strong intrinsic land values, often supported by the added benefit of more valuable alternative uses. 

Deflation and depreciation 

The continuing transfer of sales to online represents a permanent and profound structural change. Its impact is illustrated in Next's latest results which listed 17 store closures and average rental falls of 25% on the 19 leases that it decided to renew. Similarly, New Look's CVA will see 60 stores close as well as reducing rents across 393 stores of between 20% and 60%. Together, they represent over 75% of New Look's UK store portfolio. Carpetright also confirmed the closure of 93 stores and reducing rents of between 30% and 50% on another 113, in aggregate representing over 50% of their UK estate. 

The headwinds facing legacy real estate is a clear and present danger to the value of many retail assets. As well as store closures and rent reductions, retailers are demanding shorter leases and more advantageous incentive packages. The average lease taken by Next on lease renewals fell to seven years and they expect this to reduce to just five years. Whilst the store network still retains critical importance for omni-channel retailers, at current rental levels they are for many an increasingly declining asset. It is not evident that the property market is fully appreciating or pricing in the negative impact of these structural challenges. We no longer believe that it's as simple as 'prime' versus 'secondary'. It feels more indiscriminate than that. 

Therefore, we have consciously avoided the most vulnerable sectors in retail and focused our retail exposure towards long income and convenience led assets let to the likes of Aldi, M&S, Wickes and B&M. As a result, our exposure to retail parks has fallen to only 7% and our retail and leisure portfolio is 100% let on leases with over 12 years remaining. 

Our team has considerable experience in the retail market and our actions have allowed us to, so far, avoid the value destruction across the various sectors. This still has a long way to go, and whilst many in the property market want us to believe that we are entering the final act, we are not!

WE FOCUS ON SUSTAINABLE AND GROWING INCOME

Demographic trends accentuating the search for income

The extended period of low economic growth and low interest rates continues to create an almost desperate search for yield. We believe that this search is unlikely to change any time soon as a lower growth environment is combined with a demographic wave, as the population ages and life expectancy increases. In the UK, according to the ONS, the percentage of the population defined as old age dependent has risen from 24% ten years ago to 29% today and is forecast to increase to 41% by 2036. 

Therefore, we believe that income will continue to be the defining characteristic of this decade's investment environment. The investing fraternity, including dedicated income funds, private investors, corporate and local authority pension funds are pivoting their approach more and more towards income returns that are reliable, predictable and growing. 

These are compelling arguments and some real estate sectors are ideally suited to meet this need. Indeed, this is essentially the role that REITs in the UK were created to provide, passing 90% of their net income to shareholders, without the burden of double taxation.

Dividend security and growth from our portfolio

Income remains central to our investment thesis. Our ultimate priority is to pass income generated by our assets to shareholders, which is why we consistently pay out 90%+ of our earnings in dividends, and why, with the benefit of future rent reviews, finance and other corporate cost efficiencies, we are confident in our ability to progress our dividend. 

Receiving a meaningful proportion of your total return in income not only provides a margin of safety against short term price fluctuations, it also helps compounding returns. Growth on growth is always underestimated. 

Following the repositioning of the portfolio, our investment strategy today is more patient. This is allowing us to collect and compound our income and reduce the frictional costs of buying and selling that can negatively impact total returns; after all, the first rule of income compounding is to never interrupt it unnecessarily. 

Fortunately, our portfolio is in good shape with long leases of over 12 years, occupancy at 97.5%, only 1.3% gross to net income leakage and little defensive capex requirement. We have also benefited from good like for like income growth over the year, and, going forward, we know that we have the certainty of future income growth through contractual rental increases across half of the portfolio. 

Focusing on income and income growth is a simple idea but in a world of very low growth, it is one that we strongly believe in and one that we are taking seriously. 

WE MANAGE, ENHANCE AND CREATE PROPERTY IN A RESPONSIBLE WAY

Delivering enhanced returns from our property

We continue to grow our income and improve the quality and attractiveness of our assets through de-risked asset management and short cycle development activity. 

In the year, we completed the development of 0.6 million sq ft at a yield on cost of 6.4%, materially higher than the investment yield. As at the year end, we had 1.0 million sq ft of development underway or in the near term pipeline. This activity helps to further modernise our portfolio, with 28% now rated BREEAM Very Good, and it has reduced the average age of our distribution assets to 15 years.

Our 58 lettings and rent reviews helped to deliver £3.1 million of additional income with lettings achieved at 22% above ERV on average lease lengths of 15.2 years. Post year end, we have agreed and are in legals on further occupier transactions representing an additional £1.3 million of income. This includes four distribution lettings and rent reviews at 28% above passing rent.

We expect our income to continue to grow, particularly as we let the remainder of our recently completed developments and continue to settle distribution rent reviews at levels which are materially above passing. 

OUR EXPERTISE AND RELATIONSHIPS SHAPE OUR DECISION MAKING

Disciplined decision making using our occupier intelligence

We take a disciplined, patient and rational approach to investing. We are obsessed about the credit quality of occupiers, the security of our income, quality of the real estate and its potential for income growth. 

Over the year, we were a significant net investor in distribution and used our strong occupier and developer relationships to acquire over £300 million of distribution assets. Whilst we remain focused on growing our logistics exposure, that doesn't prevent us from selling to ensure that our portfolio remains fit for purpose. Therefore, we took advantage of the strong market to monetise £88.2 million of our older and shorter let distribution assets in geographies where we believe rental growth and occupier demand is less robust. 

Whilst the market remains very competitive, we have a highly talented and focused team with strong relationships which puts us in a strong position to find new opportunities and make well informed decisions.

Disciplined financing

Our financing remains aligned to our property strategy. Loan to value of 35% provides us with flexibility to make further acquisitions and build our developments. Debt maturity remains at five years and we have reduced our cost of debt to 2.8% following the cancellation and recouponing of interest rate swaps, the cost of which has already been accounted for and has a payback period of 2.5 to 4.0 years. Our dividend is 108% covered and our EPRA cost ratio fell to 15% from 16% last year.

OUTLOOK

In an uncertain economic and political environment we believe that our income compounding model is increasingly attractive, especially as investors pivot their investment approach for low growth and demographic changes. Our income focus allows us to be a little less obsessed about predicting exact market movements or the exact timing of cycles, although our thoughts on these will be reflected in the management of our capital structure.

We remain highly nervous on the outlook for the retail sector with the tectonic plates shifting so materially that it's now a very difficult sector to navigate and deliver superior returns. For the best space in the best locations, this is cyclical; for the majority it is permanent disruption and for the weakest it will be highly problematic.

Conversely, distribution remains structurally supported by the fundamental changes in consumer shopping patterns with attractive demand/supply tension, especially for urban logistics where rental growth is strongest. This is providing reliable, sustainable and consistent rental income and a fantastic bedrock from which to grow our income and dividends.

Our returns over the year are a measure of the progress that we have made and reflect our longer term sector and property decisions. Looking forward, we seek to continually build a better company and believe that, despite an environment of profound political and economic change, our strategy positions us well to not only weather but also benefit from short term fluctuations in values.

Property review

We invest in real estate that delivers repetitive, dependable and growing income and that offers the best prospects for superior total returns. Our actions aim to strengthen our portfolio's income metrics.

Strong portfolio metrics provide income security and growth

We continue to maintain strong income metrics through our activities. 

Average lease lengths of 12.4 years (11.3 years to break) provide a high level of income security with only 6% of income expiring over three years and nearly 60% with lease lengths of greater than 10 years. Occupancy remains high at 97.5% and will revert back to above 99% as we let the remainder of our recently completed distribution developments.

Gross to net income ratio of 98.7% compares very favourably against our peers and reflects the low operational requirements from owning single let assets. 50.3% of rental income benefits from fixed or inflation linked uplifts which provides certainty of income growth. Furthermore, through open market rental uplifts on distribution, we are delivering organic rental growth. 

The strength of our occupiers is critical to the quality of our income. Our top five occupiers consist of Primark, Dixons Carphone, M&S, DHL and Argos and represent 35% of our income.

Our portfolio is further aligned to structurally supported real estate

Acquisitions in the year totalled £384.9 million as we continue to invest into our preferred sectors of distribution, long income, convenience retail and leisure. £306.4 million was invested into regional and urban distribution and further broadened our end to end logistics portfolio. Whilst competition for assets in these preferred sectors is strong, our acquisitions were at an attractive yield of 6.0% and a WAULT of 10.6 years.

As part of our disciplined portfolio management, we sold £156.3 million of assets within our preferred sectors at a yield of 5.2%. £88.2 million was in distribution where we monetised older assets that had a WAULT to first break of less than five years. This investment activity delivered 80 bps of positive yield arbitrage and provides greater certainty of income and income growth with alignment to superior assets.

The remainder of our sales related to assets outside of our preferred sectors, namely our last office asset in Marlow, two retail parks and 19 residential flats at our only residential asset, Moore House, Chelsea. Including sales agreed or under offer since the year end, only 37 flats remain of the original 149 owned in a joint venture, where we have a 40% share. 

As a result of our investment and development activity, distribution increased to 69% of our total portfolio, up from 62% in 2017, with urban logistics representing nearly a third of our distribution portfolio. Conversely, retail parks exposure has fallen further to 7%.

1 Includes costs relating to the site acquisition and full development of 680,000 sq ft at Bedford

2 Includes convenience disposal of Loughborough and regional distribution sale at South Elmsall that exchanged in the year with deferred completion post year end

3 Includes the investment value from an increase in our share of the DFS Joint Venture from 30.5% to 45.0%

Our actions are delivering strong returns

We have been a significant beneficiary of our early move into distribution where strong demand/supply dynamics have pushed capital values and rents significantly higher.

Over the year, the portfolio delivered a total property return of 13.7%, significantly outperforming IPD All Property which returned 10.1%. This return reflects the portfolio's sustainable and attractive income as well as a strong capital return. 

The revaluation gain over the year was £121.6 million, reflecting a 7.1% increase. The second half gain was £68.8 million, helped by our development assets, particularly at our Bedford distribution development where we completed on the land acquisition. 

The EPRA topped up net initial yield on the portfolio is now 4.9% and the equivalent yield is 5.3%, reflecting an equivalent yield compression of 28 bps over the year on a like for like basis. 

Our actions accounted for approximately 50% of the valuation gains through our strong exposure to superior ERV growth, which averaged 3.1% in the year, and successfully executed asset management and development initiatives, which generated like for like income growth of 4.3%. 

Distribution generated a capital uplift of £74.4 million, representing a 6.4% increase. The best performing segment was urban logistics which saw a 10.9% capital uplift driven by strong ERV growth of 6.6%. 

Retail and leisure saw a £40.0 million valuation increase representing an 8.1% uplift, helped by good ERV growth and our asset management activity. All subsectors performed well. Retail parks delivered a 4.0% uplift, convenience and leisure delivered an 8.5% capital uplift, and our long income portfolio delivered 10.4%. At our last remaining residential property there was a £1.8 million fall in value, representing a 5.8% reduction. 

As income becomes an increasingly important component of total returns, we believe that our strong income focused portfolio metrics will continue to generate superior future total returns. 

Revaluation gain in the year

Distribution

We invest in the subsectors of distribution that offer the most compelling returns.

Overview

The value of our end to end distribution portfolio, including developments, increased by 33% over the year to £1,262.5 million.

These are high quality single let assets with a WAULT of 12.1 years, offering an attractive mix of guaranteed rental uplifts on mega and regional distribution, and strong organic rental growth prospects on urban logistics. 

Mega distribution continues to see strong investor demand and pricing remains highly competitive. Therefore, we have looked to increase our exposure to regional and urban logistics where we see more favourable pricing dynamics, greater income growth potential and more robust intrinsic value in the assets. 

In the year, we invested £306.4 million at an attractive blended yield of 5.9% and with average lease lengths of 10.0 years.

Regional distribution

The investment market for regional distribution is also highly competitive as investors price in strong rental growth and leasing assumptions. Whilst we remain disciplined, we acquired four regional warehouses for £83.4 million at a net initial yield of 5.6%. Three were acquired through the Cabot portfolio acquisition and the fourth was a warehouse let to Clipper Logistics. 

We have supplemented these acquisitions by investing into our development pipeline where we continue to access product at yields significantly in excess of investment value. At Bedford, we acquired a 40 acre development site and the majority of the site will be used to build two regional warehouses at a cost of £45.4 million representing a yield of 7.3%. The balance of the site will be used to build three urban logistics warehouses.

The strength of the market has prompted us to sell three regional assets for £88.2 million at a yield of 5.3%. These were older assets, let on short leases, with a WAULT to first break of 4.8 years, where we were uncertain on the prospects for future rental growth.

Urban logistics 

Occupier demand for smaller distribution warehouses continues to grow as occupiers seek closer proximity to population centres to reduce their operational costs and delivery times. Urban logistics now represents 29% of our distribution portfolio, up from 17% in 2017. This has improved the balance of our end to end logistics platform significantly. 

Over the year, we acquired 25 assets for £177.6 million, including three developments. The blended yield on the acquisitions was 5.7% with a WAULT of 9.3 years. These assets are let to strong occupiers in good locations and have attractive income growth potential. 

We firmly believe in the outlook for urban logistics. Tight supply and significant occupier demand continue to drive material rental outperformance of urban logistics compared to regional or mega distribution. In addition, with over 70% of our urban assets in the south east and the Midlands, we benefit from the strong underlying land values from alternative uses. Therefore, we are comfortable that our urban logistics portfolio has shorter average lease lengths and a lower level of contractual rental uplifts.

Distribution portfolio split

1 Including developments 

2 Topped up Yield

3 Percentage of portfolio that benefits from contractual rental uplifts

Acquisitions

1,300,000 sq ft Cabot portfolio

£116.6 million acquisition of 11 urban and 3 regional assets. Acquired at a NIY of 6.1% and with a WAULT of 5.6 years. 

680,000 sq ft in Bedford

The development site was unconditionally acquired at an anticipated development cost of £65.5 million and yield of 7.0%. 

181,000 sq ft in Leyton, Weybridge, Peterborough, Cheltenham and Haverhill

£25.6 million acquisition of five warehouses at a NIY of 5.0%, rising to 5.6% over five years, and with a WAULT of 16.0 years. 

364,000 sq ft in Ollerton

£37.4 million acquisition of a warehouse let to Clipper Logistics at a reversionary yield of 5.5%, with a WAULT of 19.8 years. 

132,000 sq ft in Speke

£10.2 million acquisition of a warehouse let to Gefco. Acquired with a WAULT of 14.8 years. 

120,000 sq ft in Huyton

£11.8 million acquisition of a forward funding development let to Antolin Interiors. Acquired at a yield of 6.1% and with a WAULT of 15.0 years. 

90,000 sq ft in Coventry

£5.7 million acquisition of a warehouse let to DHL. Acquired at a NIY of 7.0% and with a WAULT of 10.0 years. 

57,000 sq ft in Crawley

£6.9 million acquisition of six warehouses with a WAULT of 2.8 years. It is anticipated that the site will be redeveloped at a yield of c.6%.

62,000 sq ft in Frimley

Acquired a forward funding development for £13.1 million at an anticipated yield on cost of 5.3%. 

51,000 sq ft in Crawley

£6.4 million acquisition of a warehouse let to TNT. Acquired at a NIY of 4.8% and a reversionary yield of 6.2%, with a WAULT of 6.4 years. 

42,000 sq ft in Warrington

£4.4 million acquisition of a warehouse let to Hovis. Acquired at a NIY of 5.6% and with a WAULT of 9.7 years. 

Disposals

290,000 sq ft in South Elmsall

The property let to Superdrug was sold for £15.0 million, reflecting a NIY of 6.2%. The disposal completed post year end and will be accounted for in the next financial year. 

274,000 sq ft in Bolton

The property let to Tesco was sold for £24.4 million, reflecting a NIY of 5.4%. LondonMetric acquired it as part of the Cabot acquisition off a blended NIY of 6.1%. 

272,500 sq ft in Daventry

The property let to the Royal Mail was sold for £48.8 million reflecting a NIY of 5.0%.

Post year end we disposed of 490,000 sq ft comprising six warehouses and a plot of land for £36.0 million, reflecting a blended NIY of 5.9%. The properties are located in the Midlands and North of England, with a WAULT to break of 5.3 years. The disposal of three of the assets is conditional on the purchaser arranging suitable financing.

Retail and leisure

We focus on long income and convenience led assets in strong locations that generate long term, attractive and reliable income. 

Portfolio overview

Over recent years, we have significantly reduced our retail park exposure and shifted our retail exposure towards assets that have long leases, generate reliable income and/or are convenience-led. 

Our retail and leisure portfolio is 100% let with average lease lengths of 12.9 years, let to strong retailers at affordable average rents of £18.50 psf. These assets are located in good geographies and valued at an attractive NIY of 5.5%. 

Investment overview

Working in partnership with our occupiers, we acquired £78.5 million of long income, convenience and leisure retail in the year at a yield of 6.2% and with an average lease length of 12.1 years.

The investment market appetite for our retail and leisure assets is strong and we continue to see good liquidity. As a consequence, we disposed of £86.2 million in this sector. 

Retail and leisure portfolio split

1 Including developments 

2 Topped up Yield

3 Percentage of portfolio that benefits from contractual rental uplifts

Long income

Long income represents 12% of the total portfolio and consist of properties held within our DFS and MIPP joint ventures and several wholly owned properties. They have very limited operational requirements, are let on average for 11.0 years, typically to single tenants such as Dunelm, Wickes and DFS. A third of income has contractual uplifts. 

During the year, we acquired £40.5 million of assets, principally one asset in New Malden. In addition, we sold two DFS stores and a B&Q unit for £11.2 million.

Convenience & Leisure

These assets represent 10% of the total portfolio, have an average lease length of 17.2 years and 73% of income is subject to contractual rental uplifts. They consist of 13 convenience-led stores let mainly to M&S, Aldi and LIDL, and five Odeon cinemas which were acquired as part of a portfolio of ten cinemas in November 2013, bought at an overall NIY of 7.2%. 

During the year, we purchased £38.0 million of assets in Newport (Isle of Wight), Kendal, Weymouth and Ringwood at a NIY of 5.6%, and we sold two cinemas and two convenience assets for £56.9 million at a NIY of 4.7%. We continue to find attractive convenience opportunities.

Retail Parks

Over the last three years our retail park exposure has reduced from 15 to five today, representing just 7% of the overall portfolio. The five remaining assets are in good locations with strong occupier contentment and average lease lengths of 11.1 years. All have recently been asset managed. 

During the year we sold two assets in less attractive geographies in Milford Haven and Newcastle-under-Lyme at values in line with our book. We expect to further monetise our retail park exposure.

Acquisitions

New Malden

£28.3 million acquisition of a 51,500 sq ft long income asset at a yield of 6.1% and with a WAULT of 14.4 years let to Currys PC World.

Newport (Isle of Wight) and Kendall

£24.6 million acquisition of two convenience assets let to M&S. Acquired at a blended NIY of 5.5% with a WAULT of 9.6 years. 

DFS JV increase in equity share

An increase in our equity share of the DFS joint venture from 30.5% to 45.0%, represented £12.2 million of investment. 

Ringwood

£8.5 million (Group share: £4.3 million) acquisition by our MIPP JV of a 35,000 sq ft leisure development pre‑let to Premier Inn, at a yield of 5.0% and a WAULT of 25.0 years.

Weymouth

Acquired a convenience-led development site with an initial development cost of £9.1 million, reflecting an anticipated yield on cost of 6.3%. 

Post year end, our MIPP JV acquired two assets for £10.3 million (Group share: £5.1 million) at a blended yield of 5.4% and with a WAULT of 17.2 years. Wickes account for 60% of the income.

Disposals

Loughborough 

£32.5 million disposal of a 55,000 sq ft Morrisons store at a NIY of 4.3%. The asset had been extended recently and a new 25 year lease was agreed with Morrisons. The disposal completed post year end and will be accounted for in the next financial year.

Milford Haven

The 84,000 sq ft retail park was sold for £15.3 million at a NIY of 6.9% and a WAULT of 8.5 years. 

Derby

The 37,000 sq ft Odeon Cinema was sold for £12.6 million at a NIY of 4.7%.

Birkenhead

The 32,000 sq ft Vue Cinema was sold for £5.8 million at a NIY of 7.2%.

Hull 

Our MIPP JV sold the 71,000 sq ft B&Q store for £11.6 million (Group Share £5.8 million), reflecting a blended NIY of 6.0%. 

Guisborough

The 26,000 sq ft convenience scheme let to Aldi and Iceland was sold for £6.0 million at a NIY of 5.0% and with a WAULT of 11.9 years. 

Swansea and Swindon

Two assets were sold by our DFS JV for £13.9 million (Group share: £5.4 million) at a blended yield of 7.5%.

Newcastle-under-Lyme

The 22,000 sq ft retail asset was sold for £2.8 million at a NIY of 8.0% and a WAULT of 9.0 years. 

Asset management

Our asset management activity is generating further income and capital growth and is enhancing our real estate.

Lettings 

31 lettings were undertaken at 22% above ERV and with a WAULT of 15.2 years. This delivered £2.2 million of additional income, 74% of which has contractual uplifts: 

· £0.6 million related to lettings at our recently completed developments in Crawley and Ipswich with a WAULT of 13.6 years and at 15% above ERV;

· £0.8 million arose from the full letting of our M&S anchored asset in Matlock and a 15.0 year regear at our new asset in New Malden; 

· £0.5 million related to 21 retail lettings. These were undertaken at 25% above ERV and with a WAULT of 11.6 years; and

· £0.3 million related to regears at two Odeons where we are contributing towards internal refurbishment works and where the WAULT is 20.0 years.

One of the lettings was a 15 year regear on a 119,000 sq ft urban distribution asset purchased as part of the Cabot acquisition and where six years remained previously.

Post year end, including at our Frimley development, we have exchanged or agreed terms on five lettings across 0.3 million sq ft adding £1.1 million of income with an average lease length of 11.6 years. One of these lettings is an urban logistics regear where the rent has increased by 34% to £1.9 million and the term has been extended by 7.5 years.

Rent reviews

27 rent reviews were agreed across 3.0 million sq ft adding £0.9 million of income at 12.3% above passing on a five yearly equivalent basis and 6.3% above ERV:

· Nine distribution reviews at 9.5% above passing on a five yearly equivalent basis, four of which were urban logistics reviews where the average five yearly uplift was 10.5%; and 

· 18 retail and leisure reviews at 5.8% above passing (16.6% on a five yearly equivalent basis), predominantly inflation linked reviews on cinema and convenience assets.

Post year end, we have settled or agreed three rent reviews which adds £0.2 million of income at 18.8% above passing on a five yearly equivalent basis. One of these is an urban logistics asset where the uplift was 42%.

Development

Short cycle developments improve the quality of our assets at attractive yields. 

We completed five developments in the year across 578,000 sq ft at an anticipated yield on cost of 6.4%.

Developments under construction and in the pipeline at the year end totalled 1,031,000 sq ft and are expected to generate a yield of 6.5% on total costs of £124 million, of which a third has already been spent.

Since the year end, we have completed our Dagenham, Ipswich and Frimley developments across 273,000 sq ft.

1 Completed post year end

2 Based on calendar quarters and years

3 Anticipated yield on cost and rents

Stoke - the 277,000 sq ft development completed recently. 137,000 sq ft has been let to Michelin for 15 years and we are in advanced discussions on letting of the remaining unit.

Crawley - the 109,000 sq ft development completed recently and 32,000 sq ft is let to Boeing for 15 years. We are in advanced discussions on letting of the remainder.

Frimley - 38,000 sq ft of the 62,000 sq ft development has been pre-let to BAE Systems for 15 years and terms are agreed on the remaining unit.

Derby - we have pre-let the development to M&S, Starbucks and Nandos at a WAULT of 16 years. The site acquisition is expected to occur in July 2018 following receipt of planning consent.

Weymouth - we have pre-let 19,000 sq ft to Aldi and received offers on the letting of three small pods. The development is expected to have a WAULT of 18 years. The site has been purchased and planning consent is expected in Q4 2018.

Bedford - we acquired 40 acres of land in the year. The site is in an established distribution location where we also own an Argos warehouse. Planning consent has been received and we expect to commence construction of three smaller urban warehouses shortly. Construction of two larger regional warehouses is subject to pre-lets. Occupier interest is strong and detailed terms have been drawn up on pre-letting the largest warehouse of 350,000 sq ft. 

Financial review

Our strong financial returns this year are testament to sound property and financing decisions. Our patient and disciplined investment strategy continues to focus on owning fit for purpose real estate that delivers sustainable and growing income.

Overview

Our property portfolio is well positioned to support the advancement of technology and migration of consumer spending online and has delivered strong earnings and net asset growth this year.

IFRS reported profit has increased by £123.0 million to £186.0 million, predicated on a significant revaluation gain of £121.6 million in the year. IFRS net assets are £1,149.5 million or 165.7p per share, an increase of 13.2% on a per share basis in the year.

EPRA earnings have increased by 15.9% to £59.1 million or 8.5p per share. On a per share basis earnings are up 0.3p or 3.7% from 8.2p last year, reflecting the impact of the equity placing of 62.8 million shares in March 2017. EPRA NAV is £1,146.6 million or 165.2p per share, an increase of 11.3% or 10.3% on a per share basis. 

The growth in underlying EPRA earnings has enabled us to increase our dividend for the year by 5.3% to 7.9p per share. The dividend continues to be fully covered by EPRA earnings at 108%. Three quarterly dividend payments totalling 5.55p per share have been made to date and a further 2.35p is proposed for payment on 11 July 2018. A scrip alternative to a cash dividend payment was offered to shareholders and 4.8 million shares were issued in the year. It is our intention to continue to offer shareholders this choice.

In July, we refinanced our secured loan facility with Helaba and cancelled £128 million interest rate swaps. We recouponed a further £190 million swaps in the second half of the year, reducing our average cost of debt to 2.8% at the year end (2017: 3.5%). We anticipate interest cost savings over the next 2.5 to 4.0 years which will pay back the total break cost of £19.0 million.

Our other financing metrics remain strong, with loan to value of 35% and average loan maturity, despite the passing of a year, of 4.8 years (2017: 5.2 years). 

Presentation of financial information

The Group financial statements are prepared in accordance with IFRS where the Group's interests in joint ventures are shown as a single line item on the consolidated income statement and balance sheet and all subsidiaries are consolidated at 100%. 

Management monitors the performance of the business principally on a proportionately consolidated basis, which includes the Group's share of joint ventures on a line by line basis in the financial statements. These measures, presented on a proportionately consolidated basis, are alternative performance measures, as they are not defined under IFRS.

The figures and commentary in this review are consistent with our management approach, as we believe this provides a meaningful analysis of overall performance. 

Alternative performance measures

The Group uses alternative performance measures based on the European Public Real Estate (EPRA) Best Practice Recommendations (BPR) to supplement IFRS as they highlight the underlying performance of the Group's property rental business. 

The EPRA measures are widely recognised and used by public real estate companies and seek to improve transparency, comparability and relevance of published results in the sector. EPRA earnings is one of the Group's KPIs and supports the level of dividend payments. It is also one of the financial performance targets under the variable incentive arrangements for Executive Directors.

Further details, definitions and reconciliations between EPRA measures and the IFRS financial statements can be found in note 8 to the financial statements, Supplementary notes i to vii and in the Glossary.

Income statement

EPRA earnings for the Group and its share of joint ventures are detailed as follows:

The table below reconciles the movement in EPRA earnings in the year.

1 Opening earnings per share has been adjusted for the increased weighted average number of shares following the equity placing in March 2017

Net rental income 

One of our key strategic priorities has been to grow sustainable income to support growth in EPRA earnings and a progressive dividend. This year we have increased net rental income by £8.8 million or 10.8% to £90.6 million, up from £81.8 million last year. Movements in net rental income are reflected in the table below.

1 Properties held throughout 2017 and 2018 

2 Developments completed in 2017 and 2018

Like for like income from our existing portfolio generated additional income of £4.4 million from lettings, rent reviews and regears and completed developments delivered a further £4.2 million. Net acquisitions this year increased income by £3.8 million. 

Our property cost leakage is minimal as vacancy levels are extremely low. Net income as a percentage of gross rents has increased marginally this year to 98.7%.

Administrative costs 

Administrative costs have increased by 3.7% to £13.9 million and are stated after capitalising staff costs of £1.8 million (2017: £1.8 million) in respect of time spent on development activity in the year. 

Headcount is only slightly reduced and the cost increase is primarily due to the £0.6 million increase in the share based payment charge, reflecting additional awards granted to Directors since 2017.

EPRA cost ratio

The Group's cost base continues to be closely monitored and the EPRA cost ratio is used as a key measure of effective cost management. 

The ratio reflects total operating costs, including the cost of vacancy, as a percentage of gross rental income. 

The EPRA cost ratio for the year, including direct vacancy costs, has fallen 93 bps to 15.3% this year. The reduction is due to higher rents more than offsetting the increase in administrative expenses in the year. 

The full calculation is shown in Supplementary note iv.

Net finance costs 

Net finance costs, excluding the costs associated with repaying debt and terminating hedging arrangements on sales and refinancing in the year, were £18.5 million, a marginal increase of £0.1 million compared with last year. 

This was due to decreases in interest receivable from forward funded developments that have completed and interest capitalised on developments of £1.3 million and £0.2 million respectively, offset by lower Group bank interest costs of £1.4 million. Group interest payable has fallen as a result of lower average rates following the cancellation of out of the money interest rate swaps in July and lower average debt balances this year. Further detail is provided in notes 5 and 10 to the financial statements.

Share of joint ventures 

EPRA earnings from joint venture investments were £6.5 million, an increase of £0.7 million over last year as reflected in the table below.

In September 2017 we increased our shareholding in the DFS joint venture by 14.5% to 45.0%. This resulted in a higher share of earnings in the second half of the year. At the same time, Atlantic Leaf Properties Limited acquired a 45.0% interest in the joint venture from LVSII Lux S.A.R.L. Income from our MIPP joint venture also increased as a result of prior period acquisitions contributing for the full year. 

In addition, the Group received net management fees of £0.9 million for acting as property advisor to each of its joint ventures (2017: £1.0 million).

Taxation 

As the Group is a UK REIT, any income and capital gains from our qualifying property rental business are exempt from UK corporation tax. Any UK income that does not qualify as property income within the REIT regulations is subject to UK tax in the normal way.

The Group's tax strategy is compliance oriented; to account for tax on an accurate and timely basis and meet all REIT compliance and reporting obligations.

We seek to minimise the level of tax risk and to structure our affairs based on sound commercial principles. We strive to maintain an open dialogue with HMRC with a view to identifying and solving issues as they arise. 

The tax risk identification and management process is documented in the Risk Register and Internal Control Evaluation which is reviewed annually by the Audit Committee who reports its findings to the Board. The Board also considers risk at a high level at each meeting via a risk dashboard. The Finance Director has overall responsibility for the execution of the tax strategy.

We pay business rates on void properties and stamp duty land tax. In addition we collect VAT, employment taxes and withholding tax on dividends and pay these over to HMRC.

We continue to monitor and comfortably comply with the REIT balance of business tests and distribute as a Property Income Distribution 90% of REIT relevant earnings to ensure our REIT status is maintained. 

Our formal tax strategy has been published on the Group's website at www.londonmetric.com.

Dividend

The Company has continued to declare quarterly dividends and has offered shareholders a scrip alternative to cash payments. In the year to 31 March 2018 the Company paid the third and fourth quarterly dividends for 2017 and the first two quarterly dividends for 2018 at a total cost of £51.4 million or 7.6p per share as reflected in note 7 to the financial statements. The Company issued 4.8 million ordinary shares in the year under the terms of the Scrip Dividend Scheme, which reduced the cash dividend payment by £8.0 million to £43.4 million.

The first two quarterly payments for the current year of 1.85p per share were paid as Property Income Distributions (PIDs) in the year. The third quarterly payment of 1.85p was paid as a PID in April 2018 and the Company has proposed a fourth quarterly payment of 2.35p payable on 11 July 2018, of which 1.7p per share will be a PID, to shareholders on the register on the record date of 8 June 2018. The total dividend payable for 2018 has increased 5.3% to 7.9p, comprising a PID of 7.25p and an ordinary dividend of 0.65p.

IFRS reported profit

Management principally monitors the Group's underlying EPRA earnings which reflect earnings from core operational activities and excludes property and derivative valuation movements, profits and losses on disposal of properties and financing break costs. 

A full reconciliation between EPRA earnings and IFRS reported profit is given in note 8(a) to the financial statements and is summarised in the table below.

1 Other items in the prior year include amortisation of intangible assets

The Group's reported profit for the year was £186.0 million compared with £63.0 million a year ago. The increase was driven by the property revaluation gain of £121.6 million compared with just £21.0 million last year. 

Other movements in reported profit include a favourable movement in the fair value of derivatives of £26.4 million, which is offset by break costs of £19.1 million. The net favourable movement of £7.3 million compares with a loss of £3.3 million last year.

As part of the Helaba loan refinancing, we cancelled £128.4 million out of the money interest rate swaps at a cost of £6.3 million. In the second half of the year we recouponed a further £190 million interest rate swaps hedging our unsecured RCF at an additional cost of £12.7 million. These transactions are earnings accretive with a payback period of 2.5 to 4.0 years. For further details see the Financing section of this review.

The disposal of our non core office in Marlow contributed to the loss on sales in the year, generating a loss over book value of £3.6 million. This was partly mitigated by the retention of rent for the deferred completion period of £1.2 million. The corresponding profit over original cost was £4.5 million. Profit on other retail and distribution sales reduced the overall loss to £2.0 million which compares to a loss of £5.5 million in 2017. The total profit over original cost of sales in the period was £17.9 million or 9.8% (2017: £7.4 million or 3.8%). Disposals are discussed in detail in the Property review. 

Balance sheet

IFRS reported net assets increased by £142.6 million or 14.2% in the year to £1,149.5 million. 

EPRA net asset value is a key measure of the Group's overall performance, reflecting both income and capital returns. It excludes the fair valuation of derivative instruments that are reported in IFRS net assets. EPRA net assets have increased £116.1 million or 11.3% in the year to £1,146.6 million. On a per share basis EPRA net assets increased by 15.4p, or 10.3% to 165.2p. A reconciliation between EPRA net assets and IFRS reported net assets is provided in the table below and in note 8 to the financial statements.

EPRA net assets for the Group and its share of joint ventures are as follows:

The table below highlights the principal movements in the year:

1 Other movements include loss on sales (£2.0 million) debt/hedging break costs (£19.1 million), share based awards (£0.1 million) offset by scrip shares issued (£8.0 million)

The increase in both IFRS and EPRA net assets per share was principally due to the property revaluation of 17.6p. EPRA earnings of 8.5p covered the 7.6p dividend charge.

The movement in EPRA net assets, together with the dividend paid in the year net of the scrip issue of shares of £43.4 million, results in a total accounting return of 15.5%. The full calculation can be found in supplementary note viii.

Portfolio valuation

Our property portfolio, including the share of joint venture assets, grew 20.0% in the year to £1,842.0 million. This was a result of significant net property investment and a strong valuation performance.

It has been another busy year with significant investment into the distribution sector, particularly urban logistics assets, that have seen the highest levels of rental and valuation growth. We have increased our distribution exposure (including distribution developments) to 69% from 62% last year. 

1 Represents distribution of £29.4 million (1.6%), long income of £8.2 million (0.5%) and convenience and leisure of £5.9 million (0.3%). Split in March 2017 was distribution of £22.8 million (1.5%) and retail parks of £4.5 million (0.3%)

Investment in development assets remains at modest levels as short cycle opportunities at Crawley, Stoke and Huyton completed in the year and new development opportunities at Bedford and Weymouth were acquired. The Group's commitment to development activity is demonstrated by the significant spend of £62.5 million in the year, which is reflected in the investment property movement table.

The movement in the investment portfolio is explained in the table below. 

1 Further detail on the split between Group and joint venture movements and the EPRA capital expenditure analysis can be found in Supplementary note vii

The Group spent £289.7 million in the year acquiring 25 distribution and 3 retail properties.

Non core assets including our last office in Marlow and 19 residential flats at Moore House generated proceeds of £77.2 million. A further 10 commercial property sales generated additional proceeds of £126.9 million and reduced the total carrying value of property by £191.0 million, as reflected in the table above.

We exchanged to sell two further assets in the period, a distribution unit in South Elmsall let to Superdrug for £15.0 million and a Morrisons store in Loughborough for £32.5 million. Both had deferred completions and will be reflected as disposals in the financial statements in 2019.

Property values have increased by £121.6 million, most significantly in our urban logistics and development sectors and the portfolio has delivered a total property return of 13.7% compared to the IPD All Property index of 10.1%.

At the year end, the Group had capital commitments of £47.5 million as reported in note 9 to the financial statements, relating primarily to committed developments in progress at Frimley, Bedford and Weymouth. 

Further detail on property acquisitions, sales, asset management and development can be found in the Property review.

Financing 

The performance indicators that continue to be used to monitor the Group's debt and liquidity position are shown in the table below.

1 LTV at 31 March 2018 includes £47.5 million of deferred consideration receivable on sales at Loughborough and South Elmsall and excludes their £47.5 million property valuation (2017: £14.3 million)

2 Cost of debt is based on gross debt and includes amortised costs but excludes commitment fees

3 Based on the notional amount of existing hedges and total debt facilities

The Group and joint venture split is shown in Supplementary note iii.

In July 2017 we refinanced our secured debt facility with Helaba and repaid £66.2 million by drawing additional unsecured debt. We extended the term by 2.7 years and reduced the average cost of debt. As part of the refinancing we cancelled £128.4 million interest rate swaps at a cost of £6.3 million. In the second half of the year, we recouponed a further £190 million interest rate swaps which hedge our unsecured RCF at a cost of £12.7 million. 

Our MIPP joint venture increased and extended its debt facility with Deutsche Pfandbriefbank in September by £18.2 million and for a further three years to match the debt maturity to the duration of the joint venture agreement. 

As reflected in the balance sheet, the Group's share of joint venture gross debt has increased by £4.4 million due to its additional investment in the DFS Retail Warehouse joint venture, which increased our share of debt by £7.4 million. This was offset by debt repaid following sales of £3.0 million.

These financing transactions have strengthened our key financial ratios with average debt cost falling to 2.8% (2017: 3.5%) and average debt maturity of 4.8 years (2017: 5.2 years).

We deployed our available undrawn facilities, partly generated following the equity placing in March 2017, to acquire assets in our preferred sectors and progress committed developments, reducing undrawn facilities at the year end to £65.8 million.

Loan to value, net of cash resources and deferred consideration on sales which complete and will be recognised next year, was 35% (2017: 30%). We intend to keep LTV below 40% to provide sufficient flexibility to execute transactions and take advantage of investment opportunities whilst maintaining sufficient headroom under our gearing covenants.

The Group has comfortably complied throughout the year with the financial covenants contained in its debt funding arrangements and has substantial levels of headroom. Covenant compliance is regularly stress tested for changes in capital values and income. The Group's unsecured facility and private placement loan notes contain gearing and interest cover financial covenants. At 31 March 2018, the Group's gearing ratio as defined within these funding arrangements was 56% compared with the maximum limit of 125% and interest cover ratio was 5.0 times compared with the minimum level of 1.5 times. 

The Group's policy is to substantially de-risk the impact of movements in interest rates by entering into hedging arrangements. Independent advice is given by J C Rathbone Associates. At 31 March 2018, 73% of our exposure to interest rate fluctuations was hedged by way of swaps and caps assuming existing debt facilities are fully drawn (2017: 87%). This has fallen as a result of the cancellation of £128 million interest rate swaps in the year. We continue to monitor our hedging profile in light of forecast interest rate movements.

Cash flow

During the year, the Group's cash balances decreased by £16.8 million as reflected in the table below. 

Cash inflows from operations were £5.8 million higher this year reflecting increases in net rental income. 

Cash flows from operating activities have decreased by £5.1 million compared to last year due to changes in net working capital requirements. 

Cash flows from investing activities reflect property acquisitions, including those classified as forward funded developments, of £306.2 million and capital expenditure and incentives of £59.3 million. These outflows were offset by net proceeds from disposals of £183.8 million and net distributions from joint ventures of £3.6 million.

Cash flows from financing activities reflect net new borrowings of £176.8 million, cash dividend payments of £43.4 million (which reflect the £8.0 million scrip saving), financing costs of £21.6 million and share purchases of £2.5 million. 

New borrowings of £176.8 million and the cancellation of secured debt of £66.2 million reduced our available facilities in the year.

Further detail is provided in the Group cash flow statement. 

Risk management

Our risk management procedures reduce the negative impact of risk on the business. They are critical to maintaining our sustainable, progressive earnings and long term capital growth whilst operating in a socially responsible manner. Although risk cannot be eliminated completely the Board's risk tolerance is low where it prejudices these objectives. 

The Board recognises its overall responsibility for undertaking a robust risk assessment and the extent to which it is willing to accept some level of risk in achieving its strategy. It considers risk at a high level at each meeting via a risk dashboard which enables material issues to be monitored so that key risks can be managed and emerging risks identified early with appropriate action taken to remove or reduce their likelihood and any potential negative impact. 

The responsibility for detailed assurance on the risk management process has been delegated by the Board to the Audit Committee. The Audit Committee reviews the Company's risk register and internal controls in detail to consider the effectiveness of risk management and internal control processes and reports its findings to the Board. The Audit Committee last considered the register at its March 2018 meeting following a comprehensive review of the register. 

The Executive Committee is responsible for the ongoing identification of risk and the design, implementation and maintenance of robust internal control systems assisted by senior management. Appropriate mitigation plans are developed based on an assessment of the impact and likelihood of a risk occurring. Executive Committee members are closely involved in day to day matters. The Company has a small number of employees and operates from one office. This and the relatively flat management structure enable risks to be swiftly identified so appropriate responses can be put in place. 

Within the risk register, specific risks are identified and their probability rated by management as having either a high, medium or low impact. A greater weighting is applied the higher the significance and probability of a risk. These weightings are then mathematically combined to produce an overall gross risk rating which is colour coded using a traffic light system. Risk specific safeguards are identified, detailed in the register and rated as strong, medium or weak. The stronger the safeguard, the greater the weighting applied. The gross risk rating and strength of the safeguards against that risk are then combined to produce a resultant overall net risk. Consideration is given to the implementation of further action to reduce risk where necessary. Finally, every risk is allocated an owner and details of how the safeguards are evidenced is noted. The risk register is comprehensively reviewed at least once a year. 

Our three risk areas

We consider risks under three main headings but recognise that they are often inextricably interlinked.

Principal risks

Principal risks and uncertainties are those that affect our business with the potential to cause material harm, impact our ability to execute our strategic priorities or exceed the Board's risk appetite.

No new principal risks have been identified and at a corporate level there has been no significant increase or decrease in any principal risk during the year. 

Corporate governance and reporting bodies are increasing their focus on environmental, social and governance ("ESG") issues and how companies take into account wider stakeholder interests. These priorities have been broadly repeated in recent public statements from large institutional investors. To provide greater clarity and acknowledge that ESG concerns have become more mainstream we have split out non compliance with responsible business practices from non compliance with legal and regulatory obligations. We do not however consider that the overall risk has changed materially.

1 Strategy

2 Economic and political factors

3 Human resources

4 Regulatory and tax framework 

5 Responsible business approach 

6 Systems, processes and financial management

7 Investment risk

8 Development risk

9 Valuation risk

10 Transaction and tenant risk

11 Capital and finance risk

Viability statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board has assessed the future viability and prospects of the Group over a period longer than the 12 months required by the 'Going Concern' provision. 

The Directors conducted this review taking account of the Group's current position, longer term strategy, principal risks and future plans.

Assessment of review period

The viability review was conducted over a three year period of assessment as in previous years, which the Board considered appropriate for the following reasons:

· The Group's financial business plan and detailed budgets cover a rolling three year period

· It reflects the short cycle nature of the Group's developments and asset management initiatives. The average time taken from commitment of funds to practical completion of the five developments that completed in the year at Huyton, Stoke, Crawley, Tonbridge and Launceston was 15 months 

· The average length of asset management initiatives involving significant reconfiguration of retail parks is under one year

· The Group's weighted average debt maturity at 31 March 2018 was 4.8 years

· Three years is considered to be the optimum balance between long term property investment and the inability to accurately forecast ahead given the cyclical nature of property investment

Assessment of prospects

The Group's business model consists of a rolling three year profit and cash flow forecast, with both a base case scenario, which only includes deals under offer, and also an assumed case which factors in reinvestment and development. The business model considers investment plans, capital commitments, dividend cover, loan covenants and REIT compliance metrics.

The Executive Committee provides regular strategic input to the financial forecasts covering investment, divestment and development plans, capital allocation and hedging. Executive Directors and senior managers receive regular presentations from external advisors on the macroeconomic outlook and retail market which assist with the development of strategy and forecasts.

Forecasts are updated at least quarterly, reviewed against actual performance and reported to the Board. At least one Board meeting each year focuses on strategy and presentations are given by senior managers.

Assessment of viability

A sensitivity analysis was carried out which involved flexing a number of key assumptions individually and collectively to consider the impact of changes to the Group's principal risks affecting the viability of the business, including:

· Changes to macro-economic conditions impacting rental income levels and property values

· Changes in the retail environment impacting occupancy levels and lettings

· Changes in the availability of funds impacting committed expenditure and investment transactions

· Changes in property market conditions impacting disposal and reinvestment assumptions

The business model was stress tested to validate its resilience to property valuation and rental income decline, as well as increases in future LIBOR and swap rates. It assessed the impact of these movements on future performance, liquidity and the ability to finance forecast transactions, committed capital expenditure and refinance maturing debt. It took into account the flexibility of capital expenditure and disposal plans and hedging in place.

In addition, further stress testing assessed the limits at which key financial covenants and ratios would be breached or deemed unacceptable. Property values would need to fall by approximately 40% and rental income fall by 59% to breach the loan to value and interest cover covenants under the existing debt facilities.

The Directors have taken into account the strong financial position at 31 March 2018, available cash and undrawn debt facilities, headroom under existing loan facilities and the Group's ability to raise new finance. 

The Directors also noted that in the event of a severe threat to liquidity, other options existed to maintain viability including deferring non committed expenditure and selling assets.

Conclusion

Based on the results of their review, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment. 

Directors' responsibility statement

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the Company financial statements in accordance with Financial Reporting Standard 101 (FRS101) 'Reduced Disclosure Framework'. Under Company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. 

In preparing the Company financial statements, the Directors are required to:

· Select suitable accounting policies and then apply them consistently

· Make judgements and accounting estimates that are reasonable and prudent

· State whether applicable Financial Reporting Standard 101 (FRS101) 'Reduced Disclosure Framework' has been followed, subject to any material departures disclosed and explained in the financial statements

· Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business

In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:

· Properly select and apply accounting policies

· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information

· Provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance

· Make an assessment of the Company's ability to continue as a going concern

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement 

We confirm that to the best of our knowledge:

· The financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole

· The Strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face

· The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy

By order of the Board

Group income statement

For the year ended 31 March

All amounts relate to continuing activities.

Group balance sheet

As at 31 March

The financial statements were approved and authorised for issue by the Board of Directors on 30 May 2018 and were signed on its behalf by:

Martin McGann

Finance Director

Registered in England and Wales, No 7124797

Group statement of changes in equity

For the year ended 31 March

Group cash flow statement

For the year ended 31 March

Notes forming part of the Group financial statements

For the year ended 31 March 2018

1 Significant accounting policies

The financial information set out herein does not constitute the Company's statutory accounts for the years ended 31 March 2018 or 31 March 2017, but is derived from those accounts. Statutory accounts for the years ended 31 March 2018 and 31 March 2017 have been reported on by the independent auditor. The independent auditor's reports on the Annual Reports and financial statements for 2018 and 2017 were unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 March 2017 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 March 2018 will be delivered to the Registrar following the Company's Annual General Meeting.

The financial information set out in this results announcement has been prepared using the recognition and measurement principles of International Accounting Standards, International Financial Reporting Standards and Interpretations adopted for use in the European Union (collectively Adopted IFRSs). The accounting policies adopted in this results announcement have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the statutory accounts for the year ended 31 March 2017.

a) General information

LondonMetric Property Plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered office is One Curzon Street, London, W1J 5HB. The principal activities of the Company and its subsidiaries ('the Group') and the nature of the Group's operations are set out in the Strategic report.

b) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

c) Basis of preparation

The financial statements are prepared on a going concern basis. The functional and presentational currency of the Group is sterling. The financial statements are prepared on the historical cost basis except that investment and development properties and derivative financial instruments are stated at fair value. The accounting policies have been applied consistently in all material respects.

i) Significant judgements, key assumptions and estimates

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period. If the revision affects both current and future periods, the change is recognised over those periods.

The accounting policies subject to significant judgements and estimates are as follows:

Significant areas of estimation uncertaintyProperty valuations

The valuation of the property portfolio is a critical part of the Group's performance. The Group carries the property portfolio at fair value in the balance sheet and engages professionally qualified external valuers to undertake six-monthly valuations.

The determination of the fair value of each property requires, to the extent applicable, the use of estimates and assumptions in relation to factors such as future lease income, lease incentives, current market rental yields, future development costs and the appropriate discount rate. In addition, to the extent possible, the valuers make reference to market evidence of transaction prices for similar properties.

The fair value of a development property is determined by using the 'residual method', which deducts all estimated costs necessary to complete the development, together with an allowance for development risk, profit and purchasers' costs, from the fair valuation of the completed property.

Significant areas of judgementRevenue recognition

Certain transactions require management to make judgements as to whether, and to what extent, revenue should be recognised and the appropriate cut off for property transactions. Management consider whether the significant risks and rewards of ownership of assets have been transferred between buyer and seller and the point at which developments reach practical completion. Other complexities include accounting for rent free periods and capital incentive payments.

Significant transactions

Some property transactions are complex and require management to assess whether the acquisition of property through a corporate vehicle represents an asset acquisition or a business combination under IFRS 3. Where there are significant other assets and liabilities acquired in addition to property, the transaction is accounted for as a business combination. Where there are not it is accounted for as an asset purchase. Other complexities include conditionality inherent in transactions and deferred property completions.

ii) Adoption of new and revised standards

Standards and interpretations effective in the current period

During the year, the following new and revised Standards and Interpretations have been adopted and have not had a material impact on the amounts reported in these financial statements:

The IASB and the International Financial Reporting Interpretations Committee have issued the following standards and interpretations that are mandatory for later accounting periods and which have not been adopted early:

The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods. Certain standards which might have an impact are discussed below.

d) Basis of consolidation

i) Subsidiaries

The consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are those entities controlled by the Group. Control is assumed when the Group:

· Has the power over the investee

· Is exposed, or has rights, to variable return from its involvement with the investee

· Has the ability to use its power to affect its returns

In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair value at the acquisition date. The results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Where properties are acquired through corporate acquisitions and there are no significant assets or liabilities other than property, the acquisition is treated as an asset acquisition, in other cases the purchase method is used.

ii) Joint ventures and associates

Joint ventures are those entities over whose activities the Group has joint control. Associates are those entities over whose activities the Group is in a position to exercise significant influence but does not have the power to jointly control.

Joint ventures and associates are accounted for under the equity method, whereby the consolidated balance sheet incorporates the Group's share of the net assets of its joint ventures and associates. The consolidated income statement incorporates the Group's share of joint venture and associate profits after tax. The Group's joint ventures and associates adopt the accounting policies of the Group for inclusion in the Group financial statements.

e) Property portfolio

i) Investment properties

Investment properties are properties owned or leased by the Group which are held for long term rental income and for capital appreciation. Investment property includes property that is being constructed, developed or redeveloped for future use as an investment property. Investment property is initially recognised at cost, including related transaction costs. It is subsequently carried at each published balance sheet date at fair value on an open market basis as determined by professionally qualified independent external valuers. Changes in fair value are included in the income statement. Where a property held for investment is appropriated to development property, it is transferred at fair value. A property ceases to be treated as a development property on practical completion.

In accordance with IAS 40 Investment Properties, no depreciation is provided in respect of investment properties.

Investment property is recognised as an asset when:

· It is probable that the future economic benefits that are associated with the investment property will flow to the Group

· There are no material conditions precedent which could prevent completion

· The cost of the investment property can be measured reliably

All costs directly associated with the purchase and construction of a development property are capitalised. Capital expenditure that is directly attributable to the redevelopment or refurbishment of investment property, up to the point of it being completed for its intended use, is included in the carrying value of the property.

ii) Assets held for sale

An asset is classified as held for sale if its carrying amount is expected to be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable, the asset is available for sale in its present condition and management expect the sale to complete within one year from the balance sheet date.

iii) Tenant leases

Management has exercised judgement in considering the potential transfer of the risks and rewards of ownership in accordance with IAS 17 for all properties leased to tenants and has determined that such leases are operating leases.

iv) Net rental income

Rental income from investment property leased out under an operating lease is recognised in the profit or loss on a straight line basis over the lease term. Contingent rents, such as turnover rents, rent reviews and indexation, are recorded as income in the periods in which they are earned. Rent reviews are recognised when such reviews have been agreed with tenants.

Where a rent free period is included in a lease, the rental income foregone is allocated evenly over the period from the date of lease commencement to the earlier of the first break option or the lease termination date. Lease incentives and costs associated with entering into tenant leases are amortised over the period from the date of lease commencement to the earlier of the first break option or the lease termination date.

Property operating expenses are expensed as incurred and any property operating expenditure not recovered from tenants through service charges is charged to profit or loss.

v) Profit and loss on sale of investment properties

Profits and losses on sales of investment properties are calculated by reference to the carrying value at the previous year end valuation date, adjusted for subsequent capital expenditure.

f) Financial assets and financial liabilities

Financial assets and financial liabilities are recognised in the balance sheet when the Group becomes a party to the contractual terms of the instrument. Unless otherwise indicated, the carrying amounts of the financial assets and liabilities are a reasonable approximation of the fair values.

i) Trade and other receivables and payables

Trade and other receivables and payables are initially measured at fair value and subsequently at amortised cost using the effective interest method. An impairment provision is created where there is objective evidence to suggest that the Group will not be able to collect receivables in full.

ii) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and other short term highly liquid investments with original maturities of three months or less.

iii) Borrowings

Borrowings are recognised initially at fair value less attributable transaction costs. Subsequently, borrowings are stated at amortised cost with any difference being recognised in the income statement over the term of the borrowing.

iv) Derivative financial instruments

The Group uses derivative financial instruments to hedge its exposure to interest rate risks. Derivative financial instruments are recognised initially at fair value, which equates to cost and subsequently remeasured at fair value, with changes in fair value being included in the income statement.

g) Finance costs and income

Net finance costs include interest payable on borrowings, net of interest capitalised and finance costs amortised.

Interest is capitalised if it is directly attributable to the acquisition, construction or redevelopment of development properties from the start of the development work until practical completion of the property. Capitalised interest is calculated with reference to the actual interest rate payable on specific borrowings for the purposes of development or, for that part of the borrowings financed out of general funds, with reference to the Group's weighted average cost of borrowings.

Finance income includes interest receivable on funds invested at the effective rate and notional interest receivable on forward funded developments at the contractual rate.

h) Tax

Tax is included in profit or loss except to the extent that it relates to items recognised directly in equity, in which case the related tax is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, together with any adjustment in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. The amount of deferred tax provided is based on the expected manner or realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

As the Group is a UK REIT there is no provision for deferred tax arising on the revaluation of properties or other temporary differences. The Group must comply with the UK REIT regulation to benefit from the favourable tax regime.

i) Share based payments

The fair value of equity-settled share based payments to employees is determined at the date of grant and is expensed on a straight line basis over the vesting period based on the Group's estimate of shares that will eventually vest.

j) Shares held in Trust

The cost of the Company's shares held by the Employee Benefit Trust is deducted from equity in the Group balance sheet. Any shares held by the Trust are not included in the calculation of earnings or net assets per share.

k) Dividends

Dividends on equity shares are recognised when they become legally payable. In the case of interim dividends, this is when paid. In the case of final dividends, this is when approved by the shareholders at the Annual General Meeting.

2 Segmental information

An operating segment is a distinguishable component of the Group that engages in business activities, earns revenue and incurs expenses, whose results are reviewed by the Group's chief operating decision makers and for which discrete financial information is available. Gross rental income represents the Group's revenues from its tenants and net rental income is the principal profit measure used to determine the performance of each sector. Total assets are not monitored by segment. However, property assets are reviewed on an ongoing basis. The Group operates almost entirely in the UK and no geographical split is provided in information reported to the Board.

We have reclassified the operating segments this year to reflect the current portfolio mix and investment strategy. The retail segment has been split into three categories of convenience and leisure, long income and retail parks and the comparatives have been updated accordingly.

3 Gross revenue

For the year to 31 March 2018, 12% of the Group's gross rental income was receivable from one tenant. For the comparative period, 14% of the Group's gross rental income was receivable from one tenant.

4 Administration expenses

a) Total administration expenses

b) Staff costs

The emoluments and pension benefits of the Directors are set out in detail within the Remuneration Committee report.

The long term share incentive plan ('LTIP') that was created following the merger in 2013 allows Executive Directors and eligible employees to receive an award of shares, held in trust, dependent on performance conditions based on the earnings per share, total shareholder return and total accounting return of the Group over a three year vesting period. The Group expenses the estimated number of shares likely to vest over the three year period based on the market price at the date of grant. In the current year the charge was £2.4 million (2017: £1.8 million).

The Company awarded 2,163,274 LTIP shares during the year, 1,661,282 of which were awarded to Executive Directors as shown in the Remuneration Committee report. The cost of acquiring the shares expected to vest under the LTIP of £2.8 million has been charged to reserves this year (2017: £5.2 million).

Employee costs of £1.8 million (2017: £1.8 million) have been capitalised in respect of time spent on development projects.

c) Staff numbers

The average number of employees including Executive Directors during the year was:

d) Auditor's remuneration

In addition to the above audit fees, £47,000 (2017: £31,000) was due to the Group's auditor in respect of its joint venture operations. This year, BDO LLP will be responsible for the audit of other subsidiary entities at a cost to the Group of £30,950.

5 Finance costs

During the year, the Group cancelled £128 million interest rate swaps and recouponed a further £190 million at a total cost of £19.0 million. Debt and hedging break costs in the Cash flow statement have been classified within financing activities this year. Prior year comparatives have been amended.

6 Taxation

The tax assessed for the year varies from the standard rate of corporation tax in the UK. The differences are explained below:

The current tax charge relates to income tax charged to non resident landlords on property rental income in the Isle of Man. As the Group is a UK REIT there is no provision for deferred tax arising on the revaluation of properties or other temporary differences.

7 Dividends

The Company paid its third quarterly interim dividend in respect of the current financial year of 1.85p per share, wholly as a Property Income Distribution ('PID'), on 19 April 2018 to ordinary shareholders on the register at the close of business on 16 March 2018.

The fourth quarterly interim dividend for 2018 of 2.35p per share, of which 1.7p is payable as a PID, will be payable on 11 July 2018 to shareholders on the register at the close of business on 8 June 2018. A scrip dividend alternative will be offered to shareholders as it was for the first three quarterly dividend payments.

Neither dividend has been included as a liability in these accounts. Both dividends will be recognised as an appropriation of retained earnings in the year to 31 March 2019.

During the year the Company issued 4,833,765 ordinary shares in relation to the last two quarterly dividend payments for 2017 and the first two quarterly dividend payments for 2018, which reduced the cash dividend payment by £8.0 million to £43.4 million.

8 Earnings and net assets per share

Adjusted earnings and net assets per share are calculated in accordance with the Best Practice Recommendations of The European Public Real Estate Association ('EPRA'). The EPRA earnings measure highlights the underlying performance of the property rental business.

The earnings per share calculation uses the weighted average number of ordinary shares during the year and excludes the average number of shares held by the Employee Benefit Trust for the year.

The net asset per share calculation uses the number of shares in issue at the year end and excludes the actual number of shares held by the Employee Benefit Trust at the year end.

a) EPRA earnings

EPRA earnings for the Group and its share of joint ventures are detailed as follows:

1 Group net finance costs reflect net borrowing costs of £35,871,000 (note 5) less early close out costs of £18,981,000 (note 5) and finance income of £415,000

The reconciliation of EPRA earnings to IFRS reported profit can be summarised as follows:

b) Earnings per ordinary share

1 Adjustments shown in table reconciling EPRA earnings with IFRS reported profit

c) Net assets per share

Further EPRA performance measures are reflected in the Supplementary notes.

9 Investment properties

a) Investment properties

Investment properties are held at fair value as at 31 March 2018 based on external valuations performed by professionally qualified valuers CBRE Limited ('CBRE') and Savills Advisory Services Limited ('Savills'). The valuation of property held for sale at 31 March 2018 was £89.9 million (2017: £40.9 million).

The valuations have been prepared in accordance with the RICS Valuation - Professional Standards 2014 on the basis of fair value as set out in note 1. There has been no change in the valuation technique in the year. The total fees earned by CBRE and Savills from the Company represent less than 5% of their total UK revenues. CBRE and Savills have continuously been the signatory of valuations for the Company since October 2007 and September 2010 respectively.

Long term leasehold values included within investment properties amount to £101.4 million (2017: £102.0 million). All other properties are freehold.

Included within the investment property valuation is £70.3 million (2017: £65.3 million) in respect of unamortised lease incentives and rent free periods.

The historical cost of all of the Group's investment properties at 31 March 2018 was £1,328.8 million (2017: £1,135.5 million).

Capital commitments have been entered into amounting to £47.5 million (2017: £57.8 million) which have not been provided for in the financial statements.

Internal staff costs of the development team of £1.8 million (2017: £1.8 million) have been capitalised, being directly attributable to the development projects in progress.

Forward funded development costs of £9.8 million (2017: £52.7 million) have been classified within investment property as acquisitions.

b) Valuation technique and quantitative information

All of the Group's properties are categorised as Level 3 in the fair value hierarchy as defined by IFRS 13 Fair Value Management. There have been no transfers of properties between Levels 1, 2 and 3 during the year ended 31 March 2018. The fair value at 31 March 2018 represents the highest and best use.

i) Technique

The valuation techniques described below are consistent with IFRS 13 and use significant 'unobservable' inputs. There have been no changes in valuation techniques since the prior year.

Yield capitalisation - for commercial investment properties, market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the net initial yields and the fair market values per square foot derived from recent market transactions.

Residual - for certain investment properties under development, the fair value of the property is calculated by estimating the fair value of the completed property using the yield capitalisation technique less estimated costs to completion and a risk premium.

Comparison - for residential properties the fair value is calculated by using data from recent market transactions.

ii) Sensitivity

An increase or decrease in ERV will increase or decrease the fair value of the Group's investment properties.

An increase or decrease to the net initial yields and reversionary yields will decrease or increase the fair value of the Group's investment properties.

An increase or decrease in the estimated costs of development will decrease or increase the fair value of the Group's investment properties under development.

There are interrelationships between the unobservable inputs as they are determined by market conditions; an increase in more than one input could magnify or mitigate the impact on the valuation.

iii) Process

The valuation reports produced by CBRE and Savills are based on:

· Information provided by the Group, such as current rents, lease terms, capital expenditure and comparable sales information, which is derived from the Group's financial and property management systems and is subject to the Group's overall control environment

· Assumptions applied by the valuers such as ERVs and yields which are based on market observation and their professional judgement

CBRE and Savills meet the Auditors and the Audit Committee semi-annually.

10 Investment in joint ventures

At 31 March 2018, the following principal property interests, being jointly-controlled entities, have been equity accounted for in these financial statements:

1 The registered address for entities incorporated in England is One Curzon Street, London, W1J 5HB. The registered address for entities incorporated in Guernsey is Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 3AP.

The principal activity of all joint venture interests is property investment in the UK in the sectors noted in the table above, which complements the Group's operations and contributes to the achievement of its strategy.

The Metric Income Plus Partnership ('MIPP'), in which the Company has a 50% interest, acquired a development site in Ringwood for £8.5 million (Group share: £4.3 million) and sold a B&Q warehouse in Hull for £11.6 million (Group share: £5.8 million) in the year. The partnership agreement was extended to June 2023 and its debt facility with Deutsche Pfandbriefbank was increased by £18.2 million and extended for a further three years to April 2023.

The Group increased its investment in the LMP Retail Warehouse joint venture in September 2017 to 45.0% at a cost of £7.9 million. The joint venture, which holds a portfolio of DFS assets, disposed of two assets in Swansea and Swindon in the year for £13.9 million (Group share: £5.4 million).

The Group also disposed of 19 residential flats for £21.6 million (Group share: £8.7 million) through its 40% interest in LSP London Residential Investments Limited in the year.

At 31 March 2018, the freehold and leasehold investment properties were externally valued by Royal Institution of Chartered Surveyors ('RICS') Registered Valuers of CBRE Limited and Savills Advisory Services Limited. The valuation of property held for sale by joint ventures at 31 March 2018 was £21.9 million (Group share: £8.8 million), (2017: £1.6 million and Group share £0.7 million).

The movement in the carrying value of joint venture interests in the year is summarised as follows:

The Group's share of the profit after tax and net assets of its joint ventures is as follows:

11 Trade and other receivables

All amounts fall due for payment in less than one year. Trade receivables comprise rental income which is due on contractual quarter days with no credit period. At 31 March 2018, trade receivables of £2,200 were overdue and considered at risk (2017: none).

12 Cash and cash equivalents

Cash and cash equivalents include £5.3 million (2017: £5.3 million) retained in rent and restricted accounts which are not readily available to the Group for day to day commercial purposes.

13 Trade and other payables

The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe.

14 Borrowings and financial instruments

a) Non current financial liabilities

Certain bank loans at 31 March 2018 are secured by fixed charges over Group investment properties with a carrying value of £357.7 million (2017: £388.6 million). 

b) Financial risk management

Financial risk factors

The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group's financial risk management objectives are to minimise the effect of risks it is exposed to through its operations and the use of debt financing. 

The principal financial risks to the Group and the policies it has in place to manage these risks are summarised below:

i) Credit risk

Credit risk is the risk of financial loss to the Group if a client or counterparty to a financial instrument fails to meet its contractual obligations.

The Group's principal financial assets are cash balances and deposits and trade and other receivables. The Group's credit risk is primarily attributable to its cash deposits and trade receivables. 

The Group mitigates financial loss from tenant defaults by dealing with only creditworthy tenants. The trade receivable amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group will not be able to collect amounts due according to the original terms of the receivables concerned. The balance is low relative to the scale of the balance sheet and therefore the credit risk of trade receivables is considered to be low.

Cash is placed on deposit with a diverse mix of institutions with suitable credit ratings and rates of return and for varying periods of time. The credit ratings of the banks are monitored and changes are made where necessary to manage risk.

The credit risk on liquid funds and derivative financial instruments is limited due to the Group's policy of monitoring counterparty exposures with a maximum exposure equal to the carrying amount of these instruments. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties.

ii) Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Group actively maintains a mixture of long term and short term committed facilities that are designed to ensure that the Group has sufficient available funds for operations and committed investments. The Group's funding sources are diversified across a range of banks and institutions. Weekly cash flow forecasts are prepared for the Executive Committee to ensure sufficient resources of cash and undrawn borrowing facilities are in place to meet liabilities as they fall due. 

The Group had cash reserves of £26.2 million (2017: £42.9 million) and available and undrawn bank loan facilities at31 March 2018 of £53.8 million (2017: £296.8 million). 

The following table shows the contractual maturity profile of the Group's financial liabilities on an undiscounted cash flow basis and assuming settlement on the earliest repayment date.

iii) Market risk - interest rate risk

The Group is exposed to interest rate risk from the use of debt financing at a variable rate. It is the risk that future cash flows of a financial instrument will fluctuate because of changes in interest rates. It is Group policy that a reasonable portion of external borrowings are at a fixed interest rate in order to manage this risk.

The Group uses interest rate swaps and caps to manage its interest rate exposure and hedge future interest rate risk for the term of the bank loan. Although the Board accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates nor eliminates fully the cash flow risk associated with interest payments, it considers that it achieves an appropriate balance of exposure to these risks.

At 31 March 2018, 73% of the Group's exposure (including share of joint ventures) to interest rate fluctuations was hedged by way of current and forward starting swaps and caps assuming existing debt facilities are fully drawn (2017: 87%).

The average interest rate payable by the Group (including share of joint ventures) on all bank borrowings at 31 March 2018 including the cost of amortising finance arrangement fees, was 2.8% (2017: 3.5%). A 1% increase or decrease in interest rates would decrease or increase the Group's annual profit before tax by £2.3 million or £1.6 million respectively.

iv) Capital risk management

The Group's objectives when maintaining capital are to safeguard the entity's ability to continue as a going concern so that it can provide returns to shareholders and as such it seeks to maintain an appropriate mix of debt and equity. The capital structure of the Group consists of debt, which includes long term borrowings and undrawn debt facilities, and equity comprising issued capital, reserves and retained earnings. The Group balances its overall capital structure through the payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debt.

c) Financial instruments

i) Categories of financial instruments

ii) Fair values

To the extent financial assets and liabilities are not carried at fair value in the consolidated balance sheet, the Directors are of the opinion that book value approximates to fair value at 31 March 2018.

iii) Derivative financial instruments

Details of the fair value of the Group's derivative financial instruments that were in place at 31 March 2018 are provided below:


All derivative financial instruments are non current interest rate derivatives, and are carried at fair value following a valuation as at 31 March 2018 by J C Rathbone Associates Limited.

The market values of hedging products change with interest rate fluctuations, but the exposure of the Group to movements in interest rates is protected by way of the hedging products listed above. In accordance with accounting standards, fair value is estimated by calculating the present value of future cash flows, using appropriate market discount rates. For all derivative financial instruments this equates to a Level 2 fair value measurement as defined by IFRS 13 Fair Value Measurement. The valuation therefore does not reflect the cost or gain to the Group of cancelling its interest rate protection at the balance sheet date, which is generally a marginally higher cost (or smaller gain) than a market valuation.

15 Commitments under operating leases

The Group's minimum lease rentals receivable under non cancellable operating leases, excluding joint ventures, are as follows:

The Group's minimum lease payments under non cancellable operating leases, excluding joint ventures, are as follows:


16 Share capital


In June 2017, the Company granted options over 2,163,274 ordinary shares under its Long Term Incentive Plan and 608,280 ordinary shares under the Director's Deferred Bonus Plan.

In addition, 2,212,076 ordinary shares in the Company that were granted to certain Directors and employees under the Company's Long Term Incentive Plan in 2014 vested along with 606,160 ordinary shares in the Director's Deferred Bonus Plan. The share price on vesting was 171.65p.

The Company issued 4,833,765 shares under the terms of its Scrip Dividend Scheme in the year.

No disclosures have been made in accordance with IFRS 2 for share based payments to employees other than those in the Remuneration Committee report on the basis of materiality.

17 Reserves

The following describes the nature and purpose of each reserve within equity:

18 Analysis of movement in net debt