Segro Regulatory News (SGRO)

RNS Number : 7400Y

SEGRO PLC

27 February 2013

 

27 february 2013

 

RESULTS FOR THE year ended 31 december 2012

 

A strong operational performance and substantial further progress made towards our goal of becoming a leading income-focused REIT

 

	Year to 31 December 2012	Year to 31 December 2011	Change%
Net rental income (£m)	254.8	271.2	(6.0)
EPRA profit before tax (£m)	144.9	138.5	4.6
EPRA earnings per share (p)	19.3	18.4	4.9
Dividend per share (p)	14.8	14.8	-

 

	31 December2012	31 December 2011	Change%
Net borrowings (£m)	2,090.3	2,303.4	(9.3)
EPRA net asset value per share (p)	294	340	(13.5)
Loan to value ratio (including joint ventures at share) (%)	51	49	-

Calculations for EPRA performance measures are shown in note 13 to the consolidated financial information. The IFRS loss before tax for the year ended 31 December 2012 was £202.2m (31 December 2011: £53.6m loss) and the IFRS basic and diluted loss per share was 26.6p (31 December 2011: 4.1p loss per share). The IFRS net asset value per share at 31 December 2012 was 302p (31 December 2011: 345p per share).

HIGHLIGHTS

Strong operational performance

·; Headline net rental income lower due to impact of disposals; like for like net rental income up 1.9%

·; Group vacancy rate further improved at 8.2% (31 December 2011: 9.1%). On a pro forma basis, Neckermann's departure in January 2013 would have added 1.1% to the Group vacancy rate. Core portfolio vacancy rate 7.6% (31 December 2011: 8.2%)

·; Total cost ratio improved further to 22.9% (2011: 24.5%) through our focus on tight cost control and a reduction in vacancy

·; 21 developments completed, generating £16.4m of annualised new rental income when fully let (already 89% leased at year end). 14 developments currently in progress, expected to generate £10.8m of annualised new rental income, of which 70% is pre-leased 

Advancing our strategy to become a leading income-focused REIT

·; £700m of non-core asset disposals (including £152m received in 2013), at a 3.6% average discount to December 2011 book values and an average exit yield of 7.2%.

·; £207m reinvested in acquisitions, mainly comprising two prime logistics portfolios in the UK and in France, enabling us to build critical mass and strengthen our position in both markets. Average entry yield of 7.7%

·; £218m either reinvested in development projects completed during 2012 or committed for projects in our active development pipeline. Estimated yield on total development cost of 9.6%

EPRA NAV lower due to portfolio valuation reductions

·; Overall portfolio valuation reduction of £309m/6.2% on a like for like basis for the year due to the performance of our large non-strategic assets (£144m), remaining smaller non-core holdings (£44m) and South East UK suburban offices (£79m)

·; Core warehouse, light industrial and data centre portfolio like for like valuation reduction of 1.2%, compared with an 3.8% reduction in the IPD UK Industrial Quarterly Index

Solid balance sheet

·; £213m reduction in net debt to £2,090.3m; "look through" LTV ratio of 51% (or 50% on a pro forma basis, factoring in £152m of disposals completed in Jan/Feb 2013), with the impact of disposal proceeds being offset by the portfolio valuation reduction and reinvestments

·; Favourable debt profile with approximately £450m of undrawn facilities and cash; a weighted average maturity of borrowings of 8.3 years

·; Net debt/EBITDA 8.1 times (2011: 8.7 times); interest cover of 2.3 times (2011: 2.2 times); weighted average cost of debt 4.6% (31 December 2011: 4.8%)

Commenting on the results and outlook, David Sleath, Chief Executive, said:

"We are pleased with the progress made by the business over the past year. Our strong operational performance in 2012 has driven good earnings growth. Through disposals, selective acquisitions and development, we have taken substantial steps forward with our strategy to build a high quality portfolio of modern, well-located warehouses, light industrial and data centre assets. We are targeting a further £300 million to £500 million of disposals in 2013 (including £152 million, predominantly relating to Thales and MPM, which completed shortly after the year end).

Our portfolio is well-positioned to perform in 2013 both operationally and from an investment perspective. We are seeing a good level of occupier demand in our core markets and we expect to continue to benefit from the growth in e-retailing, local distribution and electronic data storage requirements. With well-located existing assets, an excellent land bank and a general shortage of modern 'grade A' buildings in most of our markets, we are well placed to capitalise on such growth drivers.

We have a clear set of priorities and expect to make further progress against these over the coming year and beyond to create a leading income-focused REIT which produces a high quality and progressive dividend and resilient capital growth."

 

webcast/CONFERENCE CALL FOR INVESTORS AND ANALYSTS

A live webcast of the results presentation will be available from 10.00 (GMT) at:

http://www.media-server.com/m/p/4ix3c72r

A conference call facility will also be available at 10.00 (GMT) on the following numbers:

Toll:	+44 (0) 20 7136 2056
Free phone:	0800 279 4992
Access code:	5419435

 

From midday the conference call will be available on a replay basis on the following numbers:

Toll:	+44 (0) 20 3427 0598
Free phone:	0800 358 7735
Access code:	5419435

 

The webcast will be available for replay at SEGRO's website at: http://www.segro.com/investors by the close of business:

A video interview with David Sleath discussing the results is now available to view on www.segro.com

CONTACT DETAILS FOR INVESTOR / ANALYST AND MEDIA ENQUIRIES RESPECTIVELY:

SEGRO	Justin Read (Group Finance Director)	Mob: +44 (0)7831 165 537 (27 Feb) Tel: + 44 (0)20 7451 9110
	Kate Heseltine (Investor Relations)	Mob: +44 (0)7714 390 537 (27 Feb) Tel: +44 (0)20 7451 9042
Tulchan Communications	John Sunnucks David Shriver	Tel: +44 (0)20 7353 4200

 

The timetable for the 2012 final dividend will be as follows:

Ex-Dividend date	20 March 2013
Record Date	22 March 2013
Payment Date	26 April 2013

This announcement, the 2012 Property Analysis Booklet and other information about SEGRO are available at www.segro.com.

Neither the content of SEGRO's website nor any other website accessible by hyperlinks from SEGRO's website are incorporated in, or form part of, this announcement.

Forward-looking statements: This announcement 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 price 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 SEGRO'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 performance cannot be relied on as a guide to future performance.

CHief executive's review

INTRODUCTION

SEGRO is a leading owner, asset manager and developer of modern warehousing, light industrial and data centre properties (collectively referred to as 'industrial properties'), with £4.7 billion of assets (including our share of joint venture assets) principally concentrated in London's Western Corridor (including the Thames Valley) and in key conurbations in France, Germany and Poland. We also own suburban office buildings in the Thames Valley, Brussels and Milan.

In the UK, we have a leading market position in Heathrow, with £0.6 billion of assets (including our share of joint venture assets) in some of the most sought after airside and off-airport locations. We have a £0.6 billion portfolio at Park Royal and Greenford, which has become a primary focus for businesses seeking 'urban logistics' space to service Central London. We also own the £1.0 billion Slough Trading Estate, which is a well-established, modern business park in the Thames Valley and which has also grown to become one of Europe's largest data centre hubs. In Continental Europe we have £1.6 billion of warehousing and light industrial assets concentrated in attractive sub-markets such as the Ile de France region around Paris, which shares similar characteristics to Greater London, the Rhine Rhür region in Germany and key markets in Poland.

ADVANCING OUR STRATEGY TO BECOME A LEADING INCOME-FOCUSED REIT

In November 2011, we set out our strategy to address areas of historical underperformance and deliver better future returns to our shareholders. Our ambition is to be the best owner-manager and developer of industrial properties in Europe and a leading income-focused REIT. We are aiming to deliver attractive returns for shareholders in the form of a low risk, progressive dividend stream, supported by long term growth in net asset value per share. 

In order to achieve that vision, we are creating a portfolio comprised predominantly of modern warehousing, light industrial and data centre assets which are well specified and located, with good sustainability credentials and which will benefit from a low structural void rate and relatively low intensity asset management requirements. These assets will be concentrated in the strongest sub-markets which have attractive property market characteristics, including good growth prospects and limited supply availability, where we already have, or can achieve, critical mass. We believe such a portfolio should deliver attractive, low risk income returns, with above average rental and capital growth when market conditions are positive and show resilience in a downturn. We aim to enhance these returns through development, but seeking to ensure the 'drag' associated with holding land does not outweigh the potential benefits. Our overall portfolio strategy will be underpinned with an efficient overhead structure and relatively modest financial leverage through the cycle.

We believe that a focus on high quality and well located industrial property, predominantly comprised of warehousing, light industrial and data centre assets, provides a good basis from which to deliver attractive returns for shareholders. Over the last 25 years, total returns from industrial property, as measured by the UK IPD Index, have been higher than from retail and office sectors, principally due to the higher income returns (i.e. yields) typically available.

Increased levels of international trade, the outsourcing of distribution by manufacturers and retailers and growth in consumer spending have created robust demand for warehousing space over this period. The opportunity to convert industrial land to 'higher value uses' such as offices, retail units or trade counters, has also enhanced the returns available from owning industrial property. More recently, growth in 'high tech' manufacturing and the engineering services sector, the pressure for more efficient supply chains and the trend towards on-line and convenience shopping have all been driving demand for new or modern warehouses; meanwhile growth in the financial services and TMT sectors has been feeding requirements for new data centres. We believe these trends are likely to continue in the years ahead and will serve to provide robust levels of demand for modern, well located property.

Fundamental to the implementation of our strategy are two key pillars of activity:

Disciplined Capital Allocation, consists of picking the right geographical markets and assets, creating the right portfolio shape and actively managing the portfolio composition in order to time the property market cycle and individual asset life cycles; and,

Operational Excellence, consists of optimising performance from the portfolio through customer service, expert asset management, development and operational efficiency.

Through Disciplined Capital Allocation and Operational Excellence we aim to apply our business model of 'Buy Smart, Add Value and Sell Well' with the goal of producing attractive income-oriented total property returns ('TPR'). We believe that strong TPR, if underpinned by the right capital structure and a lean overhead base, should translate into the attractive shareholder returns referred to above.

In order to implement the strategy announced in November 2011, we set out a plan which has four key priorities:

1. Reshaping the existing portfolio by divesting non-core assets which do not meet our strategic and financial criteria and reducing non-income producing assets as a proportion of the total portfolio;

2. Seeking profitable growth by reinvesting in core markets and asset types by taking advantage of attractive development and acquisition opportunities;

3. Reducing net debt and financial leverage over time and introducing further third party capital where appropriate; and,

4. Driving our operational performance across the business through greater customer focus, knowledge sharing, efficiency improvements and cost reductions.

 

Against these strategic priorities we have made considerable progress in the first full year of our 3 to 5 year journey to transform our business. We will continue to work towards each of these objectives in the current year and beyond.

The tables below summarise progress with our portfolio reshaping programme during 2012, together with disposals completed shortly after the year end:

DISPOSALS
Month	Portfolio/Asset	Acquirer	Disposal proceeds (£m)	Net initial yield (%)
2012
February	Four regional UK estates	Ignis	71.2	6.3 / 7.01
April	IQ Farnborough	Harbert/XLB	92.1	6.4 / 6.81
June	Four regional UK estates	Harbert	204.5	6.7 / 7.41
July	10 regional UK estates	UK Institution	111.0	8.4 / 8.91
Various	Other UK non-core assets	Various	43.6	10.9 / 11.51
Various	Other CE non-core assets	Various	25.7	7.7 / 7.7
Sub total			548.1
2013
January	Thales in Crawley, UK	L&G Property	80.0	5.9 / 5.9
February	MPM in Munich, Germany	Private investor	56.0	7.9 / 7.9
Various	Other non-core assets	Various	16.3	7.7 / 7.7
Total			700.4	7.2 / 7.71
DEVELOPMENT PROJECTS
Month	Portfolio/Asset		Total capital spent on projects completed in 2012 or required to complete current projects (£m)	Estimated yield on total development cost (%)
On-going	Pre-let and speculative developments		217.7	9.6
ACQUISITIONS
Month	Portfolio/Asset	Seller	Acquisition price (£m)	Net initial yield (%)
January	LPP, UK (formerly UKLF)	UK Institutions	65.74	6.3 / 7.72
September	13 logistics assets in France	Foncière Europe Logistique	129.7	8.4 / 7.73
September	Ozarow Business Park, Poland	Endurance Real Estate Fund	11.5	8.1 / 11.73
Total			206.9	7.7 / 7.9

1 Including the benefit of top-ups; 2 Yield when fully let; 3 Reversionary yield

4 50% stake of a £314.7m joint venture acquisition, of which SEGRO contributed equity of £15.7m in 2011 and £50.0m in 2012.

1. RESHAPING THE EXISTING PORTFOLIO

£700 million of non-core asset disposals, including three of the six large non-strategic assets

The first of our strategic priorities is to reshape the portfolio and focus on high quality modern warehousing, light industrial and data centre assets in the strongest sub-markets.

We identified non-core assets for disposal with a value of £1.4 billion at 31 December 2011, including six large non-strategic assets with a combined value of £515 million. These are a combination of mainly older more secondary and higher vacancy estates, as well as investments in sub-scale or weaker markets, which we do not believe have the right characteristics to contribute to our objective of delivering better future returns for our shareholders.

Since that time, we are pleased to have made significant progress with our portfolio reshaping programme, exceeding our target of completing £300 million to £500 million of disposals in 2012. Since January 2012 we have completed the sale of £700 million of non-core assets (of which £152 million occurred after the year end), including £228 million from the sale of three of the six large non-strategic assets we previously identified (IQ Farnborough and the Thales campus in the UK and the MPM site in Germany, our first major disposal in Continental Europe).

In aggregate, the £700 million of disposals were completed at a 3.6 per cent discount to December 2011 book values and at an average exit yield of 7.2 per cent. The disposal proceeds helped us to reduce net borrowings and provide funds for reinvestment in acquisition and development opportunities, as explained below.

£583 million of non-core assets remaining

Based on the portfolio valuation at 31 December 2012, and excluding the above disposals, we now have £583 million of the original non-core assets remaining. This includes £177 million relating to the three remaining large non-strategic assets, £353 million relating to other mainly smaller industrial assets and £53 million to land holdings.

The three large non-strategic assets are all located in Continental Europe: Pegasus Park, an established office park near to Brussels Airport; our part-developed office site, Energy Park at Vimercate in Italy; and the former Neckermann site in Frankfurt. In the present environment, investment market appetite for such large, relatively bespoke assets is limited and this has adversely affected their valuation performance during 2012. Whilst we will continue to evaluate options for divestment, we anticipate that it may take some years to reach the optimum point at which the Group will fully exit from these properties; in the meantime, our operational team will continue to actively manage the assets, seeking to maximise the income and returns.

In contrast, the remaining £406 million of non-core assets and land (comprising £169 million in the UK and £237 million in Continental Europe), whilst secondary in nature, generally represent more liquid lot sizes. We expect the majority of these assets to be sold over the next two years, in line with the time frames we set out for our strategy in November 2011, subject to the completion of various asset management initiatives and market demand.

During 2013, we aim to dispose of between £300 million and £500 million of assets, including the £152 million of disposals completed after year end. Our disposals in 2013 are likely to comprise both sales of previously identified non-core assets as well as other assets which are now deemed suitable for 'recycling' as part of our ongoing approach to actively manage the portfolio.

2. Seeking profitable growth through development and acquisition

£425 million being reinvested into modern warehousing, light industrial and data centre assets

Our second strategic priority is to seek profitable growth by reinvesting in core markets and asset types by taking advantage of attractive development and acquisition opportunities which are expected to meet, or exceed, our targeted rates of return and which will contribute to the desired shape of our overall portfolio.

We have invested, or committed, £218 million of capital expenditure into 21 projects completed during the year, including major developments for leading companies such as DB Schenker, Rolls-Royce and Decathlon, and into our current development pipeline, which comprises 14 projects approved, contracted or under construction. Such projects are expected to provide a valuable source of new rental income and are a profitable way to add high quality, modern properties to the portfolio and build critical mass.

Further detail on our completed and active development projects is presented later in the report and in our Property Analysis Booklet, which is available to download at www.segro.com/investors.

We have also completed two significant portfolio acquisitions which will strengthen our logistics platform in our target markets in the UK and France and which partly offset income lost through disposals.

In January 2012, we completed the acquisition of a 50 per cent stake in the UK Logistics Fund (subsequently renamed the Logistics Property Partnership - 'LPP') in partnership with Moorfield, for which SEGRO contributed equity of £65.7 million. The portfolio comprises 14 modern logistics warehouses, predominantly located in the Midlands and South of England.

Additionally, in September 2012, we completed the acquisition of a portfolio of 13 fully let modern logistics buildings in the Ile de France and Lyon for €160.8 million (£129.7 million) from Foncière Europe Logistique ('FEL'). This transaction provided SEGRO with a rare opportunity to build critical mass in the two strongest markets in France and to drive operating efficiencies through greater scale. The five estates in the Ile de France are located in close proximity to our existing logistics assets, with the remaining three estates well positioned to take advantage of the growing logistics market in Lyon.

Both the LPP and FEL portfolios have been successfully integrated into our operating platform and they have been performing in line with our expectations.

In the past year we have grown our logistics platform from £0.8 billion to £1.1 billion (including our share of joint venture assets) and we are delivering on our commitment to grow our logistics portfolio through development and acquisitions, using third party capital where we see attractive opportunities.

3. REDUCING NET DEBT AND FINANCIAL LEVERAGE OVER TIME

Net debt reduced by 9.3 per cent to £2,090.3 million

Against our third objective, and as a result of net divestments during the year, we reduced net borrowings at the year end to £2,090.3 million, compared with £2,303.4 million at the start of the year. This was further reduced by the £152 million of gross sale proceeds predominantly from the Thales campus and MPM site in Munich, which were received in January/February 2013.

Despite this reduction in net debt, our loan to value ratio (including our share of joint ventures assets and liabilities) rose from 49 to 51 per cent over the same period (or 50 per cent on a pro forma basis, taking into account the £152 million of post year end disposals), with the benefit of disposal proceeds being offset largely by the impact of the overall portfolio valuation decline and investments. We remain committed to reducing the LTV ratio over the longer term because we continue to believe that REITs with lower leverage offer a lower risk and a less volatile investment proposition for shareholders. Over time we expect the Group's leverage to reduce through selling assets, development, asset management and from cyclical valuation uplifts. In the near term, however, whilst continuing to prioritise disposals in line with our portfolio strategy, we continue to believe it appropriate to balance further reductions in net debt against opportunities for further, profitable capital deployment. 

The LPP acquisition was a good example of how we can partner with third party capital to build critical mass in our core markets and we will continue to assess other such opportunities in the future.

Further details of our financial position, including sensitivities to interest rate and currency fluctuations, are provided in the Financial Review. 

4. DRIVING OUR OPERATIONAL PERFORMANCE

EPRA EPS up 4.9 per cent to 19.3 pence

We have made strong progress against our fourth objective through our customer and market focus, improved operational efficiency and cost control. A number of key measures reflect our operational achievements this year, including like for like rental income growth of 1.9 per cent (2011: 0.8 per cent) and a reduction in our Group vacancy rate to 8.2 per cent (31 December 2011: 9.1 per cent). We also completed 21 new developments during the year (the largest number since 2009) and reduced our total cost ratio to 22.9 per cent (2011: 24.5 per cent). As a result of these factors and a reduction in net finance costs, our EPRA EPS increased by 4.9 per cent to 19.3 pence, despite the dilutive impact of our disposal programme.

Leasing activity

Summary of key data1		FY12	FY11
Take-up of existing space2 (A)	£m	20.7	21.9
Space returned (B)	£m	21.5	21.0
Net absorption of existing space (A-B)	£m	(0.8)	0.9
Take-up of developments completed during the year2 (C)	£m	14.6	11.6
Total take up2 (A+C)	£m	35.3	33.5
Transactional rental levels versus prior December estimated rental values	%	2.9	1.7
Lease incentives	%	8.2	11.0

 

1. All figures include joint ventures at share.

2. Annualised rental income, after the expiry of any rent free periods.

 

Despite the on-going weak economic backdrop, SEGRO's portfolio is focused on the strongest sub-markets within the UK, France, Germany and Poland, where economic and property market fundamentals have been relatively resilient. Demand in these markets has come from a range of occupiers. Whilst retailers, light industrial businesses and third party logistics operators continue to account for the majority of requirements in the market, the structural shift in internet consumption and local shopping is noticeably stimulating demand for large warehouses and smaller, edge of town or 'urban logistics' warehouses with parcel carriers particularly active. The ongoing growth in requirements for electronic data storage solutions has also continued to fuel demand for data centres in and around major financial centres.

With the overall economic and financial climate continuing to constrain speculative development, the availability of good quality, modern buildings has also continued to shrink. Whilst this has not yet translated into widespread rental growth, we have seen headline rents start to move ahead in the strongest micro-locations and a general tightening of lease incentives in several markets. Away from the 'prime' end of the market where demand is strongest and supply most limited, the general economic backdrop has meant that many traditional occupiers remain extremely cautious, slow in decision-making and generally reluctant to increase their cost base ahead of any real evidence of economic recovery; in these areas downward pressure on rents has remained evident.

During 2012 we secured 262 new lettings across the Group totalling 486,500 sq m which generated £35.3 million of new annualised rental income (2011: £33.5 million). This included £14.6 million from developments completed during the year. Our level of takebacks (the amount of rental income lost due to lease expiry or exercise of break options, surrender or insolvency) remained broadly consistent year on year at £21.5 million (2011: £21.0 million).

We have seen a positive trend in headline rental levels on new leases and lease renewals, which were achieved at 2.9 per cent above the valuers' December 2011 estimated rental values, on average. The level of lease incentives given on new lettings during the year has improved, to 8.2 per cent on average, compared with 11.0 per cent in 2011.

Greater London

 

In Greater London, we completed 85 new lettings totalling 95,400 sq m, including several significant deals at Heathrow. Our largest UK letting was for 11,400 sq m at Polar Park to Circle Express, a freight distributor, on a 15 year lease in September. We acquired this park via the Brixton acquisition in 2009 and it had been our largest void in the portfolio since that time. Also at Heathrow in October, we let 8,800 sq m at the North Feltham Trading Estate to Wincanton, a third party logistics provider, to service a major contract for supermarket chain, Morrisons. Wincanton chose this site for its close proximity to convenience stores in West London and good motorway access. At the Heathrow Cargo Centre, DHL signed a seven year lease for 7,500 sq m in November for its airside cargo distribution business and during the year we also let three of the remaining four units on the top floor of X2, a double storey building acquired with Brixton in 2009.  

Thames Valley and National Logistics

 

The main driver of new rental income in the Thames Valley region last year was the completion of five pre-let developments and two speculative schemes on the Slough Trading Estate totalling 33,700 sq m. Another key theme at the Estate was working with existing customers, such as Kosei Pharma, to meet their changing space requirements. In September, Kosei Pharma upgraded to a 1,000 sq m facility close to their original unit, allowing space to grow the business. Smaller deals away from the Estate included the letting of 10 units representing 11,700 sq m to a range of customers at IQ Winnersh, Albany Park in Frimley and Kingsland Business Park in Basingstoke. Overall, in the Thames Valley we completed 82 new lettings totalling 81,300 sq m.

Germany and Northern Europe

 

In Germany and Northern Europe we completed 61 new lettings totalling 140,200 sq m, including 20,000 sq m in Grevenbroich Kapellen, near Dusseldorf, to Rhenus Home Delivery on a 10 year lease. We also let 10,700 sq m to energy consulting firm, AEP, representing all of the remaining space at our speculative development in Alzenau, Frankfurt. In the first half of the year, we signed four office lettings at Pegasus Park in Brussels totalling 6,500 sq m which has enabled us to reduce our vacancy rate there below the persistently high level of over 20 per cent seen in the local Brussels periphery office market.

France and Southern Europe

 

Our largest letting in France was in Lyon, to Transport Fatton, for 12,600 sq m of logistics space in June. We also let 5,700 sq m to Transalliance Distribution in the north of the Ile de France region and a further 2,900 sq m of speculative space at La Courneuve to a major global courier company which chose this site for its proximity to Charles de Gaulle airport and its existing European distribution hub. In total, we signed 16 lettings in France and Southern Europe, representing 57,600 sq m.

Poland and Central Europe

 

Our lettings activity in Poland and Central Europe, which is a younger market for logistics, continues to be predominantly driven by pre-let developments. During the year we completed six new projects including major new facilities for retailers Decathlon and Zabka. The pre-let for Decathlon replaced an existing 20,000 sq m facility with us and, with Decathlon only having vacated the space in October, we were very pleased to re-let over 50 per cent by year end. Overall, we signed 18 deals in Poland and Central Europe, totalling 111,900 sq m.

Significant improvement in group vacancy to 8.2 per cent

We have improved the Group vacancy rate to 8.2 per cent at 31 December 2012 compared with 9.1 per cent a year ago (benefitting 1.6 per cent and 1.9 per cent, respectively, from short term lettings). This comprises 7.6 per cent vacancy for the core portfolio (31 December 2011: 8.2 per cent), compared with 11.1 per cent vacancy for the non-core portfolio (31 December 2011: 11.2 per cent).

Key reasons for this improvement include our capital recycling activity, which benefitted the vacancy rate by 0.9 per cent, the letting of existing space and new speculative developments and the proactive management of lease events. For example, at Heathrow we signed a number of significant deals during the year which led to an improvement in our Greater London vacancy rate, to 8.0 per cent compared with 11.3 per cent at the start of the year. We achieved an overall retention rate of 65 per cent (below the unusually high 74 per cent achieved in 2011), and our occupancy levels at year end reflect our success in re-leasing space returned to us during the year.

The 8.2 per cent year end vacancy rate excludes any impact of Neckermann, which fully vacated its premises at the end of January 2013. On a pro forma basis, taking Neckermann into account as if it had vacated at 31 December 2012, and including the re-letting of space at the site, the Group vacancy rate would have been 9.3 per cent (or 9.6 per cent, also allowing for the sale of the fully let MPM and Thales assets sold after year end). The core vacancy rate would have remained unchanged at 7.6 per cent.

In addition to managing lease events falling due in 2012, our property teams have continued to adopt a proactive approach to negotiating lease extensions in advance of break options and lease expiries falling due in later years. This, along with the benefits of recycling, has enabled us to materially reduce gross passing rent at risk from breaks and expiries in 2013 by 21 per cent to £41.0 million at 31 December 2012, compared with the £51.8 million at risk for 2013 a year earlier.

A more detailed breakdown of vacancy rates across the Group and between the core and non-core portfolio is available in our Property Analysis Booklet.

Managing rent at risk from insolvencies

SEGRO has a broad range of over 1,300 customers across multiple sectors and actively monitors their creditworthiness and any rent at risk from insolvency.

At 31 December 2012, we had £13.9 million of annualised rental income relating to customers in administration (31 December 2011: £2.7 million). This included approximately £12 million of income relating to the Frankfurt based mail order retailer, Neckermann, which filed for insolvency in July 2012. Neckermann occupied a 309,000 sq m bespoke office and distribution facility, owned by SEGRO, which it fully vacated at the end of January 2013. After taking into account rental guarantees held, the loss of income will impact us from the start of 2013. We have been working hard to identify alternative customers to help mitigate any empty costs associated with the site over the short term whilst we review longer term options for the asset. To date, we are pleased to have already re-leased approximately 15 per cent of the existing space, including 42,000 sq m to BLG Logistics Group.

Despite the challenging macro-economic environment, our general level of insolvencies across our customer base has remained very low. Neckermann is the second material insolvency in recent years, following the administration of Karstadt-Quelle, also in Germany, in 2010 (£4.6 million of annualised rental income). These two situations arose from the acquisition of higher yielding property through sale and leaseback transactions soon after the sale of the Group's US business in 2007. Such properties and concentrations of risk in such tenants would not be in line with the Group's strategy today.

Excluding these two cases, the amount of rental income lost through customer insolvencies has averaged approximately 1 per cent of passing rent each year since 2007 due to the diversification of risk across a wide range of customers and assets, combined with our commitment to monitoring, and working closely with, our customers.

A strong and highly profitable level of development activity

Our active development programme remains an attractive way to generate income and capital growth from our land bank as well as enabling us to build critical mass in core markets where the supply of well-located and modern industrial and logistics space is limited.

The vast majority of our developments have remained pre-leased projects, where we have been able to secure demand from a range of customers such as parcel delivery companies, retailers, third party logistics companies, manufacturers and light industrial users as well as data centre operators. New speculative development remains limited to our core markets and to micro-locations where we believe there to be good demand, unsatisfied by existing and anticipated supply. Each project is assessed on its individual merits and only embarked on when we are confident that it will contribute to our portfolio by delivering attractive total property returns on a risk-adjusted basis. Whilst all of our speculative developments undertaken during the year have generated a good level of enquiries and lettings success, our development programme going forwards will remain primarily focused on pre-let projects.

Completed developments

We completed 21 new developments during the year, our largest number since 2009, totalling 190,000 sq m. These projects represent £16.4 million of annualised new rental income when fully let and we have already achieved 89 per cent occupancy.

On the Slough Trading Estate, this included two data centres, for Savvis and Infinity, industrial and R&D facilities for Ragus and Lonza, respectively, and a retail unit for Family Bargains. We also completed two speculative buildings, one of which Gyron took a 20 year lease shortly after completion in June for a 2,900 sq m data centre. At the Portal site, Heathrow, we completed two state-of-the-art facilities for DB Schenker and Rolls-Royce, totalling 18,900 sq m, in August and December, respectively.

One of our most active pre-let markets recently has been Poland, where we completed six pre-let developments totalling 77,100 sq m. The largest of these was a new 32,100 sq m logistics facility for sports retailer, Decathlon which we completed in August. This replaces their existing 20,000 sq m building with us, of which we have already re-let over 50 per cent.

We have seen a good level of demand for our German schemes. During the year, we completed two partly pre-let logistics developments, for Pro-Tex and WIR Packens, and two fully speculative light industrial schemes in Berlin and Dusseldorf. Overall, these four new developments are now 75 per cent occupied.

In the Ile de France, we have now leased 80 per cent of our 8,500 sq m speculative scheme at La Courneuve, which completed in September. At the Vimercate campus, near Milan, 80 per cent of our 11,000 sq m office building is also leased, with 8,000 sq m taken by Esprinet and 800 sq m of the speculatively developed element also having been let.

Active development projects

Across the Group, we currently have 14 developments totalling 155,200 sq m approved, contracted or under construction, which will contribute £10.8 million of annualised new rental income when fully let (these developments are currently 70 per cent pre-let). Our future capital expenditure required to complete these projects is £71.4 million.

In the UK, our developments include a 2,300 sq m unit on the Slough Trading Estate for Karl Storz Endoscopy on a 10 year lease. The development will form part of a larger 4,100 sq m scheme, including 1,800 sq m of speculative space which is due to complete in Q1 2013. We have also approved a separate 3,300 sq m speculative development on the Estate, which commenced in Q1 2013 and is due to complete in Q1 2014.

At Park Royal we are building 900 sq m of warehouse and office space for Warmup on a 15 year lease to complement their existing 1,000 sq m facility with us on the Estate. This facility will form part of a larger 3,200 sq m scheme, which is due to complete in Q1 2013. In North Feltham, we signed a 6,500 sq m pre-let logistics facility for a freight forwarder, with a further 1,500 sq m of speculative space adjacent to the site, which is due to complete in Q4 2013. We have also approved a 7,800 sq m speculative development in Edmonton, which is due to commence in the second half of the year. Our plans to commence the speculative development of a three building, 15,000 sq m scheme at the Origin site in Park Royal, are currently under review following the site having been identified as a potential HS2 construction site.

In Poland we have six pre-let logistics developments in progress totalling 69,700 sq m. This includes a 23,800 sq m facility in Warsaw for Poland's largest convenience store chain, Zabka, which is expected to complete in Q3 2013. Other large projects in Poland include 18,400 sq m for a car parts manufacturer in Tychy and 10,600 sq m for Valeo and CAT in Strykow.

In Germany, we started the development of a 17,300 sq m speculative logistics scheme in Alzenau, near Frankfurt, and we are also developing 11,900 sq m of speculative logistics space in Krefeld, near Dusseldorf, which is the second phase of this scheme.

Our 34,000 sq m pre-let office development for Alcatel-Lucent in Vimercate, Milan, remains on track to complete in Q1 2014.

Potential projects

We have a 573 hectare land bank, including 296 hectares of predominantly well located sites earmarked for future development projects with the potential to generate £84 million of new annualised rental income. These sites include land at the Slough Trading Estate and Heathrow, in the UK, land around Dusseldorf in Germany and in key markets in Poland.

Our pipeline of demand for further pre-let and speculative schemes is encouraging with several projects under negotiation, agreed subject to planning approval or being prepared for construction. We remain confident that further progress will be made with the development programme in the current year and beyond.

Further detail on our completed and active development projects is presented in our Property Analysis Booklet, which is available to download at www.segro.com/investors.

Portfolio valuation

European property markets faced a challenging economic environment in 2012, with investors adopting risk-averse strategies to reflect the very uncertain external macro conditions. As a consequence, capital was primarily targeted at prime assets in core markets, with the most liquid and transparent markets of London, Paris and the major German cities particularly benefiting from this polarisation towards 'safe-havens' and a focus on only the best property. Investments that met these criteria attracted good investor interest and valuations for high quality warehousing and light industrial assets remained well supported as a result. 

The very limited investor appetite for the more secondary, older and bespoke assets, particularly those located in the more volatile regions of the Eurozone, has continued to negatively impact valuations. Shorter lease length suburban office properties have also experienced valuation declines, reflecting the greater risk premium being applied by investors to these types of assets, and following an increase in transactional evidence, particularly in the second half of 2012.

These trends are consistent with the valuation movements in our portfolio over the past year. Whilst the valuation of our high quality warehousing, light industrial and data centre properties in core markets has been relatively resilient, we have seen weakness in the valuation of our non-core assets, in particular large bespoke business parks such as Pegasus Park and Vimercate, and also South East UK suburban offices. Similarly, the Neckermann site weakened in value due to the market environment, a situation which was exacerbated and accelerated by the insolvency of that occupier during the year.

Over the year to 31 December 2012, the total value of the Group's property portfolio, comprising completed properties (including our share of joint venture assets), land and development decreased by £309 million on a like for like basis, including a £267 million reduction for the Group's non-core and large non-strategic assets and its South East UK suburban offices, the latter of which were predominantly impacted in the second half of the year.

On a like for like basis, completed property values for our higher quality core industrial, logistics and data centre portfolio reduced by 1.2 per cent and significantly outperformed the IPD UK Industrial Quarterly Index, which fell by 3.8 per cent in 2012. Overall, including the impact of the reduction in the valuation of our South East UK suburban offices, large non-strategic assets and the remaining smaller non-core assets, the portfolio recorded a like for like valuation reduction of 5.9 per cent.

In the UK, the value of our completed portfolio of core warehousing, light industrial and data centre properties reduced by 1.4 per cent, or 4.0 per cent overall, including non-core and suburban office assets. The best performing assets were those acquired in the LPP joint venture, where valuations were broadly flat. Asset values at Heathrow were broadly flat to slightly positive in the second half of the year as a result of lettings activity, leading to an overall reduction of 1.7 per cent over the full year. In the Thames Valley, valuations were mainly impacted by suburban offices with shorter leases on the Slough Trading Estate and at IQ Winnersh. This was reflected in a 4.8 per cent decline in the Slough Trading Estate's valuation. Excluding suburban offices, the Estate's valuation declined by 1.9 per cent.

Our Polish assets were the best performing of those on the Continent, recording an 2.6 per cent valuation increase, reflecting development gains and lease extensions. In France, the valuation of our core assets in the Ile de France region and Lyon remained resilient, recording a 0.5 per cent reduction, compared with a 2.4 per cent decline for the overall French portfolio. Asset values in Germany fell by 15.5 per cent, largely reflecting the write down of the Neckermann site in the first half of the year. In Belgium and the Netherlands, asset values fell by 26.5 per cent over the year, largely reflecting the valuation reduction on the Pegasus Park office campus. 

summary of property portfolio analysis as at 31 december 2012

 

By strategy	Lettable areasq m	Completed£m	Owner occupied£m	Land &development5£m	Combinedpropertyportfolio£m	Net initial yield2%	Net true equivalent yield2%	Valuation movement1 2 %	Vacancy by ERV2 6%
UK
Core - warehouses, light industrial, data centres and other business space	1,853,030	2,333.7	-	123.4	2,457.1	5.7	7.5	(1.4)	9.5
Core - offices	163,478	372.0	3.0	-	375.0	7.3	8.4	(15.9)	4.2
Smaller non-core	206,268	170.4	-	5.7	176.1	6.4	8.5	(6.9)	17.7
Large non-strategic assets3	34,497	80.0	-	1.5	81.5	5.9	7.3	(5.2)	0.0
	2,257,273	2,956.1	3.0	130.6	3,089.7	6.0	7.6	(4.0)	9.1
Continental Europe
Core - warehouses, light industrial, data centres and other business space	1,867,184	963.0	0.5	132.9	1,096.4	7.5	8.3	(0.7)	4.6
Core - offices	1,245	1.9	-	-	1.9	6.9	7.3	(5.6)	0.0
Smaller non-core	586,191	196.1	0.8	47.1	244.0	8.5	9.2	(13.5)	10.0
Large non-strategic assets4	614,818	200.7	-	22.6	223.3	13.2	9.9	(36.0)	9.6
	3,069,438	1,361.7	1.3	202.6	1,565.6	8.5	8.6	(10.0)	6.5
Group
Core - warehouses, light industrial, data centres and other business space	3,720,214	3,296.7	0.5	256.3	3,553.5	6.2	7.7	(1.2)	8.0
Core - offices	164,723	373.9	3.0	-	376.9	7.3	8.4	(15.9)	4.2
Smaller non-core	792,459	366.5	0.8	52.8	420.1	7.5	8.9	(10.6)	13.3
Large non-strategic assets3,4	649,315	280.7	-	24.1	304.8	11.1	9.2	(29.5)	8.0
Group Total	5,326,711	4,317.8	4.3	333.2	4,655.3	6.8	7.9	(5.9)	8.2

1 The valuation movement percentage is based on the difference between the opening and closing valuations for completed properties, allowing for capital expenditure, acquisitions and disposals.

2 In relation to the completed properties only.

3 Thales campus in Crawley which was sold in January 2013 for £80 million. Gross passing rent is £5 million.

4 Inclusive of the MPM campus in Munich which was sold in January 2013 for £56 million. Gross passing rent is £4.7 million.

5 Land and development valuations by asset type are not available as land sites are not yet categorised by asset type.

6 Vacancy rate excluding short term lettings for the Group at 31 December 2012 is 9.8%.

Full year dividend of 14.8 pence per share

The recommended final dividend of 9.9 pence per share (2011: 9.9 pence) will be paid in the form of a Property Income Distribution, giving a total dividend for the year of 14.8 pence (2011: 14.8 pence). The final dividend will be paid, subject to shareholder approval at the AGM, on 26 April 2013 to shareholders on the register at the close of business on 22 March 2013. The Board is offering a Dividend Reinvestment Plan for the 2012 final dividend.

As previously stated, the Board expects to at least maintain the dividend throughout the period of the strategic portfolio reshaping and is committed to a progressive dividend policy in the longer term.

Outlook

Economic conditions remain uncertain, although there are some signs of stabilisation in the Eurozone and a recovery in the UK. Property finance continues to be restricted for many and this, combined with the risk averse attitude of investors, means that the pricing of secondary assets is likely to remain under pressure.

By contrast, prime assets in the most liquid and transparent markets, such as London, the Ile de France and the major German cities are likely to continue benefitting from the polarisation towards 'safe havens'. As a result, valuations of modern warehousing, light industrial and data centre assets are expected to remain well-supported.

Operationally, we have made good progress over the past year, and believe that we are well-positioned for the year ahead. We have a strong development pipeline and an excellent land bank for future projects. We are continuing to see a good level of occupier demand in our core markets, both for our existing assets and for our developments, from a range of customers, with the continuing growth of e-retailing, local delivery and data storage requirements being particular areas of interest. There is a limited supply of good quality product in our markets and few developers have the expertise and land to meet demand for modern space in the right locations. We are well-placed to satisfy that demand.

FINANCIAL REVIEW

HIGHLIGHTS

		31 December 2012	31 December 2011
Total property return (%)		(0.1)	0.8
Net asset value (NAV) per share (p)		302	345
EPRA1 NAV per share (p)		294	340
Realised and unrealised property loss2 (£m)		(353.2)	(260.1)
Loss before tax (£m)		(202.2)	(53.6)
EPRA1 profit before tax (£m)		144.9	138.5
Loss per share (EPS) (p)		(26.6)	(4.1)
EPRA1 EPS (p)		19.3	18.4
1 EPRA NAV, EPRA EPS and EPRA profit before tax are alternate metrics to their IFRS equivalents that are calculated in accordance with the Best Practices Recommendations of the European Public Real Estate Association (EPRA). SEGRO uses these alternative metrics as they highlight the underlying recurring performance of the property rental business, which is our core operational activity. The EPRA metrics also provide a consistent basis to enable a comparison between European property companies.
2 Includes the realised and unrealised property loss of £340.8 million for the wholly owned portfolio (see note 7 to the financial information) and the realised and unrealised property loss of £12.4 million from our share of joint ventures (see note 6 to the financial information).

TOTAL PROPERTY RETURN

Total property return is a measure of the ungeared combined income and capital return from the Group's property portfolio, excluding land, and is calculated in accordance with IPD.

Total property return for the year was 0.1 per cent negative, compared to a 0.8 per cent positive return for 2011. This reflects an income return of 6.5 per cent (2011: 5.7 per cent), offset by a negative capital return of 6.2 per cent (2011: 4.9 per cent negative). The improved income return reflects the benefit of a lower vacancy rate, a reduction in non-income producing assets and improved like for like net rental income. The higher negative capital return in 2012 is driven by an unrealised valuation decline, principally in relation to our large non-strategic assets and our UK office portfolio. Realised losses on disposals of non-core assets during the year have also contributed to the negative capital return.

NAV AND EPRA NAV PER SHARE

A reconciliation of EPRA net assets to total net assets attributable to ordinary shareholders and the corresponding NAV and EPRA NAV per share calculations is provided in note 13 to the financial information.

EPRA NAV per share at 31 December 2012 was 294 pence, compared with 340 pence as at 31 December 2011. The decrease is largely as a result of the reduction in non-core property values and South East UK suburban offices, and dividends paid, offset by EPRA profit generated.

	£m	Shares Million	Pence per share
EPRA net assets attributable to ordinary shareholders at 31 December 2011	2,521.5	740.6	340
Realised and unrealised property loss (including joint ventures at share)	(353.2)		(47)
EPRA profit before tax	144.9		20
Dividends (2011 final and 2012 interim)	(109.7)		(15)
Early close-out of bond and bank debt (net)	(14.5)		(2)
Exchange rate movement	(5.6)		(1)
Other	(7.4)		(1)
EPRA net assets attributable to ordinary shareholders at 31 December 2012	2,176.0	740.9	294

REALISED AND UNREALISED PROPERTY GAIN/(LOSS)

A total realised and unrealised loss on property for the wholly owned portfolio of £340.8 million (2011: £271.8 million loss) has been recognised in 2012, which includes an unrealised valuation deficit on investment properties of £283.2 million (2011: £272.3 million deficit). A loss of £28.9 million arose in 2012 on disposal of investment properties and a further loss of £1.8 million arose on disposal of trading properties (2011: £5.2 million gain and £5.2 million gain, respectively). Impairment provisions of £24.9 million (2011: £9.1 million) were recorded on certain trading properties as their fair value is deemed to be less than the original cost. The total realised and unrealised property loss for the wholly owned portfolio is further analysed in note 7 to the financial information.

Our share of realised and unrealised property losses generated from joint venture interests was £12.4 million (2011: £11.7 million gain) and are further analysed in note 6 to the financial information.

The Group's trading property portfolio (including share of joint ventures) has an unrealised valuation surplus of £7.9 million at 31 December 2012 (2011: £11.4 million surplus), which has not been recognised in the financial statements as they are recorded at the lower of cost or fair value.

EPS AND EPRA EPS

EPS is (26.6) pence for 2012, compared to (4.1) pence in 2011. The main driver behind this was the higher realised and unrealised property losses and a reduced fair value gain on derivatives in 2012 compared to 2011.

EPRA EPS of 19.3 pence per share is 4.9 per cent higher than the 2011 equivalent (18.4 pence per share) as a result of a £6.6 million increase in EPRA profit after tax, which is further analysed in the EPRA Profit and following sections below.

EPRA PROFIT

EPRA profit is arrived at as follows:

	2012 £m	2011 £m £m
Gross rental income	305.4	326.1
Property operating expenses	(50.6)	(54.9)
Net rental income	254.8	271.2
Joint venture management fee income	7.4	5.9
Administration expenses	(27.9)	(32.1)
Share of joint ventures' EPRA profit1	20.2	16.6
EPRA operating profit before interest and tax	254.5	261.6
EPRA net finance costs	(109.6)	(123.1)
EPRA profit before tax	144.9	138.5
Tax on EPRA profit	(1.9)	(2.1)
EPRA profit after tax	143.0	136.4
1 Comprises net property rental income less administration expenses, net interest expenses and taxation.

A reconciliation between EPRA profit before tax and IFRS loss before tax is provided in note 2 to the financial information.

EPRA profit before tax increased by £6.4 million compared to 2011. The reduction in net rental income, largely due to disposals, has been more than offset by reductions in EPRA net finance costs and administration expenses. In addition, SEGRO's share of EPRA profit generated from our joint ventures and joint venture management fee income earned have also increased following our acquisition of the Logistics Property Partnership joint venture.

NET RENTAL INCOME

Like for like net rents have increased by £3.9 million, driven, in part, by the reduced vacancy, which has had the dual impact of increasing gross rental income and reducing property operating expenses on a like for like basis; as well as the impact of rent reviews and other cost savings.

Net rental income in total has decreased by £16.4 million compared to 2011. The like for like net rental income increase noted above combined with the increase in income from developments (£9.0 million) and acquisitions (£5.7 million), is offset by the impact of disposals (£21.0 million decrease in the UK and £2.2 million decrease in Continental Europe), a weaker euro average exchange rate this period compared to 2011 (£6.3 million) and reduced income from surrender premiums and dilapidations (£3.3 million).

The key drivers of the movement in net rental income are set out in the table below:

	2012	2011
Like for like net rental income	£m	£m
Completed properties owned throughout 2012 and 2011 (like for like net rental income)	214.2	210.3
Development lettings	11.6	2.6
Properties taken back for development	0.7	1.6
Like for like net rental income plus developments	226.5	214.5
Properties acquired	6.2	0.5
Properties sold	15.3	38.5
Net rental income before surrenders, dilapidations and exchange	248.0	253.5
Lease surrender premiums and dilapidation income	2.9	6.2
Rent lost from lease surrenders and other income	3.9	5.2
Impact of exchange rate difference between years	-	6.3
Net rental income per financial statements	254.8	271.2

 

JOINT VENTURES

Joint venture management fee income has increased by £1.5 million, largely due to fees earned from development activity within the APP joint venture and management fees earned from the newly acquired LPP joint venture.

SEGRO's share of EPRA profit from joint ventures has increased by £3.6 million compared to 2011. EPRA profit of £4.8 million has been recognised during the year in relation to SEGRO's share of the LPP joint venture, which was acquired in January 2012. This is offset by a reduction in SEGRO's share of EPRA profit generated from the APP joint venture of £1.5 million to £9.9 million, largely due to disposals and takebacks.

TOTAL COSTS

The Group is focused on carefully managing its cost base and regards the total cost ratio as a key measure of performance. The total cost ratio calculation is outlined in the table below. 

The total cost ratio for 2012 was 22.9 per cent compared to 24.5 per cent in 2011, notwithstanding the net disposals in the period. The improved ratio in comparison to 2011 is largely driven by a reduction in administration expenses of £4.2 million due to reduced staff costs and other professional fees. Cost control will continue to be a high priority for the Group, with continued focus on the cost base whilst the Group is in a net divestment position.

Vacant property costs are one of the Group's largest costs, whereby property taxes, maintenance and other estate service expenses relating to unlet properties are borne by the Group. Vacant property costs have decreased by £1.5 million to £13.7 million (2011: £15.2 million) as a direct result of the reduction in vacancy from 9.1 per cent to 8.2 per cent. The cost ratio, excluding vacant property costs, was 19.0 per cent for 2012 (2011: 20.3 per cent).

Total cost ratio	2012 £m	2011 £m
Costs
Property operating expenses1 (see note 5 to the financial information)	50.6	54.9
Administration expenses	27.9	32.1
Share of joint venture property operating expenses2 (see note 6 to the financial information)	4.8	4.5
Less:
Joint venture property management fee income (see note 4 to the financial information)	(4.1)	(3.5)
Total costs (A)	79.2	88.0
Gross rental income
Gross rental income (see note 4 to the financial statements)	305.4	326.1
Share of joint venture property gross rental income (see note 6 to the financial statements)	40.0	33.0
Total gross rental income (B)	345.4	359.1
Total cost ratio (A)/(B)	22.9%	24.5%
1 Property operating expenses are net of costs capitalised in accordance with IFRS of £2.6m (see note 5 to the financial information for further detail on the nature of costs capitalised).
2 Share of joint venture property operating expenses after deducting costs related to performance and other fees.

NET FINANCE COSTS

EPRA net finance costs (which exclude the fair value gains and losses on interest rate swaps and currency derivatives and realised gains or losses on debt buy backs) have decreased by £13.5 million to £109.6 million. The decrease is mainly attributable to the impact of interest savings from disposal proceeds used to reduce net debt, lower euro short-term interest rates and currency translation, which have offset the impact of higher interest costs resulting from acquisitions and funding of the largely pre-let development programme.

A net fair value gain on interest rate swaps and other derivatives of £22.9 million has been recognised within net finance costs in 2012 (2011: £67.1 million gain), mainly as a result of a further decrease in medium-term sterling interest rates on the fair value of the Group's pay floating, receive fixed sterling interest rate swap portfolio. As discussed further in the Financial Position and Funding section below, a loss of £16.8 million has been incurred in relation to the purchase and cancellation of £112.6 million of Bonds and Notes in December 2012. This is partially offset by a gain of £2.3 million recognised following the cancellation of £82 million of committed debt facilities in May and June 2012. The gains and losses discussed in this paragraph are not included in EPRA net finance costs, in accordance with EPRA Best Practices Recommendations. 

TAX

A tax credit of £4.9 million has been recognised in 2012 (2011: £23.0 million), with a £1.9 million tax charge attributable to EPRA profit (2011: £2.1 million charge), offsetting a £6.8 million tax credit in relation to the non-EPRA loss (2011: £25.1 million credit). The tax charge on EPRA profit reflects an effective tax rate of 1.3 per cent (2011: 1.5 per cent), consistent with a Group target tax rate of less than 3 per cent.

The Group's target tax rate of less than 3 per cent reflects the fact that around three quarters of its assets are located in the UK and France and qualify for REIT and SIIC status in the UK and France respectively. These regimes were introduced by the respective governments to remove inequalities between different real estate investors and to provide an opportunity for shareholders of all sizes to invest in property in a low-cost and tax efficient way. As a result, UK REIT and French SIIC status means that income from rental profits and gains on disposals of assets (in France and the UK) are exempt from corporation tax provided SEGRO meets a number of conditions, including, but not limited to, distributing 90 per cent of profits from rental income. These distributions (PIDs) are subject to 20 per cent withholding tax unless the shareholder has tax exempt status. The distributions are then further taxed in the hands of the shareholder at their marginal rate of tax. SEGRO's profits in other countries remain taxable.

 

CASH FLOW AND NET DEBT RECONCILIATION

A summary of cash flows and a reconciliation of net debt for the year is set out in the table below:

	2012 £m	2011 £m
Opening net debt	(2,303.4)	(2,203.2)
Cash flow from operations	205.1	239.0
Finance costs (net)	(103.9)	(120.3)
Dividends received (net)	18.7	10.4
Tax paid (net)	(12.8)	(4.9)
Free cash flow	107.1	124.2
Dividends paid	(109.7)	(107.4)
Acquisitions and development of investment properties	(277.9)	(187.1)
Investment property sales (including joint ventures)	494.2	79.9
Net settlement of foreign exchange derivatives	56.0	(8.1)
Net investment in joint ventures	(51.8)	(15.9)
Other items	(15.2)	7.9
Net funds flow	202.7	(106.5)
Non-cash movements	(5.3)	(5.3)
Exchange rate movements	15.7	11.6
Closing net debt	(2,090.3)	(2,303.4)

 

Free cash flow generated from operations was £107.1 million in 2012, a decrease of £17.1 million from 2011, primarily due to a reduction in cash flow from operations following the net disposals in the year, a decrease in proceeds from trading properties and an increase in rent averaging income. This is partially offset by reduced finance costs, as proceeds from disposals were used to reduce debt. Furthermore, tax paid has increased following a payment made to HMRC in respect of tax planning entered into by Brixton (prior to the Group's acquisition of the company) which was fully provided for at the time of the Brixton acquisition.

Capital expenditure on acquisitions and development of investment properties totalling £277.9 million has been spent as well as £51.8 million in acquiring a joint venture interest, which was funded through proceeds from investment property sales of £494.2 million. Dividends paid of £109.7 million are based on the 2011 final and the 2012 interim. The settlement of foreign exchange derivatives has led to an inflow of £56.0 million as euro rates have weakened against sterling in the year. Net debt has reduced by £213.1 million in the year from £2,303.4 million to £2,090.3 million.

CAPITAL INVESTMENT/DIVESTMENT

As detailed more fully in the Chief Executive's Review, the Group has made excellent progress in its key strategic priority of reshaping the portfolio during the year. The disposal programme has successfully divested £546.7 million of non-core assets which was ahead of target, of which £296.2 million has been reinvested into the acquisition of assets more aligned with our strategy and into our largely pre-let development programme. The net divestment in 2012 of £184.8 million (2011: £90.8 million net investment), as detailed in the table below, has been used to reduce debt as outlined in the Cash Flow and Net Debt Reconciliation section.

	2012 £m	2011 £m
Investment
Development expenditure on investment properties	130.3	136.9
Acquisitions of investment properties	153.0	45.3
Development expenditure on trading properties	12.9	8.4
Acquisitions of trading properties	-	3.6
Total investment1	296.2	194.2
Divestment
Investment properties	(520.0)	(77.6)
Trading properties	(22.8)	(25.8)
Joint ventures	(3.9)	-
Total divestment1	(546.7)	(103.4)
Net investment in joint ventures1	65.7	-
Net capital (divestment)/investment	(184.8)	90.8
1 Values are stated on an accruals basis rather than a cash flow basis and exclude gains or losses on disposals and therefore can differ to the Cash Flow and Net Debt Reconciliation section above.

Contractual obligations in respect of future committed acquisitions and development expenditure on projects currently in progress or committed amount to approximately £62.9 million (2011: £100.7 million).

FINANCIAL POSITION AND FUNDING

At 31 December 2012, the Group's net borrowings were £2,090.3 million (2011: £2,303.4 million) comprising gross borrowings of £2,106.9 million (2011: £2,324.6 million) and cash balances of £16.6million (2011: £21.2 million). These cash balances, together with the Group's interest rate and foreign exchange derivatives portfolio, are spread amongst a strong group of relationship banks, all of whom currently have long term credit ratings of A- or better.

The Group has actively managed its debt funding during the year in order to maintain both a strong liquidity position and debt maturity profile whilst managing net finance costs. The Group also seeks to maintain an appropriate mix of debt funding, between long-dated core funding provided by bonds, and shorter dated bank facilities providing funding headroom and flexible borrowings that can be repaid as the portfolio reshaping process generates disposal proceeds.

The following significant debt related transactions were completed during the year:

1) In May and June 2012 a total of £82 million of committed debt facilities maturing in 2014 were cancelled at a discount to face value, generating a profit of £2.3 million;

2) In November 2012 a €100 million bi-lateral bank facility maturing in April 2014 was refinanced to extend the maturity of €30 million of the facility until November 2014 and the remaining €70 million until November 2017; and,

3) Following a formal Tender Offer process, on 6 December 2012 we announced the purchase and cancellation of the following Bonds and Notes with an aggregate nominal amount of £112.6 million:

i. £49.9 million of the £150 million 6.25% Notes due in September 2015;

ii. £31.1 million of the £150 million 5.25% Bonds due in October 2015; and

iii. £31.6 million of the £210 million 6.00% Bonds due in October 2019.

 

The rationale for this transaction was to manage the sources and maturities of the Group's debt funding and achieve a lower running cost of debt. The purchase was funded by drawing on the Group's existing committed bank facilities. This transaction generated an exceptional charge of £16.8 million. The most significant element of this charge (£13.1 million) is the difference between the market price of the purchased bonds (on announcement of the tender offer) and their face value. This amount represents a pre-payment of future bond coupons which are at a higher interest rate than prevailing market interest rates. The remainder of the exceptional charge is made up of a premium of £1.3 million (around 1 per cent) to the quoted market price of the bonds on announcement of the tender offer, fees of £0.4 million and £2.0 million of accelerated fair value and capitalised finance cost amortisation.

There was a reduction in the average interest rate of the gross borrowings of the Group at 31 December 2012 of 0.2 per cent, as a result of the transaction. This was driven by the lower interest rate on the bank debt drawn to fund the buy back compared with the coupons on the Bonds and Notes purchased and cancelled.

At 31 December 2012, 81 per cent (£1,689.1 million) of the net borrowings of the Group were long-term bonds with the remaining 19 per cent (£401.2 million) representing bank borrowings net of cash. This mix of debt provides flexibility to repay short-term bank borrowings as further non-core disposal proceeds are realised during 2013. We will continue to carefully manage the composition of our debt to balance the maintenance of liquidity headroom with the avoidance of having too high a proportion of relatively higher cost and financially less flexible bond debt.

The Group's debt portfolio is predominantly unencumbered (secured borrowings at 31 December 2012 were £41.0 million, representing just 2 per cent of the Group's total gross borrowings), which provides additional flexibility to support the portfolio reshaping process within the wholly owned portfolio and supports the strong credit rating of the Group's unsecured bonds.

Group policy is that debt funding in joint ventures should be on a non-recourse basis to the Group. Given this requirement, and the size of joint ventures, secured funding is generally the most cost effective source of debt financing for joint ventures. At 31 December 2012 the Group's share of the gross borrowings in its joint ventures was £317.0 million.

The market value of the gross borrowings of the Group at 31 December 2012 was £2,409.9 million (2011: £2,507.5 million), £303.0 million (2011: £182.9 million) higher than the balance sheet carrying value. The increase in the differential between the book value and the market value of gross borrowings relates predominately to a significant increase in the market value of the Group's sterling Bonds and Notes, driven mainly by a decrease during the year in the credit spread on SEGRO's bonds. This differential, which typically fluctuates on a daily basis and usually reduces as the maturity date of the bonds approaches, would be crystallised as an exceptional cost and a reduction in EPRA NAV if these borrowings were repaid prior to their maturity date.

The net market value of the Group's portfolio of interest rate swaps at 31 December 2012 was an asset of £103.3 million (2011: £81.1 million), made up mainly of sterling instruments that swap some of the Group's sterling Bonds and Notes from fixed to floating interest rates. The increase in the value of these swaps during 2012 was driven by falling medium-term sterling swap rates, and partially offsets the increase in the market value of the Group's sterling Bonds and Notes noted above, and would be crystallised as a net increase in EPRA NAV if these instruments were repaid prior to their maturity date.

The net market value of the Group's forward foreign exchange and currency swap contracts at 31 December 2012 was a net liability of £13.8 million (2011: an asset of £28.5 million). These contracts are mainly short-dated (maturities of six months or less) instruments used to swap sterling liabilities into euros as part of the Group's currency translation hedging strategy. The strengthening of the euro against sterling towards the end of 2012 resulted in a reduction in the market value of these derivatives. This was, however, offset by a corresponding increase in the sterling value of the euro denominated property assets that they are hedging.

GEARING AND FINANCIAL COVENANTS

The loan to value ('LTV') ratio of the Group at 31 December 2012 on a look-through basis (i.e. including the borrowings and property assets of the Group's share of joint ventures, which will be our principal measure of LTV going forward) was 51 per cent (2011: 49 per cent). Including, on a pro forma basis, the impact of the MPM Munich and Thales disposals announced on 8 January 2013, the LTV ratio reduces to 50 per cent.

On a wholly owned basis, the LTV ratio of the Group was 52 per cent at 31 December 2012 (2011: 50 per cent) and 51 per cent after adjusting for the impact of the MPM Munich and Thales disposals.

We remain committed to our target of reducing the LTV ratio towards 40 per cent over the longer term because we continue to believe that REITs with lower leverage offer a lower risk, less volatile investment proposition for shareholders. Over time we expect the Group's leverage to reduce through selling assets, through development, asset management, rental growth driven gains and from cyclical valuation uplifts.

The gearing ratio of the Group at 31 December 2012, as defined within the principal debt funding arrangements of the Group (i.e. excluding debt funding arrangements within joint ventures), was 93 per cent (2011: 89 per cent), significantly lower than the Group's tightest financial gearing covenant within these debt facilities of 160 per cent.Property valuations would need to fall by around 21 per cent from their 31 December 2012 values to reach the gearing covenant threshold of 160 per cent.

The Group's other key financial covenant within the principal debt funding arrangements of the Group is interest cover, requiring that net interest before capitalisation be covered at least 1.25 times by net property rental income. At 31 December 2012, the Group comfortably met this ratio at 2.3 times (2011: 2.2 times). On a look through basis, including joint ventures, this ratio was 2.3 times (2011: 2.2 times).

LIQUIDITY POSITION

Funds availability at 31 December 2012 totalled £448.5 million, comprising £16.6 million of cash and £431.9 million of undrawn bank facilities provided by the Group's relationship banks, of which only £14.1 million were uncommitted. This level of funds availability provides substantial liquidity to fund upcoming debt maturities (with only £70.5 million of committed debt facilities maturing before 31 December 2013) and committed capital expenditure (£62.9 million at 31 December 2012) as well as providing additional liquidity headroom.

At 31 December 2012, the weighted average maturity of the gross borrowings of the Group was 8.3 years (2011: 8.8 years), broadly in line with the weighted average lease term of the Group. This relatively long average debt maturity translates into a favourable, well spread debt funding maturity profile which reduces future refinancing risk.

GOING CONCERN

Whilst wider economic conditions remain challenging, the Group has realised substantial net disposal proceeds during 2012 and has extended the maturity of a bilateral facility maturing in 2014. As a result, the Group continues to have a strong liquidity position, a favourable debt maturity profile and substantial headroom against financial covenants. It can reasonably expect to be able to continue to have good access to capital markets and other sources of funding.

Having made enquiries and having considered the principal risks and uncertainties facing the Group as detailed on page 19, the Directors have a reasonable expectation that the Company and the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

INTEREST RATE RISK EXPOSURE

The Group's interest rate risk policy is that between 50 and 100 per cent of net borrowings should be at fixed or capped rates, both at a Group level and by major borrowing currency (currently euro and sterling), including the impact of derivative financial instruments.

At 31 December 2012, including the impact of derivative instruments, £1,231.1 million (2011: £1,703.3m) of borrowings were at fixed rates, representing 59 per cent (2011: 74 per cent) of the net borrowings of the Group. By currency, 59 per cent of the euro denominated net borrowings of the Group of £1,251.6 million and 59 per cent of the remaining net borrowings (predominantly sterling) of £838.7 million were at fixed rates. The level of fixed cover has fallen in 2012 towards the lower end of our revised policy range due to the maturity of €100 million of pay fixed interest rate swaps, and the purchase and cancellation of £112.6 million of fixed rate Bonds and Notes towards the end of the year. No replacement fixed cover has been arranged based on: i) the judgement that fixed cover will increase naturally during 2013 as further disposal proceeds are used to repay floating rate bank debt; and ii) having carried out sensitivity analysis of the potential financial impact of a higher level of floating rate interest exposure.

The weighted average maturity of fixed rate cover of £1,231.1 million at 31 December 2012 was 8.4 years at an average fixed interest rate of 5.9 per cent. Including the impact of derivative financial instruments, floating rate gross borrowings at 31 December 2012 were £875.8 million at an average interest rate (including margin) of 2.7 per cent, giving a weighted average interest rate for gross borrowings at that date, before commitment fees and amortised costs, of 4.6 per cent, or 4.9 per cent after allowing for such items. The main reasons for the lower average interest rates for gross borrowings at December 2012 compared with 4.8 per cent and 5.2 per cent respectively for December 2011, are the impact of the Bond and Note tender and lower short-term sterling and euro interest rates.

The Group's marginal funding cost under unsecured bank facilities is currently between 2 and 3 per cent (dependent on currency and the level of fixed interest cover) substantially lower than the average interest rate of the gross borrowings of the Group. To the extent that net disposal proceeds generated in 2013 are used to repay drawn bank borrowings at the marginal rate, the average interest rate of the Group will increase. Based on the net borrowings position and the marginal funding rate of the Group at 31 December 2012, repaying £100 million of floating rate bank borrowings would increase the average interest rate of the Group by around 0.2% on an annualised basis.

As a result of fixed rate cover in place, if short-term interest rates had been 1 per cent higher throughout the year to 31 December 2012, the adjusted net finance cost of the Group would have increased by approximately £6 million, representing around 4 per cent of EPRA profit after tax.

The Group has decided not to elect to hedge account its interest rate derivatives portfolio. Therefore, movements in the fair value are taken to the income statement but, in accordance with EPRA Best Practices Recommendations, these gains and losses are eliminated from EPRA profit before tax and EPRA EPS.

FOREIGN CURRENCY TRANSLATION EXPOSURE

The Group has negligible transactional foreign currency exposure, but does have a potentially significant currency translation exposure arising on the conversion of its substantial foreign currency denominated net assets (mainly euro) into sterling in the Group's consolidated accounts.

The Group policy is to hedge between 50 per cent and 90 per cent of foreign currency denominated assets with liabilities of the same currency to protect the Group's reported consolidated net asset value, earnings, cash flows and financial gearing covenant.

As at 31 December 2012, the Group had gross foreign currency assets amounting to £1,679.0 million, which were 84 per cent hedged by gross foreign currency denominated liabilities (including the impact of derivative financial instruments) of £1,405.6 million. Translation hedging has been maintained towards the upper end of the 50 to 90 per cent policy range in order to substantially reduce the impact of movements in the sterling/euro exchange rate on NAV and EPRA profits of the Group.

A 5 per cent strengthening against sterling in the value of the other currencies in which the Group operates at 31 December 2012 would have increased net assets by approximately £15 million and increased reported gearing by less than 1 per cent. Including the impact of forward foreign exchange and currency swap contracts used to hedge foreign currency denominated net assets, the increase in gearing would have been approximately 2 per cent. 

A 5 per cent strengthening against sterling in the value of the other currencies in which the Group operates at 31 December 2012, including the impact of forward foreign exchange and currency swap contracts used to hedge foreign currency denominated net assets, would have increased the loan to value ratio on a look-through basis by 0.6 per cent.

The average exchange rate used to translate euro denominated earnings generated during 2012 into sterling within the consolidated income statement of the Group was €1.23: £1. Based on the hedging position at 31 December 2012, and assuming that this position had applied throughout 2012, if the euro had been 5 per cent stronger than it was against sterling throughout the year (€1.17: £1), EPRA profits after tax for the year would have been approximately £1.9 million (1 per cent) higher than those reported. 

PRINCIPAL RISKS AND UNCERTAINTIES

The Group recognises that its ability to manage risk consistently across the organisation is central to its success. It defines risk as the potential effect of uncertainty on its ability to achieve its objectives, while risk management ensures a structured approach to decision making which aims to reduce the uncertainty surrounding expected outcomes, balanced against the objective of creating value for its shareholders.

The Group's risk management process and risk mitigating actions are described in the 2012 Annual Report. The Principal Risks and Uncertainties are summarised below.

Uncertainties

These represent the risk factors over which the Group has limited control and so they are rigorously monitored. The most significant of these risk factors include changes in macro-economic conditions, change of government policy and changes in the commercial environment.

Risks1. Strategic Risks

·; Portfolio Shape and Performance. Management considers that if the Group holds the wrong shape portfolio then non-performing assets or the wrong type of assets may dilute portfolio returns, resulting in relative underperformance of TPR and TSR against the market and external expectations.

·; Pace of Strategic Change.  If SEGRO does not deliver its stated strategic changes at the right pace and within an acceptable timeframe then investor expectations may not be met and improved shareholder returns may not be delivered.

·; Impact of the Eurozone Economic Environment. A deterioration in economic conditions in the Eurozone could result in a loss in value or reduction in income to the Group, by adversely impacting economic performance in the markets in which we hold property assets in Continental Europe. If this deterioration also resulted in a weakening of the Euro against Sterling this would have an adverse currency translation impact on the reported Sterling income and asset values from our euro denominated operations.

2. Financial Risks

·; Solvency and Covenant Breach.  A material fall in the Group's property asset values or rental income could lead to a breach of financial covenants within its debt funding arrangements. This could result in the cancellation of debt funding which could, in turn, leave the Group without sufficient long-term resources (solvency) to meet its commitments.

3. Operational Risks

·; Operational Delivery.  The Group's ability to maintain its reputation, revenues and shareholder value could be damaged by operational failures such as: health and safety incidents, environmental damage, business systems or IT disruption, failing to attract, retain and motivate key staff, and possible breaches of anti-bribery and corruption regulation.

4. Investment Risks

·; Market Cycle.  The property market is cyclical and there is an inherent risk that the Group either misinterprets the market or fails to react appropriately to changing market conditions, resulting in capital being invested or disposals taking place at the wrong time in the cycle.

·; Appropriateness of Investment Plans. Investment decisions to buy, hold, sell or develop assets could be wrong due to inadequate analysis, inappropriate assumptions, poor due diligence or changes in the operating environment. 

·; Portfolio Valuation. If we fail to anticipate portfolio valuation changes we may fail to take action to sell poor performing assets or we may not be able to manage shareholder expectations appropriately, resulting in TPR underperformance or potential damage to our reputation with investors and, ultimately, to an increase in the cost of capital. 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Statement of Directors' Responsibilities below has been prepared in connection with the Company's full Annual Report for the year ended 31 December 2012. Certain parts of the Annual Report have not been included in this announcement as set out in note 1 of the financial information.

We confirm that to the best of our knowledge:

·; the financial statements have been prepared in accordance with IFRSs as adopted by the European Union and 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;

The responsibility statement was approved by the Board of Directors on 26 February 2013 and is signed on its behalf by:

 

 

David SleathChief Executive

Justin ReadGroup Finance Director

 

 

  

 

Group income statement

For the year ended 31 December 2012

	Notes	2012£m	2011£m
Revenue	4	371.0	400.1
Gross rental income	4	305.4	326.1
Property operating expenses	5	(50.6)	(54.9)
Net rental income		254.8	271.2
Joint venture management fee income	4	7.4	5.9
Administration expenses		(27.9)	(32.1)
Share of profit from joint ventures after tax	6	2.7	26.6
Realised and unrealised property loss	7	(340.0)	(271.4)
Gain on sale of investment in joint ventures		0.2	-
Other investment income	8	2.4	2.4
Amounts written off on acquisitions	9	(0.6)	(0.2)
Operating (loss)/profit		(101.0)	2.4
Finance income	10	66.1	115.3
Finance costs	10	(167.3)	(171.3)
Loss before tax		(202.2)	(53.6)
Tax	11	4.9	23.0
Loss after tax		(197.3)	(30.6)
Attributable to equity shareholders		(197.3)	(30.4)
Attributable to non-controlling interests		-	(0.2)
		(197.3)	(30.6)
Earnings per share
Basic and diluted loss per share	13	(26.6)	(4.1)p

Group statement of comprehensive income

For the year ended 31 December 2012

	Notes	2012£m	2011£m
Loss for the year		(197.3)	(30.6)
Other comprehensive income
Foreign exchange movement arising on translation of international operations		(12.2)	(10.6)
Valuation deficit on owner occupied properties	7	(0.8)	(0.4)
Actuarial loss on defined benefit pension schemes		(4.9)	(8.4)
Increase in value of available-for-sale investments		-	1.4
Fair value movements on derivatives in effective hedge relationships		4.0	4.7
Tax on components of other comprehensive income		-	-
Other comprehensive loss before transfers		(13.9)	(13.3)
Transfer to income statement on sale of available-for-sale investments		(1.0)	(2.1)
Transfer to income statement on close out of effective hedge relationships		-	2.7
Total comprehensive loss for the year		(212.2)	(43.3)
Attributable to equity shareholders		(212.2)	(43.1)
Attributable to non-controlling interests		-	(0.2)
Total comprehensive loss for the year		(212.2)	(43.3)

 

Group balance sheet

As at 31 December 2012

	Notes	2012£m	2011£m
Assets
Non-current assets
Goodwill and other intangibles		4.0	1.5
Investment properties	14	3,795.7	4,316.6
Owner occupied properties		4.3	6.5
Plant and equipment		2.9	5.8
Investments in joint ventures	6	342.6	298.8
Finance lease receivables		8.1	8.2
Available-for-sale investments	15	15.5	18.3
Trade and other receivables	16	146.2	114.8
		4,319.3	4,770.5
Current assets
Trading properties	14	193.3	261.4
Trade and other receivables	16	118.2	140.6
Cash and cash equivalents	18	16.6	21.2
		328.1	423.2
Total assets		4,647.4	5,193.7
Liabilities
Non-current liabilities
Borrowings	18	2,052.1	2,296.9
Deferred tax provision	11	23.3	25.2
Provisions		11.3	11.1
Trade and other payables	17	45.6	29.4
		2,132.3	2,362.6
Current liabilities
Trade and other payables	17	219.0	223.8
Borrowings	18	54.8	27.7
Tax liabilities		4.7	21.9
		278.5	273.4
Total liabilities		2,410.8	2,636.0
Net assets		2,236.6	2,557.7
Equity
Share capital		74.2	74.2
Share premium		1,069.9	1,069.5
Capital redemption reserve		113.9	113.9
Own shares held		(7.3)	(10.2)
Revaluation reserve		(2.6)	(0.6)
Other reserves		173.3	189.2
Retained earnings		813.6	1,119.5
Total shareholders' equity		2,235.0	2,555.5
Non-controlling interests		1.6	2.2
Total equity		2,236.6	2,557.7
Net assets per ordinary share
Basic and diluted	13	302p	345p

 

Group statement of changes in equity

For the year ended 31 December 2012

	Balance1 January2012 £m	Exchangemovement£m	Retainedloss£m	Items takendirectly toreserves£m	Sharesissued£m	Other£m	Dividends£m	Transfers£m	Balance31 December2012£m
Ordinary share capital	74.2	-	-	-	-	-	-	-	74.2
Share premium	1,069.5	-	-	-	0.4	-	-	-	1,069.9
Capital redemption reserve	113.9	-	-	-	-	-	-	-	113.9
Own shares held	(10.2)	-	-	-	-	(0.7)	-	3.6	(7.3)
Revaluation reserve	(0.6)	-	-	(0.8)	-	-	-	(1.2)	(2.6)
Other reserves:
Share based payments reserve	4.4	-	-	-	-	1.7	-	(1.0)	5.1
Fair value reserve for AFS1	5.5	-	-	-	-	(1.0)	-	-	4.5
Translation and other reserves	10.2	(12.2)	-	4.0	-	-	-	(7.4)	(5.4)
Merger reserve	169.1	-	-	-	-	-	-	-	169.1
Total other reserves	189.2	(12.2)	-	4.0	-	0.7	-	(8.4)	173.3
Retained earnings	1,119.5	-	(197.3)	(4.9)	-	-	(109.7)	6.0	813.6
Total equity attributable to equity shareholders	2,555.5	(12.2)	(197.3)	(1.7)	0.4	-	(109.7)	-	2,235.0
Non-controlling interests	2.2	-	-	-	-	(0.6)	-	-	1.6
Total equity	2,557.7	(12.2)	(197.3)	(1.7)	0.4	(0.6)	(109.7)	-	2,236.6

For the year ended 31 December 2011

	Balance1 January2011£m	Exchangemovement£m	Retainedloss£m	Items takendirectly toreserves£m	Shares issued£m	Other£m	Dividends£m	Transfers£m	Balance31 December2011£m
Ordinary share capital	74.2	-	-	-	-	-	-	-	74.2
Share premium	1,069.5	-	-	-	-	-	-	-	1,069.5
Capital redemption reserve	113.9	-	-	-	-	-	-	-	113.9
Own shares held	(13.3)	-	-	-	-	3.1	-	-	(10.2)
Revaluation reserve	0.2	-	-	(0.4)	-	-	-	(0.4)	(0.6)
Other reserves:
Share based payments reserve	6.2	-	-	-	-	(1.8)	-	-	4.4
Fair value reserve for AFS1	6.2	-	-	1.4	-	(2.1)	-	-	5.5
Translation and other reserves	13.4	(10.6)	-	4.7	-	2.7	-	-	10.2
Merger reserve	169.1	-	-	-	-	-	-	-	169.1
Total other reserves	194.9	(10.6)	-	6.1	-	(1.2)	-	-	189.2
Retained earnings	1,270.9	-	(30.4)	(8.4)	-	(5.6)	(107.4)	0.4	1,119.5
Total equity attributable to equity shareholders	2,710.3	(10.6)	(30.4)	(2.7)	-	(3.7)	(107.4)	-	2,555.5
Non-controlling interests	(1.3)	-	(0.2)	-	-	3.7	-	-	2.2
Total equity	2,709.0	(10.6)	(30.6)	(2.7)	-	-	(107.4)	-	2,557.7

1 AFS is the term used for 'Available-for-sale investments' and is shown net of deferred tax.

 

Group cash flow statement

For the year ended 31 December 2012

	Notes	2012 £m	2011 £m
Cash flows from operating activities	19(i)	205.1	239.0
Interest received		49.3	50.6
Dividends received		18.7	10.4
Interest paid		(153.2)	(170.9)
Tax paid		(12.8)	(4.9)
Net cash received from operating activities		107.1	124.2
Cash flows from investing activities
Purchase and development of investment properties		(277.9)	(187.1)
Sale of investment properties		490.1	79.9
Purchase of plant and equipment and intangibles		(3.0)	(1.9)
Purchase of available-for-sale investments		-	(1.6)
Sale of available-for-sale investments		3.5	11.8
Sale of investment in joint ventures		4.1	-
Investment in joint ventures		(50.6)	(15.6)
Net increase in loans to joint ventures		(1.2)	(0.3)
Purchase of non-controlling interests		(0.6)	(0.4)
Net cash received from/(used in) investing activities		164.4	(115.2)
Cash flows from financing activities
Dividends paid to ordinary shareholders		(109.7)	(107.4)
Repayment of bonds		(112.6)	-
Net (decrease)/increase in other borrowings		(90.4)	78.3
Net costs to close out debt		(14.8)	-
Net settlement of foreign exchange derivatives		56.0	(8.1)
Proceeds from the issue of ordinary shares		0.4	-
Purchase of ordinary shares		(0.7)	-
Net cash used in financing activities		(271.8)	(37.2)
Net decrease in cash and cash equivalents		(0.3)	(28.2)
Cash and cash equivalents at the beginning of the year		16.0	44.6
Effect of foreign exchange rate changes		(0.3)	(0.4)
Cash and cash equivalents at the end of the year		15.4	16.0
Cash and cash equivalents per balance sheet		16.6	21.2
Bank overdrafts		(1.2)	(5.2)
Cash and cash equivalents per cash flow		15.4	16.0

Notes to the condensed financial statements

1. financial information

The financial information set out in this announcement does not constitute the consolidated statutory accounts for the years ended 31 December 2012 and 2011, but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 (approved by the Board on 26 February 2013) will be delivered following the Company's annual general meeting. The external auditor, Deloitte LLP, have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) of the Companies Act 2006.

Given due consideration to the nature of the Group's business and financial position, including the financial resources available to the Group, the Directors consider that the Group is a going concern and this financial information is prepared on that basis.

The financial information set out in this announcement is based on the consolidated financial statements which are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for the use by the European Union and complies with the disclosure requirements of the Listing Rules of the UK Financial Services Authority. The financial information is in accordance with the accounting policies set out in the 2011 financial statements except for the adoption of new accounting standards in 2012, none of which had a material impact on the current or prior year reported results.

The principal exchange rates used to translate foreign currency denominated amounts in 2012 are:

Balance sheet: £1 = €1.23 (31 December 2011: £1 = €1.20)Income statement: £1 = €1.23 (2011: £1 = €1.15)

2. EPRA PROFIT

 

	2012 £m	2011 £m
Gross rental income	305.4	326.1
Property operating expenses	(50.6)	(54.9)
Net rental income	254.8	271.2
Joint venture management fee income	7.4	5.9
Administration expenses	(27.9)	(32.1)
Share of joint ventures' EPRA profit after tax	20.2	16.6
EPRA operating profit before interest and tax	254.5	261.6
EPRA net finance costs	(109.6)	(123.1)
EPRA profit before tax	144.9	138.5
Adjustments:
Adjustments to the share of profit from joint ventures after tax1	(17.5)	10.0
(Loss)/profit on sale of investment properties	(28.9)	5.2
Valuation deficit on investment and owner occupied properties	(284.4)	(272.7)
(Loss)/profit on sale of trading properties	(1.8)	5.2
Increase in provision for impairment of trading properties	(24.9)	(9.1)
Gain on sale of investment in joint ventures	0.2	-
Other investment income	2.4	2.4
Amounts written off on acquisitions	(0.6)	(0.2)
Loss on early close out of bonds	(16.8)	-
Gain on early close out of bank debt	2.3	-
Net fair value gain on interest rate swaps and other derivatives	22.9	67.1
Total adjustments	(347.1)	(192.1)
Loss before tax	(202.2)	(53.6)
Tax
On EPRA profits	(1.9)	(2.1)
In respect of adjustments	6.8	25.1
	4.9	23.0
Loss after tax
EPRA profit after tax	143.0	136.4
Adjustments	(340.3)	(167.0)
Loss after tax	(197.3)	(30.6)

 

1. A detailed breakdown of the adjustments to the share of profit from joint ventures is included in note 6.

 

The adjustments outlined above arise from adopting the Best Practices Recommendations of European Public Real Estate Association (EPRA). The EPRA profit measures highlight the underlying recurring performance of the property rental business, which is our core operational activity and also provide a consistent basis to enable a comparison between European property companies.

3. Segmental analysis

The Group's reportable segments are the geographical business units, Greater London, Thames Valley and National Logistics, Germany and Northern Europe, France and Southern Europe and Poland and Central Europe, which are managed and reported to the Board as separate distinct business units.

On 30 June 2012, the reportable segments changed from the previous periods, where we reported geographical segments of the United Kingdom and Continental Europe. The new reportable segments reflect changes made in our management structure and internal reporting following our strategic review and prior period comparatives have been re-presented accordingly.

31 December 2012	Gross rental income £m	Net rental income £m	Share of joint ventures' EPRA profit £m	EPRA PBIT £m	Total directly owned property assets £m	Investments in joint ventures £m	Capital expenditure £m
Greater London	77.7	66.8	14.7	88.3	1,159.5	261.3	7.1
Thames Valley and National Logistics	110.1	95.2	4.8	100.1	1,305.0	62.8	40.5
Germany and Northern Europe	53.5	43.3	0.7	41.9	564.5	18.5	30.3
France and Southern Europe	40.5	35.9	-	34.5	574.2	-	170.4
Poland and Central Europe	23.6	20.7	-	19.8	390.1	-	47.9
Other1	-	(7.1)	-	(30.1)	-	-	3.3
Total	305.4	254.8	20.2	254.5	3,993.3	342.6	299.5

 

31 December 2011	Gross rental income £m	Net rental income £m	Share of joint ventures' EPRA profit £m	EPRA PBIT £m	Total directly owned property assets £m	Investments in joint ventures £m	Capital expenditure £m
Greater London	81.1	67.7	15.8	89.3	1,240.8	275.4	21.0
Thames Valley and National Logistics	129.7	112.9	-	112.2	1,802.4	-	61.0
Germany and Northern Europe	55.3	45.8	0.8	43.4	714.8	23.0	39.4
France and Southern Europe	38.6	33.8	-	32.4	471.1	0.4	37.6
Poland and Central Europe	21.4	18.3	-	17.2	355.4	-	32.0
Other1	-	(7.3)	-	(32.9)	-	-	3.2
Total	326.1	271.2	16.6	261.6	4,584.5	298.8	194.2

1. Other includes the corporate centre as well as costs relating to the operational business which are not specifically allocated to a geographical business unit.

4. Revenue

	2012£m	2011£m
Rental income from investment properties	280.9	298.0
Rental income from trading properties	13.8	17.9
Rent averaging	8.8	6.6
Surrender premiums	1.4	3.0
Interest received on finance lease assets	0.5	0.6
Gross rental income	305.4	326.1
Joint venture management fee income - property management fees	4.1	3.5
- performance and other fees	3.3	2.4
Service charge income	37.2	37.1
Proceeds from sale of trading properties	21.0	31.0
Total revenue	371.0	400.1

 

5. Property operating expenses

	2012£m	2011£m
Vacant property costs	13.7	15.2
Letting, marketing, legal and professional fees	8.9	10.6
Bad debt expense	1.7	1.6
Other expenses, net of service charge income	11.2	10.7
Property management expenses	35.5	38.1
Property administration expenses1	17.7	18.5
Costs capitalised2	(2.6)	(1.7)
Total property operating expenses	50.6	54.9

1. Property administration expenses predominantly relate to the employee staff costs of personnel directly involved in managing the property portfolio.

2. Costs capitalised relate to internal employee staff costs directly involved in developing the property portfolio.

6. Investments in joint ventures and subsidiaries

6(i) - Share of profit from joint ventures after tax

The table below presents a summary income statement of the Group's largest joint ventures.

	Logistics Property Partnership £m	Airport Property Partnership£m	Heathrow Big Box Industrial and Distribution Fund£m	Other£m	2012£m	2011£m
Gross rental income	9.1	21.9	7.1	1.9	40.0	33.0
Property operating expenses
- underlying property operating expenses	(0.3)	(1.2)	(0.1)	(0.3)	(1.9)	(2.2)
- property management fees	(0.5)	(2.2)	(0.2)	-	(2.9)	(2.3)
- performance and other fees	-	(1.7)	-	-	(1.7)	(1.6)
Net rental income	8.3	16.8	6.8	1.6	33.5	26.9
EPRA net finance costs	(3.5)	(6.9)	(2.0)	(0.9)	(13.3)	(10.5)
EPRA profit before tax	4.8	9.9	4.8	0.7	20.2	16.4
Tax on EPRA profits	-	-	-	-	-	0.2
EPRA profit after tax	4.8	9.9	4.8	0.7	20.2	16.6
Adjustments:
(Loss)/profit on sale of investment properties	-	(0.1)	-	-	(0.1)	0.7
Valuation (deficit)/surplus on investment properties	0.9	(9.7)	(3.0)	-	(11.8)	11.3
Profit on sale of trading properties	-	-	-	1.5	1.5	0.6
Increase in provision for impairment of trading properties	-	-	-	(2.0)	(2.0)	(0.9)
Net fair value loss on interest rate swaps and other derivatives	(0.8)	-	-	-	(0.8)	(1.9)
Other investment loss	-	-	-	-	-	(0.2)
Amounts written off on acquisitions	(3.2)	(0.2)	-	-	(3.4)	-
Tax in respect of adjustments	-	-	-	(0.9)	(0.9)	0.4
Total adjustments	(3.1)	(10.0)	(3.0)	(1.4)	(17.5)	10.0
Profit/(loss) after tax	1.7	(0.1)	1.8	(0.7)	2.7	26.6

 

Trading properties held by joint ventures were externally valued resulting in an increase in the Group's share of the provision for impairment of £2.0 million (2011: £0.9 million). Based on the fair value at 31 December 2012, the Group's share of joint ventures' trading property portfolio has an unrecognised surplus of £3.7 million (2011: £4.0 million). 

6(ii) - Summarised balance sheet information in respect of the Group's share of joint ventures

	Logistics Property Partnership £m	Airport Property Partnership£m	Heathrow BigBox Industrial and DistributionFund£m	Other£m	2012£m	2011£m
Investment properties	155.5	364.7	101.3	-	621.5	476.2
Other investments	-	8.0	-	1.3	9.3	8.1
Total non-current assets	155.5	372.7	101.3	1.3	630.8	484.3
Trading properties	-	-	-	29.1	29.1	33.2
Other receivables	1.5	2.2	0.2	6.4	10.3	19.0
Cash	3.2	10.8	3.0	2.7	19.7	15.5
Total current assets	4.7	13.0	3.2	38.2	59.1	67.7
Total assets	160.2	385.7	104.5	39.5	689.9	552.0
Borrowings	(92.1)	(162.9)	(44.9)	(6.1)	(306.0)	(208.9)
Deferred tax	-	-	-	(1.3)	(1.3)	(0.9)
Other liabilities	(0.7)	(6.3)	(0.5)	(0.2)	(7.7)	(8.4)
Total non-current liabilities	(92.8)	(169.2)	(45.4)	(7.6)	(315.0)	(218.2)
Borrowings	-	-	-	(11.0)	(11.0)	(12.3)
Other liabilities	(4.6)	(12.0)	(2.6)	(2.1)	(21.3)	(22.7)
Total current liabilities	(4.6)	(12.0)	(2.6)	(13.1)	(32.3)	(35.0)
Total liabilities	(97.4)	(181.2)	(48.0)	(20.7)	(347.3)	(253.2)
Group share of net assets	62.8	204.5	56.5	18.8	342.6	298.8

 

In January 2012, the Group completed the acquisition of a 50 per cent interest in the Logistics Property Partnership ("LPP") (formerly UK Logistics Fund ("UKLF")) for £65.7 million. The amounts written off on acquisition of £3.2 million relate to LPP and reflect the difference between purchase price and the fair value of the assets acquired (principally as a result of fees incurred on the transaction).

6(iii) - Investments by the Group

	2012£m	2011£m
Cost or valuation at 1 January	298.8	279.8
Exchange movement	(0.6)	(0.8)
Acquisition	65.7	-
Disposals	(3.9)	(0.9)
Loan advances	1.2	0.7
Loan repayments	-	(0.4)
Dividends received	(18.7)	(8.3)
Share of profit after tax	2.7	26.6
Items taken directly to reserves	(2.6)	2.1
Cost or valuation at 31 December	342.6	298.8

 

The amount of loans advanced by the Group to joint ventures is £172.1 million (2011: £127.0 million).

7. REALISED AND UNREALISED Property loss

	2012 £m	2011 £m
(Loss)/profit on sale of investment properties	(28.9)	5.2
Valuation deficit on investment properties	(283.2)	(272.3)
Valuation deficit on owner occupied properties	(1.2)	(0.4)
(Loss)/profit on sale of trading properties	(1.8)	5.2
Increase in provision for impairment of trading properties	(24.9)	(9.1)
Total realised and unrealised property loss - income statement	(340.0)	(271.4)
Valuation deficit on owner occupied properties - other comprehensive income	(0.8)	(0.4)
Total realised and unrealised property loss	(340.8)	(271.8)

8. Other investment income

	2012£m	2011£m
Net profit on available-for-sale investments	1.4	0.3
Transfer of fair value surplus realised on sale of available-for-sale investments	1.0	2.1
Total other investment income	2.4	2.4

 

9. AMOUNTS WRITTEN OFF ON Acquisitions

	2012£m	2011£m
Acquisition of LPP	0.4	-
Amortisation of intangibles	0.2	0.2
Total amounts written off on acquisitions	0.6	0.2

10. NET Finance costs

Finance income	2012 £m	2011 £m
Interest received on bank deposits and related derivatives	29.6	24.9
Gain on early close out of bank debt	2.3	-
Fair value gain on interest rate swaps and other derivatives	33.8	89.4
Return on pension assets less unwinding of discount on pension liabilities	0.3	1.0
Exchange differences	0.1	-
Total finance income	66.1	115.3

 

Finance costs	2012 £m	2011 £m
Interest on overdrafts, loans and related derivatives	(137.4)	(144.5)
Loss on early close out of bonds	(16.8)	-
Amortisation of issue costs	(5.6)	(5.3)
Total borrowing costs	(159.8)	(149.8)
Less amounts capitalised on the development of properties	3.4	2.2
Net borrowing costs	(156.4)	(147.6)
Fair value loss on interest rate swaps and other derivatives	(10.9)	(22.3)
Exchange differences	-	(1.4)
Total finance costs	(167.3)	(171.3)
Net finance costs	(101.2)	(56.0)

The interest capitalisation rates for 2012 ranged from 4.7 per cent to 6.2 per cent (2011: 3.6 per cent to 6.2 per cent). Interest is capitalised gross of tax relief.

11. Tax

11(i) - Tax on profit

	2012£m	2011£m
Tax on:
EPRA profits	(1.9)	(2.1)
Adjustments	6.8	25.1
Total tax credit	4.9	23.0
Current tax
United Kingdom
Adjustments in respect of earlier years	0.2	0.1
	0.2	0.1
Overseas
Current tax charge	(1.5)	(2.3)
Adjustments in respect of earlier years	4.7	2.0
	3.2	(0.3)
Total current tax credit/(charge)	3.4	(0.2)
Deferred tax
Origination and reversal of temporary differences	(6.3)	(6.9)
Released in respect of property disposals in the year	-	1.0
On valuation movements	8.5	22.0
Total deferred tax in respect of investment properties	2.2	16.1
Other deferred tax	(0.7)	7.1
Total deferred tax credit	1.5	23.2
Total tax credit on loss on ordinary activities	4.9	23.0

11(ii) - Factors affecting tax charge for the year

The tax credit is lower than the standard rate of UK corporation tax. The differences are:

	2012£m	2011£m
Loss on ordinary activities before tax	(202.2)	(53.6)
Add back valuation deficit in respect of UK properties not taxable	100.0	158.4
	(102.2)	104.8
Multiplied by standard rate of UK corporation tax of 24.5 per cent (2011: 26.5 per cent)	25.0	(27.8)
Effects of:
Exempt SIIC & REIT gains	14.5	55.1
Permanent differences	(2.9)	1.1
Profit on joint ventures already taxed	(0.3)	(0.5)
Higher tax rates on international earnings	5.2	(1.4)
Adjustments in respect of earlier years and assets not recognised	(36.6)	(3.5)
Total tax credit on loss on ordinary activities	4.9	23.0

11(iii) - Deferred tax provision

Movement in deferred tax was as follows:

	Balance1 January 2012£m	Exchangemovement£m	Recognisedin income£m	Balance31 December 2012£m
Valuation surpluses and deficits on properties	(28.7)	0.7	(8.5)	(36.5)
Accelerated tax allowances	60.3	(1.2)	6.3	65.4
Deferred tax asset on revenue losses	(5.7)	0.1	0.6	(5.0)
Others	(0.7)	-	0.1	(0.6)
Total deferred tax provision	25.2	(0.4)	(1.5)	23.3

 

The Group has recognised revenue tax losses of £19.1 million (2011: £21.9 million) available for offset against future profits. Further unrecognised tax losses of £470.4 million also exist at 31 December 2012 (2011: £369.6 million) of which £44.2 million (2011: £38.0 million) expires in 15 years.

11(iv) - Factors that may affect future tax charges

No deferred tax is recognised on the unremitted earnings of international subsidiaries and joint ventures. In the event of their remittance to the UK, no net UK tax is expected to be payable.

The standard rate of UK corporation tax is due to fall in stages to 21 per cent by April 2014. This is unlikely to significantly impact the Group's tax charge.

12. Dividends

	2012£m	2011£m
Ordinary dividends paid
Interim dividend for 2012 @ 4.9 pence per share	36.4	-
Final dividend for 2011 @ 9.9 pence per share	73.3	-
Interim dividend for 2011 @ 4.9 pence per share	-	36.3
Final dividend for 2010 @ 9.6 pence per share	-	71.1
Total dividends	109.7	107.4

 

The Board recommends a final dividend for 2012 of 9.9 pence which will result in a distribution of £73.4 million. The total dividend paid and proposed per share in respect of the year ended 31 December 2012 is 14.8 pence (2011: 14.8 pence).

13. Earnings and net assets per share

The earnings per share calculations use the weighted average number of shares in issue during the year and the net assets per share calculations use the number of shares in issue at year end. Earnings per share calculations exclude 1.2 million (2011: 1.2 million) being the average number of shares held on trust for employee share schemes and net assets per share calculations exclude 1.2 million (2011: 1.1 million) being the actual number of shares held on trust for employee share schemes at year end.

13(i) - Earnings per ordinary share (EPS)

	2012				2011
	Earnings£m	Sharesmillion	Penceper share		Earnings£m	Sharesmillion	Penceper share
Basic EPS	(197.3)	740.7	(26.6)		(30.4)	740.4	(4.1)
Dilution adjustments:
Share options and save as you earn schemes	-	-	-		-	0.2	-
Diluted EPS	(197.3)	740.7	(26.6)		(30.4)	740.6	(4.1)
Adjustments to profit before tax1	347.1		46.8		192.1		25.9
Tax adjustments:
- deferred tax on investment property which does not crystallise unless sold	(2.2)		(0.3)		(16.1)		(2.2)
- other tax	(4.6)		(0.6)		(9.0)		(1.2)
Non-controlling interest on adjustments	-				-		-
EPRA EPS	143.0	740.7	19.3		136.6	740.4	18.4

1 Details of adjustments are included in note 2.

13(ii) - Net assets per share (NAV)

	2012				2011
	Equityattributableto ordinaryshareholders£m	Sharesmillion	Penceper share		Equityattributableto ordinaryshareholders£m	Sharesmillion	Penceper share
Basic NAV	2,235.0	740.9	302		2,555.5	740.6	345
Dilution adjustments:
Share options and save as you earn schemes	-	-	-		-	0.2	-
Diluted NAV	2,235.0	740.9	302		2,555.5	740.8	345
Fair value adjustment in respect of debt	(303.0)		(41)		(182.9)		(24)
Fair value adjustment in respect of trading properties - Group	4.2		1		7.4		1
Fair value adjustment in respect of trading properties - Joint ventures	3.7		-		4.0		-
EPRA triple net NAV (NNNAV)	1,939.9	740.9	262		2,384.0	740.6	322
Fair value adjustment in respect of debt	303.0		41		182.9		24
Fair value adjustment in respect of interest rate swap derivatives - Group	(103.3)		(14)		(81.1)		(11)
Fair value adjustment in respect of interest rate swap derivatives - Joint ventures	7.5		1		4.1		1
Deferred tax in respect of depreciation	65.4		9		60.3		8
Deferred tax in respect of valuation surpluses	(36.5)		(5)		(28.7)		(4)
EPRA NAV	2,176.0	740.9	294		2,521.5	740.6	340

 

14. Properties

14(i) - Investment properties

	Completed£m	Development£m	Total £m
At 1 January 2011	4,085.5	347.0	4,432.5
Exchange movement	(28.0)	(4.6)	(32.6)
Property acquisitions	34.5	10.8	45.3
Additions to existing investment properties	22.7	114.2	136.9
Disposals	(71.2)	(6.4)	(77.6)
Transfers on completion of development	82.0	(82.0)	-
Revaluation deficit during the year	(227.3)	(45.0)	(272.3)
At 31 December 2011	3,898.2	334.0	4,232.2
Add tenant lease incentives, letting fees and rental guarantees	84.4	-	84.4
Total investment properties	3,982.6	334.0	4,316.6

 

	Completed£m	Development£m	Total £m
At 1 January 2012	3,898.2	334.0	4,232.2
Exchange movement	(26.9)	(4.4)	(31.3)
Property acquisitions	149.8	3.2	153.0
Additions to existing investment properties	28.2	102.1	130.3
Disposals	(501.6)	(18.4)	(520.0)
Transfers on completion of development	153.3	(153.3)	-
Transfers from trading properties	19.3	8.1	27.4
Revaluationdeficit during the year	(265.8)	(17.4)	(283.2)
At 31 December 2012	3,454.5	253.9	3,708.4
Add tenant lease incentives, letting fees and rental guarantees	87.3	-	87.3
Total investment properties	3,541.8	253.9	3,795.7

 

Investment properties are stated at fair value as at 31 December 2012 based on external valuations performed by professionally qualified valuers. The Group's wholly owned property portfolio is valued at 31 December 2012 by CBRE Ltd (previous year's valuations were undertaken by DTZ Debenham Tie Leung). Valuations for the joint venture properties within the UK were performed by Jones Lang LaSalle (APP and LPP) and CBRE Ltd (Big Box). Valuations for the joint venture properties in Continental Europe were performed by CBRE Ltd. The valuations conform to International Valuation Standards and were arrived at by reference to market evidence of the transaction prices paid for similar properties.

CBRE Ltd and Jones Lang LaSalle also undertake some professional and agency work on behalf of the Group, although this is limited in relation to the activities of the Group as a whole. Both firms advise us that the total fees paid by the Group represent less than 5 per cent of their total revenue in any year.

Completed properties include buildings that are occupied or are available for occupation. Development properties include land available for development, land under development and construction in progress.

Following the commencement of operating leases and change in strategy, £27.4 million of trading properties were transferred to investment properties in line with the Group's accounting policy.

The historical cost of investment and development properties was £4,008.5 million (2011: £4,311.9 million) and the cumulative valuation deficit at 31 December 2012 amounted to £220.9 million (2011: £4.7 million surplus).

All properties are freehold. In the prior year long-term leasehold values within investment properties amounted to £9.2 million.

Prepaid operating lease incentives at 31 December 2012 were £56.5 million (2011: £50.1 million).

Since the year end the Group has disposed of properties with a book value of £142.0 million (see note 20), which were considered held for sale at 31 December 2012.

14(ii) - Trading properties

	Completed£m	Development £m	Total £m
At 1 January 2011	207.6	81.8	289.4
Exchange movement	(4.1)	(1.5)	(5.6)
Property acquisitions	-	3.6	3.6
Additions	2.2	6.2	8.4
Disposals	(20.0)	(5.8)	(25.8)
Transfers on completion of development	14.6	(14.6)	-
Increase in provision for impairment during the year	(6.6)	(2.5)	(9.1)
At 31 December 2011	193.7	67.2	260.9
Add tenant lease incentives, letting fees and rental guarantees	0.5	-	0.5
Total trading properties	194.2	67.2	261.4

 

	Completed£m	Development £m	Total £m
At 1 January 2012	193.7	67.2	260.9
Exchange movement	(4.3)	(1.6)	(5.9)
Additions	1.9	11.0	12.9
Disposals	(21.6)	(1.2)	(22.8)
Transfers on completion of development	5.5	(5.5)	-
Transfers to investment properties	(19.3)	(8.1)	(27.4)
Increase in provision for impairment during the year	(16.3)	(8.6)	(24.9)
At 31 December 2012	139.6	53.2	192.8
Add tenant lease incentives, letting fees and rental guarantees	0.5	-	0.5
Total trading properties	140.1	53.2	193.3

 

Trading properties were externally valued, as detailed in note 14(i), resulting in an increase in the provision for impairment of £24.9 million (2011: £9.1 million). Based on the fair value at 31 December 2012, the portfolio has an unrecognised surplus of £4.2 million (2011: £7.4 million).

15. Available-for-sale investments

	2012£m	2011£m
Valuation at 1 January	18.3	26.8
Exchange movement	(0.7)	-
Additions	-	1.6
Fair value movement - other comprehensive income	-	1.4
Disposals and return of capital	(2.1)	(11.5)
Valuation at 31 December	15.5	18.3

Available-for-sale investments comprise holdings in private equity funds investing in UK, Continental Europe and USA.

16. Trade and other receivables

	2012£m	2011£m
Current
Trade receivables	41.4	30.9
Other receivables	63.2	62.0
Prepayments and accrued income	9.4	15.9
Fair value of forward foreign exchange and currency swap contracts - non hedge	0.4	18.7
Fair value of forward foreign exchange and currency swap contracts - hedge	-	10.7
Amounts due from related parties	3.8	2.4
Total current trade and other receivables	118.2	140.6
Non-current
Other receivables	0.3	0.3
Fair value of interest rate swaps - non hedge	145.9	114.5
Total non-current trade and other receivables	146.2	114.8

Other receivables include tax recoverable of £0.1 million (2011: £0.8 million).

Group trade receivables are net of provisions for doubtful debts of £5.7 million (2011: £5.8 million).

17. Trade and other payables

	2012£m	2011£m
Due within one year
Trade payables	7.0	3.3
Non-trade payables and accrued expenses	196.2	214.4
Fair value of interest rate swaps - non hedge	1.6	5.2
Fair value of forward foreign exchange and currency swap contracts - non hedge	13.5	0.8
Fair value of forward foreign exchange and currency swap contracts - hedge	0.7	0.1
Total trade and other payables due within one year	219.0	223.8
Due after one year
Obligations under finance leases	-	0.4
Other payables	1.1	0.8
Fair value of interest rate swaps - non hedge	41.0	28.2
Amounts due to related parties	3.5	-
Total other payables due after one year	45.6	29.4

18. net Borrowings

	2012 £m	2011 £m
Secured borrowings:
Euro mortgages (repayable within one year)	1.4	10.4
Euro mortgages (repayable in more than one but less than two years )	19.1	1.5
Euro mortgages (repayable in more than two but less than five years)	20.5	40.5
Total secured (on land, buildings and other assets)	41.0	52.4
Unsecured borrowings:
Bonds
5.25% bonds 2015	106.2	135.9
6.25% bonds 2015	99.8	149.2
5.5% bonds 2018	198.9	198.7
6.0% bonds 2019	170.5	200.2
5.625% bonds 2020	247.9	247.7
6.75% bonds 2021	296.9	296.6
7.0% bonds 2022	149.1	149.0
6.75% bonds 2024	221.7	221.5
5.75% bonds 2035	198.1	198.1
	1,689.1	1,796.9
Bank loans and overdrafts	376.8	475.0
Preference shares held by subsidiary	-	0.3
Total unsecured	2,065.9	2,272.2
Total borrowings	2,106.9	2,324.6
Cash and cash equivalents	(16.6)	(21.2)
Net borrowings	2,090.3	2,303.4

The maturity profile of borrowings is as follows:

Maturity profile of borrowings	2012 £m	2011 £m
In one year or less	54.8	27.7
In more than one year but less than two	100.2	43.0
In more than two years but less than five	468.7	741.8
In more than five years but less than ten	1,063.3	943.1
In more than ten years	419.9	569.0
In more than one year	2,052.1	2,296.9
Total borrowings	2,106.9	2,324.6
Cash and cash equivalents	(16.6)	(21.2)
Net borrowings	2,090.3	2,303.4

 

Maturity profile of undrawn borrowing facilities	2012 £m	2011 £m
In one year or less	42.6	9.9
In more than one year but less than two	24.4	29.2
In more than two years but less than five	364.9	395.8
Total available undrawn borrowing facilities	431.9	434.9

19. notes to the cash flow statement

19(i) - Reconciliation of cash generated from operations

	2012£m	2011£m
Operating (loss)/profit	(101.0)	2.4
Adjustments for:
Depreciation of property, plant and equipment	3.2	3.5
Share of profit from joint ventures after tax	(2.7)	(26.6)
Loss/(profit) on sale of investment properties	28.9	(5.2)
Gain on sale of investment in joint ventures	(0.2)	-
Amounts written off on acquisitions	0.6	0.2
Revaluation deficit on investment and owner occupied properties	284.4	272.7
Gain on sale of available-for-sale investments	(2.4)	(2.4)
Pensions and other provisions	(3.1)	(11.8)
	207.7	232.8
Changes in working capital:
Decrease in trading properties	36.6	22.9
Increase in debtors and tenant incentives	(32.5)	(11.4)
Decrease in creditors	(6.7)	(5.3)
Net cash inflow generated from operations	205.1	239.0

19(ii) - Analysis of net debt

		At1 January2012£m	Exchangemovement£m	Cashflow£m	Non-cash adjustment1£m	At31 December2012£m
Bank loans and loan capital		2,350.7	(16.0)	(202.3)	(2.3)	2,130.1
Capitalised finance costs		(31.3)	-	(0.7)	7.6	(24.4)
Bank overdrafts		5.2	-	(4.0)	-	1.2
Total borrowings		2,324.6	(16.0)	(207.0)	5.3	2,106.9
Cash in hand and at bank		(21.2)	0.3	4.3	-	(16.6)
Net debt		2,303.4	(15.7)	(202.7)	5.3	2,090.3

 

1. The non-cash adjustments relate to the amortisation of issue costs offset against borrowings and gains on the early close out of bank debt.

20. Subsequent Events

Since the year end the Group has disposed of five investment properties for gross proceeds of £152.3 million (excluding rent top-ups).  

 

Glossary of Terms

Completed portfolio

The completed investment and trading properties and the Group's share of joint ventures' completed investment and trading properties.

Development pipeline

The Group's current programme of developments authorised or in the course of construction at the balance sheet date, together with potential schemes not yet commenced on land owned or controlled by the Group.

EPRA

The European Public Real Estate Association, a real estate industry body, who have issued Best Practices Recommendations in order to provide consistency and transparency in real estate reporting across Europe.

Estimated cost to completion

Costs still to be expended on a development or redevelopment to practical completion (not to complete lettings), including attributable interest.

Estimated rental value (ERV)

The estimated annual market rental value of lettable space as determined biannually by the Company's valuers. This will normally be different from the rent being paid.

Gearing

Net borrowings divided by total shareholders' equity excluding intangible assets and deferred tax provision.

Gross rental income

Contracted rental income recognised in the period, including surrender premiums and interest receivable on finance leases. Lease incentives, initial costs and any contracted future rental increases are amortised on a straight line basis over the lease term.

Hectares (Ha)

The area of land measurement used in this analysis. The conversion factor used, where appropriate, is 1 hectare = 2.471 acres.

Investment property

Completed land and buildings held for rental income return and / or capital appreciation.

Joint Venture

An entity in which the Group holds an interest and which is jointly controlled by the Group and one or more partners under a contractual arrangement whereby decisions on financial and operating policies essential to the operation, performance and financial position of the venture require each partner's consent.

Loan to Value (LTV)

Net borrowings divided by the carrying value of total property assets (investment, owner occupied and trading properties). This is measured either on a look-through basis (including joint ventures at share) or wholly owned (which excludes joint ventures).

Net equivalent yield

The internal rate of return from an investment property, based on the value of the property assuming the current passing rent reverts to ERV and assuming the property becomes fully occupied over time.

Net initial yield

Annualised current passing rent less non-recoverable property expenses such as empty rates, divided by the property valuation plus notional purchasers' costs. This is in accordance with EPRA's Best Practices Recommendations.

Net rental income

Gross Rental Income less ground rents paid, net service charge expenses and property operating expenses.

Net true equivalent yield

Net Equivalent Yield assuming rent is received quarterly in advance.

 

Passing rent

The annual rental income currently receivable on a property as at the balance sheet date (which may be more or less than the ERV). Excludes rental income where a rent free period is in operation. Excludes service charge income (which is netted off against service charge expenses).

Pre-let

A lease signed with an occupier prior to completion of a development.

REIT

A qualifying entity which has elected to be treated as a Real Estate Investment Trust for tax purposes. In the UK, such entities must be listed on a recognised stock exchange, must be predominantly engaged in property investment activities and must meet certain ongoing qualifications. SEGRO plc and its UK subsidiaries achieved REIT status with effect from 1 January 2007.

Speculative development

Where a development has commenced prior to a lease agreement being signed in relation to that development.

Rent roll

See Passing Rent.

Square metres (sq m)

The area of buildings measurements used in this analysis. The conversion factor used, where appropriate, is 1 square metre = 10.7639 square feet.

Takeback

Rental income lost due to lease expiry, exercise of break option, surrender or insolvency.

Topped up net initial yield

Net Initial Yield adjusted to include notional rent in respect of let properties which are subject to a rent free period at the valuation date. This is in accordance with EPRA's Best Practices Recommendations.

Trading property

Property being developed for sale or one which is being held for sale after development is complete.

Total Property Return (TPR)

A measure of the ungeared return for the portfolio and is calculated as the change in capital value, less any capital expenditure incurred, plus net income, expressed as a percentage of capital employed over the period concerned, as calculated by IPD and excluding land.

Total Shareholder Return (TSR)

A measure of return based upon share price movement over the period and assuming reinvestment of dividends.