Final Results - Part 2

RNS Number : 1267N

British Land Co PLC

14 May 2015

 



RISK MANAGEMENT AND PRINCIPAL RISKS

Our assessment of risk is a cornerstone of our strategy and our risk management is fundamental to its delivery.

Our risk appetite remains broadly unchanged. We maintain our focus on sectors where we see sustainable outperformance, that is high quality UK retail and London offices. In developments we have continued to deliver on our 2010 programme and have committed to new developments to manage our development exposure in-line with our return aspirations. Our approach to monitoring gearing has evolved; rather than target a specific LTV range, we aim to ensure that our LTV does not exceed a maximum threshold if yields were to rise to previous peak levels. This means we do not gear up solely on market yield shift and consequently LTV has reduced in the year. Internally we have undertaken some significant change projects to improve the operational effectiveness and efficiency of our business. While this inevitably presents a degree of operational risk, we believe we have the right people in place to manage change effectively. In the current year, we have been conscious of the increased risk of terrorist activities at our assets and have tested our crisis response plan to ensure it is robust.

Our approach to risk management

At British Land, we take the view that our assessment of risk is a cornerstone of our strategy and our embedded risk management is fundamental to its delivery. Our integrated approach combines a top-down strategic view with a complementary bottom-up operational process.

The top-down approach involves a review of the external environment in which we operate. This guides assessment of the risks which we are comfortable taking in pursuit of our performance objectives - this is our risk appetite. This evaluation guides the actions we take in executing our strategy. Key risk indicators ('KRIs') have been identified for each of our principal risks and are used to monitor our risk exposure. The KRIs are reviewed quarterly by the Risk Committee to ensure that the activities of the business remain within our risk appetite.

The bottom-up approach involves identifying, managing and monitoring risks in each area of our business. This way risk management is embedded in our everyday operations. Control of this process is provided through maintenance of risk registers in each area. These risk registers are aggregated and reviewed by the Risk Committee, with significant and emerging risks escalated for Board consideration as appropriate. This process complements the top-down view by helping us identify our principal risks and ensuring that operational risks are fully considered in determining the risk appetite and the corresponding strategy of the business.

Our principal risks are detailed in the table that follows. These remain unchanged from the prior year with two exceptions. The 'Economic and Political outlook' risk has been separated into two distinct economic and political risks, reflecting the differing drivers of these risks and their divergent paths. In addition we have separated 'Development' risk into 'Development Exposure' and 'Development Cost Inflation' to reflect the differing nature of these risks.

Risk governance

The Board takes overall responsibility for risk management with a particular focus on determining the nature and extent of significant risks it is willing to take in achieving its strategic objectives. The Audit Committee assesses the principal risks facing the Company, including those that would threaten its solvency or liquidity. A description of how these risks are managed and mitigated is included in the Financial Strategy Execution risk in the table of principal risks which follows.

The Audit Committee takes responsibility for overseeing the effectiveness of sound risk management and internal control systems.

Risk management at a glance

The diagram below summarises the complementary top-down and bottom-up aspects of our integrated approach to risk management.

The Executive Directors are responsible for delivering the Company's strategy and managing operational risk and a Risk Committee has been established to provide a forum to fulfil these responsibilities.

The Directors in turn place reliance on their teams to monitor and manage operational risks on an ongoing basis, and to identify emerging risks. The risk registers provide a framework for all staff to feed into this process recognising their shared responsibility for effective management of risk in delivering our strategy.

	Top-down strategic risk management	Bottom-up operational risk management
Board/Audit Committee	·      Review external environment ·      Set risk appetite and parameters ·      Determine strategic action points	·      Assess effectiveness of risk management systems ·      Report principal risks and uncertainties
Risk Committee (Executive Directors)	·      Direct delivery of strategic actions ·      Monitor key risk indicators	·      Consider completeness of identified risks and adequacy of mitigating actions ·      Consider aggregation of risk exposures across the business
Business units	·      Execute strategic actions ·      Report on key risk indicators	·      Report priority and emerging risks ·      Identify, evaluate, prioritise, mitigate and monitor operational risks recorded in risk register

Risk Management in Action - Crisis Response

During the year the Executive Committee undertook a simulation exercise to test the Company's crisis response plan. The scenario involved responding to a bomb explosion affecting one of our central London office estates. The Executive Committee demonstrated the steps that would be taken in order to handle such an incident, ranging from dealing with the emergency services, liaising with key stakeholders and operating telephone helplines. This was a valuable exercise to satisfy ourselves that our crisis response plan is robust and can be executed on a real time basis in response to a catastrophic external event. As well as giving us confidence that we are well prepared to handle such an event, the exercise also gave us the opportunity to refine and further enhance our response plan for the future.

External Risks

Risks and impacts		How we monitor and manage the risk	Movement in the period
Economic outlook	The economic recovery and the prospect of increasing interest rates present risks and opportunities in property and financing markets and the businesses of our occupiers.	·      The Risk Committee reviews the economic environment in which we operate quarterly to assess whether any changes to the economic outlook present risks or opportunities which should be reflected in the execution of our strategy. Indicators such as forecast GDP growth, unemployment, business and consumer confidence, interest rates and inflation/deflation are considered, as well as central bank guidance and government policy updates.	↓The UK economic recovery continued this year with improving GDP growth, low unemployment and low interest rates. Low oil prices and low inflation expectations coupled with the return of wage growth has resulted in an increase in consumer confidence.
Political outlook	Significant upcoming political events bring risks in two areas: ·      reluctance of investors and businesses to make investment decisions whilst the outcome remains uncertain, and ·      on determination of the outcome, the impact on the case for investment in the UK, and of specific policies and regulation introduced, particularly those which directly impact real estate.	·      We are not able to influence the outcome of significant political events, but take the uncertainty related to such events and the range of possible outcomes into account when making strategic investment and financing decisions. ·      We engage public affairs consultants to ensure that we are properly briefed on the potential policy and regulatory implications of political events. Where appropriate, we act with other industry participants to influence the debate on these policies.	↑ There are a number of uncertainties regarding the composition of the EU. We have been mindful to consider the impact of the possibility of the UK leaving the EU and of any revised terms of EU membership as this would need to be managed carefully.
Commercial property investor demand	Reduction in investor demand for UK real estate may result in falls in asset valuations and could arise from variations in: ·      health of the UK economy ·      attractiveness of investment in the UK ·      availability of finance ·      relative attractiveness of other asset classes	·      The Risk Committee reviews the property market quarterly to assess whether any changes to the market outlook present risks or opportunities which should be reflected in the execution of our strategy. The Committee considers indicators such as the margin between property yields and borrowing costs and property capital growth forecasts which are considered alongside the Committee members' knowledge and experience of market activity and trends. ·      We focus on those sectors which we believe will deliver outperformance over the medium term, benefiting from continuing occupier demand and investor appetite.	↓There was a high level of investor demand in UK commercial property during the year, both from domestic and international investors. The low cost of finance to many investors heightened the attractiveness of property investment in the UK.
Development cost inflation	Cost inflation presents a risk to the profitability of our development projects and has the potential to adversely affect our cash position and overall return on investment.	·      For each project we make a judgement about apportionment of construction risk. Where we retain this risk we aim to fix costs early in the process, subject to other market factors, with key contractors subject to financial covenant review. ·      We factor in construction cost inflation for our projects as part of the investment appraisal process to assess the viability of each development. ·      We are working with our supply chain on initiatives to address emerging skills shortages and potential resource constraints that could impact development costs in the long term.	↑Construction cost inflation significantly increased throughout the year as a result of the supply and demand dynamics within the construction industry. As such we have decided it is appropriate to recognise this as a separate principal risk.
Occupier demand and tenant default	·      Underlying income, rental growth and capital performance could be adversely affected by weakening occupier demand resulting from variations in the health of the UK economy and corresponding weakening of consumer confidence and business activity and investment. ·      Occupier failures may adversely impact underlying income and capital performance. ·      Changing consumer and business practices (including the growth of internet retailing, flexible working practices and demand for energy efficient buildings), new technologies, new legislation and alternative locations may result in earlier than anticipated obsolescence of our buildings if evolving occupier and regulatory requirements are not met.	·      The Risk Committee regularly reviews indicators of occupier demand including consumer confidence surveys, employment forecasts for relevant occupier sectors and ERV growth forecasts. These are considered alongside the Committee members' knowledge and experience of occupier plans, trading performance and leasing activity in guiding execution of our strategy. ·      We have a Key Occupier Account programme through which we work together with our occupiers to find ways to best meet their evolving requirements - including understanding how our stores fit with their omni-channel offer. ·      We perform rigorous occupier covenant checks and review these on an ongoing basis so that we can be proactive in managing exposure to weaker occupiers. ·      We have linked leadership on environmental issues with our business strategy and set future proofing goals to respond to customer demand, including complying with new energy and water legislation. ·      British Land prides itself on taking a leadership position in defining and responding to environmental legislation impacting the built environment. We expect our office developments to be BREEAM Excellent and our major retail developments to be BREEAM Very Good at a minimum.	↓The London office occupational market continued  to strengthen due to a combination of constrained supply and increased demand from an increasingly diverse occupier base. For retailers, there was continued demand for retail space that matches the nature of their omni-channel offerings demonstrating the need for us to have continued customer focus.
Availability and cost of finance	·      Reduced availability of property financing may adversely impact our ability to refinance facilities and result in weaker investor demand for real estate. ·      Increasing finance costs would reduce our underlying income.	·      Benchmark borrowing rates and measures of real estate credit availability are monitored by the Risk Committee quarterly and considered alongside Committee members' awareness of financing activity in the industry to guide our financing actions in executing our strategy. ·      We maintain good relationships with our key financing partners and advisors to maintain an awareness of financing market activity. ·      We maintain a diverse range of sources of finance to provide flexibility to access funding as required. ·      We are mindful of relevant emerging banking regulations, working with industry bodies and other relevant organisations to participate in the debate where our interests are affected.	↓We saw a continued increase in the availability of finance to commercial property across a range of sources. Overall financing costs remained at historic lows throughout the year.
Catastrophic Business Event	An external event such as a civil emergency, including a large-scale terrorist attack, extreme weather occurrence or environmental disaster could severely disrupt global markets (including property and finance) and cause significant damage and disruption to our portfolio and operations.	·      We maintain a comprehensive crisis response plan across all business units as well as a head office business continuity plan. ·      The Risk Committee monitors the Home Office terrorism threat levels and we have access to security threat information services. ·      Asset emergency procedures are regularly reviewed and scenario tested. ·      Physical security measures are in place at properties and development sites. ·      Asset risk assessments are carried out (e.g. security, flood, environmental, health and safety). ·      We also have appropriate insurance in place across the portfolio.	↑The Home Office threat level from international terrorism increased from 'substantial' to 'severe' reflecting events in the Middle East and some isolated incidents closer to home in Europe. The nature, location and target of terrorist attacks have become harder to predict. Security procedures across our portfolio have been reviewed and enhanced as appropriate.

Internal Risks

Risks and impacts		How we monitor and manage the risk	Movement in the period
Investment Strategy	In order to meet our strategic objectives we must invest in and exit from the right properties at the right time. Significant underperformance could result from inappropriate determination and execution of our property investment strategy, including: ·      sector selection and weighting ·      timing of investment and divestment decisions ·      exposure to developments ·      sector, asset, tenant, region concentration ·      co-investment arrangements RESPONSIBLE EXECUTIVE: Chris Grigg STRATEGIC PRIORITIES: Right places	·      Our investment strategy is determined to be consistent with our target risk appetite and is based on the evaluation of the external environment. ·      Progress against the strategy and continuing alignment with our risk appetite is discussed at each Risk Committee with reference to the property markets and the external economic environment. ·      Individual investment decisions are subject to robust risk evaluation overseen by our Investment Committee including consideration of returns relative to risk adjusted hurdle rates. ·      We foster collaborative relationships with our co-investors and enter into ownership agreements which balance the interests of the parties.	↔Chris Grigg commented "In the year we took advantage of strong investment markets to recycle capital. We made significant progress in our residential sales, particularly at Clarges and continued to re-shape our Retail portfolio by disposing some of our more mature assets. We successfully executed a property exchange with Tesco PLC resulting in increased exposure to multi-let retail parks and shopping centres while simultaneously decreasing our exposure to superstores. We were also an active buyer in the market, with notable acquisitions at Canada Water and Paddington. We remain confident that our chosen sector focus will deliver outperformance over the medium term."
Development Exposure	Development provides an opportunity for outperformance but this brings with it elevated risk. The care with which we make our decisions around which schemes to develop when, as well as our execution of these projects, must reflect this. Development risks could adversely impact underlying income and capital performance including: ·      development letting exposure ·      construction timing and costs ·      adverse planning judgements RESPONSIBLE EXECUTIVES: Charles Maudsley, Tim Roberts STRATEGIC PRIORITIES: Right places	·      We maintain our levels of total and speculative development exposure as a proportion of the investment portfolio value within a target range taking into account associated risks and the impact on key financial metrics. This is monitored quarterly by the Risk Committee, along with progress of developments against plan. ·      For each project we make a judgement about apportionment of construction risk. Where we retain this risk we fix costs early in the process, subject to other market factors, with key contractors subject to financial covenant review. ·      Pre-let targets are used to reduce development letting risk where considered appropriate. ·      We actively engage with the communities in which we operate, as detailed in our Community Charter, to ensure that our development activities consider the interests of all stakeholders. ·      We manage environmental and social risks across our development supply chain by engaging with our suppliers, including through our Sustainability Brief for Developments and Health and Safety Policy.	↓Tim Roberts commented "We reached the final stages of our 2010 development programme with the completion of Leadenhall during the year and 5 Broadgate to follow after year end. We were successful in achieving record city rents at The Leadenhall Building and made significant pre-sales at Clarges thereby reducing our risk exposure. As a result we were confident in committing to 4 Kingdom Street during the year and exploring our options at Blossom Street, Canada Water and 100 Liverpool Street without breaching our risk appetite limits."
People	A number of critical business processes and decisions lie in the hands of a few people. Failure to recruit, develop and retain staff and directors with the right skills and experience may result in significant underperformance. RESPONSIBLE EXECUTIVES: Chris Grigg STRATEGIC PRIORITIES: Expert people	Our HR strategy is designed to minimise risk through: ·      Informed and skilled recruitment processes ·      Highly competitive compensation and benefits ·      People development and training ·      Employee engagement surveys and other initiatives. We monitor this through the number of unplanned executive departures in addition to conducting exit interviews. We engage with our outsourced suppliers to make clear our requirements in managing key risks including health and safety, fraud and bribery and other social and environmental risks.	↔Chris Grigg commented "Our expert people are a key asset and their decisions and actions drive our performance. There is a significant level of change activity within the business and while we are mindful of the impact this has, we also believe that we have the right people in role to deliver these projects. We are committed to making British Land a great place to work and offer a suite of training and development opportunities to our staff. Our high level of staff engagement was recognised by maintaining a One Star rating in the Sunday Times Best Companies to Work For survey."
Income Sustainability	We must be mindful of maintaining sustainable income streams in order to continue to generate returns for our shareholders and provide the platform from which to grow the business through development and capital appreciation. We consider sustainability of our income streams in: ·      execution of investment strategy and capital recycling, notably timing of reinvestment of sale proceeds ·      nature and structure of leasing activity ·      nature and timing of asset management and development activity RESPONSIBLE EXECUTIVES: Charles Maudsley, Tim Roberts STRATEGIC PRIORITIES: Customer orientation	·      We undertake comprehensive profit and cash flow forecasting incorporating scenario analysis to model the impact of proposed transactions. ·      We monitor our market letting exposure including vacancies, upcoming expiries and breaks and tenants in administration as well as our weighted average lease length. ·      We perform rigorous occupier covenant checks and review these on an ongoing basis so that we can be proactive in managing exposure to weaker occupiers. ·      We are proactive in addressing key lease breaks and expiries to minimise periods of vacancy. ·      We have a diversified occupier base and monitor concentration of exposure to individual occupiers or sectors. ·      We actively engage with the communities in which we operate, as detailed in our Community Charter, to ensure that we provide buildings that meet the needs of all relevant stakeholders.	↔Charles Maudsley commented "We are investing in our Retail portfolio to ensure we are meeting the demands of our occupiers and their customers. We achieved a number of leasing successes in excess of ERV, occupancy rates increased and footfall continued to be above benchmarks throughout the year. We recognise that in delivering our investment strategy and selling some of our mature assets, we have had to be conscious of the impact on our income sustainability. Additionally, we are also mindful of the challenges facing the industry and continue to monitor our exposure to occupiers at risk of default and administration."
Capital Structure - Gearing	We must maintain a capital structure which recognises the balance between performance, risk and flexibility. ·      Gearing magnifies returns, both positive and negative ·      An increase in the gearing level increases the risk of a breach of covenants on borrowing facilities and may increase finance costs RESPONSIBLE EXECUTIVES: Lucinda Bell STRATEGIC PRIORITIES: Capital efficiency	·      We monitor our LTV in order to manage gearing levels over the cycle. ·      We manage our investment activity, the size and timing of which can be uneven, as well as our development commitments to ensure that our LTV level remains appropriate.	↓Lucinda Bell commented "How we monitor capital structure and our approach to LTV evolved during the year; we consider our LTV in the context of valuation movements across the property cycle rather than target an LTV within a range. Our clear strategy is that we do not gear up on market yield shift and hence our LTV reduced over the year."
Finance Strategy Execution	We must be judicious in the management of our financing as our strategy here addresses risks both to our continuing solvency and the stability of our profits. Failure to manage the refinancing requirement may result in a shortage of funds to sustain the operations of the business or repay facilities as they fall due. This and a breach of financing covenant limits are considered to be significant risks to the continuing operations of British Land as a going concern. RESPONSIBLE EXECUTIVE: Lucinda Bell STRATEGIC PRIORITIES: Capital efficiency	·      We have five key principles guiding our financing which together are employed to manage the risks in this area: diversify our sources of finance, phase maturity of debt portfolio, maintain liquidity, maintain flexibility, maintain strong balance sheet metrics. ·      We closely monitor the period until refinancing is required, which is a key determinant of financing activity, and use scenario modelling tools to evaluate the likelihood of covenant breach. ·      We are committed to maintaining and enhancing relationships with our key financing partners. ·      We are mindful of relevant emerging regulation which has the potential to impact the way that we finance the Group.	↔Lucinda Bell commented "We continued to operate an efficient debt book in the year, providing the flexibility required for our investment activity and, in conjunction with our hedging policy, stability of financing costs. We were successful in re-financing at attractive rates during the year including one of our joint ventures with Tesco. Given our sales and purchases profile, we  also focused on managing the repayment of existing facilities and ensuring our level of committed facilities is appropriate."

Statement of Directors' responsibilities

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 31 March 2015. Certain parts thereof are not included within this announcement.

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration 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 have prepared the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). 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 group and the Company and of the profit or loss of the group for that period.  In preparing these financial statements, the Directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the group and parent Company financial statements respectively;

•     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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 the group and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the group 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 Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 

The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess a Company's performance, business model and strategy. 

Each of the Directors, whose names and functions are listed in the governance and remuneration section confirm that, to the best of their knowledge:

•     the group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the group; and

•     the Strategic Report and the Directors' Report include a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that it faces.

By order of the Board.

Lucinda Bell

Chief Financial Officer

13 May 2015

 

END

 

 

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