05 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Strong investor demand for income generating assets Our strategy The extended period of low economic growth and The focus on alternative investment sources for an low interest rates is creating an almost desperate acceptable income return has increased the attraction search for yield which is set to continue. of real estate which can deliver a reliable, predictable, Our marketplace long and growing income stream. The search for income is being intensified by the increasing proportion of the UK’s population LondonMetric’s dividend yield of 4.4% is almost 300 bps entering retirement age and longer life expectancy. higher than UK government bonds and is delivering a real return above inflation. Our yield is more than fully covered 4.4 by our earnings. % * 1.5 Our business % model Ten year UK treasury LondonMetric dividend yield * Based on 7.9p dividend per share and share price as at 31 March 2018 Performance review Income from our portfolio is long and sustainable The Company has sector Lease expiry profile Top 5 occupiers leading portfolio metrics with Responsible Business 12.4 years average lease lengths, >20 years 16% 0–3 years 6% 98% occupancy and only 6% of income expiring over three years. We have financially strong occupiers, 16–20 years 4–10 years with the top five accounting for 35% 11% 36% of our rent and market capitalisations Average: ranging from £2.4bn to £39.0bn. 12 years Risk The portfolio is focused on low operational assets, with many single let. Its low property costs result in only 11–15 years 1.3% gross to net income leakage. 31% Governance …and our income has certainty of growth statements 50.3 +4.3 Financial % % Approximately half of the portfolio is subject to contractual rental increases and we are capturing strong open market rental uplifts on the remainder. of income has fixed like for like income This allows us to deliver annual like uplifts or is inflation linked growth in 2018 for like income growth on average o f 3-4%. Our development and other asset management activities provide further income growth potential. As a consequence, we are confident See Property review on pages 26 to 33 in our ability to progress our dividend.
��������� 06 LondonMetric Property Plc Annual Report and Accounts 2018 We manage, enhance and create property in a responsible way We continue to improve the quality and attractiveness of our assets through de-risked asset management and short cycle developments to build a portfolio of desirable and fit for purpose real estate. Managing our assets 58 An important driver of generating long term, reliable and repetitive income is working with occupiers to o fger them real estate solutions that meet their business objectives. Over the year, our lettings and rent reviews delivered occupier transactions £3.1 million of rental uplift. Average lease lengths on lettings was 15.2 years demonstrating the attractiveness of our assets. See page 32 of the Property review Creating fit for purpose assets 28 % During the year, we completed 578,000 sq ft of developments which were delivered at a yield on cost of 6.4%, mostly BREEAM Very Good rated. This activity has helped to further modernise our portfolio by adding new assets at yields materially above investment value. of portfolio now rated As part of our efgorts to improve our assets sustainability BREEAM Very Good credentials, and by working in conjunction with the occupier, we completed the UK’s largest landlord funded distribution solar installation at Newark. See page 33 of the Property review Delivering wider benefits for occupiers and communities 69 % Through our activities, we give proper consideration to the needs of our occupiers and stakeholders and the impact on the environment and local communities. This promotes good stakeholder relationships and helps our occupiers to achieve their own objectives. Green Star in latest GRESB* review Our sustainability and responsible business efgorts were again recognised in our increased GRESB score of 69%. * Global Real Estate Sustainability Benchmark See page 40 of the Responsible Business review
07 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Managing and developing at our 454,000 sq ft warehouse in Dagenham Our strategy 180,000 sq ft new warehouse LondonMetric worked with its occupier, Eddie Stobart, Our marketplace to construct a 180,000 sq ft distribution warehouse with 15 dock levellers, two level access doors and a 150 bay lorry park at a 5.7% yield on cost. Our business model Performance review Attractive development yield +75% pallet capacity Local community involvement • Replaced two old buildings with poor • Redevelopment created significant • Significant local resident environmental credentials operational improvements for consultation pre-planning, the occupier and was phased including a walk in exhibition and, Responsible • Built in 12 months by McLaren, a local Business to minimise disruption to the their during development, at resident contractor, on time and within the live operations association meetings £17m budget • It has increased pallet capacity by • Supported local residents in • Lease was extended by c.10 years 25,000 and is expected to generate pursuit of a better nearby traffjc to 26 years across the 454,000 sq an additional 200 permanent jobs interchange and provided funding ft estate for a new local playground • At peak, there is a lorry movement • Rent increased by £0.9 million per every three minutes and the • Over 100 temporary local workers Risk annum generating a marginal yield development significantly improves employed; t wo are now full time on cost of 5.7%, significantly higher vehicle circulation on site employees of the contractor than investment yield Delivering a modern and environmentally sustainable building Governance BREEAM Very Good The building achieved BREEAM “Very Good” and an EPC “A” rating. 99% of non hazardous demolition waste was diverted from landfill and the project achieved an exemplary BREEAM score for diversion of waste. 250 KW Solar PV installation and roof lights statements Financial The solar PV scheme is expected to fully cover all of the occupier’s energy needs at peak times. 10% of the building’s roof is covered by roof lights. Electric Vehicle charge points Four charge points were installed with enabling work undertaken for a further eight to be fitted as required. External Lighting LED upgrade The lorry park lighting was upgraded and is expected to generate a saving of 25,000 kWh per annum for the occupier. On site vehicle servicing A new facility to wash vehicles and tankers as well as a new fuel island is expected to save 3,900 lorry movements a year equating to 39,000 miles.
��������� 08 LondonMetric Property Plc Annual Report and Accounts 2018 Our expertise and relationships shape our decision making The key to the Company’s success is employing a highly talented and motivated team that makes the right property decisions and has close relationships with its occupiers and other stakeholders. 25 Our people and expertise Making informed decisions We have a highly focused team We take a disciplined, patient and of 25 employees and 11 directors. rational approach to investing: Our employees are based in • We are highly conscious of the London covering investment, asset focused team credit quality of our occupiers, management, development and of employees security of our income, quality of finance roles. the real estate and its opportunity + 13.7 % �� Since the merger in 2013, employee for growth numbers have fallen 28% despite • Our internalised structure and a 51% increase in our asset value, the Board’s 3.5% equity in the reflecting improved effjciencies and Company ensures that our lower operational requirements of interests are aligned to those total property return in the portfolio. This has resulted in a low of our shareholders the year, outperforming EPRA cost ratio. IPD All Property by 360 bps IP D All Property by 360 bps See page 26 of the Property review Our future success is reliant on a diverse team with strong expertise. We promote a culture of empowerment, inclusion and development with remuneration aligned to personal and company performance. The Company’s success at retaining and motivating stafg is reflected in its low voluntary turnover rate which has averaged 6% over the last five years. See page 45 of the Responsible Business review
��������������������������������� ������������������������������� �������������������������������������������������� ��������������������������������� � ����������������������� ���������������������������� 09 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Our stakeholder relationships Our strategy Relationships across all of our Occupier relationships activities are critical to the success Our occupier led approach provides us with market knowledge to better of the Company. Our people and our understand future trends and make the right asset decisions. Our high Our marketplace occupiers are at the core of what we average occupancy rate of over 99% since merger in 2013 demonstrates the do but we are reliant on many other strength and depth of these relationships. stakeholder relationships. Extending existing relationships and developing new contacts are key areas In particular, we interact closely of focus for us. We look to engage with occupiers across all of our activities with contractors, suppliers, local to provide real estate solutions that deliver mutually beneficial outcomes communities and authorities, our and meet their requirements. investors, joint venture partners and Our business lenders. We seek to maintain and In 2018, we undertook our biennial customer satisfaction survey and scored model build these relationships and act in the highly with an average 8.5 out of 10 rating for how well we compared against best interests of all our stakeholders. other landlords. 99 8.5 � 10 % Performance review Average occupancy Landlord score in 2018 rate since 2013 customer survey Responsible See page 46 of the Responsible Business review Property Director at a key occupier Business ���������������������������������������������������������� ������������������������������������������������������� Risk ������������������������������������������������������ Governance Jonathan Wright Michelin Our 137,000 sq ft development for Michelin statements Financial During the year, we completed our distribution development in Stoke. Michelin signed a new 15 year lease o n a 137,000 sq ft distribution warehouse. Our expertise helped Michelin to take occupation within 14 months of building work commencing.
10 LondonMetric Property Plc Annual Report and Accounts 2018 Performance highlights IFRS net assets IFRS reported profit Dividend £1,149.5m £186.0m 7.9p +14% +195% +5% 1,149.5 186.0 7.90p 7 .50p 7 .25p 7 .00p 1,006.9 159.5 898.2 870.2 82.7 63.0 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 EPRA net asset value per share EPRA EPS Net rental income (including JVs) KPI £90.6m 165.2p 8.5p +10% +4% +11% 165.2p 8.5p 90.6 8.2p 7 .8p 149.8p 81.8 147 .7p 140.6p 77.7 6.6p 70.9 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 Alternative performance measures Total property return WAULT KPI KPI The Group financial statements are 13.7 % 12.4 years prepared in accordance with IFRS where the Group’s interests in joint ventures are shown as a single line item on the income statement and balance sheet and all 17 .5% 13.1 12.8 12.8 subsidiaries are consolidated at 100%. 12.4 13.7% Management reviews the performance of the business principally on a proportionately 10.5% consolidated basis which includes the 7 .4% Group’s share of joint ventures on a line by line basis. The key financial performance indicators are also presented on this basis. Alternative performance measures are financial measures which are not specified 2015 2016 2017 2018 2015 2016 2017 2018 under IFRS but are used by management as they highlight the underlying performance of the Group’s property rental business Financial highlights and are based on the EPRA Best Practice Recommendations (BPR) reporting framework which is widely recognised and IFRS EPRA use d by public real estate companies. 2018 2017 2018 2017 Therefore, unless specifically stated, the Earnings per share 26.9p 10.1p 8.5p 8.2p performance metrics and financial results Net asset value per share 165.7p 146.4p 165.2p 149.8p reflected in the Strategic report reflect the EPRA triple net asset value per share 165.7p 146.4p Group’s wholly owned assets and its share of joint venture assets and the EPRA BPR EPRA vacancy rate 2.5% 0.4% reporting framework. EPRA cost ratio 15% 16% Further details and reconciliations between EPRA net initial yield 4.5% 4.5% EPRA measures and IFRS equivalents can be found in the Financial review EPRA ‘topped up’ net initial yield 4.9% 5.4% on page 34 and in note 8 to the Group The definition of each EPRA measure can be found in the Glossary on page 147 financial statements.
���������������������� ���������������� 11 LondonMetric Property Plc Annual Report and Accounts 2018 Chairman’s statement Overview This year marked LondonMetric’s fifth Total shareholder return Our strategy anniversary since its merger in 2013 and over five years + 119 % I am extremely proud of its progress and achievements. Over this period, we have doubled net rental income and EPRA Our marketplace earnings per share and delivered a total Dividend increase in the year shareholder return of 1 19%, of which 43% +5 % was generated from dividends. Our business to 7 .9p per share model The Company has delivered We firmly believe that income will be a particularly strong financial an increasingly important component performance in the year, resulting in a of total returns. Therefore, our focus record reported profit of £186.0 million. is on owning assets that can also On a per share basis, EPRA earnings generate rental growth. Through a Performance were 3.7% higher, dividends increased combination of contractual and open review The Company has by 5.3%, our third year of progression, market rent reviews as well as our asset and EPRA NAV rose by 10.3%, benefiting management, we increased like for like delivered a particularly from a £121.6 million revaluation surplus. income by 4.3% in the year. With half Total accounting return was 15.5%. of the portfolio subject to contractual rental increases and strong prospects Critical to our long term success is our for organic rental growth, particularly Responsible alignment to sectors supported by performance in the from our growing urban logistics Business structural changes in shopping habits, portfolio, we are confident in our ability which have been profound and, in our to grow our earnings and continue to year, resulting in a view, permanent. Distribution continues progress the dividend. to benefit significantly from these changes and is one of the best Our people remain fundamental to performing real estate sectors. Over the the ongoing success of the Company ��� £ �������������� year, our distribution assets increased and I would like to take this opportunity by over £300 million to represent 69% to thank the Board and all of our Risk of the portfolio, compared to 21% in employees for their hard work. I should Patrick Vaughan 2013. They have delivered another also like to welcome Suzanne Avery as Chairman strong performance which, together a Non Executive Director and to thank with a good performance from Andrew Varley for his contribution and bution and our convenience, leisure and long dedication to LondonMetric following c following Governance income assets, helped to deliver a his retirement earlier in the year. year. total property return of 13.7% for the Our combined occupier and property nd property year, a 360 bps outperformance of IPD relationships continue to provide us ovide us All Property. with a competitive advantage and put age and put As a REIT, our priority is to generate LondonMetric in a strong position for osition for income returns and pass onto the future. our shareholders in the form of a statements Financial I look forward to the next year ear covered and progressive dividend. with confidence. The portfolio’s alignment to strong sectors, assets and tenants and its unexpired lease term of 12 years provides highly reliable and repetitive income. Our disposal activity in the year, particularly the sale of shorter let and older distribution assets, reflects Patrick Vaughan our disciplined approach to portfolio Chairman 30 May 2018 management and the value we attach to reliable income.
12 LondonMetric Property Plc Annual Report and Accounts 2018 At a glance We own real estate that has structural support from changing consumer shopping habits. Our distribution exposure has increased to 69% o f the portfolio and the Company is delivering sustainable income growth and long term value growth. Our focus is on distribution, long income, Where our assets are located convenience and leisure1 Distribution – Distribution – Distribution Regional 22% Urban 20% Retail and Leisure 69 % Long income 12% Distribution Distribution Mega 27% Convenience & Leisure 10% Residential 2% Retail parks 7% As at 31 March 2018 NIY2 WAULT Distribution 4.6% 12.1 yrs Long Income 5.9% 11.0 yrs Convenience & Leisure 4.9% 17.2 yrs Retail Parks 5.6% 11.1 yrs Investment portfolio 4.9% 12.4 yrs 1 Including developments 2 EPRA topped up NIY Significant events in the year Investment Asset Management Development • £384.9m invested in our preferred • 58 occupier transactions • Completion of five developments sectors of distributions, long generating additional income across 578,000 sq ft at an income, convenience and leisure of £3.1m anticipated yield on cost of 6.4% • Largest investment was in the • 31 lettings at a WAULT of 15.2 years • Acquisition of 40 acre site in £116.6m Cabot portfolio of and 22% above ERV Bedford allowing us to commence 14 distribution warehouses development of up to 680,000 sq • 27 rent reviews at 12.3% above ft of distribution warehousing at an • £251.6m of disposals, including previous passing on a five yearly anticipated yield on cost of 7.0% the disposal of our last remaining equivalent basis offjce in Marlow
13 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Portfolio value WAULT Total property return Valuation uplift ERV growth Our strategy % +3.1 £1,842 m 12.4 years + 13.7 +7.1 % % Our marketplace Distribution portfolio Our business model Mega distribution Regional distribution Urban distribution Performance review Responsible Business • 7 Assets, 4.7m sq ft • 15 Assets, 3.6m sq ft • 45 Assets, 3.0m sq ft • £24.9m rent (av £5.30 psf) • £18.3m rent (av £5.60 psf) • £17.9m rent (av £6.10 psf) • NIY 1 4.7% • NIY 1 4.5% • NIY 1 4.7% • WAULT 13.2 years • WAULT 14.2 years • WAULT 8.5 years Risk Retail and leisure portfolio Governance Long income Convenience and leisure Retail parks statements Financial • 28 Assets, 1.2m sq ft • 18 Assets, 0.6m sq ft • 5 Assets, 0.4m sq ft • £13.9m rent (av £19.70 psf) • £9.4m rent (av £16.70 psf) • £8.4m rent (av £18.90 psf) • NIY 1 5.9% • NIY 1 4.9% • NIY 1 5.6% • WAULT 11.0 years • WAULT 17.2 years • WAULT 11.1 years 1 Topped up NIY
������������������������������������������������������������ ������������������������������������������������������������������ ���������������������������������������������������������������� �� ��� ������������������������������������������������ ������������������������� �������������������������������������������������������������������������������� ������������������������������������������������������� ���������������������������������������������������������������������������� ��������������������������������������������������������������� 14 LondonMetric Property Plc Annual Report and Accounts 2018 Our strategic priorities Our portfolio is aligned to modern shopping habits We focus on sustainable and growing income 3. Generate reliable income with income growth potential from We manage, enhance and create property in a responsible way Our expertise and relationships shape our decision making ����������������������������������������������������
15 LondonMetric Property Plc Annual Report and Accounts 2018 Chief Executive’s review Overview Distribution assets Our strategy Our portfolio is positioned around strong 69 % fundamentals of owning structurally supported real estate let to good tenants.” of the portfolio Our marketplace Andrew Jones Distribution assets owned Chief Executive +33 % Our business model Overview in the year to £1.3bn Our objective is to deliver We have instead focused on attractive and dependable fit for purpose distribution, long income returns to our income and convenience assets Performance shareholders whilst preserving where changing consumer review and enhancing capital through shopping habits are providing owning structurally supported structural support. real estate let to good tenants. Our occupier and property In short, we aim to behave a s a relationships improve our true REIT. decision making and allow us Responsible Business The advancement of technology to maintain our sector leading continues to cause significant portfolio metrics. Whilst we can disruption to many industries and never be totally immune from those that fail to adapt to change all headwinds, we believe that face an increasingly uncertain these relationships and our robust future. Over the past five years, approach give us a competitive we have successfully positioned advantage that allows us to Risk the portfolio to navigate this increase our earnings, progress disruption by pivoting away our dividend and see the value from multi-let operational of our assets increase ahead retail assets and offjce property. of the market. Governance statements Financial
��������������������������� �������������������������������� 16 LondonMetric Property Plc Annual Report and Accounts 2018 Chief Executive’s review continued Primark’s value and store only proposition continues to succeed whilst the likes of John Lewis, Next and Argos have successfully adapted their Even after many years of businesses for omni-channel retailing by Our portfolio actively managing their store portfolios for new distribution and and investing heavily in new distribution is aligned to modern warehouses and technology systems; warehouse space remains well shopping habits it is no coincidence that they report online sales well above 40% of total sales. Digital evolution continues to cause In food retail, the disruption from Online retail sales (non food) significant disruption convenience operators such as Aldi 26 Today’s world is complex and more and Lidl is forcing the established % dynamic than ever with technological grocery market to drive further innovation impacting every aspect pricing and cost effjciencies as well of society. as preparing for an onslaught from online competition. We have, therefore, The rapid and permanent shift in by 2020 compared consciously avoided large format consumer shopping habits has seen food stores and distribution, instead to 20% today a material growth in pure online focusing on convenience stores where and omni-channel retailing. This has changing habits have seen the growth seen online non food retail sales hit of ‘top up’ shopping. 20%, compared to 13% in 2011, and this is forecast to reach 26% by 2020. Distribution has strong Traditional brands are being replaced structural support by names which barely existed a Despite years of being unfashionable, decade ago, but are now considered the channel shift in retail spending is very much part of retail’s New World providing a significant boost to the Order: Amazon, eBay, boohoo, distribution property sector; and this ASOS and Ocado to name a few. is only expected to continue. These retailers rely on their effjcient and well located distribution network Even after many years of strong to service their customers’ demands take up, occupier demand for new with ever increasing speed. We are distribution and warehouse space n o longer a nation of shopkeepers. remains well above long term averages. Retailers and logistics Whilst the virtual tills are ringing, the operators are constantly improving physical ones aren’t. Physical retail sales their distribution infrastructure and are growing at their slowest rate since warehousing to increase speed of 2012. The outlook for more traditional delivery and cost effjciencies through retailers is very challenging and they automation, better locations and are having to adapt continuously to higher quality space; and this cycle remain relevant. Recently, New Look, of improvement is happening at a Mothercare and Carpetright admitted faster rate than ever before. that their store portfolios no longer meet their needs and have sought to There remains a strong demand/ radically shrink the size and cost of their supply imbalance, which is propelling estates. We have also seen both Toys rental growth across most parts of R Us and Maplin fall away altogether, the UK. The best distribution space and it is inevitable that they will not be is highly sought after and occupiers the last victims and that the list of retail are consequently prepared to pay failures will grow. record rents and sign long leases, often with contractual rental uplifts The retail channel shift is real, material at review, as they look to protect and permanent. Stores today are their significant capital investments increasingly having to provide inside these warehouses. The search convenience, value or extraordinary for greater effjciencies will, however, entertainment. If they cannot, then inevitably lead to the closure of some what is their purpose? older, less fit for purpose logistics warehousing, which is something that we continue to address through our disposal activities.
������������������������������ ������������������������������ ������������������������������� 17 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Consumers’ expectations are always these structural challenges. We no Our strategy rising, meaning that yesterday’s longer believe that it’s as simple as ‘wow’ quickly becomes tomorrow’s ‘prime’ versus ‘secondary’. It feels more ‘norm’. This is illustrated by increased indiscriminate than that. The real estate fundamentals for expectations around speed of delivery, Therefore, we have consciously urban logistics are strong and so a trend which has underpinned our avoided the most vulnerable sectors further investment within the urban we will continue to build critical in retail and focused our retail Our marketplace logistics sector, particularly in assets exposure towards long income and close to large population centres. convenience led assets let to the likes of attracted by growing income The real estate fundamentals are Aldi, M&S, Wickes and B&M. As a result, strong and so we will continue to build streams and strong intrinsic land our exposure to retail parks has fallen critical mass in major UK geographies, to only 7% and our retail and leisure attracted by growing income streams portfolio is 100% let on leases with over and strong intrinsic land values, often 12 years remaining. supported by the added benefit of alternative uses.” Our business more valuable alternative uses. Our team has considerable experience model in the retail market and our actions Deflation and depreciation have allowed us to, so far, avoid the Urban logistics assets The continuing transfer of sales to value destruction across the various 29 online represents a permanent and sectors. This still has a long way to go, % profound structural change. Its impact and whilst many in the property market is illustrated in Next’s latest results which want us to believe that we are entering Performance listed 17 store closures and average the final act, we are not! review rental falls of 25% on the 19 leases that it decided to renew. Similarly, New of our distribution portfolio See pages 28 to 31 of the Look’s CVA will see 60 stores close as Propert y review well as reducing rents across 393 stores of between 20% and 60%. Together, they represent over 75% of New Look’s Responsible Business UK store portfolio. Carpetright also confirmed the closure of 93 stores and reducing rents of between 30% and 50% on another 113, in aggregate representing over 50% of their UK estate. The headwinds facing legacy real estate is a clear and present danger to Risk the value of many retail assets. As well as store closures and rent reductions, retailers are demanding shorter leases and more advantageous incentive packages. The average lease taken by Next on lease renewals fell to seven Governance years and they expect this to reduce to just five years. Whilst the store network still retains critical importance for omni-channel retailers, at current rental levels they are for many an increasingly declining asset. It is not evident that the property market is fully appreciating statements Financial or pricing in the negative impact of
�������������������� �������������������������������� ����������������������������� ������������������������� ������������������������� ����������������������������������� ����������������������������������� 18 LondonMetric Property Plc Annual Report and Accounts 2018 Chief Executive’s review continued Dividend security and growth from our portfolio Income remains central to our Focusing on income and income investment thesis. Our ultimate priority is to pass income generated by our growth is a simple idea but in a We focus on assets to shareholders, which is why sustainable and we consistently pay out 90%+ of our earnings in dividends, and why, with one that we strongly believe in and growing income the benefit of future rent reviews, finance and other corporate cost effjciencies, we are confident in our Demographic trends accentuating ability to progress our dividend. the search for income Receiving a meaningful proportion The extended period of low economic of your total return in income not only growth and low interest rates continues Our portfolio is in good shape provides a margin of safety against to create an almost desperate search short term price fluctuations, it also for yield. We believe that this search is helps compounding returns. Growth unlikely to change any time soon as a on growth is always underestimated. lower growth environment is combined Following the repositioning of the with a demographic wave, as the portfolio, our investment strategy today population ages and life expectancy is more patient. This is allowing us to increases. In the UK, according to the collect and compound our income ONS, the percentage of the population and reduce the frictional costs of defined as old age dependent has buying and selling that can negatively risen from 24% ten years ago to 29% impact total returns; after all, the first today and is forecast to increase to rule of income compounding is to 41 % by 2036. never interrupt it unnecessarily. Therefore, we believe that income Fortunately, our portfolio is in good will continue to be the defining shape with long leases of over 12 years, characteristic of this decade’s occupancy at 97.5%, only 1.3% gross investment environment. The investing to net income leakage and little fraternity, including dedicated income defensive capex requirement. We have funds, private investors, corporate also benefited from good like for like and local authority pension funds are income growth over the year, and, pivoting their approach more and going forward, we know that we have more towards income returns that are the certainty of future income growth reliable, predictable and growing. through contractual rental increases These are compelling arguments and across half of the portfolio. some real estate sectors are ideally Focusing on income and income suited to meet this need. Indeed, this is growth is a simple idea but in a world essentially the role that REITs in the UK of very low growth, it is one that we were created to provide, passing 90% strongly believe in and one that we are of their net income to shareholders, taking seriously. without the burden of double taxation. See pages 26 to 27 of the Property review
19 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Outlook Our strategy In an uncertain economic and political environment we believe We manage, enhance Our expertise and that our income compounding and create property relationships shape model is increasingly attractive, Our marketplace especially as investors pivot their in a responsible way our decision making investment approach for low growth and demographic changes. Our income focus allows us to be a Delivering enhanced returns Disciplined decision making using little less obsessed about predicting from our property our occupier intelligence exact market movements or the exact timing of cycles, although We continue to grow our income and We take a disciplined, patient and our thoughts on these will be improve the quality and attractiveness rational approach to investing. We are Our business reflected in the management of our assets through de-risked obsessed about the credit quality of model o f our capital structure. asset management and short cycle occupiers, the security of our income, development activity. quality of the real estate and its We remain highly nervous on the potential for income growth. outlook for the retail sector with the In the year, we completed the tectonic plates shifting so materially development of 0.6 million sq ft at a Over the year, we were a significant that it’s now a very diffjcult sector yield on cost of 6.4%, materially higher net investor in distribution and used Performance to navigate and deliver superior than the investment yield. As at the our strong occupier and developer review returns. For the best space in the year end, we had 1.0 million sq ft of relationships to acquire over best locations, this is cyclical; for the development underway or in the near £300 million of distribution assets. majority it is permanent disruption term pipeline. This activity helps to Whilst we remain focused on growing and for the weakest it will be further modernise our portfolio, with our logistics exposure, that doesn’t highly problematic. 28% now rated BREEAM Very Good, prevent us from selling to ensure that and it has reduced the average age our portfolio remains fit for purpose. Conversely, distribution remains Responsible Business of our distribution assets to 15 years. Therefore, we took advantage of the structurally supported by the strong market to monetise £88.2 million fundamental changes in consumer Our 58 lettings and rent reviews helped of our older and shorter let distribution shopping patterns with attractive to deliver £3.1 million of additional assets in geographies where we demand/supply tension, especially income with lettings achieved at 22% believe rental growth and occupier for urban logistics where rental above ERV on average lease lengths of demand is less robust. growth is strongest. This is providing 15.2 years. reliable, sustainable and consistent Whilst the market remains very Post year end, we have agreed and rental income and a fantastic Risk competitive, we have a highly are in legals on further occupier bedrock from which to grow our talented and focused team with strong transactions representing an additional income and dividends. relationships which puts us in a strong £1.3 million of income. This includes four position to find new opportunities and Our returns over the year are a distribution lettings and rent reviews at make well-informed decisions. measure of the progress that 28% above passing rent. we have made and reflect our Governance Disciplined financing We expect our income to continue longer term sector and property to grow, particularly as we let the Our financing remains aligned to our decisions. Looking forward, we remainder of our recently completed property strategy. Loan to value of seek to continually build a better developments and continue to settle 35% provides us with flexibility to make company and believe that, despite distribution rent reviews at levels which further acquisitions and build our an environment of profound political are materially above passing. developments. Debt maturity remains and economic change, our strategy at five years and we have reduced positions us well to not only weather statements Financial our cost of debt to 2.8% following the See pages 32 to 33 of the Property but also benefit from short term cancellation and recouponing of review and pages 42 to 43 of the fluctuations in values. interest rate swaps, the cost of which Responsible Business review has already been accounted for and has a payback period of 2.5 to 4.0 years. Our dividend is 108% covered and our EPRA cost ratio fell to 15% from 16% last year. See pages 26 to 31 of the Property review and pages 34 to 39 of the Financial review
20 LondonMetric Property Plc Annual Report and Accounts 2018 Our marketplace Real estate remains an attractive investment class supported by a resilient economic backdrop and an increasing need for real income returns. However, in a complex and highly dynamic world, real estate has to be fit for purpose to navigate a rapidly evolving environment. Economic backdrop The need for income +60 The UK economy remains relatively There remains a lack of clarity on % robust. GDP growth remains resilient the UK’s future relationship with the and is forecast to be around 2% over European Union which could impact the next few years. Interest rates remain on near term investment decisions. at historic lows and inflation is set to fall The economy has remained resilient Global population aged 65 back to around 2%. With evidence of to this distraction and with greater and older growth to 2030 real wage inflation and unemployment clarity around Brexit, this could trending towards 4%, consumer improve current uncertainty. spending is set to pick up. Demographic shifts and longevity Real estate remains an attractive +2.0 of life are having a profound % pa investment class in this economic impact on the search for income. environment, delivering a positive Pension freedoms together with yield arbitrage and positive real reduction in Annuity rates have led returns. Overseas capital continues many to seek alternative sources t o be attracted to UK real estate. GDP growth remains resilient of income. over next two years Real income returns require an income ahead of the prevailing Economic forecasts (%) inflation rate. Many traditional investment classes (cash, bonds, 3.1 equities) do not deliver this and, 2.7 as a result we are seeing a rise of 2.4 alternative investment classes. 2.1 2.0 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.8 1.8 1.8 1.7 Real Estate Investment Trusts (REITs) that invest in the right real estate are 1.2 1.2 1.1 an attractive investment proposition 0.6 in this environment providing reliable, sustainable and growing income with the potential for long 2016 2017 2018f 2019f 2020f term capital appreciation. GDP 10 year gilt CPI inflation Household spending Source: Capital Economics Modern shopping habits and changes in technology The compounding impact of retailers and newly established technological change continues to ecommerce retailers. empower the consumer. The structural Online is forecast to continue to grow shift in shopping habits continues with same store sales stagnating. to have a ripple efgect through Responding to these shifts, occupiers many businesses as ecommerce are upgrading their supply chains becomes an increasingly driving to meet consumer demands. force of growth amongst traditional -1 + 13 % % Online sales year on year Store sales year on year
21 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Supply & demand imbalance Real estate requirements Our strategy The logistics and fulfilment real Technological advancements heightened demand for well located estate market is a direct beneficiary and changes in shopping habits and specified logistics and fulfilment of the shifts in shopping habits. are resulting in a need for fit for accommodation in or close to urban CBRE estimate that 18.5 million sq ft purpose, modern real estate to centres. Urban logistics property, of Grade A distribution space was maximise supply chain effjciencies. however, is in short supply given the Our marketplace taken up in the 12 month period Retailers have two principle routes alternative use that these locations against the five year average of to market: retail stores and online. have and consequently there is a c.13.8 million sq ft. Q1 2018 was Modern and effjcient logistics and demand/supply imbalance. a record quarter with 10 million fulfilment space is required to deliver The store network remains an sq ft of take up across 28 deals to the consumer regardless of route integral part of a retailer’s business. dominated by online, 3PLs and Post and logistics has to seamlessly provide However store portfolios need & Parcel operators. Online retail led for both store and home delivery. to shrink and reflect the way in Our business occupiers have accounted for 23.7% Increased parcel deliveries and which people choose to shop. model of total take up in the last two years rising retailer promises to deliver to Convenience-led retail remains a compared to 0.6% and 0.9% in 2012 your home, place of work and soon growing sector as top up shopping and 2013 respectively. anywhere of your choice, is resulting in trips complement online shopping. The development market has responded with c.19.4 million sq ft of current development activity. Performance However 64% is pre-let and review developers remain risk adverse. Total supply of new and grade A stands at c.15 million sq ft, representing c.10 months supply based on the last 12 months take up. 23.7 Responsible % Business Online retail occupiers have accounted for 23.7% of total take up in the last tw o years Risk Driving investment markets Outlook The shift in consumer behaviour Prime retail yields v prime distribution we have witnessed in recent years Governance is accelerating. We believe it is % critical to invest in real estate that is 8 fit for purpose, aligned to structural 7 shifts and ofgers strong income characteristics. Our strong occupier 6 relationships help shape our decision 5 making to navigate a rapidly statements Financial evolving market. 4 3 2002 2004 2006 2008 2010 2012 2014 2016 2018 Shopping centre – prime Distribution – prime Retail Warehouse – prime Source: CBRE The structural shifts supporting leases with contractual uplifts given accelerating growth, together with the importance of distribution to their the favourable demand/supply operations. This long dated income dynamics, have attracted large with bond like characteristics is very inward real estate investment into appealing and is delivering strong risk the logistics and fulfilment sectors. adjusted total returns for owners of Occupiers continue to sign up to long distribution real estate.
22 LondonMetric Property Plc Annual Report and Accounts 2018 Our business model How we generate sustainable income and create value. Our key stakeholders How our story creates income and value See pages 01 to 09 People We anticipate changes in shopping habits and pivot our portfolio to those sectors which benefit from these Our success is dependent on changes. As a result of our actions, we are strongly employing a talented, motivated positioned in distribution, retail and leisure property. and diverse team with strong property expertise. Occupiers Distribution We engage with occupiers across all of our activities to provide real 69 % estate solutions that deliver mutually beneficial outcomes and assist them in meeting their business needs. of portfolio Our portfolio is Contractors and suppliers aligned to modern Total property return in 2018 Delivering developments and asset shopping habits 13.7 services on time, on budget and in % adherence with our standards is of high priority. We select high quality and robust 360 bps out performance contractors who have a proven of IPD All Property track record and we work in See page 02 collaboration with them. Investors and Joint Ventures Development activity in 2018 We value our good relationships 578,000 sq ft with investors and debt providers t o ensure we have a wide access We manage, to capital markets. We also work closely with our enhance and Additional income joint venture partners to fulfil their +£3.1 m create property business objectives. in a responsible Local communities way We recognise the importance of from occupier transactions supporting and properly engaging in 2018 with local communities. See page 06 We work closely with local authorities, residents and businesses to ensure that our activities We improve the quality and attractiveness of consider and bring benefits to our assets through de-risked asset management local communities. initiatives and short cycle developments. See the Responsible Business review on pages 45 to 47
23 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Our strategy Our marketplace Value created Total shareholder return (5 years) In a yield starved environment, we are a true +119 REIT adopter where we focus on sustainable and % growing income. We believe that income will be an increasingly important component of total returns Our business and we look to improve the quality and length of our model income to maximise returns to shareholders. Total accounting return +15.5 % WAULT 12.4 years Performance review EPRA EPS growth We focus on Only 6% of income +3.7 % expires over 3 years sustainable and Responsible growing income Business LFL income growth +4.3 % Dividend growth +5.3 % See page 04 Risk Sustainable improvements Investment +£384.9 m 28 % Governance Our expertise of portfolio and relationships BREEA M Very Good Occupancy shape our 98 % Community benefits decision making 345 statements Financial See page 08 permanent jobs created by our occupiers on our recent developments Our people are highly talented and have strong relationships with retailers and the property sector which have been built up over many years. This gives us unrivalled knowledge and we are a trusted partner. As a result, we are able to access attractive opportunities and make the right property decisions.
24 LondonMetric Property Plc Annual Report and Accounts 2018 Key performance indicators We continue to track seven key performance indicators to monitor the performance of the business, which include our share of joint ventures. The KPIs are also used to determine how Executive Directors and senior employees are evaluated and remunerated. Objective KPI measure/numbers Performance Deliver long term Total Shareholder Return (‘TSR’), being the share Total shareholder return % price movement together with the dividend, shareholder returns in the five years post merger was 119%, more 2018 16.6 than twice the FTSE 350 Real Estate Super Sector 2017 4.4 movement of 58%. 12 month TSR delivered 16.6% compared to the 2016 5.9 FTSE 350 Super Sector return of 7.9%. Maximise long term Total Accounting Return (‘TAR’) of EPRA NAV Total accounting return % movement together with dividend paid in total accounting 2018 the year. 15.5 return 12 month TAR delivered a return of 15.5%. 2017 6.4 The full calculation can be found in Supplementary note viii on page 144 2016 11.5 Maximise property Unlevered Total Property Return (‘TPR’), including Total property return % capital and income return, of the portfolio as portfolio returns calculated by IPD. 2018 13.7 12 months TPR delivered a return of 13.7% 2017 7.4 compared to the IPD All Property benchmark of 10.1%. 2016 10.5 Deliver sustainable EPRA earnings per share from core operational EPRA earnings per share p activities have grown by 3.7% over the last growth in EPRA 12 months. Underlying earnings have grown by 2018 8.5 earnings 15.9% to £59.1 million. The per share equivalent 2017 8.2 reflects last year’s equity placing. In the five years post merger, EPRA earnings 2016 7.8 per share has grown by 117.9% from 3.9p to 8.5p per share. Drive like for The movement in the contracted rental income Like for like income growth % on properties owned through the period like income increased by 4.3%. 2018 4.3 growth through management 2017 4.6 actions 2016 3.1 Maintain a higher Weighted average unexpired lease term WAULT years across the investment portfolio (excluding than market 2018 12.4 residential and development) of 12.4 years as benchmark at 31 March 2018. weighted average 2017 12.8 unexpired lease 2016 12.8 term (WAULT) Maintain strong Occupancy rate of investment portfolio at EPRA vacancy % 31 March 2018 was 97.5%. We expect this to revert occupier back to above 99% as the remainder of our 2018 2.5 contentment recently completed distribution developments 2017 0.4 are let. 2016 0.7
25 LondonMetric Property Plc Annual Report and Accounts 2018 Our portfolio is We focus on We manage, enhance Our expertise and aligned to modern sustainable and and create property relationships shape Overview shopping habits growing income i n a responsible way our decision making Our strategy Our marketplace Financial performance indicators Remuneration 2018/19 ambition We monitor other financial performance indicators in respect Under the Remuneration Policy 37.5% of LTIP awards are Three year TSR performance of LTV, debt maturity and cost subject to TSR growth compared with the FTSE 350 Real to be in the upper quartile of borrowing. Estate sector excluding agencies and operators. of the FTSE 350 Real Estate sector, excluding agencies The TSR component of the 2014 LTIP award vested in These are discussed in the Finance and operators. full in the year and the TSR component of the 2015 LTIP review on pages 38 to 39. award is expected to vest in full. Our business Movements over the past five years are model reflected in the charts on page 39. Under the Remuneration Policy 37.5% of LTIP awards Three year total accounting See Finance review on page 34 granted since 2016 are subject to TAR growth return to be in the upper compared with the FTSE 350 Real Estate sector quartile of FTSE 350 Real excluding agencies and operators. Estate sector, excluding Risk management agencies and operators. Performance The achievement of our seven KPIs is review influenced by the identification and management of risks which might otherwise prevent the attainment of 35% of annual bonus award is subject to TPR One year TPR our strategic priorities. outperforming the IPD Quarterly Universe index. outperformance The relationship between our principal against IPO Quarterly This year TPR outperformed the IPD benchmark risks, strategic priorities and KPIs is Universe index. Responsible delivering a 40% bonus payout. Business reviewed in the Risk management section on pages 48 to 59. See Risk management on page 48 35% of annual bonus award is subject to an EPRA Deliver and sustain EPRA EPS growth target. This year EPRA EPS outperformed earnings growth and Remuneration its growth target securing a full bonus payout. dividend progression. The table on page 94 shows how our Risk 25% of LTIP awards vest after three years subject to KPIs are reflected in and therefore an EPS growth target. The EPS component of the aligned to remuneration and 2014 LTIP award vested in full in the year and 76% incentive arrangements. of the EPS component of the 2015 LTIP award is expected to vest this year. See Remuneration on page 88 Governance Forms part of EPRA earnings per share, which as noted Deliver like for like income above, is a key financial performance measure for the growth ahead of inflation Company’s variable incentive arrangements. plus 1.5%. statements Financial Linked to individual personal objectives, representing Maintain high weighted 30% of the annual bonus performance conditions. average unexpired lease term targeting >12 years. Linked to individual personal objectives, representing Maintain high occupancy 30% of the annual bonus performance conditions. across the investment portfolio, targeting >99%.
26 LondonMetric Property Plc Annual Report and Accounts 2018 Property review We invest in real estate that delivers repetitive, dependable and growing income and that o fgers the best prospects for superior total returns. Our actions aim to strengthen our portfolio’s income metrics. Strong portfolio metrics provide Lease expiry profile income security and growth We continue to maintain strong income metrics through our activities. >20 years 16% 0–3 years 6% Average lease lengths of 12.4 years (11.3 years to break) provide a high 16–20 4–10 years level of income security with only 6% of years 36% income expiring over three years and 11% nearly 60% with lease lengths of greater Mark Stirling than 10 years. Asset Director Occupancy remains high at 97.5% and will revert back to above 99% as Average unexpired lease length we let the remainder of our recently 11–15 years 12.4 years 31% completed distribution developments. Gross to net income ratio of 98.7% compares very favourably against our peers and reflects the low operational Our portfolio is further aligned to requirements from owning single structurally supported real estate let assets. Acquisitions in the year totalled £384.9 million as we continue to invest 50.3% of rental income benefits from into our preferred sectors of distribution, fixed or inflation linked uplifts which long income, convenience retail provides certainty of income growth. and leisure. Furthermore, through open market rental uplifts on distribution, we are £306.4 million was invested into delivering organic rental growth. regional and urban distribution and further broadened our end to end The strength of our occupiers is critical logistics portfolio. to the quality of our income. Our top five occupiers consist of Primark, Dixons Whilst competition for assets in Carphone, M&S, DHL and Argos and these preferred sectors is strong, our represent 35% of our income. acquisitions were at an attractive yield of 6.0% and a WAULT of 10.6 years. Investment activity by sub sector Acquisitions Disposals Proceeds Cost at share NIY at share NIY £m % £m % Distribution 1,3 306.4 5.9 88.2 5.3 Long Income 3 40.5 6.7 11.2 6.7 Convenience & Leisure 2 38.0 5.6 56.9 4.7 Valentine Beresford Investment Director Retail Parks – – 18.1 7.1 Offjce – – 68.5 6.7 Acquisitions Residential – – 8.7 2.5 £384.9 m Total 384.9 6.0 251.6 5.7 1 Includes costs relating to the site acquisition and full development of 680,000 sq ft at Bedford 2 Includes convenience disposal of Loughborough and regional distribution sale at South Elmsall that exchanged in the year with deferred completion post year end 3 Includes the investment value from an increase in our share of the DFS Joint Venture from 30.5% to 45.0%
27 LondonMetric Property Plc Annual Report and Accounts 2018 Overview As part of our disciplined portfolio Portfolio split 1 Distribution weighting Our strategy management, we sold £156.3 million 69 % of assets within our preferred sectors at a yield of 5.2%. £88.2 million was in Retail parks 7% Residential 2% distribution where we monetised older assets that had a WAULT to first break Convenience o f less than five years. and leisure Our marketplace 10% Total property return This investment activity delivered 80 bps of positive yield arbitrage and +13.7 Long % provides greater certainty of income income 12% and income growth with alignment to superior assets. The remainder of our sales related to Distribution assets outside of our preferred sectors, 69% Urban logistics valuation uplift Our business namely our last offjce asset in Marlow, model +10.9 two retail parks and 19 residential flats % 1 Includes assets in development at our only residential asset, Moore House, Chelsea. Including sales agreed 3.1% in the year, and successfully or under ofger since the year end, executed asset management and only 37 flats remain of the original 149 development initiatives, which owned in a joint venture, where we Performance generated like for like income growth have a 40% share. review of 4.3%. As a result of our investment and Distribution generated a capital uplift development activity, distribution of £74.4 million, representing a 6.4% increased to 69% of our total portfolio, increase. The best performing segment up from 62% in 2017, with urban logistics was urban logistics which saw a 10.9% representing nearly a third of our Responsible capital uplift driven by strong ERV distribution portfolio. Conversely, retail Business growth of 6.6%. parks exposure has fallen further to 7%. Retail and leisure saw a £40.0 million Our actions are delivering valuation increase representing strong returns an 8.1% uplift, helped by good ERV We have been a significant beneficiary growth and our asset management of our early move into distribution activity. All subsectors performed well. where strong demand/supply Retail parks delivered a 4.0% uplift, Risk dynamics have pushed capital values convenience and leisure delivered an and rents significantly higher. 8.5% capital uplift, and our long income portfolio delivered 10.4%. Over the year, the portfolio delivered a total property return of 13.7%, At our last remaining residential significantly outperforming IPD All property there was a £1.8 million fall in Governance Property which returned 10.1%. value, representing a 5.8% reduction. This return reflects the portfolio’s As income becomes an increasingly sustainable and attractive income important component of total returns, as well as a strong capital return. we believe that our strong income The revaluation gain over the year was focused portfolio metrics will continue £121.6 million, reflecting a 7.1% increase. to generate superior future total returns. The second half gain was £68.8 million, statements Financial helped by our development assets, Revaluation gain in the year particularly at our Bedford distribution development where we completed on the land acquisition. Distribution 6.4% The EPRA topped up net initial yield Long Income 10.4% on the portfolio is now 4.9% and the Convenience & Leisure 8.5% equivalent yield is 5.3%, reflecting an Retail Parks 4.0% equivalent yield compression of 28 bps over the year on a like for like basis. Residential -5.8% Our actions accounted for Developments 26.1% approximately 50% of the valuation Total portfolio 7.1% gains through our strong exposure to superior ERV growth, which averaged
28 LondonMetric Property Plc Annual Report and Accounts 2018 Property review continued Distribution We invest in the subsectors of distribution that o fger the most compelling returns. Overview Regional distribution Urban logistics The value of our end to end The investment market for regional Occupier demand for smaller distribution portfolio, including distribution is also highly competitive as distribution warehouses continues developments, increased by 33% over investors price in strong rental growth to grow as occupiers seek closer the year to £1,262.5 million. and leasing assumptions. proximity to population centres to reduce their operational costs and These are high quality single let assets Whilst we remain disciplined, we delivery times. Urban logistics now with a WAULT of 12.1 years, ofgering acquired four regional warehouses represents 29% of our distribution an attractive mix of guaranteed for £83.4 million at a net initial yield of portfolio, up from 17% in 2017. This has rental uplifts on mega and regional 5.6%. Three were acquired through improved the balance of our end to distribution, and strong organic rental the Cabot portfolio acquisition and end logistics platform significantly. growth prospects on urban logistics. the fourth was a warehouse let to Clipper Logistics. Over the year, we acquired 25 assets Mega distribution continues to for £177.6 million, including three see strong investor demand and We have supplemented these developments. The blended yield pricing remains highly competitive. acquisitions by investing into our on the acquisitions was 5.7% with Therefore, we have looked to development pipeline where a WAULT of 9.3 years. These assets increase our exposure to regional and we continue to access product are let to strong occupiers in good urban logistics where we see more at yields significantly in excess of locations and have attractive income favourable pricing dynamics, greater investment value. growth potential. income growth potential and more At Bedford, we acquired a 40 acre robust intrinsic value in the assets. We firmly believe in the outlook development site and the majority for urban logistics. Tight supply In the year, we invested £306.4 million of the site will be used to build two and significant occupier demand at an attractive blended yield of 5.9% regional warehouses at a cost of continue to drive material rental and with average lease lengths of £45.4 million representing a yield outperformance of urban logistics 10.0 years. of 7.3%. The balance of the site compared to regional or mega will be used to build three urban distribution. In addition, with over 70% logistics warehouses. of our urban assets in the south east The strength of the market has and the Midlands, we benefit from Distribution portfolio prompted us to sell three regional the strong underlying land values £1.3 bn assets for £88.2 million at a yield of 5.3%. from alternative uses. These were older assets, let on short Therefore, we are comfortable that leases, with a WAULT to first break of our urban logistics portfolio has shorter 4.8 years, where we were uncertain on average lease lengths and a lower the prospects for future rental growth. level of contractual rental uplifts. Distribution portfolio split As at 31 March 2018 Mega Regional Urban Urban logistics 29% Typical warehouse size 500,000+ sq ft 100–500,000 sq ft Up to 100,000 sq ft Mega 1 Value £501m £395m £367m 40% WAULT 13.2 years 14.2 years 8.5 years Portfolio Yield 2 4.7% 4.5% 4.7% split Contractual uplifts 3 74% 59% 28% 1 Including developments Regional 2 Topped up Yield 31% 3 Percentage of portfolio that benefits from contractual rental uplifts
29 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Distribution Our strategy Investment activity Our marketplace Overview Acquisitions Acquired 1,300,000 sq ft Cabot portfolio 120,000 sq ft in Huyton £306.4 m £116.6 million acquisition of £11.8 million acquisition of a forward 1 1 urban and 3 regional assets. funding development let to Antolin Our business Acquired at a NIY of 6.1% and Interiors. Acquired at a yield of 6.1% model with a WAULT of 5.6 years. and with a WAULT of 15.0 years. NIY: 5.9% 680,000 sq ft in Bedford 90,000 sq ft in Coventry WAULT: 10.0 years The development site was £5.7 million acquisition of a warehouse unconditionally acquired at an let to DHL. Acquired at a NIY of 7.0% Disposed anticipated development cost and with a WAULT of 10.0 years. Performance of £65.5 million and yield of 7.0%. £88.2 m review 57,000 sq ft in Crawley 181,000 sq ft in Leyton, Weybridge, £6.9 million acquisition of six Peterborough, Cheltenham warehouses with a WAULT of 2.8 years. and Haverhill It is anticipated that the site will be NIY: 5.3% £25.6 million acquisition of five redeveloped at a yield of c.6%. WAULT: 5.8 years warehouses at a NIY of 5.0%, rising Responsible 62,000 sq ft in Frimley Business to 5.6% over five years, and with a WAULT of 16.0 years. Acquired a forward funding Post period end development for £13.1 million 364,000 sq ft in Ollerton 490,000 sq ft at an anticipated yield on cost of £37.4 million acquisition of a 5.3%. warehouse let to Clipper Logistics 51,000 sq ft in Crawley at a reversionary yield of 5.5%, portfolio disposal with a WAULT of 19.8 years. £6.4 million acquisition of a Risk warehouse let to TNT. Acquired at a Disposal of six warehouses and a plot 132,000 sq ft in Speke NIY of 4.8% and a reversionary yield of land for £36.0 million, reflecting a £10.2 million acquisition of of 6.2%, with a WAULT of 6.4 years. blended NIY of 5.9%. The properties a warehouse let to Gefco. are located in the Midlands and North 42,000 sq ft in Warrington Acquired with a WAULT of 14.8 years. of England, with a WAULT to break of Governance £4.4 million acquisition of a warehouse 5.3 years. The disposal of three of the let to Hovis. Acquired at a NIY of 5.6% assets is conditional on the purchaser and with a WAULT of 9.7 years. arranging suitable financing. Disposals statements Financial 290,000 sq ft in South Elmsall LondonMetric acquired it as part of the Cabot acquisition ofg a blended The property let to Superdrug was NIY of 6.1%. sold for £15.0 million, reflecting a NIY of 6.2%. The disposal completed post 272,500 sq ft in Daventry year end and will be accounted for in The property let to the Royal Mail the next financial year. was sold for £48.8 million reflecting 274,000 sq ft in Bolton a NIY of 5.0%. The property let to Tesco was sold for £24.4 million, reflecting a NIY of 5.4%.
30 LondonMetric Property Plc Annual Report and Accounts 2018 Property review continued Retail and leisure We focus on long income and convenience led assets in strong locations that generate long term, attractive and reliable income. Portfolio overview Investment overview Retail & leisure split Over recent years, we have Working in partnership with our significantly reduced our retail park occupiers, we acquired £78.5 million of Retail parks Long income exposure and shifted our retail long income, convenience and leisure 25% 42% exposure towards assets that have retail in the year at a yield of 6.2% long leases, generate reliable income and with an average lease length of and/or are convenience-led. 12.1 years. Portfolio Our retail and leisure portfolio is 100% The investment market appetite for split let with average lease lengths of our retail and leisure assets is strong 12.9 years, let to strong retailers at and we continue to see good liquidity. afgordable average rents of £18.50 psf. As a consequence, we disposed of Convenience These assets are located in good £86.2 million in this sector. and leisure geographies and valued at an 33% attractive NIY of 5.5%. Long income Value 1 Long income represents 12% of the During the year, we acquired total portfolio and consist of properties £40.5 million of assets, principally one £229 m held within our DFS and MIPP joint asset in New Malden. In addition, ventures and several wholly owned we sold two DFS stores and a B&Q unit properties. They have very limited for £11.2 million. operational requirements, are let WAULT: 11.0 years on average for 11.0 years, typically NIY 2 : 5.9% to single tenants such as Dunelm, Contractual uplifts 3 : 32% Wickes and DFS. A third of income has contractual uplifts. Convenience & Leisure Value 1 These assets represent 10% of the total During the year, we purchased portfolio, have an average lease £38.0 million of assets in Newport £181 m length of 17.2 years and 73% of income (Isle of Wight), Kendal, Weymouth is subject to contractual rental uplifts. and Ringwood at a NIY of 5.6%, They consist of 13 convenience-led and we sold two cinemas and two stores let mainly to M&S, Aldi and LIDL, convenience assets for £56.9 million WAULT: 17.2 years and five Odeon cinemas which were at a NIY of 4.7%. NIY 2 : 4.9% acquired as part of a portfolio of ten We continue to find attractive Contractual uplifts 3 : 73% cinemas in November 2013, bought at convenience opportunities. an overall NIY of 7.2%. Retail Parks Value 1 Over the last three years our retail During the year we sold two assets in park exposure has reduced from 15 to less attractive geographies in Milford £140 m five today, representing just 7% of the Haven and Newcastle-under-Lyme at overall portfolio. values in line with our book. The five remaining assets are in We expect to further monetise our good locations with strong occupier retail park exposure. WAULT: 11.1 years contentment and average lease NIY 2 : 5.6% lengths of 11.1 years. All have recently Contractual uplifts 3 : 13% been asset managed. 1 Including developments 2 Topped up Yield 3 Percentage of portfolio that benefits from contractual rental uplifts
31 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Retail and leisure Our strategy Investment activity Our marketplace Overview Acquisitions Acquired New Malden Ringwood £78.5 m £28.3 million acquisition of a £8.5 million (Group share: £4.3 million) 51,50 0 sq ft long income asset at acquisition by our MIPP JV of a Our business a yield of 6.1% and with a WAULT 35,000 sq ft leisure development model of 14.4 years let to Currys PC World. pre-let to Premier Inn, at a yield of 5.0% and a WAULT of 25.0 years. NIY: 5.5% Newport (Isle of Wight) and WAULT: 12.1 years Kendall Weymouth £24.6 million acquisition of two Acquired a convenience-led Disposed convenience assets let to M&S. development site with an initial Performance Acquired at a blended NIY of 5.5% development cost of £9.1 million, £86.2 m review with a WAULT of 9.6 years. reflecting an anticipated yield on cost of 6.3%. DFS JV increase in equity share An increase in our equity share of NIY: 5.5% the DFS joint venture from 30.5% WAULT: 15.8 years to 45.0%, represented £12.2 million Responsible Business of investment. Post period end £5.1 m acquired Disposals Risk Loughborough Hull Our MIPP JV acquired two assets for £10.3 million (Group share: £5.1 million) £32.5 million disposal of a 55,000 Our MIPP JV sold the 71,000 sq ft B&Q at a blended yield of 5.4% and with a sq ft Morrisons store at a NIY of 4.3%. store for £11.6 million (Group Share WAULT of 17.2 years. Wickes account The asset had been extended £5.8 million), reflecting a blended NIY Governance for 60% of the income. recently and a new 25 year of 6.0%. lease was agreed with Morrisons. Guisborough The disposal completed post year end and will be accounted for The 26,000 sq ft convenience scheme in the next financial year. let to Aldi and Iceland was sold for £6.0 million at a NIY of 5.0% and with Milford Haven a WAULT of 11.9 years. statements Financial The 84,000 sq ft retail park was sold Swansea and Swindon for £15.3 million at a NIY of 6.9% and a WAULT of 8.5 years. Two assets were sold by our DFS JV for £13.9 million (Group share: £5.4 million) Derby at a blended yield of 7.5%. The 37,000 sq ft Odeon Cinema was Newcastle-under-Lyme sold for £12.6 million at a NIY of 4.7%. The 22,000 sq ft retail asset was Birkenhead sold for £2.8 million at a NIY of 8.0% The 32,000 sq ft Vue Cinema was and a WAULT of 9.0 years. sold for £5.8 million at a NIY of 7.2%.
32 LondonMetric Property Plc Annual Report and Accounts 2018 Property review continued Asset management Our asset management activity is generating further income and capital growth and is enhancing our real estate. We undertook 58 occupier transactions Post year end, including at our Frimley Occupier transactions in the year and generated £3.1 million development, we have exchanged 58 of additional income. Like for like or agreed terms on five lettings across income growth was 4.3%. 0.3 million sq ft adding £1.1 million of income with an average lease length Lettings of 11.6 years. One of these lettings is an 31 lettings were undertaken at urban logistics regear where the rent 22 % above ERV and with a WAULT has increased by 34% to £1.9 million Additional income of 15.2 years. This delivered £2.2 million and the term has been extended by £3.1 m of additional income, 74% of which 7.5 years. has contractual uplifts: Rent reviews • £0.6 million related to lettings at our 27 rent reviews were agreed across recently completed developments 3.0 million sq ft adding £0.9 million in Crawley and Ipswich with a WAULT of income at 12.3% above passing WAULT on lettings of 13.6 years and at 15% above ERV on a five yearly equivalent basis and 15.2 years • £0.8 million arose from the full 6.3% above ERV: letting of our M&S anchored asset • Nine distribution reviews at 9.5% in Matlock and a 15.0 year re-gear above passing on a five yearly at our new asset in New Malden equivalent basis, four of which • £0.5 million related to 21 retail were urban logistics reviews where 27 rent reviews lettings. These were undertaken at the average five yearly uplift 25% above ERV and with a WAULT +12.3 was 10.5% % of 11.6 years • 18 retail and leisure reviews at 5.8% • £0.3 million related to regears at two above passing (16.6% on a five yearly Odeons where we are contributing equivalent basis), predominantly towards internal refurbishment works above passing (on a 5 yearly inflation linked reviews on cinema and where the WAULT is 20.0 years equivalent basis) and convenience assets One of the lettings was a 15 year regear Post year end, we have settled or on a 119,000 sq ft urban distribution agreed three rent reviews which adds asset purchased as part of the Cabot £0.2 million of income at 18.8% above acquisition and where six years passing on a five yearly equivalent remained previously. basis. One of these is an urban logistics asset where the uplift was 42%. Martlesham Heath 47,800 sq ft Retail Park 3 leases were signed with Shoezone, Mountain Warehouse and Card Factory in the year, adding to previous lettings to M&S, Hobbycraft and Poundland. The 47,800 sq ft park has been transformed, increasing income by 73% and the WAULT to 12 years. It has generated an ungeared return of 12% per annum since purchase in 2013.
33 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Development Developments under Our strategy construction or in the pipeline Short cycle developments improve the quality 1.0 m sq ft of our assets a t attractive yields. Our marketplace at a 6.5% yield on cost We completed five developments generate a yield of 6.5% on total costs of Stoke – the 277,000 sq ft in the year across 578,000 sq ft at an £124 million, a third of which has already development completed recently. anticipated yield on cost of 6.4%. been spent. 137,000 sq ft has been let to Michelin Developments under construction and Since the year end, we have completed for 15 years and we are in advanced in the pipeline at the year end totalled our Dagenham, Ipswich and Frimley discussions on letting of the Our business 1,031,000 sq ft and are expected to developments across 273,000 sq ft. remaining unit. model Crawley – the 109,000 sq ft development completed Area sq ft Additional Yield on Practical recently and 32,000 sq ft is let Scheme Sector ’000 Rent £m cost % completion 2 to Boeing for 15 years. We are in Completed in the year advanced discussions on letting Tonbridge Retail 42 0.3 6.1 Q3 17 of the remainder. Performance Huyton Distribution 120 0.7 6.1 Q4 17 review Frimley – 38,000 sq ft of the 62,000 Stoke 3 Distribution 277 1.5 6.3 Q1 18 sq ft development has been pre-let to BAE Systems for 15 years and terms Crawley 3 Distribution 109 1.4 6.7 Q1 18 are agreed on the remaining unit. Launceston Retail 30 0.3 6.2 Q4 17 Derby – we have pre-let the 578 4.2 6.4 development to M&S, Starbucks Responsible Under construction and pipeline Business and Nandos at a WAULT of 16 years. Dagenham 1 Distribution 180 0.9 5.7 Q2 18 The site acquisition is expected to occur in July 2018 following receipt Ipswich 1 Retail 31 0.7 6.9 Q2 18 of planning consent. Frimley 1,3 Distribution 62 0.7 5.3 Q2 18 Weymouth – we have pre-let Bedford (Regional) 3 Distribution 500 3.3 7.3 2019 19,000 sq ft to Aldi and received Bedford (Urban) 3 Distribution 180 1.3 6.4 2019 ofgers on the letting of three small Risk pods. The development is expected Ringwood Leisure 35 0.2 5.0 Q4 18 to have a WAULT of 18 years. The site Weymouth 3 Retail 27 0.6 6.3 2019 has been purchased and planning Derby 3 Retail 16 0.4 6.7 2019 consent is expected in Q4 2018. 1,031 8.1 6.5 Bedford – we acquired 40 acres Governance 1 Completed post year end of land in the year. The site is in an 2 Based on calendar quarters and years established distribution location 3 Anticipated yield on cost and rents where we also own an Argos warehouse. Planning consent has been received and we expect to commence construction of three smaller urban warehouses shortly. statements Financial Construction of two larger regional warehouses is subject to pre-lets. Occupier interest is strong and detailed terms have been drawn up on pre-letting the largest warehouse of 350,000 sq ft. Bedford 680,000 sq ft distribution development
34 LondonMetric Property Plc Annual Report and Accounts 2018 Financial review Our strong financial returns this year are testament to sound property and financing decisions. Our patient and disciplined investment strategy continues to focus on owning fit for purpose real estate that delivers sustainable and growing income. Overview Presentation of financial information Our property portfolio is well positioned to support the advancement of The Group financial statements on technology and migration of consumer pages 114 to 136 are prepared in spending online and has delivered accordance with IFRS where the strong earnings and net asset growth Group’s interests in joint ventures are this year. shown as a single line item on the consolidated income statement and IFRS reported profit has increased balance sheet and all subsidiaries are by £123.0 million to £186.0 million, consolidated at 100%. Martin McGann predicated on a significant revaluation Finance Director gain of £121.6 million in the year. Management monitors the IFRS net assets are £1,149.5 million or performance of the business principally 165.7p per share, an increase of 13.2% on a proportionately consolidated on a per share basis in the year. basis, which includes the Group’s share of joint ventures on a line by EPRA earnings have increased by 15.9% IFRS reported profit line basis in the financial statements. to £59.1 million or 8.5p per share. On a £186.0 m These measures, presented on a per share basis earnings are up 0.3p proportionately consolidated basis, or 3.7% from 8.2p last year, reflecting are alternative performance measures, the impact of the equity placing as they are not defined under IFRS. of 62.8 million shares in March 2017. 2017: £63.0m EPRA NAV is £1,146.6 million or 165.2p The figures and commentary in per share, an increase of 11.3% or 10.3% this review are consistent with our on a per share basis. management approach, as we EPRA earnings per share believe this provides a meaningful The growth in underlying EPRA earnings 8.5 p analysis of overall performance. has enabled us to increase our dividend for the year by 5.3% to 7. 9p per share. Alternative performance measures The dividend continues to be fully The Group uses alternative covered by EPRA earnings at 108%. 2017: 8.2p performance measures based on the Three quarterly dividend payments European Public Real Estate (EPRA) totalling 5.55p per share have been Best Practice Recommendations (BPR) IFRS net assets made to date and a further 2.35p is to supplement IFRS as they highlight the £1,149.5 m proposed for payment on 11 July 2018. underlying performance of the Group’s A scrip alternative to a cash dividend property rental business. payment was ofgered to shareholders and 4.8 million shares were issued in the The EPRA measures are widely year. It is our intention to continue to recognised and used by public real 2017: £1,006.9m ofger shareholders this choice. estate companies and seek to improve transparency, comparability and In July, we refinanced our secured loan EPRA net asset value per share relevance of published results in the facility with Helaba and cancelled sector. EPRA earnings is one of the 165.2 p £128 million interest rate swaps. Group’s KPIs and supports the level of We re-couponed a further £190 million dividend payments. It is also one of the swaps in the second half of the year, financial performance targets under reducing our average cost of debt the variable incentive arrangements to 2.8% at the year end (2017: 3.5%). 2017: 149.8p for Executive Directors. We anticipate interest cost savings over the next 2.5 to 4.0 years which will pay Further details, definitions and Net rental income (including JVs) back the total break cost of £19.0 million. reconciliations between EPRA £90.6 m measures and the IFRS financial Our other financing metrics remain statements can be found in note strong, with loan to value of 35% 8 to the financial statements, and average loan maturity, despite Supplementary notes i to vii and the passing of a year, of 4.8 years in the Glossary on page 147. 2017: £81.8m (2017: 5.2 years).
35 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Income statement Our strategy EPRA earnings for the Group and its share of joint ventures are detailed as follows: Group JV 2018 Group JV 2017 For the year to 31 March £m £m £m £m £m £m Gross rental income 82.0 9.8 91.8 73.9 9.1 83.0 Property costs (0.8) (0.4) (1.2) (0.8) (0.4) (1.2) Our marketplace Net rental income 81.2 9.4 90.6 73.1 8.7 81.8 Management fees 1.7 (0.8) 0.9 1.7 (0.7) 1.0 Administrative costs (13.8) (0.1) (13.9) (13.3) (0.1) (13.4) Net finance costs (16.5) (2.0) (18.5) (16.3) (2.1) (18.4) EPRA earnings 52.6 6.5 59.1 45.2 5.8 51.0 Our business The table below reconciles the rents has increased marginally this year £18.5 million, a marginal increase of model movement in EPRA earnings in the year. to 98.7%. £0.1 million compared with last year. £m p This was due to decreases in Administrative costs interest receivable from forward EPRA earnings 2017 51.0 8.2 Administrative costs have increased funded developments that have by 3.7% to £13.9 million and are Net rental income 8.8 1.3 completed and interest capitalised stated after capitalising sta fg costs of Management fees (0.1) – Performance on developments of £1.3 million and £1.8 million (2017: £1.8 million) in respect £0.2 million respectively, ofgset by lower review Administrative costs (0.5) (0.1) of time spent on development activity Group bank interest costs of £1.4 million. in the year. Net finance costs (0.1) – Group interest payable has fallen as a Other 1 – (0.9) Headcount is only slightly reduced and result of lower average rates following the cost increase is primarily due to the the cancellation of out of the money EPRA earnings 2018 59.1 8.5 £0.6 million increase in the share based interest rate swaps in July and lower 1 Opening earnings per share has been adjusted for Responsible payment charge, reflecting additional average debt balances this year. the increased weighted average number of shares Business awards granted to Directors since 2017. Further detail is provided in notes 5 and following the equity placing in March 2017 10 to the financial statements. Net rental income EPRA cost ratio Share of joint ventures One of our key strategic priorities has The Group’s cost base continues to been to grow sustainable income to be closely monitored and the EPRA EPRA earnings from joint venture support growth in EPRA earnings and cost ratio is used as a key measure of investments were £6.5 million, an a progressive dividend. This year we efgective cost management. increase of £0.7 million over last year as have increased net rental income by reflected in the table below. Risk The ratio reflects total operating costs, £8.8 million or 10.8% to £90.6 million, including the cost of vacancy, as a For the year to 2018 2017 up from £81.8 million last year. 31 March £m £m percentage of gross rental income. Movements in net rental income are MIPP 3.7 3.4 reflected in the table below. 2018 2017 % % Retail Warehouse £m Governance (DFS) 2.7 2.2 EPRA cost ratio Net rental income 2017 81.8 including direct Residential Existing properties 1 4.4 vacancy costs 15 16 (Moore House) 0.1 0.2 Developments 2 4.2 EPRA cost ratio 6.5 5.8 excluding direct Net acquisitions in 2018 3.8 vacancy costs 15 15 In September 2017 we increased our Net disposals in 2017 (3.6) statements shareholding in the DFS joint venture by Financial Net rental income 2018 90.6 The EPRA cost ratio for the year, 14.5% to 45.0%. This resulted in a higher including direct vacancy costs, share of earnings in the second half 1 Properties held throughout 2017 and 2018 has fallen 93 bps to 15.3% this year. 2 Developments completed in 2017 and 2018 of the year. At the same time, Atlantic The reduction is due to higher rents Leaf Properties Limited acquired a Like for like income from our existing more than ofgsetting the increase in 45.0% interest in the joint venture from portfolio generated additional income administrative expenses in the year. LVSII Lux S.A.R.L. of £4.4 million from lettings, rent The full calculation is shown in Income from our MIPP joint venture reviews and regears and completed Supplementary note iv on page 143. also increased as a result of prior developments delivered a further period acquisitions contributing for £4.2 million. Net acquisitions this year Net finance costs the full year. increased income by £3.8 million. Net finance costs, excluding the costs In addition, the Group received net Our property cost leakage is minimal associated with repaying debt and management fees of £0.9 million for as vacancy levels are extremely low. terminating hedging arrangements on acting as property advisor to each of Net income as a percentage of gross sales and refinancing in the year, were its joint ventures (2017: £1.0 million).
36 LondonMetric Property Plc Annual Report and Accounts 2018 Financial review continued Taxation Dividend The Group’s reported profit for the year was £186.0 million compared with As the Group is a UK REIT, any The Company has continued to £63.0 million a year ago. The increase income and capital gains from our declare quarterly dividends and was driven by the property revaluation qualifying property rental business has ofgered shareholders a scrip gain of £121.6 million compared with are exempt from UK corporation tax. alternative to cash payments. In the just £21.0 million last year. Any UK income that does not qualify year to 31 March 2018 the Company as property income within the REIT paid the third and fourth quarterly Other movements in reported profit regulations is subject to UK tax in the dividends for 2017 and the first two include a favourable movement normal way. quarterly dividends for 2018 at a total in the fair value of derivatives of cost of £51.4 million or 7.6p per share £26.4 million, which is o fgset by break The Group’s tax strategy is compliance as reflected in note 7 to the financial costs of £19.1 million. The net favourable oriented; to account for tax on an statements. The Company issued movement of £7.3 million compares accurate and timely basis and 4.8 million ordinary shares in the year with a loss of £3.3 million last year. meet all REIT compliance and under the terms of the Scrip Dividend reporting obligations. As part of the Helaba loan refinancing, Scheme, which reduced the cash we cancelled £128.4 million out of the We seek to minimise the level of tax risk dividend payment by £8.0 million to money interest rate swaps at a cost and to structure our afgairs based on £43.4 million. of £6.3 million. In the second half of sound commercial principles. We strive The first two quarterly payments for the the year we recouponed a further to maintain an open dialogue with current year of 1.85p per share were £190 million interest rate swaps hedging HMRC with a view to identifying and paid as Property Income Distributions our unsecured RCF at an additional solving issues as they arise. (PIDs) in the year. The third quarterly cost of £12.7 million. These transactions The tax risk identification and payment of 1.85p was paid as a PID are earnings accretive with a payback management process is documented in April 2018 and the Company has period of 2.5 to 4.0 years. in the Risk Register and Internal Control proposed a fourth quarterly payment For further details see the Financing Evaluation which is reviewed annually of 2.35p payable on 11 July 2018, section of this review on page 38. by the Audit Committee who reports of which 1.7p per share will be a its findings to the Board. The Board PID, to shareholders on the register The disposal of our non core offjce in also considers risk at a high level at on the record date of 8 June 2018. Marlow contributed to the loss on sales each meeting via a risk dashboard. The total dividend payable for 2018 has in the year, generating a loss over book The Finance Director has overall increased 5.3% to 7.9p, comprising a value of £3.6 million. This was partly responsibility for the execution of the PID of 7.25p and an ordinary dividend mitigated by the retention of rent for tax strategy. of 0.65p. the deferred completion period of £1.2 million. The corresponding profit We pay business rates on void IFRS reported profit over original cost was £4.5 million. properties and stamp duty land tax. Management principally monitors In addition we collect VAT, employment Profit on other retail and distribution the group’s underlying EPRA earnings taxes and withholding tax on dividends sales reduced the overall loss to which reflect earnings from core and pay these over to HMRC. £2.0 million which compares to a loss operational activities and excludes of £5.5 million in 2017. We continue to monitor and property and derivative valuation comfortably comply with the REIT movements, profits and losses on The total profit over original cost of sales balance of business tests and distribute disposal of properties and financing in the period was £17.9 million or 9.8% as a Property Income Distribution 90% break costs. (2017: £7.4 million or 3.8%). of REIT relevant earnings to ensure our A full reconciliation between EPRA Disposals are discussed in detail in the REIT status is maintained. earnings and IFRS reported profit Property review section of the Strategic Our formal tax strategy has been is given in note 8(a) to the financial report on pages 26 to 33. published on the Group’s website statements and is summarised in at www.londonmetric.com. the table below. For the year to Group JV 2018 Group JV 2017 31 March £m £m £m £m £m £m EPRA earnings 52.6 6.5 59.1 45.2 5.8 51.0 Revaluation of investment property 114.7 6.9 121.6 22.2 (1.2) 21.0 Fair value of derivatives 26.2 0.2 26.4 0.2 0.1 0.3 Debt and hedging early close out costs (19.0) (0.1) (19.1) (3.5) (0.1) (3.6) (Loss)/profit on disposal (2.1) 0.1 (2.0) (4.5) (1.0) (5.5) 1 Other items – – – (0.2) – (0.2) IFRS reported profit 172.4 13.6 186.0 59.4 3.6 63.0 1 Other items in the prior year include amortisation of intangible assets
37 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Balance sheet EPRA net assets for the Group and its share of joint ventures are as follows: Our strategy IFRS reported net assets increased Group JV 2018 Group JV 2017 by £142.6 million or 14.2% in the year As at 31 March £m £m £m £m £m £m t o £1,149.5 million. Investment property 1,677.6 164.4 1,842.0 1,373.4 160.4 1,533.8 EPRA net asset value is a key measure Gross debt (650.0) (58.9) (708.9) (473.2) (54.5) (527.7) of the Group’s overall performance, Cash 26.2 13.1 39.3 42.9 3.2 46.1 reflecting both income and capital Our marketplace Other net returns. It excludes the fair valuation of (liabilities)/assets (24.8) (1.0) (25.8) (20.4) (1.3) (21.7) derivative instruments that are reported in IFRS net assets. EPRA net assets have EPRA net assets 1,029.0 117.6 1,146.6 922.7 107.8 1,030.5 increased £116.1 million or 11.3% in the Derivatives 2.8 0.1 2.9 (23.4) (0.2) (23.6) year to £1,146.6 million. On a per share IFRS net assets 1,031.8 117.7 1,149.5 899.3 107.6 1,006.9 basis EPRA net assets increased by 15.4p, or 10.3% to 165.2p. Our business A reconciliation between EPRA net model EPRA net asset value (£m and pence per share) assets and IFRS reported net assets is provided in the table opposite and in 1,030.5 59.1 121.6 (51.4) (13.2) 1,146.6 149.8 8.5 17.6 (7.6) (3.1) 165.2 note 8 to the financial statements. The increase in both IFRS and EPRA net assets per share was principally due Performance to the property revaluation of 17.6p. review EPRA earnings of 8.5p covered the 7.6p dividend charge. The movement in EPRA net assets, together with the dividend paid in the year net of the scrip issue of 2017 EPRA Property Dividend Other 2018 earnings revaluation charge movements1 Responsible shares of £43.4 million, results in a Business total accounting return of 15.5%. 1 Other movements include loss on sales (£2.0m), debt/hedging break costs (£19.1m), share based awards (£0.1m), ofgset by scrip share issues (£8.0m) The full calculation can be found in supplementary note viii on page 144. urban logistics assets, that have Huyton completed in the year and new Portfolio valuation seen the highest levels of rental and development opportunities at Bedford Our property portfolio, including the valuation growth. and Weymouth were acquired. share of joint venture assets, grew Risk 20.0% in the year to £1,842.0 million. We have increased our distribution The Group’s commitment to This was a result of significant net exposure (including distribution development activity is demonstrated property investment and a strong developments) to 69% from 62% by the significant spend of £62.5 million valuation performance. last year. in the year, which is reflected in the investment property movement table It has been another busy year Investment in development assets on page 38. Governance with significant investment into remains at modest levels as short cycle the distribution sector, particularly opportunities at Crawley, Stoke and 2018 2017 As at 31 March £m % £m % Distribution 1,233.1 66.9 927.4 60.4 Convenience & leisure 174.7 9.5 156.2 10.2 statements Financial Long income 220.8 12.0 166.6 10.8 Retail parks 139.8 7.6 145.2 9.5 Offjces – – 70.0 4.6 Investment portfolio 1,768.4 96.0 1,465.4 95.5 Residential 30.1 1.6 41.1 2.7 Development 1 43.5 2.4 27.3 1.8 Property value 1,842.0 100.0 1,533.8 100.0 1 Represents distribution of £29.4 million (1.6%), long income of £8.2 million (0.5%) and convenience and leisure of £5.9 million (0.3%). Split in March 2017 was distribution of £22.8 million (1.5%) and retail parks of £4.5 million (0.3%)
38 LondonMetric Property Plc Annual Report and Accounts 2018 Financial review continued The movement in the investment portfolio Financing Revaluation gain is explained in the table below. The performance indicators that £121.6 m continue to be used to monitor the Portfolio value 1 £m Group’s debt and liquidity position are shown in the table below. Opening valuation 2017 1,533.8 2018 2017 Acquisitions 289.7 2017: £21.0m As at 31 March £m £m Developments 62.5 Gross debt 708.9 527.7 Capital expenditure on Portfolio value Cash 39.3 46.1 completed properties 20.4 £1,842.0 m Net debt 669.6 481.6 Disposals (191.0) Loan to value 1 35% 30% Revaluation 121.6 Cost of debt 2 2.8% 3.5% Lease incentives 5.0 Undrawn facilities 65.8 299.7 2017: £1,533.8m Closing valuation 2018 1,842.0 Average debt 4.8 5.2 1 Further detail on the split between Group maturity years years Distribution and joint venture movements and the EPRA capital expenditure analysis can be found in Hedging 3 73% 87% 69 % Supplementary note vii on page 144 1 LTV at 31 March 2018 includes £47.5 million of The Group spent £289.7 million in the deferred consideration receivable on sales at Loughborough and South Elmsall and year acquiring 25 distribution and 3 excludes their £47.5 million property valuation retail properties. 2017: 62% (2017: £14.3 million) 2 Cost of debt is based on gross debt and includes Non core assets including our last offjce amortised costs but excludes commitment fees in Marlow and 19 residential flats at Dividend 3 Based on the notional amount of existing hedges and total debt facilities Moore House generated proceeds of 7.9 p £77.2 million. A further 10 commercial The Group and joint venture split is property sales generated additional shown in Supplementary note iii on proceeds of £126.9 million and reduced page 142. the total carrying value of property 2017: 7.5p by £191.0 million, as reflected in the In July 2017 we refinanced our secured table above. debt facility with Helaba and repaid Average debt cost £66.2 million by drawing additional We exchanged to sell two further assets unsecured debt. We extended the term 2.8 % in the period, a distribution unit in South by 2.7 years and reduced the average Elmsall let to Superdrug for £15.0 million cost of debt. As part of the refinancing and a Morrisons store in Loughborough we cancelled £128.4 million interest rate for £32.5 million. Both had deferred swaps at a cost of £6.3 million. 2017: 3.5% completions and will be reflected as disposals in the financial statements In the second half of the year, we in 2019. LTV recouponed a further £190 million interest rate swaps which hedge our 35 % Property values have increased by unsecured RCF at a cost of £12.7 million. £121.6 million, most significantly in our urban logistics and development Our MIPP joint venture increased and sectors and the portfolio has delivered extended its debt facility with Deutsche 2017: 30% a total property return of 13.7% Pfandbriefbank in September by compared to the IPD All Property index £18.2 million and for a further three of 10.1%. years to match the debt maturity to the Average debt maturity duration of the joint venture agreement. At the year end, the Group had 4.8 years capital commitments of £47.5 million As reflected in the balance sheet on as reported in note 9 to the financial page 37 , the Group’s share of joint statements, relating primarily to venture gross debt has increased committed developments in progress by £4.4 million due to its additional 2017: 5.2 years at Frimley, Bedford and Weymouth. investment in the DFS Retail Warehouse All amounts except for dividend per share joint venture, which increased our Further detail on property acquisitions, include the Group’s share of joint ventures share of debt by £7.4 million. This was sales, asset management and o fgset by debt repaid following sales of development can be found in the £3.0 million. Property review on pages 26 to 33.
39 LondonMetric Property Plc Annual Report and Accounts 2018 Overview These financing transactions have Cash flow Cost of debt Our strategy strengthened our key financial ratios During the year, the Group’s cash 2.8 % with average debt cost falling to 2.8% balances decreased by £16.8 million as (2017: 3.5%) and average debt maturity reflected in the table below. of 4.8 years (2017: 5.2 years). 2018 2017 We deployed our available undrawn As at 31 March £m £m 4.0 3.9 3.7 facilities, partly generated following the 3.5 3.5 Cash flows from Our marketplace equity placing in March 2017 , to acquire operations 69.5 63.7 2.8 assets in our preferred sectors and Changes in working progress committed developments, capital (1.1) 10.6 reducing undrawn facilities at the year end to £65.8 million. Finance costs and taxation (16.4) (17.2) Loan to value, net of cash resources Cash flows from and deferred consideration on sales Our business 2013 2014 2015 2016 2017 2018 operating activities 52.0 57.1 which complete and will be recognised model next year, was 35% (2017: 30%). Cash flows from Loan to value ratio investing activities (178.1) 7.5 We intend to keep LTV below 40% to 35 % provide suffjcient flexibility to execute Cash flows from transactions and take advantage financing activities 109.3 (64.3) of investment opportunities whilst Net (decrease)/ Performance maintaining suffjcient headroom under increase in cash (16.8) 0.3 43 review our gearing covenants. 38 36 35 32 Cash inflows from operations were The Group has comfortably complied 30 £5.8 million higher this year reflecting throughout the year with the financial increases in net rental income. covenants contained in its debt funding arrangements and has substantial levels Cash flows from operating activities of headroom. Covenant compliance Responsible have decreased by £5.1 million Business is regularly stress tested for changes in compared to last year due to changes capital values and income. in net working capital requirements. 2013 2014 2015 2016 2017 2018 The Group’s unsecured facility and Cash flows from investing activities private placement loan notes contain reflect property acquisitions, including Debt maturity gearing and interest cover financial those classified as forward funded 4.8 years covenants. At 31 March 2018, the developments, of £306.2 million and Group’s gearing ratio as defined within capital expenditure and incentives of Risk these funding arrangements was 56% £59.3 million. compared with the maximum limit of 5.6 These outflows were o fgset by 125% and interest cover ratio was 5.0 5.2 4.8 net proceeds from disposals of times compared with the minimum 4.2 £183.8 million and net distributions from level of 1.5 times. 3.7 joint ventures of £3.6 million. 3.0 Governance The Group’s policy is to substantially Cash flows from financing activities de-risk the impact of movements in reflect net new borrowings of interest rates by entering into hedging £176.8 million, cash dividend payments arrangements. Independent advice is of £43.4 million (which reflect the given by J C Rathbone Associates. 2013 2014 2015 2016 2017 2018 £8.0 million scrip saving), financing At 31 March 2018, 73% of our exposure costs of £21.6 million and share to interest rate fluctuations was hedged statements purchases of £2.5 million. Interest cover ratio Financial by way of swaps and caps assuming 5.0x New borrowings of £176.8 million and existing debt facilities are fully drawn the cancellation of secured debt of (2017: 87%). This has fallen as a result of £66.2 million reduced our available the cancellation of £128 million interest facilities in the year. rate swaps in the year. 5.0 5.0 Further detail is provided in the Group We continue to monitor our hedging 4.5 4.0 cash flow statement on page 117. profile in light of forecast interest rate movements. 2.9 2.2 2013 2014 2015 2016 2017 2018
���������������������������������� 40 LondonMetric Property Plc Annual Report and Accounts 2018 Responsible Business Responsible Business addresses three key areas of environment, people and our other stakeholders. It is embedded into our investment, asset management, development and corporate activities. Our approach is delivering Responsible Business benefits Our Key Responsible Business risks and potential impact We continue to build on our Environment Stakeholders Responsible Business foundations • Quality, desirability • Management of our supply chain is insuffjcient and ensure that appropriate targets and environmental leading to business interruption, accidents, are set and aligned with our standards of our assets reputational risk or breach of law deteriorate, leading • Reliance on a few employees, insuffjcient to higher voids, loss of employee development and diversity reduces income and reduced our competitive advantage Martin McGann liquidity for our assets Finance Director • Poor external stakeholder relations impact negatively on our reputation and ability to Overview undertake business activities • Poor Responsible Business focus reduces our We are committed to improving access to capital and debt markets our Responsible Business disclosure, mitigating sustainability risks and capturing environmental and Our Responsible Business objectives stakeholder related opportunities. Every year we set targets to meet our Minimise the Empower, develop and increase wellbeing and Responsible Business objectives. environmental diversity of our people impact of our business Progress is monitored at Working Enhance our external stakeholder relationships, and maximise the Group meetings held several including those with occupiers, supply chains, effjciencies of our times a year and attended by key investors and local communities assets in conjunction business representatives, one Board with occupiers member and JLL, our external real estate sustainability advisor. Overall performance is reported to Responsible Business embedded in our activities the Board at regular intervals. For the full Responsible A changing business Business report 2018 see LondonMetric has changed www.londonmetric.com significantly, moving away from offjces and multi-let retail parks into single let and modern distribution. Responsible Consequently, our carbon footprint Investment ha s fallen significantly, as has the Generating portfolio’s operational requirements sustainable value and our employee numbers. Therefore, combined with our responsible activities, risks from Responsible Business have been reduced significantly. However, we continue to monitor and address Responsible Business all potential risks and look at all Managing stakeholder opportunities that can benefit our relationships and risk well stakeholders and the Company. Responsible Responsible New targets for 2019 have been Development Asset Management set and are detailed in the full Future-proofing Responding to Responsible Business report for 2018. our assets occupier needs
�������������������������������������������������������� 41 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Our Responsible Business activities have delivered Our strategy further improvements and have increased our GRESB score which we continue to view as our most applicable sustainability benchmark. Our marketplace Global Real Estate Sustainability Benchmark (GRESB) Awards • Achieved 69% score in the 2017 Performance in 2017 GRESB Survey (%) GRESB Green Star and survey and maintained our green star 100 status. This is up from 34% in 2014, 50% maintained EPRA sBPR 2017 in 2015 and 66% in 2016 Our business Management and policy Gold award • In 2017, we achieved further model 2017 improvements particularly around 2014 Targets 2016 to 2018 management and monitoring 2014 • Further actions undertaken to 94 50 % targets achieved maintain status in the upcoming o r progressed. 2018 survey, particularly on Performance stakeholder engagement New targets set review and construction for 2019 0 EPC rating of ‘E’ or above on 0 50 100 assets for MEES purposes Implementation and measurement 100 Responsible % Business LondonMetric Peer group Property See page 42 for further details EPRA Sustainability Best Practice FTSE4Good Recommendations (sBPR) BREEAM Very Good certification • Framework for • Assessment for inclusion in the on completed developments Risk reporting standardised FTSE4Good Index environmental data ��� m sq ft • In 2017, our most recent assessment, • For first time in 2015, we scored 2.7 out of 5.0 we reported in a format • This is a significant improvement required by the EPRA sBPR on the 2015 score of 1.4 Governance and received special commendation for improvements made Annual carbon footprint • In 2017, we were one of only ��� % ten listed UK companies to receive a Gold award absolute statements Financial -17 % Future reporting like for like As investor scrutiny of our Responsible Disclosures (TCFD), established by the Business activities and reporting Financial Stability Board. grows further, we are expanding our While voluntary, it is designed to reporting to external benchmarks. help companies report decision- ISS launched their first environmental useful climate-related information. and social survey this year and we We intend to further align our responded recently to their questions. reporting with TCFD guidance and report on the resilience of our business Furthermore, we are reviewing the and portfolio to climate-related risks. framework introduced by the Task Force on Climate-related Financial For the full Responsible Business report 2018 see www.londonmetric.com
����������� 42 LondonMetric Property Plc Annual Report and Accounts 2018 Through our investment, asset management Energy consumption reduction and development activities we look to minimise (MWh) the environmental impact of our business and 9,056 maximise the effjciencies of our assets. 6,814 6,393 The environmental performance of our portfolio has significantly reduced our energy consumption and greenhouse gas emissions. Our landlord controlled 3,190 energy consumption for last year, excluding the contribution from our sold Marlow offjce asset, was 357,890 kWh. This equates to the consumption of around 20 mid-sized homes and compares against an equivalent of 722 homes in 2015. Only 8% of the portfolio by area has landlord controlled energy supply and this limits our ability to further reduce our energy consumption. 2015 2016 2017 2018 However, we continue to look at ways of reducing our consumption and the 2018 energy consumption excluding Marlow asset effjciency of our assets to reduce the energy consumption of our occupiers. Investing Our investment process involves the careful % of portfolio with EPC rating assessment of environmental risks. Our activities of A-C have shifted the portfolio into less operationally intensive, single let, newer and higher quality assets. 78% 74% 100% of assets are rated ‘E’ or above and, as shown opposite, assets with an EPC of ‘A’-’C’ have risen to 67% 78% of the portfolio up from 59% in 2015. One asset representing 0.4% of the portfolio is rated 59% ‘F’ and is related to a recent purchase where there is a clear near term action plan in place with the occupier for significant energy improvements. 2015 2016 2017 2018 Asset Managing We are delivering energy effjciencies and sourcing cleaner energy through various asse t management initiatives: • Car park lighting: We upgraded LED lighting • Recharge points: We have installed electric at two further retail assets in the year. vehicle recharge points on four assets and Together with previous installations, this is will add further installations in 2018 helping our like for like energy reductions • Smart metering and Green sourcing: For • Occupier Energy Audits: We have landlord consumption, we are investigating undertaken audits on six of our distribution remote metering to improve the tracking of assets which has so far resulted in five of our our energy usage. We will also increase the occupiers self funding internal LED lighting proportion of supply that has a green tarifg. upgrades. A further four audits are planned During the year, we put in place a green or underway and we will look at further tarifg at our offjce in Marlow, an asset that audits on a priority basis we have now sold • Renewable energy: Following ongoing • Tenant Energy Data: We continue to engagement with our tenants and feasibility collect data on our occupiers’ energy studies, 1.9 MW of solar PV capacity has consumption and have increased our been installed across 20% of our assets. energy data capture to cover 34% of We continue to engage on progressing our portfolio further installations with our occupiers and will also look at generating renewable landlord supply
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Developing Our strategy Development is a significant activity for us and Percentage of portfolio rated we carry out our development work responsibly BREEAM Very Good and give proper consideration to environmental, sustainable and social matters. We continued to integrate a range of sustainable features 28 Our marketplace % into our developments including solar PVs, roof lights, electric vehicle recharge points, water conservation and ecology. BREEAM rating Up from 10% in 2015 The majority of our developments have a minimum certification standard of BREEAM Very Good. In the Our business year. We completed five developments totalling model 0.6m sq ft, 88% of which were BREEAM Very Good or better. The proportion of the portfolio rated at least BREEAM Very Good is now 28%. First BREEAM Excellent Performance Development in Crawley review 109,000 sq ft Responsible Business development Our contractor requirements Contractor achievements on projects completed in year We have worked hard to implement robust processes to ensure that our contractors uphold our high standards and minimise the environmental Risk Silver award impact from developments. from Considerate Constructors All of our contractors adhere to • Promoting local at our Ipswich development employment opportunities our Responsible Development 100% compliance Requirements checklist, which • Fair remuneration for workers sets minimum requirements for our with our Checklist Governance We continue to monitor compliance developments on areas including: Zero reportable accidents and look at ways of improving our • Health & Safety management or incidents on 245,000 worked hours contractors’ performance. Next year, • Compliance with the Considerate in addition to our four project health 93% of all waste diverted Constructors Scheme & safety audits per annum, we intend from landfill to fully review one project with a • Environmental impact monitoring 100% on time and on budget particular focus on local sourcing, • Management and reporting statements modern slavery and minimum wage. for development Financial of progress Solar PV installation in Dagenham ��� kw See page 07 for the ful l case study
��������������������������������������������� 44 LondonMetric Property Plc Annual Report and Accounts 2018 In 2015, we established a baseline and benchmarks for measurement of our portfolio’s environmental performance. Since then, we have significantly reduced our energy consumption and GHG emissions, enabling us to save over £0. 5 million in energy costs and materially reduce our CRC costs. Energy consumption Greenhouse gas (GHG) emissions ����� MWh ����� tCO � e Down 50% on an absolute basis Down 53% on an absolute basis This large reduction is due to the sale of our Marlow asset in the The sale of our offjce in Marlow has helped to reduce our absolute year and a reduction in like for like landlord controlled energy emissions by 53%. As a result, our CRC Energy Effjciency Scheme consumption 1 (electricity and natural gas) by 7% compared to 2017. liabilities are estimated to have reduced by c.50% from last year’s cost of £38,748. We have met our annual target to reduce the portfolio’s energy consumption by 4% on a like for like basis, and therefore, continue On a like for like basis 1 , GHG emissions were down by 17% as a result to make good progress towards our longer term target to reduce of energy consumption reductions on the portfolio and ongoing energy intensity by 20% against a 2015 baseline, by 31 March 2022. decarbonisation of the National Grid. We have exceeded our annual target to reduce our like for like GHG emissions by 4%. Therefore, we continue to make good progress towards our longer term target to reduce GHG emissions intensity by 20% against a 2015 baseline, by 31 March 2022. 1 Like for like percentages exclude energy consumption of the offjce asset in Marlow which was sold in the year Mandatory GHG emissions reporting 2017/18 2016/17 Direct greenhouse gas emissions in tonnes of CO 2 e (combustion of fuel and operation facilities) Scope 1 195 432 Scope 2 – location-based 811 1,687 Indirect greenhouse gas emissions in tonnes of CO 2 e (purchased electricity, heat, steam and cooling) Scope 2 – market-based 881 1,937 Total carbon footprint in tonnes of CO 2 e Total scope 1 & 2 1,006 2,119 Scope 1 and 2 intensity (tonnes of CO 2 e per £m net income after administration costs) Scope 1 and 2 intensity 15 34 Data qualifying notes We have reported on all of the emission sources required under The location-based method uses an average emission factor for the Companies Act 2006 (Strategic Report and Directors’ Reports) the entire national grid on which electricity consumption occurs. Regulations 2013. These include the emissions associated with the Location-based emissions factors are taken from the latest UK energy used by our corporate head offjce and the landlord-controlled Government (DEFRA) conversion factors for company reporting (2017). energy from our entire investment portfolio. The market-based method uses an emissions factor that is specific We have used the main requirements of ISO14064 Part 1 and the GHG to the electricity which has been purchased, or where not available Protocol Corporate Accounting and Reporting Standard (Revised a national ‘residual-mix’ factor is applied. Market-based emissions Edition) for our methodology, using energy consumption data from factors are taken from the latest Association of Issuing Bodies European our owned and occupied properties. We have chosen to report Residual Mixes (2016). greenhouse gas emissions under our operational control. These sources The total carbon footprint and emissions intensities have been fall within our consolidated financial statements. We do not have calculated using location-based Scope 2 emissions. responsibility for any emissions sources that are not included in our Data for the year to 31 March 2017 has been restated, including consolidated financial statements. associated intensity metrics, as additional energy consumption The guidance on the reporting of Scope 2 GHG emissions under the data has been obtained since the previous report was published. Greenhouse Gas Protocol was updated in 2015 and we are now Scope 1 data does not include refrigerant emissions as these have required to report two difgerent values to reflect the ‘location-based’ been determined to not be material (represent <2% of total emissions); and ‘market-based’ emissions resulting from purchased electricity. owned fleet does not apply. For full environmental performance reporting see the Responsible Business 2018 report at www.londonmetric.com
�� LondonMetric Property Plc Annual Report and Accounts 2018 Stakeholders Overview We recognise the importance of retaining Our strategy and attracting a diverse and knowledgeable group of employees. Our marketplace Our people Our employees Inclusion & We have a flat management structure with clear responsibilities. We strongly encourage input on decision making from all sta fg and wide participation communicate The Company is highly focused with in committee meetings. There is strong collaboration across teams which 25 employees, four Executive Directors enables good sharing of information and ideas. There are regular strategy Our business and performance updates to employees from Executive Directors. and seven Non Executive directors. model Since merger in 2013, employee and Modern During the year, we implemented more flexible working arrangements covering dress code, holiday buy back, improved systems to enable home Director numbers have fallen by 28% working working and a core hours policy. despite a 51% increase in the value practices of our assets. This reflects improved Fair Employee remuneration is aligned to personal and company performance effjciencies and lower operational with longer term incentivisation plans in place that replicate arrangements remuneration for Executive Directors. All employees receive a pension contribution of 10% of requirements of our portfolio. Performance salary and access to advice on pensions, free medical insurance and advice, review childcare and cycle to work vouchers. Culture and approach Diversity We promote diversity across knowledge, experience, gender, age and We have successfully attracted and ethnicity. Whilst overall female employee representation is good, we and equal retained a talented, hard working recognised that we needed to specifically promote greater gender diversity. opportunity With only one female board member we were pleased to appoint Suzanne and loyal team, something which Avery as a Non-Executive Director in the year, increasing our female board we recognise as vital to the business. representation to 18%. This is reflected in our low annual Responsible Furthermore, and recognising the significant diversity imbalance in the Business voluntary stafg turnover rate which real estate sector, we joined the Real Estate Balance group to further our promotion of diversity both internally and externally. We intend to publish has averaged 6% since merger. a diversity and inclusion policy. We believe this success is a result Employee An annual appraisal process is undertaken where training needs and requests of our: are discussed. We actively encourage training and, over the year, our stafg development undertook 758 hours of training, some of which related to a senior employee’s • Culture of empowerment, inclusion, MBA programme. We also undertook Responsible Business training across openness and teamwork all of our employees and encourage participation in Young Property Professionals groups. • Fair and performance Risk We continued to ofger secondment and work placement opportunities and, based remuneration over the year, 7 people participated in this programme. • Small number of stafg, which allows Health & In 2016, we formalised a policy to provide and maintain safe and healthy a flexible and individual approach working conditions for all employees, providing appropriate equipment, Safety to addressing staffjng needs operational processes and safe systems of work. During the year, we undertook workplace assessments and an external review of our offjce and How we are improving four developments. Governance As a Company with a small number Wellbeing During the year, we reviewed our offjce arrangements and have decided to reduce our offjce space and undertake a major refurbishment to improve of employees, some policies and employee facilities and wellbeing. As part of the refurbishment plans, a procedures that are applicable wellbeing study has been undertaken and we carried out a wider employee to larger organisations might not survey to identify other improvements as well as to gauge overall employee satisfaction. Once these works are complete, we will undertake another be appropriate for us. However, employee survey to measure improvements. as the way people work continues statements to change, we recognise the Financial importance of continually improving Employee gender diversity our approach to managing our people and attracting new people. Directors Senior managers Employees The number of persons of The number of persons of each The number of persons Over the year, we have introduced each sex who were Directors sex who were senior managers of each sex who were various initiatives to focus on how we of the Company: of the Company (other than employees of the Company: can provide more flexible working, identified as Directors): improve diversity and general wellbeing. The table opposite highlights key arrangements in place for our employees and the 2 9 2 6 15 21 improvements that we have made and plan to make.
������������������������� ������������������ ���������������������� ���������������������� ���������������������� ������������� ����������������������� ���������������������� ����������������������� 46 LondonMetric Property Plc Annual Report and Accounts 2018 Stakeholders External relationships across all of our activities are critical to the success of our business. Occupiers Developing our occupier relationships is a key focus for us. We engage with occupiers across all of our activities to provide real estate solutions that deliver mutually beneficial outcomes. These relationships are more important than ever and, whilst occupancy of 98% suggests strong levels of occupier contentment, we continue to engage regularly through events, meetings and surveys to ensure we keep close to our customers. Customer satisfaction survey We engaged with several occupiers to discuss their feedback and have met face In February 2018, we undertook our biennial to face with one of those occupiers. survey across key occupiers. We received a response from nearly 70%, representing Future plans half of our income, which was a significantly We expect to increase the frequency higher response than in 2016. We scored of our customer survey and will look to an average of 8/10 for satisfaction with further enhance our customer relationship our properties and 8.5/10 for how well we management and monitoring processes. needs and commercial compared against other landlords. Recognising that all survey responses noted in thinking, which sets Whilst scoring methodology was difgerent a desire to work on sustainable property to our 2016 survey, the results suggested a solutions, we will continue to engage broadly similar overall scoring with a good with occupiers on energy effjciency level of satisfaction. and renewable solutions. Property Director A key LondonMetric occupier Contractors & Suppliers Delivering developments and asset services on time, on budget and in adherence with our high standards is a key priority. Our procurement policy Contractors In 2015, we implemented a policy to ensure In conjunction with our external project appropriate supply chain and procurement managers, our development team ensures standards on areas such as labour; human that we select high quality and robust rights; health and safety; resource; pollution contractors who have a proven track risk and community. Our contractors are record. We regularly review the financial required to adhere to our Responsible robustness of these contractors and their LondonMetric has a Development Requirements (as detailed on performance on our projects. page 43) and, for suppliers of asset services, Our development team monitors progress through our Managing Agents’ policies. of developments and tracks all elements with its supply chain of the projects including sub contracted Modern Slavery and we were pleased to works. We stay close to our contractors and, Our exposure to human rights risks – for example, during the year we visited including modern slavery and human one of our main contractors to undertake traffjcking – is deemed limited given our a more detailed review of their systems UK only activities. Our procurement policy and processes. requires our supply chain to adhere to numerous standards including: paying Suppliers Duncan Berry a fair wage, complying with Human RPS Group Whilst spend on asset services is small, we Rights and Labour Rights Legislation, monitor the compliance of our suppliers and investigating their supply chains. against our Managing Agents’ policies. For developments, contractors are During the year, we undertook a high level expected to demonstrate adherence to review of our top five suppliers and were these requirements . Our Modern Slavery satisfied that they were compliant. Act Statement is available on our website and no human rights concerns arose within the year.
��� 47 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Local communities Our strategy We recognise the importance of supporting Local community stakeholders our local communities and engaging with Authorities: We work hard to develop our all local stakeholders. Over the last few local authority relationships. For example, years, we have established a Communities we have worked in partnership with Policy and a Charity and Communities Our marketplace Bedford Council for over three years Working Group. We aim to maximise on our Bedford development which is the local benefits that our activities estimated to create 1,000 permanent jobs. bring through: Permanent jobs created Residents: As necessary, and as carried • Investment into the infrastructure of those out recently at our Aldi development communities, typically involving the in Weymouth, we undertake public regeneration of land and derelict sites consultations to inform local residents Our business • Creation of construction and fit out jobs of our plans. model during our developments. We typically by occupiers on our Throughout our developments, we use local contractors recent developments communicate project progress through • Creation of modern buildings and facilities contractor newsletters and we task our fit for the future needs of shopping contractors to minimise local disruption. Community donations • Long term commitments from our Post development, we maintain active £110k occupiers, who typically sign leases for Performance dialogue with residents to address any periods o f 10-15 years review of their concerns. • Creation of permanent jobs by our Businesses: We actively engage with local occupiers, most of which are local Charitable donations business and look to support events in • Our ongoing involvement at our conjunction with local authorities. and local community properties by funding of local events spend in 2018 and facilities. For example, we arranged For example, we presented at a recent Responsible several community days in Leeds during event held at our new distribution Business the year warehouse in Stoke. The “Make it” event was organised by the local authority where • Charitable giving , where we support a they presented to businesses on their number of local causes. We also support Local Plan for the area’s long term growth. other organisations such as LandAid, Over 90 people attended the event. and match employee charity giving and events. In the year, charitable donations totalled £25,170 Risk See case study on page 07 for local community involvement at our Dagenham development Community day at our asset in Leeds Governance Investors and joint ventures We value our good relationships with 2018 Responsible Business investors and debt providers to ensure full investor survey access to capital markets. Over the year, as • Undertaken across half of our share covered in detail on pages 72 to 73, we met holders with feedback received from with over 200 investors. 20% of the register statements Financial As shareholder expectations on corporate • Responsible Business disclosure, targets governance and sustainability increase, and activities were considered good we undertook our first Responsible Business Investors seen and of an appropriate standard survey of investors and met with members 209 • Recognition that CSR expectations for of the 30% Club Investor Group on diversity a company of our size are lower than matters. We have incorporated feedback is expected of larger corporates from the survey into setting of our 2019 • There was particular emphasis on sustainability targets. We will also look at ensuring that we have good supply Investor survey on green financing solutions. chain monitoring, continue to perform Responsible Business In addition, we enjoy strong relationships well against GRESB and that we continue Good standard with our JV partners, principally at our MIPP to value and improve our human and DFS Joint Ventures, and continue to capital and develop a diverse group work closely with our partners. of employees
48 LondonMetric Property Plc Annual Report and Accounts 2018 Risk management Our risk management procedures reduce the negative impact of risk on the business. They are critical to maintaining our sustainable, progressive earnings and long term capital growth whilst operating in a socially responsible manner. Although risk cannot be eliminated completely the Board’s risk tolerance is low where it prejudices these objectives. Risk management structure and processes The table below illustrates our risk management structure. • Has ultimate responsibility for risk management and internal controls • Considers the long term viability of the business • Sets strategic objectives and considers risk as part of this process Board • Determines risk appetite • Sets delegated authority limits for the Executive Committee • Responsible for detailed assurance on risk Audit Committee management, internal controls and viability • Reports to the Board • Identifies risks Executive Committee • Assesses and quantifies risks • Implements and monitors risk mitigation processes Senior Management • Assist the Executive Committee The Board recognises its overall Committee last considered the register weighting is applied the higher responsibility for undertaking a robust at its March 2018 meeting following a the significance and probability risk assessment and the extent to comprehensive review of the register. of a risk. These weightings are then which it is willing to accept some mathematically combined to The Executive Committee is responsible level of risk in achieving its strategy. produce an overall gross risk rating for the ongoing identification of risk It considers risk at a high level at which is colour coded using a traffjc and the design, implementation each meeting via a risk dashboard light system. Risk specific safeguards and maintenance of robust internal which enables material issues to are identified, detailed in the register control systems assisted by senior be monitored so that key risks can and rated as strong, medium or management. Appropriate mitigation be managed and emerging risks weak. The stronger the safeguard, plans are developed based on identified early with appropriate the greater the weighting applied. an assessment of the impact action taken to remove or reduce The gross risk rating and strength of the and likelihood of a risk occurring. their likelihood and any potential safeguards against that risk are then Executive Committee members are negative impact. combined to produce a resultant closely involved in day to day matters. overall net risk. Consideration is given The responsibility for detailed The Company has a small number to the implementation of further assurance on the risk management of employees and operates from action to reduce risk where necessary. process has been delegated by one o ffjce. This and the relatively flat Finally, every risk is allocated an owner the Board to the Audit Committee. management structure enable risks and details of how the safeguards are The Audit Committee reviews the to be swiftly identified so appropriate evidenced is noted. The risk register Company’s risk register and internal responses can be put in place. is comprehensively reviewed at least controls in detail to consider the Within the risk register, specific risks are once a year. e fgectiveness of risk management and identified and their probability rated internal control processes and reports by management as having either a its findings to the Board. The Audit high, medium or low impact. A greater
49 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Our three risk areas Our strategy We consider risks under three main headings but recognise that they are often inextricably interlinked. These relate to the Group as a whole Strategy, market, systems, employees, wider stakeholders, Corporate risks regulatory, social and environmental responsibilities These focus on the Group’s core business Portfolio composition and management, developments, Our marketplace Property risks valuation and occupiers These focus on how the business Investors, joint ventures, debt and cash management Financing risk operations are funded Principal risks Corporate governance and The chart below illustrates the reporting bodies are increasing their probability and post mitigation Principal risks and uncertainties are Our business focus on environmental, social and residual risk level of the principal risks those that afgect our business with model governance (“ESG”) issues and how which have been identified. They are the potential to cause material companies take into account wider categorised in a manner consistent harm, impact our ability to execute stakeholder interests. These priorities with the Board’s risk dashboard which our strategic priorities or exceed have been broadly repeated in it considers at each meeting. the Board’s risk appetite. They are recent public statements from large identified and reported on in pages institutional investors. To provide Performance 50 to 59. greater clarity and acknowledge that review No new principal risks have been ESG concerns have become more identified and at a corporate level mainstream we have split out non there has been no significant increase compliance with responsible business or decrease in any principal risk during practices from non compliance with the year. legal and regulatory obligations. We do not however consider that the Responsible Business overall risk has changed materially. Post mitigation residual risk Risk Corporate risks High 1 Strategy 2 Economic and political factors Governance 3 Human resources 4 Regulatory and tax framework 5 Responsible Business approach 2 6 Systems, processes and financial management 9 7 Probability Medium 10 Property risks 8 statements Financial 7 Investment risk 8 Development risk 4 9 Valuation risk 10 Transaction and tenant risk 5 3 Financing risk 11 6 11 Capital and finance risk 1 Low Low Medium High Potential impact
50 LondonMetric Property Plc Annual Report and Accounts 2018 Risk management continued Corporate risks 1 Strategy Risk Impact Mitigation Our strategic objectives may be: • Suboptimal returns for • Our strategy and objectives are regularly shareholders reviewed by the Board to adapt to change • Inappropriate for the current • Missed opportunities • We commission retail and logistics related economic climate or market cycle • Inefgective threat research to assist strategic decision making • Not achieved due to poor management • Senior management have extensive financial and implementation • Wrong balance of real estate experience with strong, longstanding skills and resources for retailer relationships Appetite ongoing success • We have a UK only portfolio in a world leading online shopping market The Board view the Company’s Impact on strategy • We undertake regular and rigorous portfolio strategic priorities as fundamental reviews which take into account considerations to its business and reputation. such as sector weightings, tenant and geographical concentrations, perceived threats and market changes, balance of income to non-income producing assets and asset management opportunities • Our three year forecast is regularly flexed and reported • The Executive Directors are closely involved in day to day management and a relatively flat organisational structure operating from one offjce makes it easier to identify market changes and monitor operations • Management’s interests are aligned with external shareholders through their substantial shareholdings 2 Economic and political factors Risk Impact Mitigation Economic and political factors may • Suboptimal returns for • We commission economic and market research lead to a market downturn or specific shareholders and monitor market volatility sector turbulence. • Occupier demand • We have limited exposure to the London market and solvency may be • The majority of our portfolio is in resilient Appetite impacted asset classes • Asset liquidity may reduce • We maintain a high weighted average unexpired Market conditions are outside of the • Debt markets may be lease term reducing re-letting risk Company’s control. impacted • We have a low vacancy rate due to our strict investment and development criteria Impact on strategy • Our occupier base is diverse. Acquisition due diligence considers tenant covenant strength, which is then monitored on an ongoing basis. Strong retailer relationships help to provide market intelligence • We have limited exposure to speculative development which is only undertaken where a researched supply/demand imbalance exists • We have medium term, flexible funding with significant headroom in covenant levels
51 LondonMetric Property Plc Annual Report and Accounts 2018 Our portfolio is We focus on We manage, enhance Our expertise and aligned to modern sustainable and and create property relationships shape Overview shopping habits growing income in a responsible way our decision making Our strategy Commentary Change Read more • 91% of the portfolio is now in our preferred sectors of No significant See Our Story on Our marketplace distribution, long income and convenience retail. These change in risk pages 01 to 09 sectors have proved to be resilient and have real prospects There has been no significant See Chief Executive’s for rental and capital growth driven by structural changes change in this risk during review on pages 15 in consumer shopping habits. Logistics space is still heavily the year. to 19 undersupplied. Having successfully anticipated the See Remuneration migration of consumer spending online, our sector choices on page 102 have resulted in like for like rental growth of 4.3% this year • Executive Directors hold 10.7 million shares Our business and comfortably meet the Company’s high model shareholding targets Performance review Responsible Business Commentary Change Read more Risk • Our portfolio metrics continue to be strong. Our average No significant See Chief Executive’s unexpired lease length is 12.4 years and occupancy 97.5%, change in risk review on pages 15 both high within the industry. Only 6% of our income expires to 19 While there has been no within three years significant change in this risk See Property review Governance • We have further diversified our tenant base this year. at a corporate level during on pages 26 to 33 Our top five tenants, which account for 35% of rent, are the year, a finely balanced financially strong UK General Election result • Our exposure to the stagnated London residential market and lack of clarity on through our 40% interest in Moore House has reduced. Brexit arrangements mean As at today’s date only 37 units remain unsold continuing political and • We exited our last remaining, non core offjce asset at economic uncertainty. The statements Marlow during the year Financial Board has limited controls • Although our portfolio is UK only, we acknowledge that over such external factors Brexit uncertainty could impact occupier near term but will continue to monitor decision making them. Our strategy to closely align our portfolio to rapidly changing consumer shopping habits mean structural drivers in demand for our assets continue to outweigh these uncertainties at present.
52 LondonMetric Property Plc Annual Report and Accounts 2018 Risk management continued Corporate risks (continued) 3 Human resources Risk Impact Mitigation There may be an inability to attract, The business may lack • We maintain an organisational structure with motivate and retain high calibre the skill set to establish clear responsibilities and reporting lines employees. and deliver strategy and • Our remuneration structure and incentive maintain a competitive arrangements are aligned with long term Appetite advantage. performance targets for the business • Senior management have significant The Board believes it is vitally Impact on strategy shareholdings in the business important that the Company has • Annual appraisals identify training requirements the appropriate level of leadership, and assess performance expertise and experience to deliver • Specialist support is contracted its objectives and adapt to change. where appropriate • Our staffjng plan focuses on experience and expertise necessary to deliver strategy • There is a phased refreshment plan for Non Executive Directors 4 Regulatory and tax framework Risk Impact Mitigation Non compliance with legal or • Reputational damage • We monitor regulatory changes that impact regulatory obligations. • Potential loss of REIT status our business with support from specialist • Increased costs consultants, on issues such as health and safety, Appetite • Reduced access to debt employment, data protection and anti-corruption and capital markets related legislation The Board has no appetite where non • Fines, penalties, sanctions • We have allocated responsibility for specific compliance risks injury or damage to obligations to individuals with Executive its broad range of stakeholders, assets Impact on strategy Committee oversight and reputation. • Our health and safety handbook is regularly updated and health and safety audits are carried out on developments • Our procurement and supply chain policy sets standards for areas such as labour, human rights, pollution risk and community • Stafg training is provided on wide ranging issues such as those identified above • We use external tax specialists to provide advice • Our REIT compliance is monitored • We consider the impact of legislative changes on strategy
53 LondonMetric Property Plc Annual Report and Accounts 2018 Our portfolio is We focus on We manage, enhance Our expertise and aligned to modern sustainable and and create property relationships shape Overview shopping habits growing income in a responsible way our decision making Our strategy Commentary Change Read more • During the year the Board undertook an externally No significant See Responsible Our marketplace facilitated performance evaluation; its findings were change in risk Business on page 45 extremely positive There has been no significant See Remuneration • The Chairman’s letter of appointment has been extended change in perceived risk report on pages 88 for a further three years with a mutual six month rolling from 2017. to 103 break option See Nomination • We have diversified the Board’s skill base through the Committee report appointment of Suzanne Avery who has extensive on pages 74 to 79 financial, banking and real estate experience. Succession Our business planning and diversity remain high on the Board’s agenda model for 2019 • A number of flexible working initiatives have been introduced to improve employee wellbeing • The Executive Directors have significant unvested share awards in the Company to incentivise performance and retention providing stability to the management structure Performance • Senior managers are incentivised in a similar way to the review Executive Directors Commentary Change Read more Responsible Business • During the year a fire risk assessment was undertaken No significant See Financial review on our entire portfolio. This included a cladding review. change in risk on page 36 All properties were rated as low risk The Board considers this risk to See Responsible • In response to the introduction of new legislation against have remained broadly similar Business on pages 45 the criminal facilitation of tax evasion and GDPR we during the year. There has and 46 have undertaken detailed mapping and risk assessment however been an increase in exercises, made changes to some of our policies Risk management time diverted and processes with assistance from Jones Day, our to new regulations and legal advisors evolving best practice due to the flow of recent changes which impact the business. Governance statements Financial
54 LondonMetric Property Plc Annual Report and Accounts 2018 Risk management continued Corporate risks (continued) 5 Responsible Business approach Risk Impact Mitigation Non compliance with responsible • Reputational damage. • We monitor changes in law, stakeholder business practices. • Suboptimal returns for sentiment and best practice in relation shareholders to responsible business practices such as • Asset liquidity may be sustainability, environmental matters and our Appetite impacted societal impact and receive advice and support • Reduced access to debt from specialist consultants The Board has a low tolerance for non and capital markets • We consider the impact of changes on strategy compliance with risks which impact • We give proper consideration to the needs of reputation and stakeholder sentiment Impact on strategy our occupiers and shareholders by maintaining towards the Company. a high degree of engagement and also consider our impact on the environment and local communities • Responsibility for specific obligations has been allocated to individuals and is overseen by the Executive Committee. A Responsible Business Working Group meets at least three times a year and reports to the Board • Stafg training is provided • EPC rating benchmarks are set to ensure compliance with Minimum Energy Effjciency Standards (MEES) that could otherwise impact the quality and desirability of our assets leading to higher voids, lost income and reduced liquidity • Sustainability targets are set, monitored and reported • Contractors are required to conform to our responsible development requirements 6 Systems, processes and financial management This risk category was previously included within ‘Regulatory and tax framework’. Risk Impact Mitigation Controls for safeguarding assets and • Compromised asset • The Company has a strong control culture supporting strategy may be weak. security • We have IT security systems in place with back • Suboptimal returns for up supported and tested by a specialist advisor shareholders • Our property assets are safeguarded by Appetite • Decisions made on appropriate insurance inaccurate information • We have safety and security arrangements The Board’s appetite for such risk is low in place on our developments, multi-let and and management continually strives Impact on strategy vacant properties to monitor and improve processes. • Appropriate data capture procedures ensure the accuracy of the property database and financial reporting systems • We maintain appropriate segregation of duties with controls over financial systems • Management receive timely financial information for approval and decision making • Cost control procedures ensure expenditure is valid, properly authorised and monitored
55 LondonMetric Property Plc Annual Report and Accounts 2018 Our portfolio is We focus on We manage, enhance Our expertise and aligned to modern sustainable and and create property relationships shape Overview shopping habits growing income in a responsible way our decision making Our strategy Commentary Change Read more • During the year we met with over 200 investors and carried No significant See Responsible Our marketplace out an investor survey targeting 50% of our register on change in risk Business on pages 40 responsible business matters. Feedback was positive and to 47 There has been no significant will be incorporated into our 2019 sustainability targets change in perceived risk from • We met with the 30% Club Investor Group and joined Real 2017, however focus on how Estate Balance which aims to promote greater gender companies take into account diversity within the industry wider stakeholder interests • The appointment of Suzanne Avery will add a fresh has increased. perspective to the Board on responsible business matters. Our business Suzanne was formerly Managing Director of Real model Estate Finance Group and Sustainability at RBS and is a co-founder of Real Estate Balance with keen interests in governance, responsible business practices and a number of societal issues • We supplemented direct meetings with our tenants with our biennial customer satisfaction survey of key occupiers. Performance Tenant responses representing half our income scored review us 8.5/10. Feedback has been discussed with several occupiers. We propose to increase the frequency of the survey to further improve processes • We have increased the green credentials of our portfolio over recent years through development and modernisation. 28% of our portfolio is now rated BREEAM Responsible Business Very Good, our GRESB score has improved to 69% and we have maintained our green star rating. 78% of our portfolio has an EPC of C or above • During the year we undertook numerous green initiatives. At Newark, for example we completed the UK’s largest landlord funded distribution solar panel installation to provide a proportion of the tenants power requirements from renewable sources Risk • Our Communities Policy and Charity and Communities Working Group aim to maximise the local benefits of our activities, for example urban regeneration and employment Governance Commentary Change Read more • During the course of the year we have improved No significant See Audit Committee our IT security and back up systems change in risk report on pages 82 statements • We have also made improvements to our financial Financial to 83 There has been no significant reporting processes and have further integrated our change in perceived risk property database and our accounting system from 2017.
56 LondonMetric Property Plc Annual Report and Accounts 2018 Risk management continued Property risks 7 Investment risk Risk Impact Mitigation We may be unable to source Ability to implement strategy • Management’s extensive experience and their afgordable investment opportunities. and deploy capital into strong network of relationships provide insight into value and earnings accretive the property market and opportunities. Appetite investments is at risk. The Board aims to keep this risk to a Impact on strategy minimum but matters outside of its control may have a negative impact. The Board continues to focus on having the right people and funding in place to take advantage of opportunities as they arise. 8 Development risk Risk Impact Mitigation • Excessive capital may be allocated • Poorer than expected • We only undertake short cycle and relatively to activities with development risk performance uncomplicated developments on a pre-let basis • Developments may fail to deliver • Reputational damage or where there is high occupier demand expected returns due to inconsistent • Development exposure as a percentage of our timing with the economic and Impact on strategy total portfolio is limited with larger projects phased market cycle, adverse letting • Development sites are acquired with planning conditions, increased costs, consent where possible planning or construction delays • Management have significant experience resulting from contractor failure or of complex development supply chain interruption • We use standardised appraisals and cost budgets and monitor expenditure against budget to Appetite highlight potential overruns early • External project managers are appointed The Board is willing to take some • Our procurement processes include tendering speculative development and and the use of highly regarded firms with proven planning risk if it represents a relatively track records small proportion of the total property • We review and monitor contractor portfolio and is supported by robust covenant strength research in respect of demand and a high likelihood of planning approval. 9 Valuation risk Risk Impact Mitigation Investments may fall in value. Pressure on NAV growth and • Our core portfolio is pivoted to structural changes in potentially loan covenants. shopping patterns with a significant supply imbalance Appetite in available distribution space Impact on strategy • Our focus is on sustainable income with lettings to high There is no certainty that property quality tenants within a diversified portfolio of well values will be realised. This is an located assets with a high weighted average unexpired inherent risk in the industry. lease term reducing the risk of negative movements in a downturn • The property cycle is continually monitored with investment and divestment decisions made strategically in anticipation of changing conditions • Property portfolio performance is regularly reviewed and benchmarked on an asset by asset basis • We monitor tenant covenants and trading performance
57 LondonMetric Property Plc Annual Report and Accounts 2018 Our portfolio is We focus on We manage, enhance Our expertise and aligned to modern sustainable and and create property relationships shape Overview shopping habits growing income in a responsible way our decision making Our strategy Commentary Change Read more • We used our strong occupier and developer No significant See Property review Our marketplace relationships to acquire over £300 million of change in risk on pages 26 to 27 distribution assets and deployed all the equity There has been no significant change we raised in March 2017 in perceived risk from 2017. • Distribution assets now represent 69% of the portfolio, up from 62% last year • We made a strong valuation gain of £74.4 million on our distribution assets alone Our business model Performance review Commentary Change Read more • Developments represent 2.4% of the portfolio No significant See Property review at the year end. No developments completed change in risk on page 33 in the year were late or over budget There has been no significant change See Responsible • Development activity this year has added rent in perceived risk from 2017. Business review on Responsible of £4.2 million per annum. Of this 43% was built Business page 43 speculatively. We are in advanced discussions on the remaining unlet space • Assets under construction and in our development pipeline of 1.0 million sq ft, predominantly at our Bedford site, are expected to add a further £8.1 million of rental income. The Bedford development will Risk be phased with the first phase commencing this year Governance Commentary Change Read more statements Financial • 50.3% of our income has contractually fixed No significant See Property review or index linked uplifts change in risk on pages 26 to 27 • Our valuation gain this year was £121.6 million, There has been no significant change in See Financial review with the largest increase in our urban logistics perceived risk from 2017. Technological on page 39 distribution and development sectors advances continue to cause significant See Audit Committee • A high average WAULT of 12.4 years was disruption in the retail landscape. The report on pages 84 maintained Company’s preferred asset classes are to 85 • We have substantial headroom under our however aligned to modern shopping financial loan covenants habits where the prospects for valuation preservation and growth are significantly better than traditional retail.
58 LondonMetric Property Plc Annual Report and Accounts 2018 Risk management continued Property risks (continued) 10 Transaction and tenant risk Risk Impact Mitigation • Property purchases and asset Pressure on NAV, earnings • We undertake thorough due diligence on all management initiatives may be and potentially loan acquisitions including legal and property, tenant inconsistent with strategy covenants. covenant strength and trading performance • Due diligence may fail to • Tenant concentration within the portfolio is highlight risks Impact on strategy considered for all acquisitions and leasing • Lettings may be made to transactions. We have a diversified tenant base inappropriate tenants and limited exposure to individual occupiers • Tenant failure risk in bespoke properties • Asset management initiatives undergo Appetite cost-benefit analysis prior to implementation • We use external advisors to benchmark The Board’s appetite to risks arising lease transactions and advise on acquisition out of poor due diligence processes due diligence on acquisitions, disposals and • Our experienced asset management team lettings is low. The Board is willing work closely with tenants to ofger them real estate to accept a higher degree of risk solutions that meet their business objectives. in relation to tenant covenant This proactive management approach helps strength and unexpired lease term to reduce vacancy risk on urban logistics assets where • We monitor rent collection closely to identify there is high occupational demand, potential issues redevelopment opportunity or alternative site use. Financing risk 11 Capital and finance risk Risk Impact Mitigation The Company may have insuffjcient Strategy implementation • We maintain a disciplined investment approach funds and available credit. is at risk. with competition for capital. Assets which have achieved target returns and strategic asset plans Appetite Impact on strategy are sold • Cash flow forecasts are closely monitored The Board has no appetite for • Relationships with a diversified range of lenders imprudently low levels of available are nurtured and loan facilities regularly headroom in its reserves or credit lines. reviewed. The availability of debt and the terms on which it is available is considered as part It accepts a low degree of market of the Company’s long term strategy standard inflexibility in return for the • Loan facilities incorporate covenant headroom, availability of credit. appropriate cure provisions and flexibility The Board has some appetite for • Headroom and non-financial covenants interest rate risk, loans are not fully are monitored hedged. This follows cost benefit • We maintain a modest level of gearing assessment and takes into account • The impact of disposals on secured loan facilities that not all loans are fully drawn all covering multiple assets is considered as part the time. of the decision making process • Interest rate derivatives are used to fix or cap exposure to rising rates. A specialist hedging advisor is used
59 LondonMetric Property Plc Annual Report and Accounts 2018 Our portfolio is We focus on We manage, enhance Our expertise and aligned to modern sustainable and and create property relationships shape Overview shopping habits growing income in a responsible way our decision making Our strategy Commentary Change Read more • Our tenant default rate within the industry is very low No significant See Chief Executive’s Our marketplace and we have no significant arrears. The impact of recent change in risk review on pages 15 retailer collapses and CVAs has had a negligible impact to 19 There has been no significant on earnings change in perceived risk from See Property review • We maintain a high occupancy level within the industry 2017 despite a number of on page 32 despite a number of smaller speculative developments high profile retail casualties completing recently. Our EPRA vacancy rate at the year and more retailers looking end was 2.5% to restructure their physical store portfolios through a Our business CVA process. Retail occupiers model continue to invest heavily in distribution and logistics and convenience retail fulfils a top up function for online shoppers. Performance review Responsible Business Commentary Change Read more • The majority of our debt is diversified, unsecured and No significant See Financial review Risk extremely flexible. Headroom on our revolving credit facility change in risk on pages 38 to 39 and proceeds from forecast capital recycling are suffjcient There has been no significant to fund our forecast investment programme change in perceived risk • During the year we reduced our secured loan with Helaba from 2017. but extended its term to seven years and incorporated Governance greater flexibility • We recouponed £190 million of swaps and cancelled £128 million in excess of our requirements. The cost of doing this has a 2.5 to 4.0 year payback period • 73% of facilities are hedged by way of interest rate swaps and caps statements Financial
60 LondonMetric Property Plc Annual Report and Accounts 2018 Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board has assessed the future viability and prospects of the Group over a period longer than the 12 months required by the ‘Going Concern’ provision. The Directors conducted this review taking account of the Group’s current position, longer term strategy, principal risks and future plans. Assessment of review period The Executive Committee provides impact of these movements on regular strategic input to the financial future performance, liquidity and The viability review was conducted forecasts covering investment, the ability to finance forecast over a three year period of divestment and development plans, transactions, committed capital assessment as in previous years, capital allocation and hedging. expenditure and refinance maturing which the Board considered debt. It took into account the flexibility appropriate for the following reasons: Executive Directors and senior of capital expenditure and disposal managers receive regular • The Group’s financial business plan plans and hedging in place. presentations from external advisors and detailed budgets cover a on the macroeconomic outlook and In addition, further stress testing rolling three year period retail market which assist with the assessed the limits at which key • It reflects the short cycle nature development of strategy and forecasts. financial covenants and ratios of the Group’s developments would be breached or deemed Forecasts are updated at least and asset management unacceptable. Property values quarterly, reviewed against actual initiatives. The average time taken would need to fall by approximately performance and reported to the from commitment of funds to 40% and rental income fall by 59% to Board. At least one Board meeting practical completion of the five breach the loan to value and interest each year focuses on strategy developments that completed in cover covenants under the existing and presentations are given by the year at Huyton, Stoke, Crawley, debt facilities. senior managers. Tonbridge and Launceston was The Directors have taken into account 15 months Assessment of viability the strong financial position at • The average length of asset A sensitivity analysis was carried out 31 March 2018, available cash and management initiatives involving which involved flexing a number of undrawn debt facilities, headroom significant reconfiguration of retail key assumptions individually and under existing loan facilities and the parks is under one year collectively to consider the impact Group’s ability to raise new finance. • The Group’s weighted average of changes to the Group’s principal The Directors also noted that in the debt maturity at 31 March 2018 risks afgecting the viability of the event of a severe threat to liquidity, was 4.8 years business, including: other options existed to maintain • Three years is considered to be the • Changes to macro-economic viability including deferring non optimum balance between long conditions impacting rental income committed expenditure and term property investment and the levels and property values selling assets. inability to accurately forecast • Changes in the retail environment ahead given the cyclical nature impacting occupancy levels Conclusion of property investment and lettings Assessment of prospects Based on the results of their review, • Changes in the availability of funds the Directors have a reasonable The Group’s business model consists impacting committed expenditure expectation that the Company will of a rolling three year profit and cash and investment transactions be able to continue in operation flow forecast, with both a base case • Changes in property market and meet its liabilities as they fall scenario, which only includes deals conditions impacting disposal due over the three year period under ofger, and also an assumed and reinvestment assumptions of their assessment. case which factors in reinvestment The business model was stress tested and development. The business to validate its resilience to property model considers investment plans, valuation and rental income decline, capital commitments, dividend as well as increases in future LIBOR cover, loan covenants and REIT and swap rates. It assessed the compliance metrics.
61 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Governance Our strategy Our marketplace Inside this section Introduction from the Chairman 62 Board of Directors 64 Governance at work 66 Our business Leadership 67 model Efgectiveness 74 – Nomination Committee report 74 Accountability 80 – Audit Committee report 80 Performance Remuneration 88 review – Remuneration Committee report 88 Report of the Directors 104 Directors’ responsibility statement 107 Responsible Business Risk Governance statements Financial
������������������������ 62 LondonMetric Property Plc Annual Report and Accounts 2018 Introduction from the Chairman The Corporate Governance report which follows provides insight into our governance processes and activities in the year and demonstrates our commitment to upholding the principles and provisions of the UK Corporate Governance Code (the ‘Code’). Good governance is embedded into members of the 30% Club Investor our day to day business operations and group to consider and share our underpins the way we manage our diversity aspirations and to discuss At LondonMetric business. It guides our ability to operate the challenges we face. We support in a way that is both legally compliant initiatives to promote gender diversity we recognise that and also responsible an d supports in the real estate sector and have maintaining the high the successful delivery of our strategy. recently become a member of the We strive to operate in a transparent Real Estate Balance group whose standards of corporate and responsible way and foster a objective is to improve gender culture of appropriate decision making diversity by promoting and supporting governance we have at all levels in the organisation. the development of a female talent pipeline. Low stafg turnover at senior developed over the Through the close involvement of levels signifies a loyal, content and the Executive Directors, our culture motivated workforce and something years is critical to permeates through the wider we are proud of. However it also organisation, promoting good constrains the pace of change as governance practices beyond opportunities are dependent upon the boardroom. of our strategy.” stafg vacancies arising. Performance evaluation To the extent that we have the Patrick Vaughan I am pleased to report the findings opportunity and as evidenced by Chairman of the external board performance our most recent Board appointment, evaluation that was undertaken by we will seek to improve our gender Independent Audit this year. The Board diversity throughout the Company. was praised for its exceptional Succession planning cohesion and culture of openness. The mutual respect and confidence Succession planning and developing of individual members and the strong talent continues to be a key area of and supportive relationships formed focus for the Nomination Committee over many years working together to support the Company’s long term were noted as particular strengths and plans. Two years ago we instigated I thank my colleagues for engaging in a phased refreshment of the Non open and constructive conversations. Executive Board in light of members’ However, in seeking continued tenure and the best practice improvement to our performance, recommendations of the Code. we welcome suggestions for This year we are delighted to improvements to Board processes to welcome Suzanne Avery to the enhance boardroom debate and Board and as a member of the challenge, including varying the Audit Committee. Suzanne brings pace of discussion and agenda, by a fresh perspective and wealth of involving other managers and stafg and complementary financial, banking, occasionally changing the format and sustainability and real estate location of meetings. experience and expertise to the Board as former Managing Director Diversity of Real Estate Finance Group and The Board believes in the benefits Sustainability at RBS. of diversity and strives to operate in a working environment of equal opportunity. This year we met
63 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Stakeholders agenda item at each Board meeting, As advised to the market on Our strategy highlighting changes in the Group’s 9 November 2017, Valentine Beresford, Our approach to business builds exposure to risks and prompting Investment Director, has taken a and maintains the trust of our key further debate. leave of absence from the Company stakeholders including investors, following an operation. He continues to business partners, customers, suppliers We are mindful of the need to ensure make a good recovery and we expect and employees. Furthermore we are that evolving risks are considered which him to return to the offjce towards the committed to enhancing the business this year included cyber risk and the Our marketplace end of the summer. environments in which we operate as impact of Brexit. discussed in detail in the Responsible Whilst Valentine’s day to day The Audit Committee has challenged Business section of the Strategic report. responsibilities have been covered the going concern principal underlying by other members of the Company’s We have a comprehensive investor the preparation of these accounts and executive team and senior colleagues, relations programme and regular considered the Company’s longer term he has remained in close contact with communication with investors viability. It has reviewed the processes the Company and we have been continues to be a key priority for the in place followed by management to Our business able to benefit from his wide skills Executive Directors. Understanding the ensure that the financial statements model and experience. views of shareholders is fundamental are fair, balanced and understandable to the Company’s strategic direction and has scrutinised and challenged Looking ahead and ultimate success. This year the significant accounting judgements We look forward to another busy we commissioned our first investor made by management, including and rewarding year ahead whilst Responsible Business survey and those concerning the valuation remaining mindful of the ever were reassured by the positive results. of property. The Committee also Performance changing economic and political The Executive Directors met with over considered the likely impact of review challenges. We will seek to ensure 200 shareholders, fund managers, adopting new accounting standards the business remains resilient to such private wealth investors and other on revenue, financial instruments and challenges and adapts to regulatory interested parties during the year to leasing that become mandatory over and legislative changes including the discuss the Company’s performance the next two years. impact of Brexit and implementation and plans. This year we welcomed a new lead of the EU Withdrawal Bill as well as Responsible The Board is aware of its responsibility audit partner, Georgina Robb, to the proposed revised UK Corporate Business to other stakeholders when making replace the previous partner who Governance Code. business decisions and actively retired by rotation and was no longer Succession planning and diversity engages with and welcomes considered independent, given her remain high on the Board’s agenda feedback from suppliers, tenants prior role as audit partner to Metric. for 2019 and we will endeavour to and employees. During the year we Given that 2019 will be Deloitte’s sixth implement the recommendations undertook our biennial customer consecutive year in offjce, we will from this year’s external satisfaction survey and our first consider whether to re-tender the audit performance evaluation. Risk employee satisfaction survey to better during the next two financial years. understand our key stakeholders’ The Company received a letter from views. In addition we have introduced the Financial Reporting Council (FRC) flexible working practices for stafg to concerning its review of its 2017 Annual help improve employees’ work/life Report. I am very pleased to report that balance. The success of the Company Governance no questions or queries were raised. is dependent upon the hard work and Patrick Vaughan A few improvements to disclosures dedication of a small team here at Chairman were noted and have been taken into 30 May 2018 LondonMetric and on behalf of the consideration in the preparation and Board I would like to thank each and review of this year’s Annual Report. every employee for their contribution and commitment. Remuneration Statement of Compliance statements Accountability The Board remains committed to Financial attracting and retaining talented The Audit Committee continues to The Board has considered the individuals to deliver outstanding play a key oversight and assurance Company’s compliance with the results. The Remuneration Committee role, assisting the Board and ensuring provisions of the UK Corporate continues to promote a fair reward shareholder and other stakeholder Governance Code (the ‘Code’) structure that adequately incentivises interests are protected by monitoring published by the Financial Reporting and retains the executive team to the processes that support financial Council in 2016, publicly available deliver long term growth and success reporting and control. at www.frc.org.uk. and is advised by PwC. This year the The Committee has undertaken The Board considers that the Committee reviewed the variable its annual comprehensive review Company has complied with the elements of remuneration and has of principal risks and the internal main provisions set out in the Code recommended annual bonuses for control framework and no significant throughout the year under review th e Executive Directors at 71% to 79% weaknesses were identified. The risk and to the date of this report. of their maximum levels. dashboard continues to be a standing
64 LondonMetric Property Plc Annual Report and Accounts 2018 Board of Directors Patrick Vaughan Andrew Jones Martin McGann Chairman Chief Executive Finance Director Appointed 13 January 2010 Appointed 25 January 2013 Appointed 13 January 2010 Skills and experience Patrick has been Skills and experience Andrew was a Skills and experience Martin joined involved in the UK property market since co-founder and CEO of Metric from its London & Stamford as Finance Director 1970. He was a co-founder and CEO inception in March 2010 until its merger in September 2008 until its merger with of Arlington, of Pillar, and of London with London & Stamford in January 2013. Metric in January 2013, when he became & Stamford, leading all three of the On completion of the merger, Andrew Finance Director of LondonMetric. companies to successful listings on the FTSE became Chief Executive of LondonMetric. Between 2005 and 2008, Martin was main market. Upon completion of London Andrew was previously Executive a Director of Kandahar Real Estate. & Stamford’s merger with Metric in January Director and Head of Retail at British From 2002 to 2005 Martin worked for Pillar, 2013, he was appointed Chairman, Land. Andrew joined British Land in 2005 latterly as Finance Director. Prior to joining becoming Non Executive Chairman on following the acquisition of Pillar where Pillar, Martin was Finance Director of the 1 October 2014. Patrick also served as an h e served on the main Board. Strategic Rail Authority. Martin is a qualified Executive Director of British Land 2005 to Chartered Accountant, having trained Other appointments Non Executive 2006, following its acquisition of Pillar. and qualified with Deloitte. Director of The Unite Group Plc Other appointments None Other appointments None Board Committees Executive Committee Board Committees Board Committees Executive Committee Nomination Committee A balanced board Non Executive Chairman 9% Executive 36% Composition Valentine Beresford Mark Stirling Investment Director Asset Director Non Executive Appointed 3 June 2014 Appointed 3 June 2014 55% Skills and experience Valentine was co- Skills and experience Mark was co- founder and Investment Director of Metric founder and Asset Management Director from its inception in March 2010 until its of Metric from its inception in March 2010 merger with London & Stamford in January until its merger with London & Stamford 2013. He joined the Board of LondonMetric in January 2013. He joined the Board of on 3 June 2014 as Investment Director. LondonMetric on 3 June 2014 as Asset Female 18% Prior to setting up Metric, Valentine was Management Director. Prior to the setting on the Executive Committee of British up of Metric, Mark was on the Executive Land and was responsible for all their Committee of British Land and as Asset European retail developments and Management Director was responsible Gender investments. Valentine joined British Land for the planning, development and diversity in July 2005, following the acquisition of asset management of the retail portfolio. Pillar, where he also served on the Board Mark joined British Land in July 2005 as Investment Director. following the acquisition of Pillar where he Male 82% was Managing Director of Pillar Retail Parks Other appointments None Limited from 2002 until 2005. Board Committees Executive Committee Other appointments None 1 All charts reflect the composition of the Board Board Committees Executive Committee as at 31 March 2018
65 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Our strategy Our marketplace Philip Watson James Dean Suzanne Avery Senior Independent Director Independent Director Independent Director Appointed 25 January 2013 Appointed 29 July 2010 Appointed 22 March 2018 Skills and experience Philip joined Skills and experience James is a Skills and experience Suzanne was the Board of Metric at the Company’s Chartered Surveyor and has worked with appointed to the Board of LondonMetric Our business inception in March 2010. He is a Non Savills plc since 1973, serving as a Director in March 2018. Suzanne has 25 years’ model Executive Director of Mirabaud Asset from 1988 to 1999. experience in corporate banking, holding Management Limited. Philip joined Hill various Managing Director roles at RBS, Other appointments James is a Non Samuel in 1971 and then Robert Fleming in including Managing Director of Real Executive Director of Branston Holdings 1972 on the UK desk, where he worked as Estate Finance Group & Sustainability, and Chairman of London & Lincoln an investment analyst and fund manager. where she was responsible for REITs, Properties Ltd and Patrick Dean Ltd Philip left Robert Fleming in 1982 to found Funds and London based private TWH Asset Management Limited (now Board Committees Remuneration property companies. Performance Mirabaud Asset Management Limited) Committee (Chairman) and Other appointments Church review Nomination Committee in which he and his partners sold a Commissioner, senior advisor to Centrus controlling interest to Mirabaud Pereire Advisors, Non Executive Director of Holdings Limited in 1991. Richmond Housing Partnership Limited, Other appointments A Non trustee of LandAid and co-founder of Executive Director of Mirabaud Asset Real Estate Balance. Management Limited Board Committees Audit Committee Board Committees Nomination Responsible Business Committee and Remuneration Committee Risk Rosalyn Wilton Alec Pelmore Andrew Livingston Independent Director Independent Director Independent Director Governance Appointed 25 March 2014 Appointed 25 January 2013 Appointed 31 May 2016 Skills and experience Rosalyn was Skills and experience Alec joined the Skills and experience Andrew was appointed to the Board of LondonMetric Board of Metric at the Company’s appointed to the Board on 31 May 2016. in March 2014, becoming Chairman inception in March 2010. He has been On 2 April 2018, Andrew was appointed of the Audit Committee in March 2015. a member of the Supervisory Board Chief Executive of Howden Joinery Group She has held a number of Non Executive of Unibail-Rodamco SE, Europe’s Plc, having been the Chief Executive of Directorship positions, most recently largest property company, since 2008 Screwfix since 2013 and previously the with AXA UK Limited, until September and is currently a member of its Audit Commercial and Ecommerce Director statements Financial 2015, where she acted as Chair of the Committee. Alec held positions as an from 2009 to 2013. Before joining Screwfix, Risk Committee and Optos Plc, where equity investment analyst specialising in Andrew was Commercial Director at she was Chair of Remuneration. She has property companies from 1981 to 2007. Wyevale Garden Centres between 2006 previously served as Senior Advisor to The majority of his career as an investment and 2008 and then Chief Operating 3i Investments and Providence Equity analyst was spent at Dresdner Kleinwort Offjcer between 2008 and 2009. Partners, Chairman of Ipreo Holdings LLC, Benson and Merrill Lynch, where his teams Andrew has worked previously at Marks the US-based financial data and solutions were voted number one for property & Spencer, CSC Index and B&Q where he group, and has worked for Reuters in Europe by the Institutional Investor was Showroom Commercial Director from Group where she was a member of the European Property Research Survey for 2000 to 2005. Executive Committee. 1 2 out of 13 years from 1995 to 2007. Other appointments Chief Executive Other appointments Trustee of the Other appointments Member of the of Howden Joinery Group Plc and Director University of London, Vice Chair of the Supervisory Board of Unibail-Rodamco SE of Vedoneire Limited Harris Federation and Chair of Governors Board Committees Nomination Board Committees Audit Committee of Harris Academy Bromley. Committee and Audit Committee and Remuneration Committee Board Committees Audit Committee (Chairman) and Remuneration Committee
66 LondonMetric Property Plc Annual Report and Accounts 2018 Governance at work Your Board remains committed to maintaining the high standards of corporate governance that are embedded in the culture and day to day running of our business and which drive the achievement of strategy and long term success of the Company. Corporate governance code Leadership The Board provides leadership and • Role of the Board and its Committees direction to the business as a whole, • Division of responsibilities having due regard to the views of its • Non Executive Directors stakeholders and the environment within • Purpose and culture which it operates. See pages 67 to 73 Efgectiveness The Board sets the key processes to ensure • Nomination Committee report the Board and its Committees operate • Composition and independence efgectively. • Diversity • Board appointments and succession planning • Board induction, development and time commitments • This year’s external Board evaluation See pages 74 to 79 Accountability The Board establishes and maintains the • Audit Committee report Group’s system of risk management and • Financial reporting and significant judgements internal controls and ensures the integrity • Oversees external audit process o f financial reporting. • Assessment of principle and emerging risks, risk management and internal control • Viability statement and going concern • Ensuring a ‘fair, balanced and understandable’ Annual Report See pages 80 to 87 Engagement The Chief Executive and Executive • Engagement with shareholders – 209 meetings Directors prioritise an open dialogue with and presentations in the year with shareholders shareholders. and stakeholders • Portfolio tours arranged for investors and advisors • AGM is attended by the whole Board See pages 72 to 73 Remuneration The Remuneration Committee determines • Remuneration Committee report and implements a fair reward structure to • Remuneration Policy incentivise Executive Directors to deliver • Annual bonus and LTIP achievement the Group’s strategic objectives whilst against targets maintaining stability in the management of its long term business. See pages 88 to 103
67 LondonMetric Property Plc Annual Report and Accounts 2018 Leadership Overview Our strategy The Board Chairman: Patrick Vaughan Comprises: 4 Executive and 6 Non Executive Directors Our marketplace • Responsible for leading, directing and controlling the Company and the overall success of the business • Establishes culture and ethics of the organisation • Fosters wider stakeholder relationships • Sets and implements long term strategy • Manages human resources and succession planning Our business • Sets risk appetite and determines principle risks model • Corporate governance Board Committees Performance Audit Committee Remuneration Committee Nomination Committee review Chairman: Rosalyn Wilton Chairman: James Dean Chairman: Patrick Vaughan Comprises: 4 Non Executive Directors Comprises: 4 Non Executive Directors Comprises: 4 Non Executive Directors • Oversees financial and • Determines and implements • Recommends Board appointments narrativ e reporting Remuneration Policy • Succession planning and Board & Responsible Business • Scrutinises significant judgements • Sets Executive Directors Committee composition made by management remuneration packages and • Diversity incentives • Monitors efgectiveness of risk • Performance evaluation management systems and • Approves bonus and LTIP targets internal control and outcomes • Evaluates the external audit process Risk Audit Committee report see page 80 Remuneration Committee report Nomination Committee report see page 88 see page 74 Management Committees Governance Executive Committee Chairman: Andrew Jones • Implementation of strategy • Day to day management • Employee remuneration of the business and its and wellbeing Comprises: 4 Executive • Sets budgets and manages principle risks Directors; 1 Senior Executive operational and financial • Manages allocation performance • Succession planning of capital statements Financial below Board, people development Investment Committee Asset Management Committee Finance Committee Chairman: Valentine Beresford Chairman: Mark Stirling Chairman: Martin McGann Comprises: 4 Executive Directors Comprises: 4 Executive Directors Comprises: 4 Executive Directors and senior management and senior management and senior management • Reviews investment and divestment • Reviews value enhancing • Reviews budgets and forecasts, opportunities and allocation operational activities and achievement of targets, funding of capital development opportunities requirements and liquidity The framework reflects the composition of the Board as at 31 March 2018
68 LondonMetric Property Plc Annual Report and Accounts 2018 Leadership continued Division of responsibilities A balanced board The following table sets out the key responsibilities of Board members: Non Executive Chairman 9% Role Responsibilities Chairman • Leads the Board and ensures it operates efgectively Executive Patrick Vaughan • Sets Board culture, style and tone of discussions to 36% promote boardroom debate and openness • Promotes Company purpose, values and ethics Composition • Builds relationships between Executive and Non Non Executive Directors Executive • Monitors progress against strategy and 55% performance of the Chief Executive Chief Executive • Manages dialogue and communication with Andrew Jones shareholders and key stakeholders and relays views to the Board Female 18% • Develops and recommends strategy to the Board and is responsible for its implementation • Day to day management of the business Gender operations and personnel assisted by the diversity Executive team Non Executive Directors • Support and constructively challenge the Male 82% Suzanne Avery Executive Directors in determining and James Dean implementing strategy Andrew Livingston • Bring independent judgement and scrutiny Alec Pelmore to decisions recommended by the Executive Philip Watson Directors and approve decisions reserved for the Rosalyn Wilton 0–3 years Board as a whole 6–9 years 18% • Contribute a broad range of skills and experience 27% • Monitor delivery of agreed strategy within the risk and control framework set by the Board Tenure1 • Review the integrity of financial information and risk management systems Senior Independent Director • Acts as a sounding board for the Chairman 3–6 years Philip Watson and trusted intermediary for the other Directors 55% • Available as a communication channel for shareholders if other means are not appropriate • Leads performance evaluation of Chairman Risk management 9% Executive Directors • Manage business operations within area Valentine Beresford of expertise Martin McGann • Assist Chief Executive in the implementation Retail 9% Mark Stirling of strategy • Identify, assess and quantify risks in operating the business and implement risk mitigation processes Property Expertise2 64% • Manage, appraise and develop stafg below Finance Board level 36% Company Secretary • Advises the Board and is responsible to the Jadzia Duzniak Chairman on corporate governance matters • Ensures good flow of information to the Board, its Committees and senior management • Promotes compliance with statutory and regulatory requirements and Board procedures • Provides guidance and support to Directors, 1 Tenure has been reflected from the date of individually and collectively appointment to the LondonMetric Board 2 Some Directors are represented in more than one category in terms of their expertise 3 All charts reflect the composition of the Board a s at 31 March 2018
69 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Board activities in 2018 Our strategy The key areas of focus for the Board during the year were as follows: • Strategy presentation from senior managers to the • Approved the interim and annual financial statements whole Board with continued focus on sustainable and results presentations income and portfolio repositioning into urban logistics • Reviewed the three year financial forecasts Our marketplace and divestment of non core assets • Scrutinised the interim and annual property valuations • Debated the property and retail market outlook, • Discussed financing arrangements, available debt shopping patterns and competitor activity facilities, LTV and financial covenants • Considered the economic, legislative and political • Received reports from the Finance Director on landscape including the impact of Brexit debt refinancing and hedging and approved the • Approved all property acquisitions and disposals in cancellation and recoupon of interest rate swaps excess of £10 million including a portfolio acquisition Our business • Considered dividend policy, quarterly scrip dividend of 14 logistics assets and the sale of the last remaining model payments and annual PID offjce in Marlow • Executive Directors and senior managers received • Approved major capital expenditure and presentations from tax advisors and external auditors development projects including at Stoke, Crawley, following legislative changes Dagenham and Bedford • Executive Directors and • Considered impact of new Performance senior managers accounting standards review Strategy Financial attended quarterly on revenue, financial economic and instruments and leases market update presentations from external advisors Responsible Business Board • Met with members of the • Appointed new Non 30% Club Investor group Executive Director, to discuss diversity in Suzanne Avery Risk the organisation • Reviewed Executive • Joined the Real Estate Directors’ remuneration Balance group to promote and performance and foster diversity in the against targets sector and Company at • Succession planning and Governance Stakeholders Governance all levels tenure and extended • Risk register and dashboard Chairman’s letter of update, including debate appointment for a further o f significant and emerging risks three years • Reviewed the efgectiveness of the internal control • Reviewed and began implementation of flexible framework to manage risks working practices for stafg • Received briefings from the Finance Director and • Participated in Hampton Alexander review statements Financial external auditors on regulatory and governance • Received Responsible Business update from senior issues including consideration of S172 Companies management including a fire risk and cladding Act compliance assessment following the Grenfell Tower tragedy • External Board and Committee performance • Extended commitment to joint ventures and partners, evaluation review extending commitment to MIPP and increasing stake • Viability statement and going concern review and in DFS JV approval of statements thereon • Considered shareholder relations, liaison and feedback from roadshows and results presentations • Stafg received a presentation on the auto enrolment pension scheme implemented in the year
70 LondonMetric Property Plc Annual Report and Accounts 2018 Leadership continued Membership and attendance The number of Board and Committee members and their attendance during the year was as follows: Tenure 5 Audit Remuneration Nomination Title Date appointed (years) Independent Board Committee Committee Committee Chairman Patrick Vaughan 13/1/2010 8 n/a 1 6 (6) 3 (3) Executive Directors Andrew Jones 25/1/2013 5 No 6 (6) Martin McGann 13/1/2010 8 No 6 (6) Valentine Beresford 4 3/6/2014 4 No 4 (6) Mark Stirling 3/6/2014 4 No 6 (6) Non Executive Directors Suzanne Avery 22/3/2018 0 Yes 1 (1) 0 (0) James Dean 29/7/2010 8 Yes 6 (6) 4 (4) 3 (3) Andrew Livingston 31/5/2016 2 Yes 6 (6) 5 (5) 1 (2) Alec Pelmore 25/1/2013 5 Yes 6 (6) 5 (5) 3 (3) Andrew Varley 3 25/1/2013 n/a n/a 3 (3) 2 (2) 2 (2) Philip Watson 25/1/2013 5 Yes 6 (6) 4 (4) 3 (3) Rosalyn Wilton 25/3/2014 4 Yes 6 (6) 5 (5) 4 (4) Percentage independent 1 60% 1 Provision B.1.1 of the Code regarding independence is not appropriate in 3 Resigned with efgect from 30 September 2017 relation to the Chairman. Calculation is based on Board members as at 4 Valentine Beresford was unable to attend two Board meetings due to a leave 31 March 2018 of absence to undergo and recuperate from an operation 2 Bracketed numbers indicate the number of meetings the member was 5 Tenure is measured from the date of appointment to the LondonMetric Board eligibl e to attend and as at 31 March 2018, rounded to the nearest whole year The role of the Board There is a division of responsibility As reported in the table above, each between the Chairman and Chief of the Non Executive Directors, other The Board is collectively responsible Executive which has been approved than the Chairman, is considered by to the members of the Company for by the Board. the Board to be independent from the long term success of the business, management and has no commercial having due regard to the views and The Chairman is responsible for or other connection with the Company. interests of all stakeholders. leading the Board and monitoring its efgectiveness and the Chief Executive, In considering independence, the It operates in an open and transparent supported by the Executive Directors, Board concluded that tenure should way, engaging and fostering is responsible for the day to day be measured from the date of election relationships with shareholders, management of the Group and the to the LondonMetric Board. customers, suppliers, employees implementation and delivery of the and the communities within which The Board’s composition throughout Board’s agreed strategic objectives. it operates. the year met the Code’s requirement The Chairman is responsible for that at least half of its members, The Board establishes the culture, ensuring a constructive relationship excluding the Chairman, are values and ethics of the organisation, between Executive and Non Executive independent Non Executive Directors. sets and implements strategy and Directors and for encouraging and It would still meet this requirement provides leadership and direction fostering a culture of boardroom under the current new Code proposals within a sound framework of risk challenge and debate. He maintains to include the Chairman within management and internal controls. regular contact with the Executive the calculation. The Board’s collective experience Directors and senior management The Board has a schedule of matters and skill set covers a range of relevant outside of formal Board meetings reserved for its attention which includes sectors including property, finance, which ensures he is kept abreast of approval of strategy, budgets, financial banking and retail as reflected in the individual Directors’ views and issues as reports, significant acquisitions and chart on page 68 and as described in they arise. disposals, major capital expenditure, their individual biographies on pages During the year the Board funding and dividend policy. 64 and 65. recommended the extension of the Chairman’s appointment for a further three years to 31 March 2021, with a six month mutual break option.
71 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Board meetings Following a review led by the The Chairman of each Committee Our strategy Nomination Committee of the provides a verbal update on the The Board has a regular schedule of Board size and structure, Suzanne matters discussed at each meeting to meetings, timed around the financial Avery was appointed as a new Non the Board. calendar, together with further ad Executive Director and member of hoc meetings as required to deal with The Executive Committee meets the Audit Committee in March 2018. transactional matters. monthly to discuss financial and The Nomination Committee report operating targets and performance, Whilst strategy is considered at every Our marketplace includes details of the recruitment property transactions and the Board meeting encompassing topics process, selection procedure and management of the business and such as market conditions and outlook, induction programme for the its stafg. There are informal meetings investment opportunities, capital appointment on page 77. between the Executive Directors at allocation and emerging risks, one other times and due to the size of Board culture and values meeting each year is dedicated to the organisation they are involved this topic. The Chairman sets and fosters the in all significant business discussions culture and values of the Board and In September 2017 two senior Our business and decisions. wider organisation, broadly defined as managers were invited to present to model a balanced approach to business and The Executive Committee is the Board on the Company’s longer a willingness to take considered risks to supported by three sub Committees, term strategy in light of market and achieve strategic goals within an open, each focusing on difgerent areas economic conditions including Brexit, inclusive and respectful environment of the business; the Investment, changes in technology and consumer which encourages constructive Asset Management and Finance shopping patterns and investment challenge and debate. Committees. These Committees Performance opportunities. The session considered comprise Executive Directors and review implications for resources and skills, This culture and thinking permeates members of the senior management financing and liquidity. through the organisation through team and meet at least monthly. the close interaction of Directors The Executive Committee has regular and stafg in day to day activities. Non Executive Directors ofg site meetings to discuss business Individual Directors and senior strategy and performance in a less The Non Executive Directors are a managers have formed strong formal environment. External advisors diverse group with a wide range of Responsible relationships over several years of Business and senior managers are invited to business experience encompassing working together and processes are present and the focus is reviewing property, finance, fund management, well understood and adhered to after the appropriateness of and progress banking, risk management, many years of consistent application. against agreed strategy in light of sustainability and retailing. the retail and investment market, Board Committees They provide a valued role by investment opportunities and the wider The Board has three Committees of independently challenging and macroeconomic environment. Non Executive Directors to which scrutinising aspects of executive Risk All Directors are expected to attend it has delegated a number of its decisions and monitoring the all meetings of the Board and of the responsibilities; the Audit, Remuneration delivery of the agreed strategy, Committees on which they serve, and Nomination Committees. adding insight from their varied and to devote suffjcient time to the commercial backgrounds. The Committees ensure a strong Company’s afgairs to enable them to governance framework for decision Many either currently or have previously fulfil their duties as Directors. On the Governance making and each operates within served on other listed Boards, bringing rare occasion that a Director is unable defined terms of reference which difgerent views and perspectives to to attend a meeting, papers will still are reviewed annually by each Board operations and debates. be provided in advance and their Committee and the Board and which comments and apologies for absence The Senior Independent Director acts are available on written request are provided to the Board prior to as an intermediary to the Executive and on the Company’s website at the meeting. Directors for the Non Executive www.londonmetric.com. Directors and shareholders as statements Board changes Financial The Audit and Remuneration required. He is available to meet with Andrew Varley retired from the Board Committees are composed entirely of shareholders at their request to address and its Committees in September independent Non Executive Directors. concerns or, if other communication 2017 as announced last year. The Nomination Committee includes channels fail, to resolve queries raised. Andrew Livingston was appointed the Chairman who is not considered to No such requests were received from as a member of the Remuneration be independent but his attendance is shareholders in the year. Committee in July 2017 replacing permitted by the Code. Andrew Varley.
72 LondonMetric Property Plc Annual Report and Accounts 2018 Leadership continued On appointment Non Executive Independent advice Investor meetings Directors are advised of the likely time All Directors and Committees have commitment to fulfil the role. The ability access at all times to the advice and of individual Directors to allocate UK regional 22% Overseas 17% services of the Company Secretary, suffjcient time to discharge their who is responsible for ensuring that responsibilities is considered as part Board procedures are followed and o f the annual evaluation process led that governance regulations are by the Nomination Committee. complied with and high standards Site visit maintained. The Directors may, in The Board is satisfied that each of 7% By location the furtherance of their duties, take the Non Executive Directors devoted independent professional advice at the suffjcient time to the Company’s expense of the Company. None of the London business during the year and has 54% Directors sought such advice in capacity to continue to do so. the year. Non Executive Directors are encouraged to communicate directly Conflicts of interest and openly with the Executive Directors Directors are required and have a Generalist Specialist and senior management between institution 31% institution 28% duty to notify the Company of any scheduled Board meetings to explore potential conflicts of interest they may and challenge large and complex have. Any conflicts are recorded and transactions and as part of each reviewed at each Board meeting. Director’s contribution to the delivery There have been no conflicts of interest of strategy. By type noted this year. Broker of investor This ad hoc communication is often 5% Investor relations supplemented by site visits and Communication with investors remains Private provides further opportunity to mix wealth 36% a top priority of the Board who believes with senior management. that understanding the views of Information flow shareholders is key to the Company’s strategic direction and success. The Chairman, supported by the These meetings and roadshows seek Company Secretary, ensures that The Company places considerable to keep investors informed of the the Directors receive clear and timely emphasis on maintaining an Company’s performance and plans, information on all relevant matters. open dialogue with investors, in answer questions they may have and particular institutions and private understand their views. Comprehensive reports and briefing wealth managers and brokers papers are circulated one week prior Topics discussed include the through a comprehensive investor to Board and Committee meetings development and implementation relations programme. to give the Directors suffjcient time of strategy, performance, property to consider their content prior to the transactions, quality of underlying The Chief Executive and Finance meeting and to promote an informed occupiers, strength of the Company’s Director are the Company’s principal boardroom discussion and debate. income, debt structure and the real representatives and, along with estate market in general. the other Executive Directors and The Board papers contain market, the Head of Investor Relations, hold property, financial and risk updates Investor site visits meetings throughout the year to as well as other specific papers communicate the Company’s strategy Two investor site visits were arranged in relating to agenda items. and performance. These include results the year, at several of the Company’s The Board receives other ad hoc presentations, one to one meetings, distribution warehouses and papers of a transactional nature at group meetings, panel discussions, developments in: other times, circulated by email, for conferences and site visits. • Dagenham, occupied by their review and approval which are Eddie Stobart ratified at the next Board meeting. Investor meetings • Crawley and Croydon, where four The framework of investor relations In addition, the Chairmen of the sites were visited in total, three of is set around the financial reporting Audit and Remuneration Committees which are occupied by TNT, Barker calendar, specifically announcement communicate regularly and & Stonehouse and Tesco of half and full year results. In addition, independently with relevant stafg significant shareholder engagement and external advisors including the occurs outside these periods and Company’s external auditors and primarily consists of UK regional and remuneration advisors. overseas roadshows and responses to ad hoc requests for meetings.
73 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Investor activity Public communication Key shareholder events Our strategy During the financial year, the Company Shareholders are kept informed of the throughout the year met with over 200 shareholders, Company’s progress through results analysts and potential investors. statements and other announcements Q1 released through the London A breakdown by type of investor seen Stock Exchange. and location of meeting are shown • Full year 2017 results presentation in the charts opposite. Meetings were Company announcements are Our marketplace held predominantly in the UK with over made available on the website • Investor full year roadshow held 50% of investors seen in London. afgording all shareholders full access post results t o material information. • Site visit to Dagenham As the importance of retail/private wealth shareholders continues to The website is an important source • Regional investor meetings in grow, the Company maintained its of information for shareholders and Edinburgh and Leeds high level of roadshow activity in UK includes a comprehensive investor regions. Regional roadshows included relations section containing all Our business visits to Leeds, Birmingham, Edinburgh, RNS announcements, share price model Liverpool, Southampton, Chichester information, investor presentations, and Manchester. In total, private half year results and Annual Reports Q2 wealth meetings accounted for 36% available for downloading. of investors seen and the Company A live and on demand webcast of continues to place great importance • Annual General Meeting results and a CEO interview is posted Performance on engaging with its private of Shareholders twice a year. Individual shareholders review wealth shareholders. • US investor roadshow can raise questions directly with the 17% of investor meetings were held Company at any time through a facility • Investor meetings in Liverpool overseas in Holland, Canada and on the website. • Site visit to Crawley and Croydon the United States. The Company will Annual General Meeting continue to engage with overseas investors to broaden its investor Shareholders are encouraged to Responsible Business base further. participate in the Annual General Meeting of the Company, which The Company also presented at a provides a forum for communication number of conferences during the with both private and institutional Q3 year including participating on panel shareholders alike. The whole Board discussions organised by various brokers attends and is available to answer including Green Street, Wells Fargo, • Half year results presentation shareholder questions. Kempen and Societe Generale. • Half year investor roadshow Risk The Senior Independent Director is post results In addition, the Company met with available for shareholders to contact a number of corporate governance • Investor roadshow in if other channels of communication representatives from approximately London, Toronto, Edinburgh with the Company are not available ten of its main shareholders to update and Amsterdam or appropriate. them on corporate governance • Investor meeting on corporate Governance developments of the Company. The Annual Report is sent to all governance developments at shareholders at least 20 working days the Company Investor feedback before the AGM and details of the Investor feedback is presented to the resolutions to be proposed can be Board at scheduled meetings, together found in the Notice of Meeting on with published analyst comments. pages 148 to 151. Q4 Feedback received is very supportive Shareholders are able to lodge their statements Financial of the Company’s strategy, votes through the CREST system or by performance, management and returning the Proxy Card sent with the • Investor meetings in London, future direction. Annual Report. Birmingham, Leeds, Chichester, Southampton, Manchester and As part of its ongoing shareholder Details of the number of proxy New York engagement, the Company votes for, against and withheld for • Investor Responsible Business conducted its first biennial investor each resolution will be disclosed survey sent to major shareholders Responsible Business survey during at the meeting and in the AGM the year. The survey was sent to the RNS announcement. Company’s top shareholders covering half of the register. Further detail on the survey is contained on page 47.
������������������������ ���������������������������������� ��������������������������������� ��������������� 74 LondonMetric Property Plc Annual Report and Accounts 2018 Effectiveness Nomination Committee report Patrick Vaughan Chairman, Nomination Committee Membership & Attendance I am pleased to present the Nomination Tenure Meetings Member Date appointed (years) attended Committee’s report for the year to Patrick Vaughan 1/11/2012 5 3 (3) Alec Pelmore 25/1/2013 5 3 (3) Philip Watson 25/1/2013 5 3 (3) This year the Committee’s main focus James Dean 14/7/2016 2 3 (3) has been the composition and diversity Bracketed numbers indicate the number of meetings the member was eligible to attend. Tenure is measured from date of appointment to the Committee and as at 31 March 2018, rounded to the nearest whole year. of the Board and succession planning Highlights this year for the Non Executive Directors which led to the appointment in • Considered Board composition, succession and diversity • Led the appointment process for a new Non Executive Director and recommended Suzanne Avery to the Board and Audit Committee • Recommended the extension of the Chairman’s appointment for a further three years, with a six month mutual break option • Led external Board and Committee performance evaluation • Recommended the election and re-election of Directors t o the Board at the AGM Responsibilities of the Committee The principal responsibilities of the Committee are to: • Review and evaluate the size, structure and composition of the Board and its Committees, including the diversity and balance of skills, knowledge and experience of each • Make recommendations to the Board regarding Board and Committee membership changes • Consider succession planning for Directors and other senior executives • Lead the process for new Board and Committee appointments to fill Board vacancies • Promote the Company’s policy on diversity at Board level and in the wider organisation • Lead the Board and Committee performance evaluation exercise • Assess the time commitment required from Non Executive Directors • Consider the annual election and re-election of Directors to the Board
75 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Chairman’s Introduction It is responsible for identifying and During the year the Committee Our strategy recommending candidates to fill Board continued its review of Board It has been another busy year for the vacancies and leads the selection composition and succession in light Committee, whose main focus has process ensuring it is formal, rigorous of Non Executive Directors’ tenure been the composition and diversity and transparent. and diversity aspirations. o f the Board. The Committee drives succession This led to the appointment in March In March 2018, following a rigorous planning for Directors and other 2018 of Suzanne Avery as a Non recruitment process, we were Our marketplace senior executive positions and Executive Director of the Board and delighted to welcome Suzanne ensures that the refreshment process member of the Audit Committee. Avery to the Board and Audit is properly planned and managed Committee. The appointment improves The remaining balance of to maintain stability and mitigate the balance of Board skills and independent Non Executive Directors business disruption. gender diversity. continues to meet the requirements of the Code and proposed changes Meetings and activities Suzanne brings complementary recommended by the FRC and has and relevant financial, banking, Our business The Committee met three times the correct balance of skills and sustainability and real estate skills as model during the year to consider and make knowledge to lead the Company former Managing Director of Real recommendations to the Board in going forward. Estate Finance Group and Sustainability respect of: at RBS. The Committee also reappointed • The appointment and Patrick Vaughan for a further three year The appointment and induction reappointment of Non Executive term with a six month mutual break process for Suzanne are discussed Directors to the Board and Performance option, as they value his leadership, in detail on page 77. its Committees review contribution and commitment to • The externally led performance The Committee also led the the business. evaluation of the Board and Company’s three yearly externally The Board is committed to a phased its Committees facilitated evaluation of Board and refreshment of the Non Executive Committee performance in the year. • The election and re-election of Directors and this will be considered Directors at the forthcoming AGM The Committee concluded following further next year by the Committee as Responsible • Its own terms of reference Business the review that the Board continued the length of service of some members to operate as an efgective and and Committee chairs approaches Succession planning cohesive team, led by knowledgeable the best practice limit. The Committee continues to focus and respected Executive Directors who The Executive Directors consider on succession planning and talent created an inclusive and collegiate succession planning below Board development at Board and senior atmosphere of transparency and trust. level and are committed to nurturing, management levels to ensure there is Further details of the Board evaluation developing and retaining high a pipeline of experienced and suitable Risk findings and recommendations can performing individuals to ensure people in the organisation to support be found on pages 78 to 79. a clear talent pipeline of future the Company’s longer term plans. leaders exists for Board and senior Composition of the Committee It ensures that the ongoing refreshment management positions. of Board members is properly Throughout the year the Committee Stafg appraisals are undertaken on planned and managed to maintain comprised of four Non Executive Governance an annual basis and provide a forum stability in its operations and avoid Directors and was chaired by Patrick to discuss targets, progress and business disruption. Vaughan as set out in the table on future prospects. page 74. In reviewing succession planning for Although there are no immediate both Executive and Non Executive Role of the Committee vacancies at Board level and Directors, the Committee considers The Committee’s role is to ensure the execution of the Company’s strategy the leadership needs of the Company Board and its Committees continue is not dependent on any one individual, and the balance and diversity of statements Financial to have the right balance of skills, we recognise the need to develop our Board skills and experience It is mindful experience and knowledge to internal talent and for contingency of the Code requirements that a independently carry out their duties plans for unforeseen absences. rigorous review of any Non Executive and provide strong and efgective appointment whose term exceeds six leadership to enable the Company to years be undertaken. deliver its strategy, having due regard to the interest of its shareholders and other key stakeholders and to the benefits of diversity.
76 LondonMetric Property Plc Annual Report and Accounts 2018 Effectiveness continued Diversity Although it does not deem quotas Gender Diversity appropriate given the size of the The Board recognises the importance Company and has not set targets, of a diverse and balanced Board there is an ongoing commitment to and the benefits this brings to Female 42% strengthen female representation the organisation in terms of skills, at Board level and within the senior knowledge and experience. management team. We will continue The Board strives to operate in a to monitor carefully our diversity Employees working environment of equal going forward. opportunity and promotes a culture Ultimately, all appointments to the of mutual respect and inclusion Male 58% Board and senior management throughout the organisation. team are based on merit as an Diversity on the Board, and in senior appointment on any other basis would teams, brings wider perspectives and not be in the best long term interests of enables more efgective discussions and the Company. better decision-making. The Board acknowledges the Female 25% During the year, we appointed one challenges faced by the real estate female Non Executive Director and two sector in improving gender diversity members of stafg, one male and one as recruitment is dependent on the Senior female reinforcing our commitment. availability of suitable candidates and management there continues to be fewer female Diversity is promoted at every level applications to join the sector. of recruitment and across a range of Male 75% criteria including skills, knowledge, The Board supports initiatives to experience, gender, age, disability, promote gender diversity in the real sexual orientation, educational estate sector and during the year has background and ethnicity. However, become a member of the Real Estate over the last five years stafg numbers Balance group whose objective is to have fallen by nearly 30% which, along Female 18% improve gender diversity at Board and with high retention rates in key roles, senior management level by promoting has reduced our ability to shift the and supporting the development of a diversity balance. We are proud of our female talent pipeline. low level of stafg turnover which signifies Directors Gender diversity at Board, senior a loyal and content workforce, but management and in the Company recognise that this constrains the pace Male 82% as a whole is reflected in the charts of change. opposite. At the date of this report, During the year the Chairman, Finance female representation at Board level Director and senior managers met was 18%, up from 9% last year. with members of the 30% Club Investor All charts reflect the composition of the The Board is also mindful of the group to discuss the importance of Company and Board as at 31 March 2018 Parker Review regarding ethnic and diversity considerations for Board cultural diversity on UK boards and its and executive appointments and recommendation that each FTSE 250 succession planning. board should have at least one director The Chairman confirmed the from an ethnic minority background Board’s support for greater female by 2024. representation on listed company The Committee will take this into boards and the aspirational targets consideration when making o f the Hampton Alexander review and future appointments. supports the 30% Club which aims to achieve a minimum of 30% of women Further information on the Company’s on boards and senior leadership teams commitment to developing and by 2020. supporting employees and to promoting diversity and inclusion at LondonMetric is contained on page 45.
77 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Board appointment Induction Programme Our strategy Following the review of Board composition and refreshment, and Key induction events included with particular focus on diversity, the the following: Committee began the search for a • One to one meetings with the new Non Executive Director. In the Executive Committee, Company past, the Company has employed Our marketplace Secretary and senior managers search agencies to assist with Board from property and finance to appointments, however having understand the day to day identified the required skills and operations of the business, risk attributes, it decided to explore internal appetite and culture recommendations which had the Suzanne Avery right cultural fit in the first instance and • Provision of past Board and Non Executive Director and member to only approach a search firm to Committee papers, minutes and of the Audit Committee facilitate the search if no candidates finance reports Our business could be identified. Estimated cost model • Guidance and information A comprehensive induction savings of £50,000 were made by not on annual Board timetables, programme was arranged for using a third party search agency. governance processes and Suzanne Avery, who joined as a new regulatory procedures including All Directors were asked to nominate Non Executive Director in the year. share dealing candidates, with a strong preference for a female candidate and with • One to one meeting with the Performance financial experience to improve Company’s external audit partner review the gender diversity and relevant • Property tours to be arranged skills of the Board. However it was acknowledged that ultimately the search should be for the best Professional development Stafg are encouraged to develop and candidate irrespective of gender. broaden their experience and skills Oversight of the training needs of Responsible A shortlist of four candidates was and to engage with Board members individual Directors is the responsibility Business created and reviewed by the by way of presentations, property of the Nomination Committee Nomination Committee. Suzanne Avery tours or one to one discussions on Chairman. However, Directors are also was chosen following an extensive specific issues. expected to identify and develop their interview process including the own individual training needs, skills Further details of employee Chairman, Executive and Non and knowledge and ensure they are development including sponsorship Executive Directors, as the preferred adequately informed about the Group’s of MBAs and participation in Young appointee given her personal strategy, business and responsibilities. Property Professionals groups can Risk attributes, values, skills and experience. They are encouraged to attend relevant be found in the People section of seminars and conferences and receive Suzanne brings complementary the Responsible Business review technical update material from advisors and relevant financial, banking, o n page 45. and are ofgered training and guidance sustainability and real estate skills as Time commitment at the Company’s expense. former Managing Director of Real Governance Estate Finance Group and Sustainability The Committee considers the time During the year, training and at RBS. commitment required of the Directors information updates were provided and other external appointments they through presentations at Board Board induction have. Before taking on any additional and Committee meetings by senior On appointment, the Company external commitments Directors must management and the external arranges a tailored induction seek the prior agreement of the Board auditors. Specific briefing papers were programme for all new Directors to help to ensure possible conflicts of interest provided on the Group’s hedging statements them develop an understanding of the are identified and to confirm they Financial strategy and interest rate swap business including its culture, strategy, will continue to have suffjcient time recoupon, refinancing of the Helaba governance structure, stakeholders, available to devote to the business and unsecured debt facilities, fire risk portfolio, finances, risks and controls. of the Company and fulfil their duties. assessments, Responsible Business The induction includes the provision of update, stakeholder engagement and Executive Directors are required a detailed Company information pack, the likely impact of new accounting to devote almost all their working site visits, introductions and one to one standards on revenue, financial time to their executive role at meetings with senior management instruments and leases. LondonMetric although certain and advisors. external appointments are permitted. Non Executive Directors are Details of the Induction Programme All Directors are expected to attend encouraged to familiarise themselves for Suzanne Avery is given in the case all meetings of the Board and of the with the Group’s business through study above. Committees on which they serve regular communications with the and the Annual General Meeting. Executive Directors and senior management between formal meetings and site visits.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Effectiveness continued Board performance and evaluation Outcome of 2018 externally facilitated performance evaluation The Board committed to undertaking an external review of its performance The key findings and recommendations from the 2018 external Board and that of its Committees. evaluation review are listed below. The Board discussed and agreed the recommendations and progress will be reported at future meetings. The Nomination Committee appointed Independent Audit Limited (IAL) in Key findings December to undertake this review following a tender process in which • Most Board members have worked together, in various guises, for a number three firms were shortlisted. IAL has no of years and Directors are engaged and passionate about the business connection with the Company. • The Board benefits from a knowledgeable group of Non Executive Directors The process involved a comprehensive who provide relevant and complementary skills in property, investment, review of Board, Committee and finance and retail other financial documents and reports followed by a series of one • There is a high calibre and motivated executive team, led by a respected to one meetings with the Directors, Chief Executive who has the confidence of the Non Executive Directors Executive Committee and Company Secretary and the observation of a full • The Non Executive Chairman is greatly respected and praised by Board meeting. his colleagues for his skill in running meetings, creating an inclusive and collegiate atmosphere and for his extensive experience and A detailed report of IAL’s findings was business acumen sent to the Chairman and presented at the Board meeting in March 2018. • The relationship between the Chairman and Chief Executive is particularly IAL discussed their findings, proposals strong, supportive and mutually respectful. Together they promote a culture and implementation plans with of trust and openness and are not afraid to bring both good and bad news the Board. to the Board. Non Executive Directors show a high degree of confidence i n the Executive Directors Overall the results were extremely positive. The review concluded • There is notably frequent interaction between all Directors outside of the that the Board has many strengths boardroom, maintaining a culture of ongoing dialogue and continues to operate to a high standard. • The Executive Directors keep the Non Executives informed of developments and the Non Executives provide frequent input and challenge in one to The Chairman was praised for one meetings creating an inclusive and collegiate atmosphere and for his experience, Recommendations business acumen and judgement. The Directors agreed that the • To facilitate a more balanced debate in the boardroom, variations to Chairman and Chief Executive had a the format, agenda, seating arrangements, attendees and location very strong, supportive and respectful of meetings could be explored. The Board is encouraged to foster working relationship and promoted a more debate in the boardroom to complement the extensive debate culture of transparency and trust. among individuals Not withstanding these strengths, the • Consider holding one ofg site meeting each year, ensuring the length, review guarded against complacency format and location are conducive to good discussions and recommended that the Directors continued to improve its processes. • Encourage Non Executive Directors to stay in touch with the wider organisation by arranging more meetings with senior managers and The Board welcomed IAL’s mentoring those senior managers identified as having high potential recommendations for continued development to its practices • Consider if more could be done to help the Non Executive Directors have and procedures and will contact with a range of stakeholders, for instance by attending more site continue the implementation of visits to customers those recommendations.
79 LondonMetric Property Plc Annual Report and Accounts 2018 Overview Progress against 2017 targets Our strategy Progress against the recommendations from last year’s internally facilitated review is set out below. Recommendation Progress Our marketplace Consideration of • Review of Board composition undertaken in the Board size, skills and year leading to the appointment of a second experience given female No n Executive Director with financial, changes to Code banking, sustainability and real estate experience to complement the existing skill set • After consideration and debate, it was decided not to reduce the complement of Non Executive Directors at present as all members of the Board Our business continue to make a valuable individual contribution, model bringing complementary skills and knowledge Continued focus on • Recruitment of Suzanne Avery as a Non Executive Board refreshment Director recognised the benefits of diversity and and diversity to complementary skill sets complement culture Performance review Continue to promote • 18% of Board members are female (up from 9% diversity at all levels last year) • 25% of senior management positions are filled by women Succession planning • The Chairman’s letter of appointment has been Responsible for the Chairman extended for a further three years to 31 March 2021 Business with a six month mutual break option More time devoted • One Board meeting in the year devoted to strategy to strategy debate with presentations from two senior managers The review of individual Directors Re-election of Directors Risk was outside the scope of the Following the Board evaluation and external review. appraisal process the Committee concluded that each of the Directors The Chairman will undertake one seeking election and re-election to one meetings with each of the continues to make an efgective Directors and the Senior Independent contribution to the Board and has Governance Director will lead a review of the the necessary skills, knowledge, Chairman’s performance in the experience and time to enable them coming year. to discharge their duties properly The Company is committed to in the coming year. undertaking a further external Therefore the Board, following review in three years’ time with internal the advice of the Committee, reviews in the intervening years. statements Financial recommends the election and re-election of all Directors at the forthcoming AGM. Patrick Vaughan Chairman of the Nomination Committee 30 May 2018
�������������������������������� �� �������������� ������������������������������������������ �������������������������������������� ��������������� ���������������������������������� LondonMetric Property Plc Annual Report and Accounts 2018 Audit Committee report Rosalyn Wilton Chairman, Audit Committee Membership & Attendance Tenure Meetings Member Date appointed (years) attended Committee’s report for the year to Rosalyn Wilton 25/3/2014 4 5 (5) Andrew Livingston 31/5/2016 2 5 (5) Andrew Varley (retired 30 September 2017) 25/1/2013 n/a 2 (2) Alec Pelmore 25/1/2013 5 5 (5) oversight and assurance role, assisting Suzanne Avery 22/3/2018 0 0 (0) the Board and ensuring shareholder and Bracketed numbers indicate the number of meetings the member was eligible to attend. Tenure is measured from date of appointment to the Committee and as at 31 March 2018, rounded to the nearest whole year. by monitoring the processes that support Highlights this year • Review of significant issues, accounting judgements and estimates including six monthly property valuations • Ongoing review of risk management and internal control processes including consideration of Brexit and cyber risk • Review of going concern, viability and longer term prospects o f the Company • Considered likely impact of adopting new IFRSs on revenue, financial instruments and leasing • Assessed the Directors’ duty under S172 Companies Act 2016 to promote the success of the Company for the benefit of its members as a whole whilst having regard to wider stakeholders • Oversight of the efgectiveness of the audit process • External evaluation of its own performance and review of its terms of reference Responsibilities of the Committee • Monitors the integrity of the financial reporting process and scrutinises the full and half year financial statements • Considers and challenges the key financial judgements made by management • Reviews the risk management framework and ensures risks are carefully identified, assessed and mitigated • Reviews the performance, independence and efgectiveness of the external auditor and audit process • Reviews the viability statement and going concern basis of preparation • Considers whether the Annual Report is ‘fair, balanced and understandable’
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Chairman’s introduction previous partner who was no longer financial experience as a former Our strategy considered independent and retired. Chairman of the Risk Committee at The role of the Audit Committee is to AXA UK Limited. It considers that the review and report to the Board on The Committee has considered the Committee as a whole has the relevant financial reporting, internal control and provisions of the Code concerning property and financial competence risk management and the external going concern and longer term to enable it to discharge its duties and audit process. viability and has advised the Board on the appointment of Suzanne Avery the statements made in the Report of This year we welcomed Suzanne Our marketplace brings complementary financial, the Directors on page 106 and in the Avery to th e Committee. Suzanne has banking, sustainability and real estate Risk management section of this report extensive financial, banking and experience through the senior positions on page 60. property experience, serving previously she has held. as Managing Director of Real Estate We have also scrutinised the processes Meetings Finance Group and Sustainability in place to ensure that, taken as at RBS, and brings diversity and a a whole, the Annual Report is fair, The Committee follows an annual fresh approach. balanced and understandable and programme to ensure it gives full Our business have advised the Board to make its consideration to matters of particular The Committee has continued to model statement on page 107. Our review importance and its terms of reference. focus on risk management and has process is described on page 87. undertaken its annual comprehensive The Committee met five times last review of principal risks and the internal During the year the Company received year, with meetings aligned to the control framework as discussed on a letter from the Financial Reporting Company’s financial reporting page 82. We are mindful of the need Council (FRC) concerning its review timetable. Meetings are attended Performance to ensure that emerging and evolving of the 2017 Annual Report. The object by the Committee members and, review risks are considered. This year we of the FRC’s review was not to verify by invitation, the Group’s external considered specific risks relating to that the information in the Annual auditor, independent property cyber security, political uncertainty and Report was correct but rather to valuers (CBRE Ltd and Savills Advisory the impact of Brexit on the Company. consider compliance with reporting Services Limited), the Finance I can confirm that no significant requirements. I am very pleased to Director and senior management. weaknesses in the control processes report that no questions or queries were Time is allocated for the Committee Responsible were identified this year. raised. However a few improvements to to meet the external auditor and Business disclosures on alternative performance property valuers independently of This year, we considered the Directors’ measures and IFRS 13 fair value management. In addition to formal duty to its wider stakeholders under measurements were noted and have Committee meetings, the Chairman S172 Companies Act 2016 having been taken into consideration in the has regular contact and meetings received a report from the Finance preparation and review of this year’s with the Audit Partner and Finance Director. The Company has undertaken Annual Report. Director. This is considered more helpful its first investor Responsible Business and and efgective than waiting for the employee satisfaction surveys along All Committee members will be Risk scheduled meetings. with its biennial tenant satisfaction attending this year’s Annual General survey. It has introduced flexible Meeting and engagement with and The May and November meetings are working arrangements for stafg, feedback from investors is welcomed scheduled to precede the approval increasing its focus and commitment to and encouraged. and issue of the full and half year its wider stakeholders. financial reports. Separate meetings Governance Membership are held with the Company’s The Committee challenged the During the year the Committee property valuers to challenge significant financial judgements made comprised of four Non Executive the valuation process and review by management, including those Directors until Andrew Varley retired their independence. At the March concerning the largest balance sheet on 30 September 2017, as previously meeting, the Committee reviewed item being the valuation of investment announced. For the remainder of the risk management and internal control property. Our review is described on year until March 2018 it comprised processes and considered the year pages 83 to 85. statements the remaining three Non Executive end audit plan. Financial We received a report from the Finance Directors, chaired by Rosalyn Wilton. The Chairman of the Committee Director on the potential impact of Suzanne Avery was appointed to the reports to the Board on the matters new accounting standards on revenue, Board and Committee on 22 March considered and conclusions reached financial instruments and leasing and 2018. Members have no day to day after each Committee meeting. are satisfied that management are involvement with the Company or links fully prepared to comply with the with the external auditor. The Committee is satisfied that it new standards. receives suffjcient, reliable and Biographies of the Committee timely information and support from We have also considered the members which set out the relevant management and the Company’s independence and efgectiveness skills, knowledge and sector external auditor to allow it to fulfil of the external audit process and experience they bring can be found on its obligations. have recommended that Deloitte pages 64 and 65. be reappointed at the AGM in July. The Board is satisfied that Rosalyn This year we welcome a new lead audit Wilton brings recent and relevant partner, Georgina Robb, to replace the
�� ������������������������ LondonMetric Property Plc Annual Report and Accounts 2018 Activities during 2018 During the year, the work undertaken by the Committee has included the consideration, review and approval o f the following: Financial reporting Risk management External audit • Interim and year end results • Annual assessment of the Group’s • Scope of the external audit plan announcement and Annual Report principal risks including Brexit and • The independence and objectivity • Accounting treatment of significant cyber risk and comprehensive of Deloitte LLP transactions and areas of review of the risk register • Performance of the external judgement which could have a • Risk appetite and dashboard auditor and efgectiveness of the material impact on the financial reviewed at each Board meeting audit process statements • The adequacy and efgectiveness of • Evaluation of key audit findings • Developments in new accounting the Group’s internal control and risk • Auditor’s fee proposal standards on revenue, financial management systems • Reappointment of external auditor instruments and leasing • The appropriateness of the going • External audit tenure • Processes undertaken to ensure that concern assumption and the level • Review of non audit services and the financial statements are fair, of stress testing undertaken ratio of fees balanced and understandable • The Viability statement and longer • Directors’ duty under S172 term forecast Companies Act 2016 • Audit Committee report Property valuation Other • The property valuation process and • Committee’s composition and member changes the appropriateness of the interim • Annual review of Committee’s own terms of reference and constitution and year end individual valuations • External performance evaluation • The independence and • Annual review of the need for an internal audit function competence of the external valuers • The Group’s whistle blowing arrangements and anti-bribery and corruption policies Risk management The system is designed to give the Board The Audit Committee carries out an and internal controls confidence that the risks are managed annual review of the risk register and or mitigated as far as possible. However, reports its findings to the Board. The Company has a culture of it should be noted that no system can risk awareness and management The risk register was last updated in eliminate the risk of failure to achieve embedded into its decision March 2018 and presented to the Audit the Company’s objectives entirely and making processes. Committee at their planning meeting. can only provide reasonable but not The Board is ultimately responsible absolute assurance against material for establishing and maintaining misstatement or loss. Risk register the Company’s framework of risk The Board undertakes a robust management and internal control and The risk register identifies the assessment of the principal and for determining the nature and extent following for each key strategic, emerging risks facing the business at of the principal risks which may afgect economic, transactional and each meeting, including those that its strategic objectives. It recognises financial risk facing the business: could threaten the business model, that risk is inherent in running the future performance, solvency and • Significance and probability of business and understands that efgective liquidity. It has adopted a risk dashboard each risk risk management is critical to the as a standing agenda item which • Controls and safeguards in place decision making process and ultimate highlights changes in the Company’s to manage and minimise each risk success of the Company. exposure to current and emerging risks • Movements in the Group’s The risk framework and ongoing and the mitigation thereof. exposure to the risk since the processes in place to identify, evaluate The Board has delegated responsibility last review and manage the principal risks and for reviewing the efgectiveness of the risk • Allocated owner of the risk and uncertainties facing the Group are management framework and internal management of safeguards described in the Risk management control environment and compliance section on pages 48 to 59. with the Code to the Audit Committee.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview A key part of the risk management Significant financial judgements Management confirmed that they Our strategy process is the identification were not aware of any material The Committee monitors the integrity and assessment of risks which misstatements and the auditor of the financial information published are the responsibility of the confirmed they had not found any in the interim and annual statements Executive Committee assisted by material misstatements in the course and considers the extent to which senior management. of their work. suitable accounting policies have been adopted, consistently applied Short reporting lines and operating After reviewing reports from Our marketplace and disclosed. from one offjce ensures the Executive management and following its Directors have close involvement in discussions with the auditor and It pays particular attention to day to day matters allowing early valuers, the Committee is satisfied that matters it considers to be important identification of risks and development the key financial judgements have by virtue of their size, complexity, of mitigation strategies. been appropriately and adequately level of judgement and potential addressed by the Executive Directors, impact on the financial statements The Audit Committee monitors and reviewed by the external auditor and and remuneration. reviews the efgectiveness of the Our business reported in these financial statements. Group’s internal controls including all The significant matters considered by model material, financial, operational and The Committee is also satisfied that the the Committee, discussed with the compliance controls. processes used to determine the value external auditor and addressed during of the assets and liabilities have been the year are set out in the table on It receives an annual internal control appropriately reviewed, challenged pages 84 to 85. evaluation questionnaire which is and are suffjciently robust. completed by senior management Further details can be found in note 1 Performance and other reports provided by the The significant matters considered by to the financial statements. review external auditor. the Committee during the year are The Committee has considered a set out in the table on pages 84 to 85 Based on its review and assessment, the number of other judgements made should be read in conjunction with Audit Committee is satisfied that there by management, none of which were the Independent Auditor’s report on are no significant weaknesses in the material in the context of the Group’s pages 109 to 113 and the significant Group’s internal control structure and results or net assets. accounting policies disclosed in an efgective risk management system Responsible note 1 to the financial statements on Business These included judgements is in place, and has reported these page 118. concerning the recoverability of findings to the Board. financial assets, the valuation of It concluded that risks were properly derivative instruments, the disclosure of categorised, understood and acted alternative performance measures and upon as necessary. compliance with REIT legislation. Internal control framework Risk The key elements of the Group’s internal control framework are as follows: • A defined schedule of matters reserved for the Board’s attention • A documented appraisal and approval process for all significant Governance capital expenditure • A comprehensive and robust system of financial budgeting, forecasting and reporting • Short term cash flow forecasting that is considered weekly by the Executive Committee • An integrated financial and property management system statements • An organisational structure with clearly defined roles, responsibilities and Financial limit s of authority that facilitates efgective and effjcient decision making • Close involvement of the Executive Directors in day to day operations including regular meetings with senior management on all operational aspects of the business • Disciplined monthly meetings of the Executive, Investment, Asset Management and Finance Committees • The maintenance of a risk register and risk dashboard highlighting movements in principal and emerging risks and mitigation strategies • A formal whistle blowing policy
�� ������������������������ LondonMetric Property Plc Annual Report and Accounts 2018 Significant financial judgements Property valuations Area of focus Reporting Issue The Committee’s role The property valuation is a significant Property valuations are inherently All of the Group’s investment properties part of the Group’s reported subjective as they are based on and those held in joint ventures are performance being the largest assumptions and judgements made externally valued by two independent line item on the balance sheet at by the external valuers which are property valuers, CBRE and Savills. £1,842.0 million including share of underpinned by recent market The Committee met twice during the joint ventures. transactions and may not prove year with the property valuers, as part to be accurate. It is a key determinant of the Group’s of the interim and year end reporting profitability, net asset value, total These include future rental growth process, to challenge and assess the property return, and drives an element and yield assumptions, committed integrity of the valuation process, of variable remuneration and is expenditure on developments, letting methodologies and outcomes. therefore a key area of focus. and vacancy assumptions, rent free The key judgements applied to each periods and lease incentives. It is an ongoing business risk, as property valuation and any issues raised reflected within Risk management with management were considered on pages 56 to 57 of this report. and discussed, to ensure that undue influence had not been placed on For further details on property the valuation process and the valuers valuations refer to notes 1 and 9 remained independent and objective. of the financial statements. Revenue recognition Area of focus Reporting Issue The Committee’s role Total revenue for the year, which There is a risk of overstatement or The Committee received reports from primarily consists of rental income deferral of income in order to meet management and the external auditor generated from the investment performance and remuneration targets on the timing of revenue recognition property portfolio, was £92.7 million or expectations. for property and lease transactions including share of joint ventures. completing in the year, lease incentives Complex items include the accounting and surrender payments. Consistency Certain transactions are non standard for rent free periods and capital of accounting treatment with previous in nature and include unusual or incentives, which vary between years was considered, including in complex terms requiring management lease contracts and are considered relation to the following: to make judgements as to whether, when property is acquired, sold or as and to what extent, revenue should developments complete as well as be recognised in the year. when existing leases are regeared. Significant transactions Area of focus Reporting Issue The Committee’s role During the year, the Group transacted Some transactions were large and/ Significant property acquisitions on £636.5 million of property or complex in nature and required and disposals were reviewed by the acquisitions and sales, as discussed in management to make judgements Committee to the extent that there detail in the Property review on pages when considering the appropriate were unusual terms and conditions 26 to 33. accounting treatment including or judgement in relation to timing. how and when a transaction should The Committee, in conjunction with be recognised and the fair value of the external auditor, received and the consideration. challenged management’s accounting Complexities considered this year proposals in relation to: included corporate acquisitions and sales, rental top up payments, conditionality and deferred completion arrangements.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Our strategy Conclusion Our marketplace Supporting market evidence was The Committee challenged yield and ERV The Committee confirmed to the provided to enable the Committee to assumptions and discussed the impact Board that the external property benchmark assets and conclude that the on values of committed expenditure valuation included within the financial assumptions applied were appropriate. on developments, letting assumptions, statements had been carried out vacant space, rent free periods and appropriately, independently This year the Committee probed and lease incentives. and in accordance with industry debated any valuations which required valuation standards. a greater level of judgement or particular As part of their audit work, Deloitte issues with the valuers, including property use valuation specialists to assess and Our business under development and valuation challenge the valuation approach, model movements that were not broadly in line assumptions and judgements. They with the IPD benchmark. meet independently with the valuers and report their findings and conclusions to the Committee. Performance review Responsible Business Conclusion • The timing of recognising rental income • The accounting for surrender premium The Committee considered the arising on developments at Stoke, received at Leicester options available, challenged Crawley, Huyton, Tonbridge and the judgements made and were Launceston that completed in the year satisfied that revenue had been appropriately recognised in the • The accounting for rent free periods and Risk financial statements. lease inducements including at Speke, Coventry and Launceston Governance Conclusion statements Financial • The corporate acquisition of • The timing of recognition of acquisitions The Committee concurred with the 1 4 distribution assets for £117 million and disposals based on the transfer approach adopted by management of risks and rewards of ownership, in each case. • The corporate disposals of a retail park including the disposal of the Morrisons in Milford Haven and an offjce in Marlow store at Loughborough which for £84 million exchanged before the year end with All transactions were considered in a deferred completion substance to be property acquisitions and disposals and not business combinations under IFRS 3
������������������������ �� LondonMetric Property Plc Annual Report and Accounts 2018 External audit Independence Non audit services The Committee recognises the Deloitte LLP was appointed as importance of auditor objectivity and external auditor following a formal The Company’s policy on non audit independence and understands that tender process in 2013. Current UK services stipulates that they are this could be compromised by the regulations require rotation of the assessed on a case by case basis by provision of non audit services. lead audit partner every five years, a the Executive Directors who observe formal tender of the auditor every ten th e following guidelines: All taxation services and remuneration years and a change of auditor every advice is provided separately by • Pre approval of fees by the 20 years. PwC and corporate due diligence Executive Directors up to a limit is undertaken by BDO LLP. This year A new lead partner, Georgina of £100,000 or referral to the BDO LLP has also been appointed Robb, was appointed following the Audit Committee for review to undertake the external audit of conclusion of last year’s audit during and approval a number of the Group’s subsidiary which she shadowed the team and • Proposed arrangements to company accounts. former partner. maintain auditor independence However, there may be certain Oversight • Confirmation from the circumstances where, due to Deloitte’s Deloitte presented their audit plan for auditors that they are expertise and knowledge of the the year at the planning meeting in acting independently Company or real estate sector, it is March. The key audit risks and area of • Certain services are prohibited appropriate for them to undertake non judgement were highlighted and the from being undertaken by the audit work. level of audit materiality agreed. external auditors including The table below sets out the fees bookkeeping, preparing Deloitte presented detailed reports payable to Deloitte for each of the past financial statements, design of their findings to the Committee three years. The three year average and implementation of financial before the interim and full year results. ratio of non audit fees (including the information systems, valuation, The Committee questioned and cost of the interim review) to audit remuneration and legal services challenged the work undertaken and fees is less than 20%, supporting the the key assumptions made in reaching Committee’s conclusion that Deloitte their conclusions. Having undertaken its review, in the remains independent and that the Efgectiveness opinion of the Audit Committee, the level on non audit fees is not material. 2018 audit was appropriately planned, The Committee has assessed the Deloitte has confirmed to the executed and of a high quality. performance, independence, Audit Committee that they remain objectivity and fees of the external There continues to be a good working independent and have maintained auditor through discussions with relationship between management internal safeguards to ensure the the Finance Director and senior and Deloitte, who remain independent objectivity of the engagement partner management team and through a and objective. and audit stafg is not impaired. review of the audit deliverables. They have also confirmed that they In making its assessment, the have internal procedures in place to Committee considers the qualifications, identify any aspects of non audit work expertise and resources of the audit which could compromise their role as partner and team as well as the quality auditors and to ensure the objectivity of and timeliness of the audit deliverables. their audit report. It reviewed the extent to which the audit plan was met, the level Audit and non audit fees to Deloitte of independent challenge and scrutiny applied to the audit and 2018 2017 2016 Year to 31 March £000 £000 £000 the depth of understanding of key accounting judgements. Audit fees 115 153 153 Review of interim results 27 26 26 It considered the interaction with and feedback from senior management Other non audit fees 2 – – on the audit process, focusing on the Total 144 179 179 early identification and resolution Ratio of non audit fees (including interim review) of issues and judgements and the to audit fees 25% 17% 17% quality and timely provision of audit clearance reports for review. The results Audit fees paid to the external auditor in respect of joint ventures totalled £47,000 at share of the audit debrief meeting held (2017: £17,000 at share). between senior management and the audit team are relayed to the Audit Committee along with any areas identified for improvement.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Auditor reappointment Following their review, the Committee • The report was written in Our strategy was satisfied that the going concern straightforward language and The external audit was last tendered basis of preparation remained without unnecessary repetition in 2013 and in accordance with the appropriate and recommended the current regulation the Company is • The use of any alternative Viability statement be approved by required to re-tender the audit at least performance measures had the Board. every 10 years. The Committee believes been adequately explained Deloitte remains efgective in its role The Board’s confirmation on going and reconciled to the financial Our marketplace and has recommended to the Board concern is set out on page 106 and statements and had not been that they be appointed for another its Viability Statement is set out on given more prominence than a year. A resolution to this efgect will be pag e 60. corresponding measure under IFRS proposed at the AGM in July. The Audit Committee is satisfied Fair, balanced and understandable There are no immediate plans to re- that the Annual Report met At the request of the Board, the Audit tender the audit. However, given that this requirement. Committee considered whether the 2019 will be Deloitte’s sixth consecutive Our business 2018 Annual Report was fair, balanced Committee efgectiveness year in offjce, the Committee will model and understandable and whether it consider whether to re-tender the audit During the year the Board, led by the provided the necessary information over the next two financial years. Nomination Committee, carried out for shareholders to assess the Group’s an externally facilitated evaluation The Company has complied with position, performance, business model of its performance and that of the provisions of the Statutory Audit and strategy. its Committees. Services for Large Companies Market In reaching this decision the Performance Investigation (Mandatory Use of The Directors felt the Audit Committee Committee received a report from the review Competitive Tender Processes and continued to run smoothly, at a high Finance Director on the procedures in Audit Committee Responsibilities) Order standard and was very well supported place and adopted by management 2014 during the year. by the Finance Director, senior finance in the preparation of the Annual team and the external auditors. Internal audit Report, which, as in previous years, included the following: The Chairman was commended The requirement for a dedicated for her ability to probe and provide Responsible internal audit function was reviewed • The establishment of a team of senior Business the appropriate level of challenge by the Audit Committee during the managers drawn from finance, and scrutiny. year and was not felt to be necessary investor relations and property with or appropriate given the size and clear responsibilities for preparation Terms of reference relatively simple structure of the Group, and review of relevant sections of The Committee considers its own terms the close day to day involvement of the report of reference on an annual basis taking the Executive Directors and the internal • Regular team meetings were held into account changes to legislation. control procedures in place. This is kept during the drafting stages to ensure Risk under regular review. They were last reviewed and updated consistency of tone and message, in March 2018 and can be found on the balanced content and appropriate Going concern and viability Company’s website. linking of the various sections Although the statements on going • Regulatory and technical updates concern and viability are a matter for were provided by and discussed the whole Board, the Audit Committee Governance with the external auditor as part reviewed the appropriateness of Rosalyn Wilton of a technical briefing workshop preparing the financial statements on a Chairman of the Audit Committee attended by relevant stafg in going concern basis and whether the 30 May 2018 February 2018 business was viable in accordance with • The Chief Executive provided early the Code. input to and agreed the overall Its assessment included a review of message and tone of the report statements the principal risks and risk appetite, Financial • The Executive Directors were closely the chosen period of assessment, involved in the initial drafting process headroom under loan covenants, and reviewed their respective undrawn debt facilities and the draft sections level of stress testing of financial • An extensive verification exercise forecasts undertaken. was undertaken to ensure factual Particular attention was paid to the accuracy and consistency time horizon chosen to assess the throughout the report Company’s viability and its longer • The final draft report was reviewed by term prospects. the Audit Committee and discussed with the Finance Director and senior management before being presented for Board approval
����������������������������� ������������������������������� ���������������������������������� ���������������������������������������� ������������������������������������� ��������������������������������� �������������������������������������� ���������������������������� ���������������������������������������� 88 LondonMetric Property Plc Annual Report and Accounts 2018 Remuneration Remuneration Committee report James Dean Chairman, Remuneration Committee Membership & Attendance I am pleased to present the Tenure Meetings Member Date appointed (years) attended Remuneration Committee’s report on James Dean 1/10/2010 8 4 (4) Philip Watson 25/1/2013 5 4 (4) 31 March 2018. Andrew Varley (retired 30 September 2017) 30/5/2013 n/a 2 (2) Rosalyn Wilton 14/7/2016 2 4 (4) Andrew Livingston 11/7/2017 1 1 (2) Bracketed numbers indicate the number of meetings the member was eligible to attend. Tenure is measured from date of appointment to the Committee and as at 31 March 2018, rounded to the nearest whole year. Highlights this year • Appointment of Andrew Livingston following the AGM in July replacing Andrew Varley who retired from the Board and Committee on 30 September 2017 • Reviewed and approved the extension to the Chairman’s letter of appointment for three years, with a six month mutual break option, and fees of £230,000 for the year to 31 March 2019, reducing to £215,000 and £200,000 for the following two years respectively • Considered a Remuneration Benchmarking report and Corporate Governance update from PwC • Set challenging targets for the annual bonus and LTIP Responsibilities of the Committee • Setting and reviewing the Group’s overall Remuneration Policy and strategy • Determining and reviewing individual remuneration packages • Determining and reviewing the rules for the Long Term Incentive Plan (LTIP) and the Annual and Deferred Bonus Plan arrangements • Approving salaries, bonuses and share awards for the Executive Directors This report is structured as follows: Chairman’s introduction page 89 Directors’ Remuneration at a glance page 90 Directors’ Remuneration Policy page 94 Annual Report on Remuneration page 96
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Chairman’s introduction EPRA earnings per share has increased The Committee is satisfied that the level Our strategy by 3.7% to 8.5p and EPRA net assets of payout under the variable incentive The primary role of the Remuneration per share by 10.3% to 165.2p. Like for plans is appropriate and no discretion Committee is to determine and like income grew by 4.3% and the was exercised by the Committee in recommend to the Board a fair Group’s total property return of 13.71% relation to these outcomes. reward structure that incentivises outperformed the IPD Quarterly the Executive Directors to promote LTIP awards Universe Index for the Group’s and deliver the Group’s strategic Our marketplace portfolio of assets of 12.95% by 76 bps. Delivery of long term growth in objectives whilst maintaining stability Total accounting return for the year shareholder value is rewarded through in th e management of its long was 15.5%. the Group’s LTIP arrangements. term business. Awards over 1,661,282 shares were Given the strength of the Company’s Our Annual Report on Remuneration granted to the Executive Directors performance and the returns enjoyed contains details of our payouts during in the year. LTIP and deferred bonus by its shareholders, the Committee the financial year being reported on shares amounting to 2,333,997 shares considers it appropriate to reward the and how we intend to implement vested in the year. The Directors Our business Executive Directors with the variable the Remuneration Policy for the year disposed of 1,178,416 shares to model elements of remuneration calculated ending 31 March 2019. This part of the settle tax liabilities and retained the this year. It has also considered pay report is subject to an advisory vote at remaining 1,155,581 shares. increases, bonuses and LTIP awards of the forthcoming AGM. the wider workforce when determining Salary increases Remuneration aligned to strategy Executive Directors’ pay. The Committee approved salary The performance metrics which increases of 2.5% for the Executive Performance Annual bonus underpin the variable elements of Directors, efgective from 1 June 2018 review The Executive Directors have delivered remuneration are EPRA earnings per which are lower than the increases successfully against a large number of share (EPS), total property return (TPR), for employees generally of 4.8%. operational and strategic objectives total accounting return (TAR) and total including income quality and growth, Looking forward shareholder return (TSR). Three of these portfolio repositioning, optimising the are KPIs used to monitor performance Following an extensive Policy review funding structure, the development of the business against strategic and update last year, the Committee Responsible pipeline and relationships with Business priorities as reflected on pages 24 to 25. believes the current remuneration stakeholders. arrangements are fair and fit Performance during the year This strong financial and non financial for purpose. The Company has delivered another performance has been taken into However we are mindful of the very strong set of results this year. account when considering the changing economic and political Its successful deployment of the variable elements of remuneration. landscape and of the proposed proceeds generated from the equity The Committee has calculated annual legislative changes to the UK Corporate placing in March 17 into the logistics Risk bonuses for the Executive Directors Governance Code extending the sector and the disposal of non core to be at 71 – 79% of their respective remit of Remuneration Committees, assets, including the last remaining maximum levels. This year the Directors strengthening the employee voice and offjce in Marlow, has secured both have decided to opt out of the annual reporting the pay ratio between the earnings and NAV growth. bonus deferral provision in accordance CEO and the average UK workforce. We continue to reposition the portfolio with the Remuneration Policy, as they We have committed to publishing the Governance towards the logistics market to reflect have met the minimum shareholding pay ratio once there is clarity over the the change in consumer shopping requirement of 700% of salary. appropriate calculation methodology. patterns and have increased our Their annual bonuses will be paid As such, we will continue to review exposure in this sector to 69%. in full in cash in June 2018. the policy to ensure it meets our This is supported by a profitable objective of incentivising and LTIP vesting development programme that has motivating management to deliver delivered property completions at Vesting of the LTIP awards granted statements the Company’s strategy. Financial Huyton, Stoke and Crawley to schedule to Executive Directors in 2015 is and within budget. dependent on Company performance over the three year period to Our strategy has delivered strong 31 March 2018. financial performance, underpinned by robust portfolio metrics, supporting James Dean Performance is measured by reference Chairman of the Remuneration Committee the commitment to a progressive and to TSR versus the FTSE 350 Real Estate 30 May 2018 well covered dividend. This year the Super Sector and EPRA EPS growth. Directors have increased the dividend The Committee assessed performance by 5.3% to 7.9p. and based on actual EPRA EPS of 8.5p and TSR performance of 30.4%, 94% of awards granted are expected to vest in June 2018, subject to continued service.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Remuneration continued Directors’ Remuneration at a glance What we awarded during the financial year and why Total remuneration for Executive Directors Illustrative change in value of shares owned and Total Total outstanding Salary Benefits Pension Bonus LTIP 2018 2017 share awards 1 £000 £000 £000 £000 £000 £000 £000 £000 Andrew Jones 520 24 78 679 1,023 2,324 2,506 574 Martin McGann 342 25 51 378 537 1,333 1,415 362 Valentine Beresford 360 24 54 360 566 1,364 1,488 410 Mark Stirling 360 25 54 398 566 1,403 1,488 360 1 Based on an illustrative swing in share price of 10p. For reference, the highest closing share price during the year was 188.40p and the lowest closing price was 155.65p. The number of shares and share awards was calculated based on the year end total Actual total remuneration compared to the 2018 potential The following charts show the actual remuneration earned we have included the single figure remuneration for the year by the Executive Directors against the minimum, on target ending 31 March 2018. and maximum scenarios for the year. In line with the expected changes to the regulations on The elements of remuneration have been categorised into policy scenarios, we have also included additional reference three components: (i) Fixed; (ii) Annual Bonus (including points to show indicative share price growth scenarios at Deferred Bonus); and (iii) LTIP. target (50% growth over three years) and maximum (100% growth over three years) levels. The target scenarios assume 50% payout of the maximum opportunity under the annual bonus and 25% (being Actual remuneration is between the on target and maximum threshold vesting) of the LTIP. For the purposes of comparison scenarios reflecting the strong performance in the year. Andrew Jones £000 Martin McGann £000 3,538 1,975 1,027 539 2,511 1,436 2,324 1,333 539 539 1,027 1,027 859 1,438 792 1,310 67 128 135 135 257 257 479 479 862 862 239 239 431 431 418 418 418 418 418 622 622 622 622 622 Minimum On target Maximum Actual Minimum On target Maximum Actual Fixed Bonus LTIP Share price growth Fixed Bonus LTIP Share price growth Valentine Beresford £000 Mark Stirling £000 2,078 2,079 568 568 1,511 1,510 1,403 1,364 568 568 568 568 903 904 833 832 71 71 142 142 142 142 504 504 504 504 252 252 252 252 439 439 439 439 439 438 438 438 438 438 Minimum On target Maximum Actual Minimum On target Maximum Actual Fixed Bonus LTIP Share price growth Fixed Bonus LTIP Share price growth
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Annual bonus plan – targets and outcomes Our strategy Combining these outcomes with the personal objectives % of Payout target gives the following payouts: £000 maximum % Andrew Jones 679 79 Performance measure 25% 50% 100% Actual awarded EPRA EPS 7.93p 8.07p 8.50p 8.54p 100% Martin McGann 378 79 Our marketplace TPR 12.95% 14.24% 15.54% 13.71% 40% Valentine Beresford 360 71 Mark Stirling 398 79 2015 LTIPs vesting in the year – targets and outcomes The estimated number of shares Our business Payout target vesting are as follows: Number model % Andrew Jones 574,189 Performance measure 25% 100% Actual awarded TSR 1.7% 2.6% 30.4% 100% Martin McGann 301,450 EPRA EPS 8.29p 8.66p 8.54p 76% Valentine Beresford 317,438 Mark Stirling 317,438 Performance review The level of LTIP vesting in 2018 demonstrates the successful performance of the Company over the longer term performance period with strong absolute earnings growth and a resulting comparative return performance in excess of the Company’s direct competitors. LTIPs granted in the year Responsible Business Basis of award Share awards Face value Face value of award (% of salary) Date of grant number per share £000 Andrew Jones 200% 16 June 2017 619,500 168.6p 1,044 Martin McGann 165% 16 June 2017 335,402 168.6p 565 Valentine Beresford 165% 16 June 2017 353,190 168.6p 595 Mark Stirling 165% 16 June 2017 353,190 168.6p 595 Risk Shareholding of the Executive Directors % of salary 0% 250% 500% 750% 1,000% 1,250% Governance Shareholding requirement 700% Andrew Beneficially owned shares Jones Unvested interests over shares Shareholding requirement 700% Martin Beneficially owned shares statements McGann Financial Unvested interests over shares Shareholding requirement 700% Valentine Beneficially owned shares Beresford Unvested interests over shares Shareholding requirement 700% Mark Beneficially owned shares Stirling Unvested interests over shares
�� LondonMetric Property Plc Annual Report and Accounts 2018 Remuneration continued Summary of Policy and operation next year Elements and operation Implementation in the year to 31 March 2019 Base salary An Executive Director’s basic salary is set on appointment and The Committee decided to increase base salaries for the reviewed annually with changes taking efgect fro m 1 June or Executive Directors by 2.5%. The average increase across the when there is a change in position or responsibility. Group was 4.8%. Base salary from Base salary from When determining an appropriate level of salary, the Executive Director 1 June 2018 1 June 2017 Committee considers multiple factors including pay increases Andrew Jones 535,167 522,115 to other employees, remuneration within comparable property companies, and the general performance of the Martin McGann 351,204 342,638 Company and individual. Valentine Beresford 369,831 360,811 Mark Stirling 369,831 360,811 Pension The maximum contribution is 15% of salary which is payable as Executive Directors will receive the 15% of salary supplement in a monthly contribution to the Executive Director’s individual lieu of pension this year. personal pension plan or taken as a cash equivalent. Salary sacrifice arrangements can apply. Benefits The Committee recognises the need to maintain suitable In line with the Policy, each Executive Director receives: flexibility in the benefits provided to ensure it is able to support • Car allowance the objective of attracting and retaining personnel in order to • Private medical insurance deliver the Group strategy. • Life insurance • Permanent health insurance Annual bonus Annual performance targets are set by the Committee at The maximum bonus opportunity will remain at 165% of the start of the financial year linked to the Group’s long term salary for the Chief Executive and 140% of salary for the other strategy of growth in EPRA EPS and TPR. Executive Directors. The performance conditions and their weightings for the annual bonus are as follows: At least half of the bonus will be linked to the key property and financial metrics. Performance measure Weighting Description of targets Non financial targets are set to measure individual strategic performance and contribution to the achievement of Growth in 35% Growth in Company’s EPRA portfolio management initiatives and other operational EPRA EPS EPS against a range of management objectives. challenging targets The payout for on target performance is 50% of the Growth in 35% Growth in Company’s TPR against maximum and the payout for threshold performance is 25% total property IPD Quarterly Universe Index; Full of the maximum. return (TPR) payout if growth is 120% of the Index; 50% payout if growth is Executive Directors who have met their minimum 110% of the Index; 25% payout if shareholding requirement have the option to receive the growth matches the Index; Straight annual bonus paid in cash. line interpolation between limits; For those who are yet to meet the minimum shareholding No payout if TPR is negative requirement, up to 100% of the annual bonus will be paid in Personal 30% Vary between individuals and deferred shares vesting after three years. objectives include portfolio management metrics, financial and people management, investor relations and regulatory compliance The Committee believes that the EPRA EPS target and details of the personal objectives for the coming year are commercially sensitive and accordingly these are not disclosed. These will be reported and disclosed retrospectively next year in order for shareholders to assess the basis for any payouts.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Summary of Policy and operation next year (continued) Our strategy Elements and operation Implementation in the year to 31 March 2019 Long Term Incentive Plan Annual awards of up to 200% of salary for the Chief Executive Performance Threshold Maximum 1 Our marketplace measures Weighting (25% vesting) (100% vesting) and 165% of salary for the other Executive Directors. Total shareholder 37.5% Equal to index Equal to upper quartile Awards for the year to 31 March 2019 will be made in line with return (TSR) ranked company these levels. Total accounting 37.5% Equal to index Equal to upper quartile Awards will normally vest at the end of a three year period return (TAR) ranked company subject to: EPRA EPS growth 25% RPI plus 0% RPI plus 4% • The Executive Director’s continued employment at the date over three years over three years of vesting Our business 1 Straight line interpolation between threshold and maximum • Satisfaction of the performance conditions model TSR and TAR are relative measures measured against the Vested awards will be subject to a further two year holding FTS E 350 Real Estate Sector excluding agencies and operators period during which Executive Directors cannot dispose of (the Index). Under the TSR element, there will be no payout if shares other than for tax purposes. TSR is negative. The Committee determined that the indices The Committee may award dividend equivalents on awards would not be weighted. that vest. The Committee has determined to reduce the EPRA EPS growth Performance target range from RPI plus 3% and RPI plus 8% to RPI plus 0% review and RPI plus 4%. The rationale for this change was as follows: • The Company has now substantially completed its repositioning of the portfolio to logistics; therefore the opportunity to increase EPS over the next period, as a result of the yield arbitrage on disposals of non core assets, has Responsible been materially reduced Business • The majority of the Group’s leases contain fixed or RPI linked rent review clauses which limit the ability of the Executive Directors to grow earnings materially ahead of the index • The Company has had a long run of very strong EPS performance as it repositioned itself which has resulted in a high base point from which to generate future growth in an increasingly challenging external market Risk Shareholding requirement Executive Directors are encouraged to build up and hold a The shareholding requirement for 2019 is: shareholding equivalent to a percentage of base salary. • Chief Executive – 700% of salary Governance Executive Directors will be required to retain at least 50% of • Other Executive Directors – 700% of salary the post tax amount of vested shares from incentive plans • Newly appointed Executive Directors – 400% of salary until this requirement is met and maintained. The Committee has introduced a post leaving shareholding requirement for the Executive Directors, who must retain shares equivalent in value to one year’s salary for 12 months post cessation. statements Financial Key elements and time period Year ending March 2019 2020 2021 2022 2023 Base salary Pension Benefits Annual bonus Cash Deferred shares LTIP Non Executive Directors’ fees Key: Performance period: Vesting period: Holding period:
�� LondonMetric Property Plc Annual Report and Accounts 2018 Remuneration continued Overview of our Policy Directors’ The overriding objective is to operate • Is aligned with the interests of Remuneration Policy a fair and transparent Remuneration shareholders by encouraging high Policy which motivates and retains levels of share ownership The Group’s Remuneration Policy individuals of the highest calibre and • Attracts, motivates and retains high is designed to align Executive pay rewards the delivery of the Group’s key calibre individuals and incentives with the Company’s strategic priorities, long term growth • Is competitive in relation to other goals and encourage and and attractive shareholder returns. comparable property companies reward exceptional overall and As well as motivating, remuneration individual performance. • Is set in the context of pay and plays a key role in retaining highly employment conditions of regarded individuals and needs to The Remuneration Policy for other employees be competitive. the Group was approved by • Rewards superior performance shareholders at the 2017 AGM The principles which underpin the through the variable elements on 11 July 2017 for a period of Policy ensure that Executive Directors’ of remuneration that are linked three years. remuneration: to performance The following section is an extract • Is aligned to the business strategy from the full Remuneration and achievement of business goals Policy which can be found on the Company’s website at www.londonmetric.com. Strategy Link to Remuneration Policy The Committee’s remuneration decisions are heavily steered by the Group’s strategic direction and corporate objectives. It is important that the incentive arrangements operated by the Company are directly linked to the achievement of the Company’s strategy and overall corporate objectives. It is the Committee’s belief that the incentive elements of the Remuneration Policy align with these objectives. The following table demonstrates how the Company’s strategic objectives and key performance indicators (KPIs) are aligned to its variable incentive arrangements of the annual bonus and LTIP. Further details of these KPIs can be found o n pages 24 to 25 of this Annual Report. Annual Bonus Annual Bonus Strategic objective and key performance indicator cash deferred shares LTIP Deliver long term shareholder returns Total shareholder return Maximise long term total accounting return Total accounting return Maximise property portfolio returns Total property return Deliver sustainable growth in EPRA earnings EPRA earnings per share Drive like for like income growth through management actions Like for like income growth Maintain a higher than market benchmark WAULT WAULT Maintain strong occupier contentment EPRA vacancy Key remuneration objective Encourage the build-up and retention of shares The table on pages 92 to 93 provides a summary of the core elements of the Directors’ Remuneration Policy, as well as its implementation in the coming year.
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Shareholding guidelines Non Executive Directors’ fees Our strategy Minimum shareholding requirement In line with the Group’s remuneration The fees for Non Executive Directors and the Chairman are broadly set at a principles, the Remuneration Policy competitive level against the comparato r group. places significant importance on In general the level of fee increase for the Non Executive Directors and aligning the long term interests the Chairman will be set taking account of any change in responsibility. of shareholders with those of Our marketplace The aggregate fee for Non Executive Directors and the Chairman will not management by encouraging the exceed £1 million. Executive Directors to build up over a five year period and then subsequently The current fees for the Non Executive Director roles are: hold a shareholding equivalent Chairman £230,000 to a percentage of base salary. Adherence to these guidelines is a Base Non Executive Director fee £48,500 condition of continued participation in Senior Independent Director additional fee £5,000 the equity incentive arrangements. Our business Additional fee for Audit/Remuneration Committee Chairmanship £10,000 model In addition, Executive Directors will be Additional fee for Audit/Remuneration Committee membership £5,000 required to retain at least 50% of the post tax amount of vested shares from the Company incentive plans until the Other directorships • The remuneration attracts, motivates minimum shareholding requirement and retains high calibre individuals Executive Directors are permitted is met and maintained. The following Performance • The remuneration is competitive to accept external, non executive table sets out the minimum in relation to other comparable review appointments with the prior approval shareholding requirements. property companies of the Board where such appointments are not considered to have an • The incentive elements reward Shareholding adverse impact on their role within superior performance through the requirement the Group. Fees earned may be Role (% of salary) variable elements of remuneration retained by the Director. There were that are linked to performance Chief Executive 700% Responsible no new appointments in the year. Business The Committee is mindful of the internal Other Executive Directors 700% Andrew Jones is a Non Executive pay relativities when setting pay for the Director of Unite Plc and earned fees of Newly appointed Executive Directors. £46,130 in the year to 31 March 2018. Executive Directors 400% The diagram below illustrates the The other Executive Directors did not cascade of pay structures throughout hold external appointments during The Committee has set the requirement the business for the Chief Executive, the year. at 400% of salary for the Policy period other Executive Directors and for newly appointed Executive Directors Risk Employee considerations senior management for the year to to reflect the practical maximum that 31 March 2018. The Company applies the same could be achieved if all incentives were principles to the remuneration of earned over the Policy period and paid The Committee believes this all employees as it applies to the in shares. demonstrates a fair and transparent Executive Directors, namely that: progression of remuneration Post leaving shareholding requirement Governance throughout the Company which is in • Any incentive compensation is There is a post leaving shareholding line with one of its core pay principles aligned to the business strategy and requirement for the Executive Directors, that variable performance based pay achievement of business goals who must retain shares equivalent in increases with seniority. value to one year’s salary, for 12 months • The remuneration encourages post cessation. employees to become shareholders This requirement provides further long statements Employee considerations Financial term alignment with shareholders and ensures a focus on successful Participation succession planning. Other Executive Senior Element of pay Chief Executive Directors Management LTIP 200% of salary 165% of salary 40% to 125% of salary Annual bonus 165% of salary 140% of salary 50% to 100% of salary Pension 15% of salary 15% of salary 10% to 15% of salary Salary £522,115 £342,638 £100,000 to £360,811 to £200,000
�� LondonMetric Property Plc Annual Report and Accounts 2018 Remuneration continued The role of the Remuneration Committee Annual Report The Committee determines Directors’ Group other than in the provision of on Remuneration remuneration in accordance with advice on executive and employee the approved policy and its terms remuneration matters and taxation Set out below is the Annual of reference, which are reviewed advice. Total fees paid to PwC in Report on Remuneration for annually by the Board and are respect of remuneration advice to the the year ending 31 March 2018 available on the Company’s website Committee were £98,500 calculated which provides details of how the at www.londonmetric.com. on both hourly and fixed fee bases. Remuneration Policy was applied The Board recognises that it is No Executive Director is involved in the and how we intend to apply the ultimately accountable for executive determination of his own remuneration proposed policy for the year to remuneration but has delegated and fees for Non Executive Directors 31 March 2019. It is subject to an this responsibility to the Committee. are determined by the Board as advisory vote at the forthcoming All Committee members are Non a whole. AGM and complies with UK Executive Directors of the Company, Corporate Governance Code, The Company Secretary acts as which is an important pre-requisite to Listing Rules and The Large and secretary to the Committee and the ensure Executive Directors’ pay is set by Medium Sized Companies and Chief Executive and Finance Director Board members who have no personal Groups (Accounts and Reports) attend meetings by invitation but are financial interest in the Company other (Amendment) Regulations not present when their own pay is than as potential shareholders. 2013. The areas of the report being discussed. which are subject to audit have The Committee meets regularly without The Chairman of the Committee been highlighted. the Executive Directors being present reports to the Board on proceedings and is independently advised by and outcomes following each PwC, a signatory of the Remuneration Committee meeting. Consultants’ Code of Conduct and which has no connection with the Meetings and activities The Committee met on four occasions during the year. The main activities of the Committee during the year and to the date of this report were as follows: • Set a base EPS target for the 2017 LTIP awards and annual bonus for the year to 31 March 2018 • Approved Executive Directors’ share awards under the LTIP following the announcement of the Company’s results fo r the year ended 31 March 2017 • Approved the Deferred Bonus Shares vesting in the year for Executive Directors • Assessed the performance of Executive Directors against targets set at the beginning of the year and determined annual bonuses for the year • Reviewed and approved annual salary increases efgective from 1 June 2018 and reviewed against pay increases within the wider workplace • Reviewed and approved the Chairman’s annual fee to be fixed at £230,000 per annum until 31 March 2019, reducing to £215,000 and £200,000 for the following two years respectively • External evaluation of its own performance and review of its terms of reference • Reviewed and approved the Remuneration Committee Report
�� LondonMetric Property Plc Annual Report and Accounts 2018 Overview Single total figure of remuneration for each Director (audited) Our strategy Salary and fees Benefits 1 Pension 2 Annual bonus 3 LTIP 4 Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Director £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Executive Andrew Jones 520 510 24 24 78 77 679 751 1,023 1,144 2,324 2,506 Our marketplace Martin McGann 342 335 25 25 51 50 378 418 537 587 1,333 1,415 Valentine Beresford 5 360 353 24 25 54 53 360 441 566 616 1,364 1,488 Mark Stirling 360 353 25 25 54 53 398 441 566 616 1,403 1,488 Non Executive Patrick Vaughan6 250 320 9 9 – – – – – 259 329 Our business Charles Cayzer – 31 – – – – – – – – – 31 model James Dean 63 62 – – – – – – – – 63 62 Andrew Livingston 56 43 – – – – – – – – 56 43 Alec Pelmore 53 52 – – – – – – – – 53 52 Andrew Varley 29 57 – – – – – – – – 29 57 Philip Watson 58 55 – – – – – – – – 58 55 Performance Rosalyn Wilton 68 65 – – – – – – – – 68 65 review Suzanne Avery – – – – – – – – – – – – 1 Taxable benefits include the provision of a car allowance for Executive Directors The estimated figures disclosed in the previous Annual Report for 2017 vesting has and private medical insurance been restated to reflect final vesting figures and the share price on the date of vesting. The estimated share price used was 152.0p and the actual share price 2 Pension contribution is 15% of salary (excluding any salary sacrifice) and may be on vesting was 171.65p. The difgerences in value were : Andrew Jones £144,000, taken partly or entirely in cash Martin McGann £74,000, Valentine Beresford £76,000 and Mark Stirling £76,000. 3 Annual bonus payable in respect of the financial year ending 31 March 2018 paid fully in cash as minimum shareholding requirements met 5 The bonus payable to Valentine Beresford has been adjusted to take account of Responsible 4 2015 LTIP awards expected to vest in June 2018 for the performance period to his leave of absence Business 31 March 2018. The value of the award has been calculated by multiplying the 6 Private Medical Insurance benefit has continued at the discretion of the estimated number of shares that will vest, including the dividend equivalent, Remuneration Committee since becoming a Non Executive Chairman b y the average share price for the three months to 31 March 2018. The Committee believes it is important Annual bonus outcome for the year ended 31 March 2018 to take a holistic view of the Executive The annual bonus performance targets set for the year to 31 March 2018 and Directors’ total wealth when considering the assessment of actual performance achieved is set out in the table below. the single figure of remuneration. Bonus awards are based 70% on the Company’s financial performance The Executive Directors have very Risk and 30% on the individual’s contribution in the year. large shareholdings in the Company and are exposed to relatively small The financial performance element measures growth in EPRA EPS and Total changes in the share price significantly Property Return relative to the IPD Quarterly Universe Index for the Group’s afgecting their overall wealth. In the portfolio of assets. In determining the base EPRA EPS target, the Committee looks Committee’s opinion, the impact of to maintain consistency with longer term incentive targets but is mindful of shorter Governance share price movements on the total term strategic priorities and changing market conditions. The 2018 annual bonus wealth of the Director is more important outcome is set out in the table below. than the single figure. The significant shareholding encourages Directors to Financial Individual Bonus % Bonus % Total bonus objectives objectives of maximum of salary £000 take a long term view of the sustainable performance of the Company, Andrew Jones 49% 30% 79% 130% 679 which is critical in a cyclical business. Martin McGann 49% 30% 79% 110% 378 The Directors’ significant exposure to statements Financial Valentine Beresford 49% 22% 71% 100% 360 share price movements is a key facet of Mark Stirling 49% 30% 79% 110% 398 the Company’s Remuneration Policy. Group financial targets Performance Basis of Range Maximum Actual measure Weighting calculation (0%) (25%) (50%) (100%) performance % awarded Growth in EPRA EPRA EPS 35% Base 7.93p 8.07p 8.50p 8.54p 100% EPS against target a challenging 7.80p base target Growth in TPR Total property 35% Positive TPR TPR is TPR is 13.71% 40% against IPD return (TPR) growth matches 1.1 times 1.2 times Quarterly Universe index index index index 12.95% 14.24% 15.54%
�� LondonMetric Property Plc Annual Report and Accounts 2018 Remuneration continued Individual non financial targets Executive Directors’ non financial their individual personal objectives The table below outlines the targets accounted for 30% of and approved a full payout for all key personal objectives set and the maximum bonus award. Directors except Valentine Beresford the Committee’s assessment of Personal objectives were aligned to who was awarded a 75% payout of the performance for each of the Executive th e delivery of the Group’s key strategic maximum level, which was adjusted to Directors for the annual bonus objectives. The Committee felt that take account of his leave of absence. awarded in the year to 31 March 2018. all Executive Directors had achieved Objective Assessments • Portfolio focus to maximise both EPS • Increase in EPRA EPS of 3.7% from 8.2p to 8.5p, providing cover for a 5.3% increase Andrew and NAV growth in dividend in the year Jones • Strong increase in EPRA NAV per share of 10.3% from 149.8p to 165.2p • Recycling capital with sell down of non core assets • Investment in preferred sectors increased to 91% of the overall portfolio from 83% last year, with distribution at 69% of the portfolio • Focus on income quality to deliver growth in • Growth in earnings in the year and projected 5.3% increase in dividend sustainable earnings • WAULT maintained at 12.4 years (2017: 12.8 years) despite a year passing • Like for like income growth at 4.3% • Lengthen and strengthen relationships with • 209 investor meetings in the year and strong share price performance key stakeholders: institutional shareholders, • Continuing focus on PCMs which now account for 40% of the register private client wealth managers (PCM), • Continuation of strong portfolio metrics occupiers and analysts • Occupancy remains in excess of 97% (retail portfolio 100%) and strong like for like growth • Strengthened relationships with top tenants, including Amazon • Focused programme in support of key analysts. Strong feedback from FTI analyst survey ahead of results announcement • Continue to review the team in line with our • Further team realignment and headcount reduction ensures continuing focus on evolving portfolio strategy right team with right skills • Reinforce the position of the company as leading • Reinforcement of ‘end to end’ logistics is well received in the market. Increased investor/partner of choice in logistics emphasis on urban logistics well received by stakeholders • Optimising the funding structure to support the real • Modification to Helaba facility to reduce quantum and extend maturity to 7 years Martin estate strategy • Focus on building relationships with future potential PP investors McGann • Deliver risk management/corporate governance • Focus on Board diversity leading to appointment of Suzanne Avery to the Board agenda to increasing satisfaction of stakeholders • Continued focus on risk dashboard/register at Board/Audit Committee • Focus on income quality to deliver growth in our • Growth in earnings in the year and projected 5.3% increase in dividend sustainable earnings • WAULT maintained at 12.4 years (2017: 12.8 years) despite a year passing • Like for like income growth at 4.3% (2017: 4.6%) • Improve our ranking in the EPRA/GRESB • Enhanced ranking in sustainability benchmark sustainability rankings • GRESB Green Star, EPRA sustainability Gold Award • All responsible business targets met • Improve EPRA cost ratio • Improved cost ratio of 15.3% (2017: 16.3%) • Maintain LTV at less than 40% • LTV at 35% (2017: 30%) • Continue to reposition portfolio with the objective of • Logistics portfolio now 69% (2017: 62%) and the retail park portfolio reduced to 7% Valentine increasing distribution to c.70% and reducing retail (2017: 9.5%) Beresford parks bias to 10% in the year • Sell down non-core, ex-growth and • Sale of last offjce at Marlow in the year underperforming assets • Residential portfolio reduced to 51 units at the year end • Continue to strengthen team and integrate whole • Continued strong performance and fine tuning of team to ensure right people Investment team into broader Company business with right skills • Promote Company as ‘partner of choice’ with • Evidence of ‘ofg market’ opportunities testament to strong reputation amongst developers, vendors and agents developers and agents • Portfolio focus to deliver both income and • Strong portfolio metrics with like for like growth at 4.3% and total property return Mark capital growth exceeding the IPD benchmark Stirling • Continuing focus on asset management to lengthen • Asset management activity delivered 58 deals in the year. 31 lettings achieved and strengthen our rent roll as ERV uplift of 22%. Average lease lengths on new lettings over 15 years • Continuing to increase and improve our • Additional development schemes at Bedford, Weymouth, Huyton and Frimley development pipeline through new opportunities in the year and new planning consents • Continued focus on funding and development opportunities • Maintain our high occupancy • Occupancy remains in excess of 97% (Retail portfolio at 100%) • Retain our position as partner of choice amongst • Continued focus on real estate needs of retailers leading to 73% of the logistics key retailers portfolio being let to retailers
Recommend
More recommend
