Last checked at 18 Mar 2014 16:01
SEGRO plc
ANNUAL FINANCIAL REPORT
SEGRO plc (the Company)
Availability of 2013 Annual Report and Accounts
The 2013 Annual Report and Accounts is now available to view at www.SEGRO.com/investors.
The following documents are scheduled to be mailed to registered shareholders of the Company on 24 March 2014:
* 2013 Annual Report and Accounts;
* Notice of the 2014 Annual General Meeting; and
* Form of Proxy for the 2014 Annual General Meeting.
In accordance with Listing Rule 9.6.1 a copy of each of these documents will be submitted to the National Storage Mechanism and will be available for viewing on 24 March 2014 or shortly thereafter. The Notice of the 2014 Annual General Meeting will be available to view on the Company's website from this date.
The information below, which is extracted from the 2013 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 26 February 2014 announcement of its 2013 Final Results (available at www.SEGRO.com). This material is not a substitute for reading the full 2013 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2013 Annual Report and Accounts.
PRINCIPAL RISKS
MANAGING RISK IS CENTRAL TO OUR SUCCESS
The Group recognises that its ability to manage risk consistently across the organisation is central to its success. Risk management ensures a structured approach to decision making that aims to reduce the uncertainty surrounding expected outcomes, balanced against the objective of creating value for our shareholders.
RISK APPETITE
The Group's risk appetite is reviewed annually and approved by the Board in order to guide management. Our risk appetite is equally applicable to wholly-owned operations and joint venture interests.
Whilst our appetite for risk will vary over time and during the course of the property cycle, in general the Group maintains a fairly low appetite for risk, appropriate to our strategic objectives of delivering a low risk progressive dividend stream, supported by long-term growth in net asset value per share.
Risks are considered under the headings of property, financial and corporate risk.
PROPERTY RISK
We recognise that in seeking above average rental and capital growth from our portfolio, the Group must accept a balanced level of property risk.
Our target portfolio composition, principally of well specified and located modern assets, should deliver attractive low risk income returns with above average rental and capital growth when market conditions are positive and show relative resilience in a downturn. We aim to enhance these returns through development, whilst seeking to ensure that the income 'drag' associated with holding land for future development does not outweigh the potential benefits.
In line with our income focus, we have a low appetite for risks to income from customer defaults, and accordingly seek occupiers with strong covenants and avoid over-exposure to individual occupiers in inflexible, bespoke properties.
FINANCIAL RISK
The Group maintains a low to moderate appetite for financial risk in general, with a very low appetite for risks to solvency.
As an income-focused REIT we have a low appetite for risks which could impact growth in earnings and dividends over the long term. We are, however, prepared to tolerate a temporary reduction in dividend cover as a consequence of our strategic portfolio reshaping programme.
Our appetite for risks to net asset value from the factors within our control is low, albeit acknowledging that our appetite for moderate leverage across the cycle somewhat amplifies the impact of asset valuation movements.
CORPORATE RISK
We have a very low appetite for risks which could undermine how we are regarded by our investors, regulators, employees, customers, business partners, suppliers, lenders and by the wider communities and environments in which we operate.
APPROACH TO MANAGING RISK
The Board has overall responsibility for ensuring that risk is effectively managed across the Group. The Audit Committee reviews the effectiveness of the Group's risk management process on behalf of the Board.
The risk management process is designed to identify, evaluate and mitigate the significant risks that the Group faces. The process aims to understand and mitigate, rather than eliminate, the risk of failure to achieve business objectives, and therefore can only provide reasonable and not absolute assurance.
Appetite towards risk is considered at Board meetings whenever significant strategic, financial or operational decisions are made, and is a key part of ongoing discussions about strategy. Risk appetite is also formally reviewed by the Board annually.
Whilst the nature of the principal risks faced by the Group do not tend to change substantially from year to year, their degree of impact and likelihood may change more significantly.
The Board recognises that it has limited control over many of the external risks it faces, such as the macro-economic environment, but it reviews the impact of such risks on the business and actively considers them in its decision- making. For example, during 2013, the Board regularly considered the market cycle and its impact on investment decisions of all types.
The Board also monitors internal risks and ensures that controls are in place to manage them. For example, during 2013, the Board reviewed the Group's health and safety policies and approved a more specific statement of the Group's risk appetite.
Risks are considered within each area of the business, taking into account both the unmitigated risk (assuming that no controls are in place) and residual risk (with mitigating controls operating normally). The most significant risks are detailed in the Group Risk Register. Each risk is owned by a member of the Executive Committee who then works with a senior manager who is responsible for the monitoring and mitigation of that risk within appetite. Communication across a relatively small management team, and regular consideration of risk at key management committees, allows management to respond quickly to changing events so as to reduce any adverse effects on the Group's risk profile.
The Group has a Risk Management Committee responsible for regularly reviewing the Group Risk Register, monitoring the most important controls and prioritising risk management activities. The Executive Committee considers emerging risks and their impact on the Group Risk Register. The Board reviews the principal risks twice a year and the Audit Committee receives a report twice a year on how the Group Risk Register has been compiled.
Details of the principal risks facing the Group are set out overleaf.
PRINCIPAL RISKS
The principal risks have the potential to affect SEGRO's business materially - either favourably or unfavourably. Risks are classified as 'principal' according to their potential to exceed our appetite and cause material harm to the Group.
Some risks may be unknown at present, and other risks that are currently regarded as immaterial and therefore not detailed here, could turn out to be material in the future.
The current principal risks facing the Group are described across the following pages, along with the potential areas of impact on the Group's strategy and the principal activities that are in place to mitigate and manage such risks. The direction of change in the level of the risk during the course of 2013 is indicated, along with an assessment of whether the risk is within our appetite, and links to further relevant information provided in other sections of this report.
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 risk environment, as well as its strategic priorities, has resulted in four additional risks now being classified as principal risks: 'Counterparty default', 'Financial leverage', 'Interest rates' and 'Regulatory environment'. Furthermore, the 'Health & Safety' risk previously incorporated within 'Operational delivery' risk is now classified as principal.
Two risks have been de-classified as principal risks since last year: 'Pace of Strategic Change' and the 'Portfolio Valuation' risk of failing to anticipate valuation changes. In both cases the re-classification reflects both the substantial progress made to date in portfolio reshaping; and that the ongoing risks now faced are addressed within the 'Portfolio Strategy' risk.
PROPERTY RISKS
Risks to achieving above average rental and capital growth from our portfolio, including external market and competitive conditions, portfolio strategy, and execution of acquisitions and disposals.
RISK | IMPACT ON STRATEGY | CHANGE IN 2013 | MITIGATIONS | RESIDUAL RISK WITHIN APPETITE?
| FURTHER INFORMATION |
MARKET CYCLE
The property market is cyclical and there is an inherent continuous risk that the Group could either misinterpret the market or fail to react appropriately to changing market conditions, which could result in capital being invested or disposals taking place at the wrong price or time in the cycle.
This is continuous risk with a moderate likelihood.
| Disciplined Capital Allocation | → | The Board, Executive Committee and Investment Committee monitor the property market cycle on a continual basis and adapt the Group's capital investment/divestment strategy in anticipation of changing market conditions.
Independent sources of investment and occupier market intelligence are regularly collated and considered. | Yes | The market outlook is detailed in the Chief Executive's Review on page 23. |
PORTFOLIO STRATEGY
The Group's Total Property and/ or Shareholder Returns could underperform in absolute or relative terms as a result of an inappropriate portfolio strategy. This could result from: - Holding the wrong balance of prime or secondary assets; - Holding the wrong amounts or types of land, leading to diluted returns and/or constraints on development opportunities; - Holding the wrong level of opportunity assets or too many old or obsolete assets which dilute returns; - Missing opportunities in new markets or a lack of critical mass in existing markets. This is continuous risk with a moderate likelihood, reducing as the Group's portfolio reshaping programme progresses.
| Disciplined Capital Allocation | ↓ | The Group's portfolio strategy is subject to an annual review by the Board to consider the desired shape of portfolio in order to meet the Group's overall objectives and to determine our response to changing opportunities and market conditions.
The Group's disciplined capital allocation is informed by comprehensive asset plans and independent external assessments of market conditions and forecasts. | Yes | Further information is contained in the Chief Executive's review on pages 14 to 23. |
EXECUTION OF INVESTMENT PLANS
Decisions to buy, hold, sell or develop assets could be flawed due to uncertainty in analysis and assumptions, poor due diligence or unexpected changes in the economic or operating environment.
Our investment decisions could be insufficiently responsive to implement our strategy effectively. This is continuous risk with a moderate likelihood as changing investment and occupier market conditions require constant adaptation. | Disciplined Capital Allocation | → | Asset plans are prepared annually for all estates to determine where to invest capital in existing assets and to identify assets for disposal.
A Capital Investment Policy is in place to govern evaluation, due diligence, approval and execution of investment activity.
The Investment Committee meets frequently to exercise control and to make timely decisions on capital allocation.
Investment hurdle rates are regularly reappraised based on consensus estimates of our weighted average cost of capital.
Major capital investment and disposal decisions are subject to Board approval.
| Yes | Further information is contained in the Chief Executive's review on pages 14 to 23. |
FINANCIAL RISKS
Risks to the costs, cash flows, equity capital and solvency of the Group resulting from the capital structure of the Group and changes in external factors such as interest rates, foreign exchange rates and the creditworthiness of the Group's major financial counterparties.
RISK | IMPACT ON STRATEGY | CHANGE IN 2013 | MITIGATIONS | RESIDUAL RISK WITHIN APPETITE?
| FURTHER INFORMATION |
SOLVENCY AND COVENANT BREACH
A substantial fall in the Group's property asset values or rental income levels could lead to a breach of financial covenants within its debt funding arrangements. This could lead to a cancellation of debt funding which could, in turn, leave the Group without sufficient long-term resources (solvency) to meet its commitments.
This is a medium term risk with a very low likelihood. | Efficient Capital and Corporate Structure | ↓ | Future funding requirements and covenant headroom, including sensitivity to asset valuation declines, are closely monitored by the Group Treasury function, the Finance Committee (which reports to the Group's Executive Committee) and the Board. Group Treasury calculate actual levels and headroom with sensitivities to financial covenants on a quarterly basis and review non-financial covenants on an ongoing basis.
The Audit Committee reviews the Group's going concern status biannually.
In line with its Treasury policy, the Group maintains substantial undrawn headroom under committed bank facilities which are generally refinanced well ahead of maturity.
| Yes | Significant headroom exists against all financial covenants. Property valuations would need to fall by around 35 per cent from their 31 December 2013 values to reach the gearing covenant threshold of 160 per cent.
Further details of Treasury Policy, funding headroom, financial covenant ratios and related headroom and sensitivities are provided in the Financial Review on pages 48 to 55. |
EUROZONE ECONOMIC ENVIRONMENT
The risk of a significant adverse impact to the Group's earnings, net asset value or financial covenants arising from a disorderly default and partial or full break-up of the Euro zone.
This is a short to medium-term risk with a low and declining likelihood. | Efficient Capital and Corporate Structure
Disciplined Capital Allocation
| ↓ | We remain alert to the potential financial and operational risks to the business arising from a deterioration in economic conditions in the Eurozone. We continue to maintain a high level of currency translation hedging against the impact of a weaker euro and to closely monitor our exposure to major tenants in the Eurozone. Geographically, the portfolio is located predominantly in the relatively stronger European economies.
| Yes | France represents 8%, Germany 7%, Netherlands/Belgium 5% and Italy 2% of the Group's assets. Poland, which also involves exposure to the Euro, represents a further 6% of the Group's assets.
Treasury policies are outlined in the Financial Review on page 52. |
FINANCIAL LEVERAGE
The Group could maintain an inappropriate capital structure. Financial leverage (usually expressed as the LTV ratio, but in financial covenants defined as gearing) needs to be managed depending on the direction of the economic and property market cycle. If gearing is too high when property valuations are falling, net asset value movements can be exacerbated and financial covenants put at risk. Equally, if gearing is too conservative, there is a risk that attractive growth opportunities could be missed.
This is a medium to long-term risk with a low and declining likelihood.
| Efficient Capital and Corporate Structure
Disciplined Capital Allocation | ↓* | The Group has targeted a look- through LTV ratio of around 40% in the longer term. Gearing levels are also tracked and forecast internally to monitor headroom against financial covenants. The LTV target is considered in strategic planning and in asset recycling decisions. The Group's look-through LTV ratio was 42% at 31 December, 2013; however, given where we are in the property cycle and given the scope for further disposals, it is prepared to flex LTV temporarily upwards to take advantage of attractive investment opportunities if necessary. | Yes | Gearing is discussed in the Financial Review on page 53. |
INTEREST RATES
A significant adverse movement in interest rates could have an unacceptable impact on the Group's earnings, on investment market conditions or on tenant covenant strength.
This is a long-term risk with a moderate likelihood.
| Efficient Capital and Corporate Structure | NEW | Fixed interest cover is maintained between 50% and 100% of net debt in order to balance the cost and certainty of interest cost. The position is formally reviewed quarterly by the Finance Committee.
| Yes | Interest rate hedging is detailed in the Financial Review on page 54. |
COUNTER-PARTY DEFAULT
A bank or other counterparty could default while holding SEGRO deposits or derivative assets, resulting in a significant financial loss to the Group. This could also include the loss of solvency headroom from lost undrawn committed bank facilities.
Although SEGRO has increased its liquidity in 2013, this is considered to be a long-term risk with a low likelihood. | Efficient Capital and Corporate Structure | NEW | Counterparties are accepted based on a strict credit rating criteria (a minimum long-term credit rating of A- or better). Compliance with the policy is monitored daily by both front and back-office for Group Treasury. | Yes | Treasury policies are outlined in the Financial Review on page 52. |
* Previously incorporated within Solvency and covenant breach.
CORPORATE RISKS
Risks to business performance, legal and regulatory compliance, health and safety, environmental impact, reputation and business continuity arising from external factors or inadequate internal processes, people or systems.
RISK | IMPACT ON STRATEGY | CHANGE IN 2013 | MITIGATIONS | RESIDUAL RISK WITHIN APPETITE?
| FURTHER INFORMATION |
OPERATIONAL DELIVERY
The Group's ability to protect its reputation, revenues and shareholder value could be damaged by operational failures such as: environmental damage; failing to attract, retain and motivate key staff; a breach of anti-bribery and corruption or other legislation; major customer default or supply chain failure.
This is a continuous risk with a very low likelihood of causing significant distress to the Group.
| Operational Excellence | → | The Group maintains a strong focus on Operational Excellence. The Executive and Operations Committees regularly monitor the range of risks to operational delivery, compliance, business continuity, organisational effectiveness and customer management. | Yes | During 2013 the Group increased its investment in key customer relationship management, and default risk management. |
HEALTH AND SAFETY
Health and safety management processes could fail, leading to a loss of life, litigation, fines and serious reputational damage to the Group.
This is a continuous risk with a low likelihood of causing significant distress to the Group. The higher profile of this risk is due to the increased scale of the Group's development construction programme.
| Operational Excellence | ↑** | The Group manages an active health and safety management system, with a particular focus on managing the quality and compliance to good health and safety practice of construction and maintenance contractors. A published health and safety policy is backed up by independent site inspections, staff and contractor training. | Yes | |
REGULATORY ENVIRONMENT
The Group could fail to anticipate legal or regulatory changes, leading to a significant un-forecasted financial or reputational impact.
This is a medium to long term risk with a low likelihood of causing significant distress to the Group. | Efficient Capital and Corporate Structure | → | Emerging risks in this category are reviewed regularly by the Executive Committee, Finance Committee and Group Risk Committee.
Corporate heads of function consult with external advisers, attend industry and specialist briefings, and sit on key industry bodies such as EPRA and BPF.
A number of potential risks were identified, assessed and managed during the course of the year. None were assessed as being material enough to be classified as Principal Risks. | Yes |
** Previously incorporated within Operational delivery.
RELATED PARTY TRANSACTIONS
GROUP
Transactions during the year between the Group and its joint ventures are disclosed below:
2013 £m | 2012 £m | |
New loans during the year | 6.9 | 1.2 |
Loans outstanding at the year end | 260.7 | 172.1 |
Dividends received | 24.1 | 18.7 |
Management fee income | 7.1 | 7.4 |
COMPANY
Transactions between the Company and its subsidiaries eliminate on consolidation and are not disclosed in this note. Amounts due from subsidiaries are disclosed in note 18 and amounts due to subsidiaries are disclosed in note 19.
None of the above Group or Company balances are secured. All of the above transactions are made on terms equivalent to those that prevail in arm's length transactions.
REMUNERATION OF KEY MANAGEMENT PERSONNEL
Key management personnel comprise Executive and Non-Executive Directors and any other members of the Executive Committee, as outlined in the Governance Report on pages 58 to 65. Key management personnel compensation is shown in the table below:
| 2013 £m | 2012 £m |
Salaries and short term benefits | 4.1 | 3.5 |
Post-employment benefits | 0.2 | 0.1 |
Share-based payments | 0.6 | 0.6 |
TOTAL REMUNERATION | 4.9 | 4.2 |
More detailed information concerning directors' remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans, as required by the Companies Act 2006, is shown in the Remuneration Report on pages 75 to 91.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
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 such 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 also chosen to prepare the parent Company financial statements under IFRSs as adopted by the European Union. Under company law the Directors must not approve the financial statements 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 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 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 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 United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
DIRECTORS' RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
1. the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
2. the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
3. 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
CHIEF EXECUTIVE DAVID SLEATH 25 February 2014
| GROUP FINANCE DIRECTOR JUSTIN READ 25 February 2014
|
FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward looking statements with respect to SEGRO'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 process changes, economic conditions and the current regulatory environment. Any forward looking statements made by or on behalf of SEGRO speak only as of the date they are made. SEGRO does not undertake to update forward looking statements to reflect any changes in events, conditions or circumstances on which any such statement's based. Nothing in this Annual Report should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance.
Robin Healy
Deputy Company Secretary
+44 (0) 20 7451 9082