Annual Financial Report
SEGRO plc
ANNUAL FINANCIAL REPORT
SEGRO plc (the Company)
Availability of 2012 Annual Report and Accounts
The 2012 Annual Report and Accounts is now available to view at www.SEGRO.com/investors.
The following documents are scheduled to be mailed to registered shareholders
of the Company on 15 March 2013:
* 2012 Annual Report and Accounts;
* Notice of the 2013 Annual General Meeting; and
* Form of Proxy for the 2013 Annual General Meeting.
In accordance with Listing Rule 9.6.1 a copy of each of these documents will be
submitted to the National Storage Mechanism and will be available for viewing
on 15 March 2012 or shortly thereafter. The Notice of the 2012 Annual General
Meeting will be available to view on the Company's website from this date.
The information below, which is extracted from the 2012 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 27 February 2013
announcement of its 2012 Final Results (available at www.SEGRO.com). This
material is not a substitute for reading the full 2012 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 2012
Annual Report and Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
MANAGING RISK RESPONSIBILITY
The Group recognises that its ability to manage risk consistently across the
organisation is central to its success. It defines risk as the potential effect
of uncertainty on its ability to achieve its objectives, while risk management
ensures a structured approach to decision-making that aims to reduce the
uncertainty surrounding expected outcomes, balanced against the objective of
creating value for its shareholders.
APPROACH TO MANAGING RISK
The Board has overall responsibility for ensuring that risk is effectively
managed across the Group and, on behalf of the Board, the Audit Committee
reviews the effectiveness of the Group's risk management process.
The risk management process is designed to identify, evaluate and manage the
significant risks that the Group faces. The process aims to manage, rather than
eliminate, the risk of failure to achieve business objectives, and therefore
can only provide reasonable and not absolute assurance.
Appetite towards risk is considered at Board meetings whenever significant
strategic, financial or operational decisions are made, and is a key part of
ongoing discussions about strategy.
The individual risks faced by the Group do not typically change materially from
year to year; however, the magnitude and importance of these risks can change
significantly. The Board recognises that it has limited control over many of
the external risks it faces, such as the macro-economic environment, but it
reviews the impact of such risks on the business and actively considers them in
its decision-making. For example, during 2012 the Board regularly considered
the financial difficulties in the Eurozone and assessed the impact of them on
the Group's investment and divestment decisions.
The Board monitors internal risks and ensures that controls are in place to
manage them. During the year, the Group revised its governance process for
major investment transactions to ensure that the risks involved in due
diligence or contract negotiations are more formally considered before
proceeding with any transaction and that any specific risks being assessed are
in line with the Group's risk appetite.
Risks are considered within each area of the business, taking into account both
the unmitigated risk (assuming that controls fail) and residual risk (with
controls operating normally). The most significant risks are detailed in the
Group Risk Register. Each risk is owned by a member of the Executive Committee
and assigned to a manager who is required to develop a plan to manage or
mitigate individual risks to an agreed position. The relatively small
management team allows management to respond quickly to changing events so as
to reduce any adverse effects on the Group's risk profile.
During the year, the Executive Committee and the Board have reviewed the
effectiveness of the Group's risk management framework and practices. The Group
has identified certain areas for improvement in 2013, such as a greater focus
on seeking to anticipate valuation movements.
The Group has a Risk Management Committee responsible for regularly reviewing
the Group Risk Register, monitoring the most important controls and
prioritising risk management activities. The Executive Committee considers
emerging risks and their impact on the Group Risk Register. The Board reviews
the principal risks twice a year and the Audit Committee receives a report
twice a year on how the Group Risk Register has been compiled.
Details of the principal risks and uncertainties facing the Group are set out
below.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties have the potential to affect SEGRO's
business materially - either favourably or unfavourably.
The principal risks and uncertainties facing the Group are described below,
along with the potential areas of impact on the Group's key performance
indicators (KPIs) and the principal activities that are in place to manage such
risks. The direction of change in the level of the risk during the course of
2012 is given, along with commentary on any changes occurring and key links to
further relevant information provided in other sections of this report.
UNCERTAINTIES
These represent the risk factors over which the Group has limited control, and
so they are rigorously monitored. The most significant of these risk factors
and some of the major potential impacts on the Group are set out below:
PRINCIPLE UNCERTAINTIES POTENTIAL IMPACTS
CHANGES IN MACRO-ECONOMIC CONDITIONS Bank covenant breaches
Global market and economic conditions have been Changes in the
challenging, with tighter credit conditions and availability and cost of
slower growth in most major economies during the finance
last few years. Although signs of recovery may
exist, there are continued concerns about government Fluctuations in currency
austerity measures, Eurozone sovereign and bank exchange rates
debt, the availability and cost of credit and
geopolitical issues that all contribute to increased Changes in expected
market volatility and uncertain expectations for the returns on investments
global economy.
Changes in asset values
CHANGES IN GOVERNMENT POLICIES
Increases in customer
Changes in government regulation or policy at insolvencies
European Union (EU), national and local levels could
impact on the Group. For example, unfavourable Occupier requirements not
changes in tax and planning regulations or changes met
to existing or planned infrastructure investment
(including transport) might change the value of the Changes in occupier demand
Group's property portfolio or influence development
decisions. Changes in rental income
CHANGES IN THE COMMERCIAL ENVIRONMENT Changes in operating costs
Changes in consumer behaviour, sustainability Regulatory requirements
regulations or customer preferences could impact the not met / compliance
attractiveness of the Group's properties to certain breaches
industry sectors. For example, the increase in
online commerce is stimulating the demand for
logistics and distribution space located near major
transport hubs and conurbations. Competitor
behaviour could also have a bearing on the Group's
plans - particularly in relation to competition for
acquisitions, tenants and land for development.
PRINCIPAL RISKS
Not all of the risks listed here are within the control of the Group, and other
factors besides those listed may affect the performance of our business. Some
risks may be unknown at present, and other risks that are currently regarded as
immaterial and therefore not detailed here, could turn out to be material in
the future.
Risks are classified as 'principal' according to their potential level of
materiality after mitigating actions have been taken into consideration as
determined by the risk management process.
The principal risks that the Group reported last year have evolved in nature,
as has the Group's response to them. Consideration of the Group's current risk
environment, as well as its strategic priorities, has resulted in an additional
risk not being classified as principal risks, and this is described in the
table below.
Additionally, there are also a number of risks that have been de-classified as
a principal risk since last year. There are a number of reasons for this,
including: the risk has been re-categorised as a principal uncertainty; there
is duplication of an issue; mitigating actions have reduced the level of risk
and/or natural hedging has occurred between risks and/or the uncertainty
surrounding the risk has been reduced.
The declassified risks are: 'failure to maintain an appropriate and
cost-effective capital structure'; 'the availability and cost of borrowing';
and 'fluctuations in foreign exchange rates'.
The following table details each of the Group's current principal risks, and
these are arranged by five risk groupings - referred to as risk categories that
cover strategic risks, financial risks, operational risks, investment risks and
compliance/regulatory risks. The purpose of grouping risks into risk categories
is to assist the systematic identification of risks in a consistent manner. It
also helps to identify the root causes of these risks, and the KPIs most
directly impacted by each category are also identified. The Group's strategy
and KPIs are detailed in the Chief Executive's Review on pages 10 to 19.
STRATEGIC RISKS
The current or prospective risks to earning and capital arising from changes in
the business environment and from adverse business decisions, failed
implementation of decisions or lack of responsiveness to changes in the
business environment.
KPIs IMPACTED: TPR, TSR, EPRA ADJUSTED EPS, NAV, LTV, VACANCY RATE
RISK CHANGE MITIGATING ACTIONS COMMENTARY
SINCE 2011
PORTFOLIO SHAPE AND → A strategic review of The reshaping
PERFORMANCE the portfolio was strategy and the
completed and assets progress made
Management considers identified for during 2012 are
that if the Group holds disposal. The described in the
the wrong shape reshaping strategy is Chief Executive's
portfolio then being implemented over Review.
non-performing assets the medium term and
or the wrong type of should result in SEGRO
assets may dilute holding an appropriate
portfolio returns balance of high
resulting in relative quality `stabilised'
underperformance of TPR and `opportunity'
and TSR against the assets necessary to
market and external achieve the returns
expectations. that our shareholders
require.
PACE OF STRATEGIC → The pace of strategic Considerable
CHANGE charge, including progress has been
balancing our made against three
If SEGRO does not strategic priorities of the four
deliver its stated against each other strategic
strategic changes at (for example reducing priorities
the right pace and leverage against announced in
within an acceptable reinvesting in new, November 2011, the
timeframe then investor core assets), will exception being,
expectations may not be continue to be reducing financial
met and improved carefully considered leverage.
shareholder returns may by both the Board and
not be delivered. the Executive The strategic
Committee during 2013, priorities and the
alongside the KPIs progress made
established in against these
November 2011 to priorities are
monitor performance. detailed in the
Clear targets have Chief Executive's
been established for Review.
further progress to be
made in 2013, which
have been built into
the personal
objectives of senior
managers.
IMPACT OF THE EUROZONE → We remain alert to the The Financial
ECONOMIC ENVIRONMENT potential financial Review on pages 38
and operational risks to 39 provides
A deterioration in to the business further detail of
economic conditions in arising from a the Group's foreign
the Eurozone could deterioration in exchange exposure
result in a loss in economic conditions in to the euro and the
value or reduction in the Eurozone. We will policies and the
income to the Group, by continue to maintain a hedging
adversely impacting high level of currency arrangements in
economic performance in translation hedging place to manage
the markets in which we against the impact of this exposure.
hold property assets in a weaker euro and to
Continental Europe. If closely monitor our
this deterioration also exposure to major
resulted in a weakening tenants in the
of the euro against Eurozone.
sterling this would
have an adverse Geographically, the
currency translation portfolio is located
impact of the reported predominantly in the
sterling income and relatively stronger
asset values from our European economies.
euro denominated The split by property
operations. values is: UK 66%,
France 11%, Germany
8%, Poland 7%, Belgium
3%, Netherlands 2%,
Italy 2% and Czech
Republic 1%.
FINANCIAL RISKS
The risks to the cash flows, equity capital and solvency of the Group resulting
from the debt funding arrangements of the Group and movement in external
financial variables that have a significant impact on the Group, such as
interest rates, foreign exchange rates and the creditworthiness of the Group's
major financial counterparties.
KPIs IMPACTED: TSR, EPRA ADJUSTED EPS, NAV, LTV
RISK CHANGE MITIGATING ACTIONS COMMENTARY
SINCE 2011
SOLVENCY AND COVENANT → Funding and covenant Further details of
BREACH ratio headroom are Treasury Policy,
closely monitored by funding headroom,
A material fall in the Group Treasury, the financial covenant
Group's property asset Treasury Committee and ratios and related
values or rental income the Board. headroom and
could lead to a breach sensitivities are
of financial covenants The impact of major provided in the
within its debt funding investment decisions Financial Review on
arrangements. This on covenant and pages 36 to 39.
could result in the funding headroom is
cancellation of debt also considered by the
funding which could, in Investment Committee
turn, leave the Group as part of the
without sufficient approval process for
long-term resources these decisions.
(solvency) to meet its
commitments.
OPERATIONAL RISKS
The risk of loss and/or missed opportunities resulting from inadequate or
failed internal processes, people or systems or from external events.
KPIs IMPACTED: TOTAL COST RATIO, CUSTOMER SATISFACTION, EPRA VACANCY RATE, EPRA
ADJUSTED EPS
RISK CHANGE MITIGATING ACTIONS COMMENTARY
SINCE 2011
OPERATIONAL DELIVERY → In 2012, various Sustainability,
operational processes performance
The Group's ability to were subject to relative to
maintain its internal audit. This operational
reputation, revenues has provided assurance delivery is
and shareholder value that our processes are detailed in the
could be damaged by essentially robust, Corporate
operational failures but with some scope Responsibility
such as: for improvement . Review on pages 24
to 31.
- Health and Safety We will ensure that
incidents operational processes That section sets
remain well controlled out the identified
- Environmental damage during 2013, and will areas for
seek to implement improvement in
- Business systems or identified operational
IT disruption improvements to these processes and the
processes. Group's approach to
- Failing to attract, managing people.
retains and motivate
key staff
- Breach of
anti-bribery and
corruption legislation
INVESTMENT/REAL ESTATE RISKS
The risks associated with capital allocation including the acquisition,
disposal and development of assets and the valuation of the Group's portfolio.
KPIs IMPACTED; TPR, TSR AND NAV
RISK CHANGE MITIGATING ACTIONS COMMENTARY
SINCE 2011
MARKET CYCLE → The Board, Executive The market outlook
Committee and is detailed in the
The property market is Investment Committee Chief Executive's
cyclical and there is monitor the property Review on page 16.
an inherent risk that market cycle on a
the Group could either continual basis and
misinterpret the market seek to adapt the
or fail to react Group's capital
appropriately to investment/divestment
changing market strategy in
conditions, which could anticipation of
result in capital being changing market
invested or disposals conditions.
taking place at the
wrong time in the
cycle.
APPROPRIATNESS OF ↓ Formal asset The approach to
INVESTMENT PLANS management plans are investment and
prepared annually for development is
Decisions to buy, hold, all estates to ensure detailed in the
sell or develop assets that capital Performance Review
could be flawed due to allocation is on pages 20 to 21.
inadequate analysis, optimised across the
inappropriate portfolio. The plans
assumptions, poor due are used to determine
diligence or changes in where to invest
the economic or capital in existing
operating environment. assets and to identify
assets for disposal.
The Group's major
development projects
are generally pre-let
to customers on a long
lease. Speculative
development is
carefully monitored by
the Investment
Committee and is
limited to locations
where supply is
limited and demand is
expected to be strong.
A new comprehensive
Capital Investment
Policy covering
evaluation, due
diligence, approval
and execution, has
been developed and
implemented.
PORTFOLIO VALUATION NEW The Group's re-shaping The reshaping
strategy is focused on strategy is
If we fail to increasing exposure to detailed in the
anticipate portfolio attractive assets in Chief Executive's
valuation changes we core locations and Review on page 10.
may fail to take action disposing of non-core
to sell assets. The progress made
under-performing assets during 2012 in
or we may not be able The Group's investment reshaping the
to manage shareholder team is responsible portfolio is also
expectations for the regular detailed in the
appropriately, assessment of Performance Review
resulting in TPR investment market on page 11 to 12.
underperformance or conditions and for
potential damage to our managing the biannual
reputation with external valuations.
investors and,
ultimately, to an This risk is also
increase in our cost of regularly monitored by
capital. the Investment
Committee which also
provides oversight of
and challenge to the
annual asset planning
process. An investor
relations process is
in place to maintain
positive shareholder
relationship and
manage shareholder
expectations.
COMPLIANCE RISKS
The risk of legal or regulatory sanctions, material financial loss, or loss of
reputation that the Group may suffer as a result of its failure to comply with
laws, regulations, rules, related self-regulatory organisation standards, and
codes of conduct applicable to its business activities.
THERE ARE CURRENTLY NO RISKS WITHIN THIS CATEGORY THAT MEET THE CRITERIA FOR
CLASSIFACTION OF A PRINCIPAL RISK
Currently there are no compliance risks which, taking into account the impact
of mitigating actions, including continued assessments and internal controls,
are considered to be principal risks.
RELATED PARTY TRANSACTIONS
GROUP
Transactions during the year between the Group and its joint ventures are
disclosed below:
2012 2011
£m £m
New loans during the year 1.2 0.7
Loans repaid during the year - (0.4)
Loans outstanding at the year end 172.1 127.0
Dividends received 18.7 8.3
Management fee income 7.4 5.9
COMPANY
Transactions between the Company and its subsidiaries eliminate on
consolidation and are not disclosed in this note. Amounts due from subsidiaries
are disclosed in note 18 and amounts due to subsidiaries are disclosed in note
19.
None of the above Group or Company balances are secured. All of the above
transactions are made on terms equivalent to those that prevail in arm's length
transactions.
REMUNERATION OF KEY MANAGEMENT PERSONNEL
Key management personnel comprise Executive and Non-Executive Directors and any
other members of the Executive Committee, as outlined in the Governance Report
on pages 46 to 51. Key management personnel compensation is shown in the table
below:
2012 2011
£m £m
Salaries and short-term benefits 3.5 4.4
Termination benefits - 0.6
Post employment benefits 0.1 0.2
Share-based payments 0.6 0.1
TOTAL REMUNERATION 4.2 5.3
More detailed information concerning directors' remuneration, shareholdings,
pension entitlements, share options and other long-term incentive plans as
required by the Companies Act 2006, is shown in the audited part of the Report
on Directors' Remuneration on pages 57 to 65.
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 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 EU. Under company law the Directors
must not approve the accounts unless they are satisfied that they give a true
and fair view of the state of affairs of the Company and of the profit or loss
of the Company for that period. In preparing these financial statements,
International Accounting Standard 1 requires that Directors:
* properly select and apply accounting policies;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the
entity's financial position and financial performance; and
* make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with International
Financial Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
* the management report, which is incorporated into the Directors' Report,
includes a fair review of the development and performance of the business
and the position of the Company and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
By order of the Board
David Sleath Justin Read
Chief Executive Group Finance Director
26 February 2013 26 February 2013
FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward looking statements with respect to
SEGRO's expectations and plans, strategy, management objectives, future
developments and performance, costs, revenues and other trend information.
These statements and forecasts involve risk and uncertainty because they relate
to events and depend upon circumstances that may occur in the future. There are
a number of factors which could cause actual results or developments to differ
materially from those expressed or implied by these forward looking statements
and forecasts. Certain statements have been made with reference to forecast
process changes, economic conditions and the current regulatory environment.
Any forward looking statements made by or on behalf of SEGRO speak only as of
the date they are made. SEGRO does not undertake to update forward looking
statements to reflect any changes in SEGRO's expectations with regard thereto
or any changes in events, conditions or circumstances on which any such
statement is based. Nothing in this Annual Report should be construed as a
profit forecast. Past share performance cannot be relied on as a guide to
future performance.
Robin Healy
Deputy Company Secretary
+44 (0) 20 7451 9082
Friday, 5th July 2024
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