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RNS Number : 2779H
SEGRO PLC
12 March 2015
 

SEGRO plc

ANNUAL FINANCIAL REPORT

 

SEGRO plc (the Company)

 

Availability of 2014 Annual Report and Accounts

 

The 2014 Annual Report and Accounts is now available to view at www.SEGRO.com/investors.

 

The following documents will be made available to shareholders of the Company from 18 March 2015:

 

·      2014 Annual Report and Accounts;

·      Notice of the 2015 Annual General Meeting;

·      Form of Proxy for the 2015 Annual General Meeting;

·      Scrip Dividend Scheme Booklet; and

·      Mandate Form for the Scrip Dividend Scheme.

 

In accordance with Listing Rule 9.6.1, a copy of each of these documents will be submitted to the National Storage Mechanism and will be available to view on 18 March 2015 or shortly thereafter. The Notice of the 2015 Annual General Meeting will be available to view on the Company's website from this date.

 

The information below, which is extracted from the 2014 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 25 February 2015 announcement of its 2014 Final Results (available at www.SEGRO.com). This material is not a substitute for reading the full 2014 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2014 Annual Report and Accounts.

 

MANAGING RISK REMAINS CENTRAL TO OUR SUCCESS

 

The Group recognises that its ability to manage risk effectively across the organisation is central to its success. Risk management ensures a structured approach to decision making that aims to reduce the uncertainty surrounding expected outcomes, balanced against the objective of creating value for our shareholders.

 

Risk Appetite

 

The Group's risk appetite is reviewed annually and approved by the Board in order to guide management.

It is equally applicable to investment interests in both wholly-owned operations and joint ventures.

 

Whilst our appetite for risk will vary over time and during the course of the property cycle, in general the Group maintains a fairly low appetite for risk, appropriate to our strategic objective of delivering a sustainable low risk progressive dividend stream, supported by long-term growth in net asset value per share.

 

Property Risk

 

We recognise that, in seeking outperformance from our portfolio, the Group must accept a balanced level of property risk in order to provide opportunities for superior returns.

 

Our target portfolio should deliver attractive low risk income returns with strong rental and capital growth when market conditions are positive and show resilience in a downturn. We aim to enhance these returns through development, but seek to ensure that the 'drag' associated with holding development land does not outweigh the potential benefits.

 

In line with our income focus, we have a low appetite for risks to income from customers, and accordingly seek a diverse occupier base with strong covenants and avoid over-exposure to individual occupiers in bespoke properties.

 

Financial Risk

 

The Group maintains a low to moderate appetite for financial risk in general, with a very low appetite for risks to solvency and to gearing covenant breaches.

 

As an income-focused REIT, we seek to maintain a stable progression in earnings and dividends over the long term. We have a low appetite for risks to this stability, but are prepared to tolerate fluctuations in dividend cover as a consequence of ongoing capital recycling activity.

 

We also seek long-term growth in net asset value per share. Our appetite for risks to net asset value from the factors within our control is low, albeit acknowledging that our appetite for moderate leverage across the cycle amplifies the impact of asset valuation movement on net asset value.

 

Corporate Risk

 

We have a very low appetite for risks to our obligations to being responsible and well-regarded by our investors, regulators, employees, customers, business partners, suppliers, lenders and by the wider communities and environments in which we operate.

 

An integrated approach to managing risk

 

The Board has overall responsibility for ensuring that risk is effectively managed across the Group.

The Audit Committee reviews the effectiveness of the Group's risk management process on behalf of the

Board. Further information on compliance with the risk management provisions of the UK Corporate Governance Code can be found on page 70.

 

The risk management process is designed to identify, evaluate and mitigate the significant risks that the Group faces. The process aims to understand and mitigate, rather than eliminate, the risk of failure to achieve business objectives, and therefore can only provide reasonable and not absolute assurance.

 

Accountabilities for risk management are outlined in the diagram opposite.

 

Appetite towards risk is considered at Board meetings whenever significant strategic, financial or operational decisions are made, and is a key part of ongoing discussions about strategy. Risk appetite is also formally reviewed by the Board annually.

 

Whilst the nature of the principal risks faced by the Group do not tend to change substantially from year to year, their degree of impact and likelihood may change more significantly.

 

The Board recognises that it has limited control over many of the external risks it faces, such as the macroeconomic environment, but it reviews the impact of such risks on the business and actively considers them in its decision making. The Board also monitors internal risks and ensures that appropriate controls are in place to manage them.

 

Risks are considered within each area of the business to ensure that risk management is embedded within the Group's decision making processes and culture. Each risk in the Group Risk Register is owned by a member of the Executive Committee who works with a senior manager who is responsible for the monitoring and mitigation of that risk within appetite. Communication across a relatively small management team, and regular consideration of risk at key management committees, allows management to respond quickly to changing events so as to reduce adverse effects on the Group's risk profile.

 

Risks are assessed in both unmitigated (assuming that no controls are in place) and residual (with mitigating controls operating normally) states. This assessment makes explicit reference to risk appetite so that it is clear whether each risk is within appetite, within tolerance, beyond appetite or below appetite.

 

The most significant risks and mitigating controls are detailed in the Group Risk Register.

 

Controls relevant to each risk are also documented and monitored in the Group Risk Register. The risks and controls in the register are used to inform the Group's internal audit assurance work and drive management's annual assessment of control effectiveness. Strengthening the link between significant risks and control assurance has been a particular focus in 2014.

 

The Group has a Risk Management Committee responsible for regularly reviewing the Group Risk Register, monitoring the most important controls and prioritising risk management activities. The Group's approach to risk management has been documented and formalised in a policy. The Executive Committee considers emerging risks and their impact on the Group Risk Register. The Board reviews the principal risks twice a year and the Audit Committee receives a report twice a year on how the Group Risk Register has been compiled.

 

RISK MANAGEMENT

 

BOARD

 

 

Oversees the Group's risk management and internal controls.

 

Approves the Group's risk appetite.

 

 

ßà

CHIEF EXECUTIVE

 

Responsible for risk management.

 

 

 

Assigns responsibility for risks to senior Executive Risk Owners.

 

ßà

EXECUTIVE RISK OWNER

 

Owns risk in domain.

 

 

 

 

Assigns accountability for risks to senior Risk Managers.

 

Ensures that risks are identified, assessed and adequately controlled.

 

ßà

RISK MANAGER

 

Responsible for ensuring the risk is within appetite.

 

 

Regularly reviews and assesses existing risks with Risk Management.

 

Drives Design and implementation of controls.



RISK MANAGEMENT FUNCTION

 

Develops risk policy.

 

Manages/reports risk register.

 

Provides assistance in assessing and documenting risks and controls.

 

Provides quality assurance and challenge to risk owners and managers.

 

 

 

á

â


 

á

â


 

á

â

 


 

    

å

 

 

 

à

GROUP RISK COMMITTEE

 

Establishes, monitors and reports on the Group's approach to risk management.

 

Oversees the work of the risk management function.

 

Challenges individual risk owners and managers.

AUDIT COMMITTEE

 

Monitors effectiveness of the Group's risk management and internal control systems.


EXECUTIVE COMMITTEE

 

Monitors Strategic and other risks.

 

Delegates accountability for risk management and monitors performance.


MONITORING COMMITTEES

 

Regularly identify, assign accountability for, and monitor the significant risks and corresponding controls within their domains.

 

Report status to Risk Management function.




 

 


EXECUTIVE RISK OWNER

MONITORING COMMITTEE

RISK MANAGER

RISK MANAGEMENT FUNCTION

 

Strategic

Chief Executive

Executive

 

As assigned by Executive Risk Owner

Provides information, assists in documentation and provides quality assurance to risk managers, executive risk owners and committees.

Financial

Group Finance Director

 

Finance

Operational

Chief Operating Officer / Others as appropriate

Operations

Business Information Systems

Executive

 

Investment

Chief Investment Officer

 

Executive / Investment

Compliance

As appropriate

As appropriate

 

 

Property Risks

 

Risks to achieving above average rental and capital growth from our portfolio, including external market and competitive conditions, portfolio strategy, and execution of acquisitions and disposals.

 

RISK

IMPACT ON STRATEGY

CHANGE IN 2014

MITIGATIONS

RESIDUAL RISK WITHIN APPETITE?

 

FURTHER INFORMATION

Market cycle

 

The property market is cyclical and there is an inherent continuous risk that the Group could either misinterpret the market or fail to react appropriately to changing market conditions, which could result in capital being invested or disposals taking place at the wrong place or time in the cycle.

 

There is a continuous risk with a moderate likelihood.

 

 

 

Disciplined capital allocation

 

 

à

 

 

The Board, Executive Committee and Investment Committee monitor the property market cycle on a continuous basis and adapt the Group's investment / divestment strategy in anticipation of changing market conditions.

 

Independent diverse sources of investment and occupier market intelligence are regularly commissioned and considered.

 

 

 

Yes

 

 

The market outlook is detailed in the Chief Executive's Review on page 28.

Portfolio strategy

 

The Group's Total Property and/or Shareholder Returns could underperform in absolute or relative terms as a result of an inappropriate portfolio strategy. This could result from:

 

·  Holding the wrong balance of prime or secondary assets;

·  Holding the wrong amounts of types of land, leading to dilute returns and/or constraints on development opportunities;

·  Holding the wrong level of opportunity assets or too many old or obsolete assets which dilute returns;

·  Missing opportunities in new markets or lacking critical mass in existing markets.

 

This is a continuous risk with a moderate likelihood.

 

 

 

Disciplined capital allocation

 

 

æ

 

 

With the strategic portfolio reshaping programme substantially complete, the Group's portfolio is better placed to deliver strong performance through the cycle.

 

The Group's portfolio strategy is subject to regular review by the Board to consider the desired shape of the portfolio in order to meeting the Group's overall objectives and to determine our response to changing opportunities and market conditions.

 

The Group's disciplined capital allocation is informed by comprehensive asset plans and independent external assessments of market conditions and forecasts.

 

 

Yes

 

 

Further information is contained in the Chief Executive's Review on pages 16 to 28.

Execution of investment plans

 

Decisions to buy, hold, sell or develop assets could be flawed due to uncertainty in analysis, quality of assumptions, poor due diligence or unexpected changes in the economic or operating environment.

 

Our investment decisions could be insufficiently responsive to implement our strategy effectively.

 

This is a continuous risk with a moderate likelihood as changing investment and occupier market conditions require constant adaptation.

 

 

 

Disciplined capital allocation

 

 

 

à

 

 

 

Asset plans are prepared annually for all estates to determine where to invest capital in existing assets and to identify assets for disposal.

 

Locally-based property investment and operational teams provide market intelligence and networking to deliver attractive opportunities.

 

Policies are in place to govern evaluation, due diligence, approval, execution and subsequent review of investment activity.

 

The Investment Committee meets frequently to review investment and disposal proposals and to consider appropriate capital allocation.

 

Investment hurdle rates are regularly reappraised taking into account estimates of our weighted average cost of capital.

 

Major capital investment and disposal decisions are subject to Board approval.

 

 

 

Yes

 

 

 

Further information is contained in the Chief Executive's Review on pages 16 to 28.

Financial Risks

 

Risks to the revenues, costs, cash flows, equity capital and solvency of the Group resulting from the capital structure of the Group and changes in external factors such as interest rates, foreign exchange rates and the creditworthiness of the Group's major financial counterparties.

 

RISK

IMPACT ON STRATEGY

CHANGE IN 2014

MITIGATIONS

RESIDUAL RISK WITHIN APPETITE?

 

FURTHER INFORMATION

Solvency and covenant breach

 

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

 

This is a medium-term risk with a low likelihood.

 

 

 

Efficient capital and corporate structure

 

 

 

æ

 

 

 

Future funding requirements and covenant headroom, including sensitivity to asset valuation declines, are closely monitored by the Group Treasury function, the Finance Committee (which reports to the Group's Executive Committee) and the Board. Group Treasury calculate actual levels and headroom with sensitivities to financial covenants on a quarterly basis and review non-financial covenants on an ongoing basis.

 

The Audit Committee reviews the Group's going concern status bi-annually.

 

In line with its Treasury policy, the Group maintains substantial undrawn headroom under committed bank facilities which are generally refinanced well ahead of maturity.

 

 

 

 

Yes

 

 

 

Significant headroom exists against all financial covenants. Property valuations would need to fall by around 39% from their 31 December 2014 values to reach the gearing covenant threshold of 160%.

 

Further details of Treasury policy, funding headroom, financial covenant rations and related headroom and sensitivities are provided in the Financial Review on pages 54 to 61.

 

European economic environment

 

The risk of a significant adverse impact to the Group's earnings, net asset value, financial covenants or investor confidence arising from the exit of a significant economy from the eurozone; a UK exit from the EU; or sustained poor economic performance in the eurozone.

 

These are short to medium-term risks with a medium and, in some cases, increasing likelihood.

 

 

 

Disciplined capital allocation

 

Efficient capital and corporate structure

 

 

 

ä

 

 

 

We remain alert to the potential financial and operational risks to the business arising from a deterioration in economic conditions in the eurozone, including a partial break-up.

 

We continue to maintain a high level of current translation hedging against the impact of a weaker euro and to closely monitor our exposure to major tenants in the eurozone.

 

Geographically, the portfolio is located predominantly in the relatively stronger eurozone economies and regions.

 

Mitigations for the risk of a UK exit from the EU include maintaining substantial covenant headroom, access to diverse sources of funding, and FX and interest rate hedging. Portfolio quality and geographic diversity provides further mitigation.

 

 

 

 

Yes

 

 

 

France represents 8%, Germany 8%, Netherlands/Belgium 2% and Italy 2% of the Group's assets. Poland, which also involves exposure to the euro, represents a further 7% of the Group's assets.

 

Treasury policies are outlined in the Financial Review on page 59.

Financial leverage

 

The Group could maintain an inappropriate capital structure. Financial leverage (usually expressed as the LTV ratio, but in financial covenants defined as gearing) needs to be managed depending on the direction of the economic and property market cycle. If gearing is too high when property valuations are falling, net asset value movements can be exacerbated and financial covenants put at risk. Equally, if gearing is too conservative, there is a risk that attractive growth opportunities could be missed and the benefits of leverage not maximised.

 

This is a medium to long-term risk with a low and declining likelihood.

 

 

 

Disciplined capital allocation

 

Efficient capital and corporate structure

 

 

æ

 

 

The Group has targeted a look-through LTV ratio of around 40%. Gearing levels are also tracked and forecast internally to monitor headroom against financial covenants. The LTV target is considered in strategic planning and in asset recycling decisions. The Group's look-through LTV ratio was 40% at 31 December 2014. Depending on the Board's ongoing assessment of the property cycle, the Group is prepared to flex LTV moderately upwards or downwards to take advantage of attractive investment opportunities.

 

 

Yes

 

 

Gearing is discussed in the Financial Review on page 60.

Interest rates

 

A significant adverse movement in interest rate could have an unacceptable impact on the Group's earnings, on investments market conditions or on tenant covenant strength.

 

This is a long-term risk with a moderate likelihood.

 

 

 

 

Efficient capital and corporate structure

 

 

à

 

 

In accordance with the Group's Treasury policy, fixed interest cover is maintained between 50% and 100% of net borrowings in order to balance the cost and certainty of interest cost. The position is formally reviewed quarterly by the Finance Committee.

 

 

Yes

 

 

At 31 December 2014 79.8% of net borrowings (including the Group's share of net borrowings within joint ventures) were at fixed rates.

 

Interest rate hedging is detailed in the Financial Review on page 60.

 

Counterparty default

 

A bank or other financial counterparty could default while holding SEGRO deposits or derivative assets, resulting in a significant financial loss to the Group. This could also include the loss of solvency headroom from lost undrawn committed to bank facilities.

 

This is considered to be a long-term risk with a low likelihood.

 

 

Efficient capital and corporate structure

 

 

à

 

 

Financial counterparties are accepted based on a strict credit rating criteria (a minimum long-term credit rating of A- or better). Compliance with the policy is monitored daily by both front and back-office staff within Group Treasury.

 

 

Yes

 

 

Treasury policies are outlined in the Financial Review on page 59.

 

Corporate Risks

 

Risks to business performance, legal and regulatory compliance, health and safety, environmental impact, reputation and business continuity arising from external factors or inadequate internal processes, people or systems.

 

RISK

IMPACT ON STRATEGY

CHANGE IN 2014

MITIGATIONS

RESIDUAL RISK WITHIN APPETITE?

 

FURTHER INFORMATION

Operational delivery and compliance

 

The Group's ability to protect its reputation, revenues and shareholder value could be damaged by operational failures such as: environmental damage; failing to attract, retain and motivate key staff; a breach of anti-bribery and corruption or other legislation; major customer default or supply chain failure.

 

Compliance failures, such as breaches of joint venture shareholders' agreements, secured loan agreements or tax legislation could also damage reputation, revenue and shareholder value.

 

This is a continuous risk with a low likelihood of causing significant harm to the Group.

 

 

 

 

Operational excellence

 

Efficient capital and corporate structure

 

 

 

à

 

 

 

The Group maintains a strong focus on Operational Excellence. The Executive and Operations Committees regularly monitor the range of risks to operational delivery, compliance, business continuity, organisation effectiveness and customer management.

 

The Group's tax compliance is managed by an experienced internal tax team. The tax function was subject to an internal audit in 2014 and judged to be appropriately controlled. REIT and SIIC tax regime compliance is demonstrated at least bi-annually.

 

Compliance with joint venture shareholder agreements is managed by experienced property operations, finance and legal staff. The SELP JV additionally has comprehensive governance and compliance arrangements in place, including dedicated management, operational manuals, and specialist third-party compliance support services. The 2014 internal audit of SELP governance assessed controls as adequate.

 

 

 

 

Yes


Health and safety

 

Health and safety management processes could fail, leading to a loss of life, injury, litigation, fines and serious reputational damage to the Group.

 

This is a continuous risk with a low likelihood of causing significant harm to the Group.

 

 

 

Operational excellence

 

 

à

 

 

The Group manages an active health and safety management system, with particular focus on managing the quality and compliance to good health and safety practice of construction and maintenance contractors.

 

A published health and safety policy is backed up by independent site inspections and a programme of staff and contractor training.

 

 

 

Yes

 

 

Further information on Health and Safety is provided on page 50.

Regulatory environment

 

The Group could fail to anticipate legal or regulatory changes, leading to a significant unforecasted financial or reputational impact.

 

This is a medium to long-term risk with a low likelihood of causing significant harm to the Group.

 

 

Operational excellence

 

Efficient capital and corporate structure

 

 

à

 

 

Emerging risks in this category are reviewed regularly by the Executive Committee, Finance Committee and Group Risk Committee.

 

Corporate heads of function consult with external advisers, attend industry and specialist briefings, and sit on key industry bodies such as EPRA and BPF.

 

A number of potential risks were identified, assessed and managed during the course of the year. None were considered to be material enough to be classified as Principal Risks.

 

 

Yes


 

28. Related party transactions

 

Group

 

Transactions during the year between the Group and its joint ventures are disclosed below:

 

 

2014

£m

2013

£m

New loans during the year

222.4

6.9

Loans repaid during the year

75.7

-

Loans outstanding at the year end

333.9

260.7

Dividends received

22.2

24.1

Management fee income

11.8

7.1

 

 

Transactions between the Company and its subsidiaries eliminate on consolidation and are not disclosed in this note.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

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

 

Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article

4 of the IAS Regulation and have also chosen to prepare the parent Company financial statements under IFRSs as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:

 

-- properly select and apply accounting policies;

-- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

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

-- make an assessment of the Company's ability to continue as a going concern.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the

Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

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

 

Directors' responsibility statement

 

We confirm that to the best of our knowledge:

1. the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

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

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

 

By order of the Board

 

DAVID SLEATH

Chief Executive

24 February 2015

JUSTIN READ

Group Finance Director

24 February 2014

 

 

FORWARD-LOOKING STATEMENT

 

The Annual Report contains certain forward-looking statements with respect to SEGRO's expectations and plans, strategy, management objectives, future developments and performances, costs, revenues and other trend information. These statements are subject to assumptions, risks and uncertainties. Many of these assumptions, risks and uncertainties relate to factors that are beyond SEGRO's ability to control or estimate precisely and which could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. Certain statements have been made with reference to forecast process changes, economic conditions and the current regulatory environment. Any forward-looking statements made by or on behalf of SEGRO are based upon the knowledge and information available to Directors on the date of this Annual Report. Accordingly, no assurance can be given that any particular expectation will be met and SEGRO's shareholders are cautioned not to place undue reliance on the forward-looking statements. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), SEGRO does not undertake to update forward-looking statements to reflect any changes in events, conditions or circumstances on which any such statement is based. Past share performance cannot be relied on as a guide to future performance. Nothing in this Annual Report should be construed as a profit forecast.

 

 

 

Stephanie Murton

Legal Counsel

+44 (0) 20 7451 9083


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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