Last checked at 8 Mar 2013 12:00
SEGRO PLC - Annual Financial ReportSEGRO PLC - Annual Financial Report
PR Newswire
London, March 8
Availability of 2012 Annual Report and Accounts
The 2012 Annual Report and Accounts is now available to view at www.SEGRO.com/investors.
The following documents are scheduled to be mailed to registered shareholdersof the Company on 15 March 2013:
* 2012 Annual Report and Accounts;
* Notice of the 2013 Annual General Meeting; and
* Form of Proxy for the 2013 Annual General Meeting.
In accordance with Listing Rule 9.6.1 a copy of each of these documents will besubmitted to the National Storage Mechanism and will be available for viewingon 15 March 2012 or shortly thereafter. The Notice of the 2012 Annual GeneralMeeting will be available to view on the Company's website from this date.
The information below, which is extracted from the 2012 Annual Report andAccounts, is included solely for the purpose of complying with DTR 6.3.5. Thisinformation should be read in conjunction with the Company's 27 February 2013announcement of its 2012 Final Results (available at www.SEGRO.com). Thismaterial is not a substitute for reading the full 2012 Annual Report andAccounts. All page numbers and cross-references in the extracted informationbelow refer to page numbers and notes to the financial statements, in the 2012Annual Report and Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
MANAGING RISK RESPONSIBILITY
The Group recognises that its ability to manage risk consistently across theorganisation is central to its success. It defines risk as the potential effectof uncertainty on its ability to achieve its objectives, while risk managementensures a structured approach to decision-making that aims to reduce theuncertainty surrounding expected outcomes, balanced against the objective ofcreating value for its shareholders.
APPROACH TO MANAGING RISK
The Board has overall responsibility for ensuring that risk is effectivelymanaged across the Group and, on behalf of the Board, the Audit Committeereviews the effectiveness of the Group's risk management process.
The risk management process is designed to identify, evaluate and manage thesignificant risks that the Group faces. The process aims to manage, rather thaneliminate, the risk of failure to achieve business objectives, and thereforecan only provide reasonable and not absolute assurance.
Appetite towards risk is considered at Board meetings whenever significantstrategic, financial or operational decisions are made, and is a key part ofongoing discussions about strategy.
The individual risks faced by the Group do not typically change materially fromyear to year; however, the magnitude and importance of these risks can changesignificantly. The Board recognises that it has limited control over many ofthe external risks it faces, such as the macro-economic environment, but itreviews the impact of such risks on the business and actively considers them inits decision-making. For example, during 2012 the Board regularly consideredthe financial difficulties in the Eurozone and assessed the impact of them onthe Group's investment and divestment decisions.
The Board monitors internal risks and ensures that controls are in place tomanage them. During the year, the Group revised its governance process formajor investment transactions to ensure that the risks involved in duediligence or contract negotiations are more formally considered beforeproceeding with any transaction and that any specific risks being assessed arein line with the Group's risk appetite.
Risks are considered within each area of the business, taking into account boththe unmitigated risk (assuming that controls fail) and residual risk (withcontrols operating normally). The most significant risks are detailed in theGroup Risk Register. Each risk is owned by a member of the Executive Committeeand assigned to a manager who is required to develop a plan to manage ormitigate individual risks to an agreed position. The relatively smallmanagement team allows management to respond quickly to changing events so asto reduce any adverse effects on the Group's risk profile.
During the year, the Executive Committee and the Board have reviewed theeffectiveness of the Group's risk management framework and practices. The Grouphas identified certain areas for improvement in 2013, such as a greater focuson seeking to anticipate valuation movements.
The Group has a Risk Management Committee responsible for regularly reviewingthe Group Risk Register, monitoring the most important controls andprioritising risk management activities. The Executive Committee considersemerging risks and their impact on the Group Risk Register. The Board reviewsthe principal risks twice a year and the Audit Committee receives a reporttwice a year on how the Group Risk Register has been compiled.
Details of the principal risks and uncertainties facing the Group are set outbelow.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties have the potential to affect SEGRO'sbusiness materially - either favourably or unfavourably.
The principal risks and uncertainties facing the Group are described below,along with the potential areas of impact on the Group's key performanceindicators (KPIs) and the principal activities that are in place to manage suchrisks. The direction of change in the level of the risk during the course of2012 is given, along with commentary on any changes occurring and key links tofurther relevant information provided in other sections of this report.
UNCERTAINTIES
These represent the risk factors over which the Group has limited control, andso they are rigorously monitored. The most significant of these risk factorsand some of the major potential impacts on the Group are set out below:
PRINCIPLE UNCERTAINTIES POTENTIAL IMPACTS CHANGES IN MACRO-ECONOMIC CONDITIONS Bank covenant breaches Global market and economic conditions have been Changes in thechallenging, with tighter credit conditions and availability and cost ofslower growth in most major economies during the finance
last few years. Although signs of recovery mayexist, there are continued concerns about government Fluctuations in currencyausterity measures, Eurozone sovereign and bank exchange rates
debt, the availability and cost of credit andgeopolitical issues that all contribute to increased Changes in expectedmarket volatility and uncertain expectations for the returns on investmentsglobal economy.
Changes in asset valuesCHANGES IN GOVERNMENT POLICIES Increases in customerChanges in government regulation or policy at insolvenciesEuropean Union (EU), national and local levels couldimpact on the Group. For example, unfavourable Occupier requirements notchanges in tax and planning regulations or changes met
to existing or planned infrastructure investment(including transport) might change the value of the Changes in occupier demandGroup's property portfolio or influence development
decisions. Changes in rental income CHANGES IN THE COMMERCIAL ENVIRONMENT Changes in operating costsChanges in consumer behaviour, sustainability Regulatory requirementsregulations or customer preferences could impact the not met / complianceattractiveness of the Group's properties to certain breaches
industry sectors. For example, the increase inonline commerce is stimulating the demand forlogistics and distribution space located near majortransport hubs and conurbations. Competitorbehaviour could also have a bearing on the Group'splans - particularly in relation to competition foracquisitions, tenants and land for development.PRINCIPAL RISKS
Not all of the risks listed here are within the control of the Group, and otherfactors besides those listed may affect the performance of our business. Somerisks may be unknown at present, and other risks that are currently regarded asimmaterial and therefore not detailed here, could turn out to be material inthe future.
Risks are classified as 'principal' according to their potential level ofmateriality after mitigating actions have been taken into consideration asdetermined by the risk management process.
The principal risks that the Group reported last year have evolved in nature,as has the Group's response to them. Consideration of the Group's current riskenvironment, as well as its strategic priorities, has resulted in an additionalrisk not being classified as principal risks, and this is described in thetable below.
Additionally, there are also a number of risks that have been de-classified asa principal risk since last year. There are a number of reasons for this,including: the risk has been re-categorised as a principal uncertainty; thereis duplication of an issue; mitigating actions have reduced the level of riskand/or natural hedging has occurred between risks and/or the uncertaintysurrounding the risk has been reduced.
The declassified risks are: 'failure to maintain an appropriate andcost-effective capital structure'; 'the availability and cost of borrowing';and 'fluctuations in foreign exchange rates'.
The following table details each of the Group's current principal risks, andthese are arranged by five risk groupings - referred to as risk categories thatcover strategic risks, financial risks, operational risks, investment risks andcompliance/regulatory risks. The purpose of grouping risks into risk categoriesis to assist the systematic identification of risks in a consistent manner. Italso helps to identify the root causes of these risks, and the KPIs mostdirectly impacted by each category are also identified. The Group's strategyand KPIs are detailed in the Chief Executive's Review on pages 10 to 19.
STRATEGIC RISKS
The current or prospective risks to earning and capital arising from changes inthe business environment and from adverse business decisions, failedimplementation of decisions or lack of responsiveness to changes in thebusiness environment.
KPIs IMPACTED: TPR, TSR, EPRA ADJUSTED EPS, NAV, LTV, VACANCY RATE
RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 PORTFOLIO SHAPE AND → A strategic review of The reshapingPERFORMANCE the portfolio was strategy and the completed and assets progress madeManagement considers identified for during 2012 arethat if the Group holds disposal. The described in thethe wrong shape reshaping strategy is Chief Executive'sportfolio then being implemented over Review.non-performing assets the medium term andor the wrong type of should result in SEGROassets may dilute holding an appropriateportfolio returns balance of highresulting in relative quality `stabilised'underperformance of TPR and `opportunity'and TSR against the assets necessary tomarket and external achieve the returnsexpectations. that our shareholders require. PACE OF STRATEGIC → The pace of strategic ConsiderableCHANGE charge, including progress has been balancing our made against threeIf SEGRO does not strategic priorities of the fourdeliver its stated against each other strategicstrategic changes at (for example reducing prioritiesthe right pace and leverage against announced inwithin an acceptable reinvesting in new, November 2011, thetimeframe then investor core assets), will exception being,expectations may not be continue to be reducing financialmet and improved carefully considered leverage.shareholder returns may by both the Board andnot be delivered. the Executive The strategic Committee during 2013, priorities and the alongside the KPIs progress made established in against these November 2011 to priorities are monitor performance. detailed in the Clear targets have Chief Executive's been established for Review. further progress to be made in 2013, which have been built into the personal objectives of senior managers. IMPACT OF THE EUROZONE → We remain alert to the The FinancialECONOMIC ENVIRONMENT potential financial Review on pages 38 and operational risks to 39 providesA deterioration in to the business further detail ofeconomic conditions in arising from a the Group's foreignthe Eurozone could deterioration in exchange exposureresult in a loss in economic conditions in to the euro and thevalue or reduction in the Eurozone. We will policies and theincome to the Group, by continue to maintain a hedgingadversely impacting high level of currency arrangements ineconomic performance in translation hedging place to managethe markets in which we against the impact of this exposure.hold property assets in a weaker euro and toContinental Europe. If closely monitor ourthis deterioration also exposure to majorresulted in a weakening tenants in theof the euro against Eurozone.sterling this wouldhave an adverse Geographically, thecurrency translation portfolio is locatedimpact of the reported predominantly in thesterling income and relatively strongerasset values from our European economies.euro denominated The split by propertyoperations. values is: UK 66%, France 11%, Germany 8%, Poland 7%, Belgium 3%, Netherlands 2%, Italy 2% and Czech Republic 1%. FINANCIAL RISKSThe risks to the cash flows, equity capital and solvency of the Group resultingfrom the debt funding arrangements of the Group and movement in externalfinancial variables that have a significant impact on the Group, such asinterest rates, foreign exchange rates and the creditworthiness of the Group'smajor financial counterparties.
KPIs IMPACTED: TSR, EPRA ADJUSTED EPS, NAV, LTV
RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 SOLVENCY AND COVENANT → Funding and covenant Further details ofBREACH ratio headroom are Treasury Policy, closely monitored by funding headroom,A material fall in the Group Treasury, the financial covenantGroup's property asset Treasury Committee and ratios and relatedvalues or rental income the Board. headroom andcould lead to a breach sensitivities areof financial covenants The impact of major provided in thewithin its debt funding investment decisions Financial Review onarrangements. This on covenant and pages 36 to 39.could result in the funding headroom iscancellation of debt also considered by thefunding which could, in Investment Committeeturn, leave the Group as part of thewithout sufficient approval process forlong-term resources these decisions.(solvency) to meet itscommitments. OPERATIONAL RISKSThe risk of loss and/or missed opportunities resulting from inadequate orfailed internal processes, people or systems or from external events.
KPIs IMPACTED: TOTAL COST RATIO, CUSTOMER SATISFACTION, EPRA VACANCY RATE, EPRAADJUSTED EPS RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 OPERATIONAL DELIVERY → In 2012, various Sustainability, operational processes performanceThe Group's ability to were subject to relative tomaintain its internal audit. This operationalreputation, revenues has provided assurance delivery isand shareholder value that our processes are detailed in thecould be damaged by essentially robust, Corporateoperational failures but with some scope Responsibilitysuch as: for improvement . Review on pages 24 to 31.- Health and Safety We will ensure thatincidents operational processes That section sets remain well controlled out the identified- Environmental damage during 2013, and will areas for seek to implement improvement in- Business systems or identified operationalIT disruption improvements to these processes and the processes. Group's approach to- Failing to attract, managing people.retains and motivatekey staff - Breach ofanti-bribery andcorruption legislation INVESTMENT/REAL ESTATE RISKSThe risks associated with capital allocation including the acquisition,disposal and development of assets and the valuation of the Group's portfolio.
KPIs IMPACTED; TPR, TSR AND NAV
RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 MARKET CYCLE → The Board, Executive The market outlook Committee and is detailed in theThe property market is Investment Committee Chief Executive'scyclical and there is monitor the property Review on page 16.an inherent risk that market cycle on athe Group could either continual basis andmisinterpret the market seek to adapt theor fail to react Group's capitalappropriately to investment/divestmentchanging market strategy inconditions, which could anticipation ofresult in capital being changing marketinvested or disposals conditions.taking place at thewrong time in thecycle. APPROPRIATNESS OF ↓ Formal asset The approach toINVESTMENT PLANS management plans are investment and prepared annually for development isDecisions to buy, hold, all estates to ensure detailed in thesell or develop assets that capital Performance Reviewcould be flawed due to allocation is on pages 20 to 21.inadequate analysis, optimised across theinappropriate portfolio. The plansassumptions, poor due are used to determinediligence or changes in where to investthe economic or capital in existingoperating environment. assets and to identify assets for disposal. The Group's major development projects are generally pre-let to customers on a long lease. Speculative development is carefully monitored by the Investment Committee and is limited to locations where supply is limited and demand is expected to be strong. A new comprehensive Capital Investment Policy covering evaluation, due diligence, approval and execution, has been developed and implemented. PORTFOLIO VALUATION NEW The Group's re-shaping The reshaping strategy is focused on strategy isIf we fail to increasing exposure to detailed in theanticipate portfolio attractive assets in Chief Executive'svaluation changes we core locations and Review on page 10.may fail to take action disposing of non-coreto sell assets. The progress madeunder-performing assets during 2012 inor we may not be able The Group's investment reshaping theto manage shareholder team is responsible portfolio is alsoexpectations for the regular detailed in theappropriately, assessment of Performance Reviewresulting in TPR investment market on page 11 to 12.underperformance or conditions and forpotential damage to our managing the biannualreputation with external valuations.investors and,ultimately, to an This risk is alsoincrease in our cost of regularly monitored bycapital. the Investment Committee which also provides oversight of and challenge to the annual asset planning process. An investor relations process is in place to maintain positive shareholder relationship and manage shareholder expectations. COMPLIANCE RISKSThe risk of legal or regulatory sanctions, material financial loss, or loss ofreputation that the Group may suffer as a result of its failure to comply withlaws, regulations, rules, related self-regulatory organisation standards, andcodes of conduct applicable to its business activities.
THERE ARE CURRENTLY NO RISKS WITHIN THIS CATEGORY THAT MEET THE CRITERIA FORCLASSIFACTION OF A PRINCIPAL RISK
Currently there are no compliance risks which, taking into account the impactof mitigating actions, including continued assessments and internal controls,are considered to be principal risks.
RELATED PARTY TRANSACTIONS GROUP Transactions during the year between the Group and its joint ventures aredisclosed below: 2012 2011 £m £m New loans during the year 1.2 0.7 Loans repaid during the year - (0.4) Loans outstanding at the year end 172.1 127.0 Dividends received 18.7 8.3 Management fee income 7.4 5.9 COMPANYTransactions between the Company and its subsidiaries eliminate onconsolidation and are not disclosed in this note. Amounts due from subsidiariesare disclosed in note 18 and amounts due to subsidiaries are disclosed in note19.
None of the above Group or Company balances are secured. All of the abovetransactions are made on terms equivalent to those that prevail in arm's lengthtransactions.
REMUNERATION OF KEY MANAGEMENT PERSONNEL
Key management personnel comprise Executive and Non-Executive Directors and anyother members of the Executive Committee, as outlined in the Governance Reporton pages 46 to 51. Key management personnel compensation is shown in the tablebelow: 2012 2011 £m £m Salaries and short-term benefits 3.5 4.4 Termination benefits - 0.6 Post employment benefits 0.1 0.2 Share-based payments 0.6 0.1 TOTAL REMUNERATION 4.2 5.3More detailed information concerning directors' remuneration, shareholdings,pension entitlements, share options and other long-term incentive plans asrequired by the Companies Act 2006, is shown in the audited part of the Reporton Directors' Remuneration on pages 57 to 65.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the financialstatements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for eachfinancial year. Under that law the Directors are required to prepare the Groupfinancial statements in accordance with International Financial ReportingStandards (IFRSs) as adopted by the European Union and Article 4 of the IASRegulation and have also chosen to prepare the parent Company financialstatements under IFRSs as adopted by the EU. Under company law the Directorsmust not approve the accounts unless they are satisfied that they give a trueand fair view of the state of affairs of the Company and of the profit or lossof the Company for that period. In preparing these 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; and * make an assessment of the Company's ability to continue as a going concern.The Directors are responsible for keeping adequate accounting records that aresufficient to show and explain the Company's transactions and disclose withreasonable accuracy at any time the financial position of the Company andenable them to ensure that the financial statements comply with the CompaniesAct 2006. They are also responsible for safeguarding the assets of the Companyand hence for taking reasonable steps for the prevention and detection of fraudand other irregularities.
The Directors are responsible for the maintenance and integrity of thecorporate and financial information included on the Company's website.Legislation in the United Kingdom governing the preparation and disseminationof 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 International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and * the management report, which is incorporated into the Directors' 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. By order of the BoardDavid Sleath Justin ReadChief Executive Group Finance Director26 February 2013 26 February 2013FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward looking statements with respect toSEGRO's expectations and plans, strategy, management objectives, futuredevelopments and performance, costs, revenues and other trend information.These statements and forecasts involve risk and uncertainty because they relateto events and depend upon circumstances that may occur in the future. There area number of factors which could cause actual results or developments to differmaterially from those expressed or implied by these forward looking statementsand forecasts. Certain statements have been made with reference to forecastprocess changes, economic conditions and the current regulatory environment.Any forward looking statements made by or on behalf of SEGRO speak only as ofthe date they are made. SEGRO does not undertake to update forward lookingstatements to reflect any changes in SEGRO's expectations with regard theretoor any changes in events, conditions or circumstances on which any suchstatement is based. Nothing in this Annual Report should be construed as aprofit forecast. Past share performance cannot be relied on as a guide tofuture performance.
Robin HealyDeputy Company Secretary+44 (0) 20 7451 9082