CAD O GAN Annual Report 2017
B
Contents 2 - 3
40 - 41
Directors and Secretary
Independent Auditor’s Report
4 - 5
42
Chairman’s Statement
Consolidated Income Statement
6 - 7
43
The Estate Today
Statements of Comprehensive Income
8 - 9
Our Core Objectives and Financial Highlights
44
Statements of Changes in Equity
10 - 11
The Estate at a Glance
45 - 46
Statements of Financial Position 12 - 13
Our Community
47
14 - 31
Consolidated Statement of Cash Flows
Strategic Report 48 - 68 32 - 37
Financial Review 38 - 39
Directors’ Report
C
Annual Report 2017
Notes on the Financial Statements 69
Five Year Summary
1 The Duke of York Restaurant, an award-winning design from NEX architects due for completion in 2018
Directors & Secretary LIFE PRESIDENT
REGISTERED OFFICE
The Earl Cadogan KBE DL
10 Duke of York Square London SW3 4LY
D I R E C TO R S Viscount Chelsea DL* Chairman The Hon. James Bruce* Deputy Chairman Hugh Seaborn CVO Chief Executive Jeremy Bentley Finance Director Charles Ellingworth* John Gordon* Francis Salway* * Non-executive
S E C R E TA RY Paul Loutit
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Annual Report 2017
C O M PA N Y N U M B E R 2997357
A U D I TO R Ernst & Young LLP 1 More London Place London SE1 2AF
3 A view from Cadogan Place South gardens to 28-30 Cadogan Place
Chairman’s Statement
Viscount Chelsea, Chairman
I am delighted to be presenting the Chairman’s statement for the business covering progress over 2017. The context of 2017 has been one of increased domestic economic uncertainty and London and the UK’s economic growth has slowed since the EU referendum. Results at Cadogan have included an increase in capital values of only 1.8% across our portfolio, which continues the pattern of muted capital growth we reported last year. Within this growth, the office sector, a relatively small element of the portfolio, showed significant capital increase of 8.3%, supported by the retail portfolio which grew by 3.0%. Residential values declined by 0.9%, which continues a pattern of flat or mildly negative growth for this sector that we have experienced over the past 3 years.
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Annual Report 2017
Notwithstanding this uncertain background, I am pleased to be reporting that 2017 was a successful year for Cadogan. In financial terms we draw particular pride from the continuing growth in rental income which has supported the operating profit before capital items. Rental income grew by 7.0%. This follows growth of 10.0% in 2016, and 8.2% in 2015. This improving income has been achieved through a continued programme of investment into all parts of the portfolio. In 2017 we invested over £94.3m in the purchase of properties and the refurbishment and development of existing assets. This continuing financial investment allows us to secure high quality new occupiers to the area, and particularly to contribute to refreshing the retail offering and provide further attractions for residents, shoppers and other visitors.
of the Grenfell Tower fire. Like so many people, I was deeply affected by the devastating effect this horrific event had on so many people and their families. My deepest sympathies remain with all those people who have been affected. It was small comfort that Cadogan was able to act swiftly to offer direct and indirect support to the victims. If there is any solace to be taken from such a terrible event, it is in the immediate and widespread expression of compassion for the victims and their families, which manifested itself in a generous response to the various fundraising campaigns.
“It is the complex matrix of arts and culture, fashion and retail, churches and gardens and much more besides, which helps define the character of an area.”
Reflec ting on 2018 and looking to the future, there is a more uncertain backdrop as a result of the Brexit vote and the subsequent negotiations with the European Union. Growth in the UK economy has slowed despite strong global growth and finance remaining relatively cheap. Although London has greater relative exposure to the impact of Brexit, the capital’s property market has proved more resilient to date than many expected.
My family has been involved in Chelsea for over 300 years. I was delighted to mark this long and rich history (initiated with the marriage of Charles, Baron Cadogan to Elizabeth Sloane in 1717), with the launch of Cadogan & Chelsea; The Making of a Modern Estate. This publication covers the early history of Sir Hans Sloane’s acquisition of the Manor of Chelsea and goes on to concentrate on how Chelsea and the Estate have evolved in the 20th century. It is the complex matrix of arts and culture, fashion and retail, churches and gardens and much more besides, which help define the character of an area. It is the role of the Estate to protect and enhance these things that make Chelsea unique in the interests of future generations of my family and the local community.
Overall we remain positive about the outlook for our business. However, capital growth has slowed and residential remains depressed. While we are experiencing healthy demand for our shops, retailers are proving more selective and deals are taking longer to secure. The Cadogan business is favourably positioned holding an exceptionally high quality portfolio, long-term and conservative funding and an extremely talented and able team led by my Chief Executive, Hugh Seaborn, who I have charged with driving the business forward.
When commenting on the events of 2017, all other matters within the Royal Borough of Kensington and Chelsea and indeed beyond, fade into insignificance compared to the tragic events
Finally, I would like to extend my gratitude to my fellow board members for their guidance, support and wise counsel throughout the year. VISCOUNT CHELSEA 25 April 2018
Chairman’s Statement
5
The Estate Today D E F I N E D BY O U R H E R I TA G E . D E D I C AT E D TO T H E F U T U R E .
Cadogan is a dynamic property manager, investor and developer with a 300-year family history. This long heritage provides a remarkable foundation upon which to base a contemporary, forward looking business able to respond swiftly to the changing needs of our customers and markets.
C E L E B R AT I N G 30 0 Y E A R S Cadogan’s long association with Chelsea began when Charles, Baron Cadogan, wed Elizabeth Sloane in 1717, 300 years ago. Since that time, the family and place have grown together – evolving the Cadogan Estate into one of London’s most charac ter ful and distinc tive neighbourhoods.
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Annual Report 2017
We marked this significant milestone with the publication of a coffee table book ‘Cadogan & Chelsea - The making of a modern Estate’, a collection of essays and images celebrating ever y thing from the architectural and horticultural heritage to pioneering fashion trends that have shaped the neighbourhood over generations.
C USTO M E R CO M M I T M E N T
We are committed to providing exceptional customer service for those both living and working on the Estate. We are proud to have so many long lasting relationships, which help to build a strong sense of community across the neighbourhood.
94.4%
of customers rate their overall satisfaction as a Cadogan customer good or excellent
R EC E N T AWA R D S & R EC O G N I T I O N
U K P RO P E RT Y AWA R D S ‘Mixed Use Development’ - George House
N E W LO N D O N A RC H I T EC T U R E AWA R D S Duke of York Restaurant, ‘Hotels & Hospitality’ category
I N T E R N AT I O N A L B R E E A M AWA R D S 126 Pavilion Road, ‘Homes Post Construction’ category
73.6%
LO N D O N I N B LO O M AWA R D S Gold for Cadogan Place South Gardens
of new customers cited Cadogan’s reputation as to why they chose their current property N AT I O N A L C O N S I D E R AT E C O N ST RU C TO R S C H E M E Bronze Award
93.8%
WA L P O L E B R I T IS H LU X U RY AWA R D S
of customers rate Cadogan responsiveness to requests as good or excellent
shortlisted for ‘Luxury with a heart’ category
We have partnered with RealService* on a Customer Feedback Framework, designed following extensive research to ensure that we receive live feedback at key stages of our customers’ experience, allowing us to listen and react swiftly - continually shaping and improving the customer experience.
2 0 1 7 V I TA L I T Y I N D E X *
* RealService is a leading independent customer experience consultancy
Chelsea named one of the best places to shop in the UK* * Annual index produced by Harper Dennis Hobbs following extensive research on the quality of 1,000 shopping districts in Britain, considering factors such as how well the retail offering served the local community and shop vacancy rates. Chelsea was ranked 4th in Britain, and Sloane Street awarded a new entry as the 11th best retail location in the UK
The Estate Today
7
Our Core Objectives 1 To protect and enhance the Estate’s position as one of the world’s leading locations in which to live, work and visit.
2 To safeguard its future and protect the portfolio as a long-term investment – creating and maintaining outstanding buildings and environment.
3 To make a positive contribution towards a sustainable environment and a thriving community.
4 To deliver excellent customer service, aiming to be good neighbours and ensuring that integrity is at the heart of all business decisions.
5 To recruit and retain an exceptionally talented team and to use the best external advisers.
8
Annual Report 2017
Financial Highlights FIVE YEAR GROWTH
G RO S S R E N T S
O P E R AT I N G P RO F I T B E F O R E C A P I TA L I T E M S
7.8% PA
£93.8m 2017 £152.6m
2017
£142.7m
2016
£129.7m
2015
2017
£93.8m
2016
£92.6m £82.8m
2015
2014
£119.9m
2014
2013
£117.1m
2013
£72.4m £77.6m
NET ASSETS PER SHARE
G RO S S P RO P E RT Y VA LU E FIVE YEAR GROWTH
9.7% PA
£38.2 2017 £6,147.6m
2017
£5,985.5m
2016 2015
£5,793.9m
2014
£5,175.2m
2013
£38.2
2017
£37.2
2016
£35.7
2015 2014
£30.5
2013
£4,456.0m
£26.3
BAL ANCE SHEET GEARING
TOTA L R E T U R N FIVE YEAR AVERAGE
12.8% PA 2017 2016 2015 2014 2013
14.0% 2017
3.3% 4.6% 17.7% 16.9%
2017
14.0%
2016
13.9%
2015
13.7%
2014 22.9%
2013
16.0% 16.3%
Our Core Objectives and Financial Highlights
9
The Estate at a Glance
7 SCHOOLS
5 CHURCHES
5 EMBASSIES
9 HOTELS
300 SHOPS
500,000FT 2 OF OFFICE SPACE
OVER 30 RESTAURANTS, CAFÉS AND BARS
OVER A DOZEN GARDENS AND GREEN SPACES
OVER 3,000 FLATS AND HOUSES
SLOANE STREET Sloane Street is 1km of the world’s finest luxury brands – including flagships for Tom Ford, Alberta Ferretti, Emilia Wickstead, Valentino and Versace
THE CADOGAN HOTEL Currently closed for refurbishment, this grand Victorian hotel will reopen in late 2018 under the management of Belmond
PAVILION ROAD New ‘community heart’ following local consultation - small independent food artisans, restaurant and cafés
CADOGAN HALL Originally a Christian Science church, Cadogan acquired this building in 2000 and converted it into one of London’s best classical concert venues
DUKE OF YORK SQUARE Designed as a school for military orphans in 1801. Acquired by Cadogan and redeveloped into an award winning shopping and dining destination
KEY THE CADOGAN ESTATE SPANS 93 ACRES 15 ACRES OF G ARDENS
Our Community Stewardship and community are the watchwords of the Estate. Our long-term commitment comes with the responsibility to ensure that we are making a positive contribution towards a sustainable environment, protecting the area’s unique heritage and supporting a thriving community.
COMMUNIT Y
Chelsea’s neighbourhood is vibrant and full of character. We actively and regularly contribute to this thriving community – working closely with local groups, charities, educational and religious bodies as well as supporting local cultural attractions: yy
The Cadogan family has donated more than £16 million over the last 5 years, to both local and national charitable causes
yy
Around £250,000 further each year is given to support essential community facilities such as cultural centres, shelters, local churches and schools
yy
Donated £200,000 in 2017 via ‘The Big Give’ to the Grenfell Tower Appeal fund, and offered accommodation to help families affected
yy
Work with the Kensington & Chelsea Foundation, who help local charities operating at grass roots level by creating a specific Fund. This has recently included:
yy
yy
Smart Works: donated clothes to support vulnerable people back into work
yy
Clement James: work with our retailers to help long-term unemployed
yy
Octavia Foundation: volunteer at social events for socially isolated people in the borough
yy
Over £1.3 million committed each year to subsidise affordable, community and key worker housing
yy
Over 60 exciting and inclusive events for the enjoyment of the local community. From the annual Summer Fete, Chelsea in Bloom, ‘Strawberries & Screen’ Wimbledon screenings and Christmas Shopping Weekend to ‘Yoga on the Square’ and a Fine Food Market each weekend
yy
Support key neighbourhood institutions including the Royal Court Theatre, Chelsea Physic Garden and Cadogan Hall
yy
Consultation with community – most recently resulting in the creation of a ‘village heart’ of independent, artisan, ‘useful’ shops on Pavilion Road
Staff policies on charitable matchfunding and volunteering Chelsea Summer Fete
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Annual Report 2017
H E R I TAG E A N D C O N S E RVAT I O N
Conservation of the Estate’s rich heritage is essential. This includes cyclical repair and maintenance of our existing buildings following a strategic Conservation Management Plan, of ten using traditional skills and materials to make sympathetic repairs to restore buildings, replacing missing features and architectural detail:
Traditional casting method used to replace iron railings on Oakley Gardens
yy
Returning a lost generation of iron railings to Oakley Gardens (lost as part of the Second World War home front efforts) – worked with heritage specialists to accurately reinstate the ornate ironwork patterns, bringing back the original character and charm to 300m of railings
yy
Restored original Georgian detailing to 28 – 30 Cadogan Place, both internally and externally
yy
Enhancing 224 – 226 King’s Road, a Grade II listed former banking hall, constructed in 1909 by respected Edwardian architect Reginald Blomfield, preserving and enhancing the internal ornamentation and restoring original plaster detailing to walls and ceiling
E N V I RO N M E N T – E N S U R I N G A S USTA I N A B L E F U T U R E
Our long-term approach means we naturally think of our impact on future generations and seek to actively manage our environmental footprint: from ensuring historic buildings are as energy efficient as possible to introducing the latest sustainable technology, reducing waste and continually seeking ways to reduce energy consumption: yy
Employ green technologies and recycle materials wherever possible - in 2017, 90% of our residential and commercial projects achieved BREEAM ‘Very good’ or above (George House received ‘excellent’)
yy
Creation of one of the UK’s few retrofit ‘PassivHaus’ eco homes, using cutting edge environmental measures but retaining historical character and charm – achieved ‘Outstanding’ BREEAM rating (88.3%)
yy
Dedicated to improving energy performance across our portfolio
yy
Benchmark all sites against the ‘Considerate Constructors Scheme’
yy
Achieve a minimum 90% recycling on all of our construction sites
yy
100% of waste from Duke of York Square is diverted from landfill
PassivHaus at 126 Pavilion Road
Our Community
13
Strategic Report
Hugh Seaborn, Chief Executive
Despite subdued capital growth, I am pleased to report that the business has performed strongly in 2017. Total income has increased from £149.7m to £160.9m, an overall increase of 7.5%. This revenue growth has resulted in operating profit after interest rising by 15.4% to £74.8m, which represents a record level for Cadogan. Growth in rental income and operating profit reflect the actions we have taken and the investments we have made over the past few years to upgrade the assets. In 2017 we invested £94.3m in the improvement of the portfolio through development and acquisitions. Over the past five years this figure amounts to £561m. UK GDP growth remained at 1.8% in 2017, and despite the backdrop of improving global economic activity, notably in continental Europe, most commentators expect UK economic performance to remain subdued. Despite the more uncertain context particularly as a result of ongoing Brexit negotiations, London commercial property has remained in demand from investors, effectively underpinning capital values.
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Annual Report 2017
“London is one of the world’s genuinely international cities and continues to have great attraction globally.”
Due to our focus on Chelsea, the success of Cadogan is inevitably closely tied to that of London. Due to its status as a global financial centre, the capital city is more exposed to Brexit risk. London is one of the world’s genuinely international cities and continues to have great attraction globally. London represents the largest city of commerce in Europe, has excellent global connectivity, a large, diverse and highly skilled workforce together with convenient time zone working hours. As an international trading city with a high concentration of headquarters and corporate functions, it provides access to key decision makers and global businesses and is founded on a strong legal system. London also provides an unrivalled lifestyle and is the leading European city for retail, with more leading international brands than any other location in continental Europe. Therefore the case for London remains powerful.
Redeveloped retail space and residential apartments at 224 – 226 King’s Road
Strategic Report
15
Property Portfolio Although residential values declined marginally during 2017, the office sector delivered our strongest growth of 8.3%, reflecting a healthier occupational market and minimal voids in our portfolio. The London office market has benefited from limited supply which has supported rental levels despite softening demand. Retail, which at 50% of the total portfolio is our most significant sector, provided capital growth of 3.0% in 2017. Behind this figure was a slight improvement in rental tone, particularly on Sloane Street, and static investment yields which has had the effect of flattening growth in values. The significance of our residential sector has been diminishing steadily since the sustained market slow down which started in the second half of 2014. Following several
16
Annual Report 2017
years of flat or gently declining values, (added to in 2017 when values reduced by 0.9%), coupled to increasing commercial capital returns, the residential sector now represents just 32% of our total portfolio. Perhaps as a result of the weaker market and much reduced sales activity, our sales arising due to enfranchisement have remained at historically low levels and behind 2016 levels (2017 ÂŁ46.5m and 2016 ÂŁ56.3m). The remainder of the portfolio, which comprises leisure and other uses, was subject to a 4.6% decline in capital value. This sector includes hotels, several of which are subject to extensive redevelopment, which will benefit the business once they have been completed and put back into operation over the following few years.
Investment Performance Highlights TOTAL PROPERTY PORTFOLIO
£6.2bn INCREASE OF
1.8% COMMERCIAL PORTFOLIO UP
3.1% RESIDENTIAL PORTFOLIO DOWN
0.9%
Pavilion Road
Retail Retail is our largest sector in financial terms and it also brings vitality and personality to the Estate. Our 300 retail units are largely located on Sloane Street, Sloane Square, Duke of York Square and parts of the King’s Road. They account for 50% of the capital value of our portfolio and 53.6% of the revenue. The changes in the way people shop continues at pace. In simple terms, shoppers have numerous ways online in which to satisfy their requirements without needing to venture into a shop unless they wish to. In response we have a range of strategies to encourage people to visit the area and to do so more often. This means working in partnership with our retail brands to thoroughly understand their needs and those of their customers. We aim to curate an environment where our shops can thrive, which includes creating a vibrant neighbourhood where customers want to spend time. We achieve this through a combination of developing the optimal physical space for the brands, providing an attractive environment to ensure the wider Estate complements
RE TA IL
the luxury retail offer. This includes carefully selecting a range of outstanding restaurants and cafes as consumers are seeking a more engaging, memorable and social shopping experience. Food and drink plays an increasingly important role as an attraction and also as “glue” for retail as their customers dwell in the area for longer. In response to our retailers, we have been working closely with the Royal Borough of Kensington and Chelsea on plans to enhance the public realm of Sloane Street. The proposals include creating a greener and more elegant environment with more trees and high quality planting, removing “street clutter ”, renewing paving, lighting and street furniture to enhance the character and appearance of the street and creating more space for pedestrians by re-allocating surplus road space to widen pavements in some limited areas. The aim is to create an elegant and attractive environment for pedestrians, whether local residents or visitors, while ensuring improvements have a neutral impact on vehicular traffic.
201 7 £M
201 6 £M
% INCREASE
G RO SS VA LU E
3,072
2,952
3.0%*
G RO SS RE N TS
81.2
77.0
5.5%
* - adjusted for purchases, sales and capital expenditure
18
Annual Report 2017
Aesop store, Duke of York Square - a fusion of futuristic and classic design from Snohetta architects
Retail
19
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Annual Report 2017
“I am immensely proud of what we have created on the southern part of Pavilion Road. Having taken the decision to build small shop units at the rear of the development of George House on Sloane Street, we wanted to understand what local residents wanted to see in the locality; so we asked them.” During 2017, the Royal Borough of Kensington and Chelsea undertook an extensive public consultation on the proposals, canvassing the views of over 12,000 properties in the area surrounding Sloane Street. There was a healthy response and 75% of respondents supported the proposals for Sloane Street. We are hopeful to be able to proceed with these plans in due course. I am immensely proud of what we have created on the southern part of Pavilion Road. Having taken the decision to build small shop units at the rear of the development of George House on Sloane Street, we wanted to understand what local residents wanted to see in the locality; so we asked them. The resounding feedback from 80% of respondents, was that they wanted independently owned “useful” shops selling quality produce,
such as family butchers and greengrocers, to enhance the Chelsea village feel and benefit the local community. We have delivered these shops for local residents and visitors and we are completing the second phase by converting Victorian garages to create further small shop units to complement what has now become a very attractive destination. The demand for our retail space remained healthy throughout the year and as a consequence vacant space was negligible. Sloane Street, the internationally recognised luxury stopping street, was strengthened with new lettings to Fendi, Versace and Escada together with the arrival of exciting new luxury fashion brands including Corneliani and Giambattista Valli. The value of real shops is illustrated by two new businesses to the Estate. Firstly, the eponymous British family fashion brand, Boden opened a shop on the King’s Road and secondly, the contemporary British brand aimed at the modern, professional woman, The Fold, opened on Pont Street. Both these brands were opening their first proper shops having previously operated primarily online. “Bricks and mortar” shops provide consumers with the opportunity to make an emotional connection with the brand, to feel the texture of the products and be immersed in the experience. Consumer spending is forecast to slow in 2018 and this coupled to the growth in online sales, provides a mixed outlook for many retailers. Premium locations in central London which provide an exciting mix of leisure, retailing and dining experiences and benefit from domestic and overseas visitor footfall, will continue to be in demand from top quality retailers. However, it has never been more important to be able to manage our retail property with the aim of improving the overall neighbourhood and to be prepared to commit financially to projects such as the improvement of public realm, that do not necessarily have a direct or immediate return.
Retail
21
Offices The of fice sector represents almost 12% of the Cadogan portfolio. As at the year end, our offices were valued at £718m growing 8.3% in the year – our top performing sector – and with an associated rent roll of £29m which has increased by over 50% in just two years. The office portfolio has performed well due to strong letting and renewal transactions. As a result, office income represents an increased proportion of our total rents, of 19.1%. T h i s s i g n i f i c a n t i n c re a s e re f l e c t s refurbishment and development activity over previous years principally on Sloane
OFFICES
Street and Duke of York Square, coupled with a scarcity of space in the area, which has resulted in continued resilience in the office letting market despite a softening of demand. We have virtually no available office space and do not anticipate this changing in the near term as we have sought to position the portfolio for an anticipated weaker market. Although a relatively small component of the Estate, office use is important to the business because it delivers healthy income and brings businesses and people which contributes to the vibrancy and prosperity of the area.
201 7 £M
201 6 £M
% INCREASE
G RO SS VA LU E
718
661
8.3%*
G RO SS RE N TS
29.0
22.8
27.2%
* - adjusted for purchases, sales and capital expenditure
22
Annual Report 2017
George House, Sloane Street, designed by Stiff + Trevillion
Offices
23
Residential The value of our residential portfolio decreased by 0.9% to £1.99bn in 2017 representing 32.4% of the total portfolio. Notwithstanding the reduction in capital value, our income performance was encouraging as residential rents grew by 5.4% to £33.1m, reflecting 21.8% of the Estate’s rent roll, as refreshed units and new developments were brought to the market. The overall proportion of our residential holdings has followed a reducing pat tern from historically being the majority of our assets, to just over 32% of the total portfolio in 2017. This reflects the progressive disposal of long leasehold interests as a consequence of enfranchisement legislation, together with weak investment performance over the past three years. In addition to long leasehold residential, we hold a market let portfolio of over 700 flats and houses which accounts for the lion’s share of the gross income referred to above. The residential letting market stabilised in 2017 after an extended period of volatility during which our intense focus on minimising void periods resulted in continued improvement in net rental performance.
RESIDENTIAL
We continue to add to the residential portfolio, although 2017 was a quiet year with just seven units purchased at a cost of £12.8m, and a further £12.4m committed to refurbishment and development projects. The value of residential sales through enfranchisement in 2017 exceeded the value of residential acquisitions. The total value of enfranchisement sales fell in 2017 to £46.5m from £56.3m in 2016. These sales represented 55 units (2016 – 75 units) comprising 5 houses and 50 flats. The profit from these sales compared to book value was £6.9m (2016 – £10.7m) reflecting a margin of 17% which was slightly weaker than previous years, probably reflecting the softening residential market. The outlook for the prime central London residential sales market looks set to continue to be characterised by subdued transaction levels due in part to the inertia resulting from the escalating stamp duty system. Most residential commentators are predicting close to flat growth over the short to medium term.
201 7 £M
201 6 £M
% CHANGE
G RO SS VA LU E
1,992
2,025
-0.9%*
G RO SS RE N TS
33.1
31.4
5.4%
* - adjusted for purchases, sales and capital expenditure
24
Annual Report 2017
Redevelopment and restoration of 28 – 30 Cadogan Place
Cadogan Place Gardens North
Redevelopment and restoration of 28 – 30 Cadogan Place
Residential
25
Leisure & Other By virtue of being an Estate rather than a structured portfolio, we own a range of uses that do not fit neatly into a single category. These include hotels, restaurants, pubs, schools, cultural venues, car parking and medical suites. The value of this collection of uses is £367m and represents 6% of our gross assets. As long term stewards of Chelsea we have an interest in contributing to the vibrancy of the community and attraction of the area as a destination. Therefore, the value of these assets to the business is far greater than their relative size suggests. As well as being a property investor we do, when necessary, take operational risk. One example is Cadogan Hall, one of London’s leading classical concert venues. The Hall represents an important component of the cultural fabric of the area, something we are committed to maintaining despite the inevitable cost of doing so. Another example, is our boutique hotels. No. 11 Cadogan Gardens is a 56 room hotel
L E I SU R E & OT H E R
run on our behalf by Iconic Luxury Hotels (who also own and run Chewton Glen in Hampshire and Cliveden in Berkshire), who took over the operation of this hotel during 2017. By taking operational risk in these properties we are able to exercise more influence over the quality of management and the character of the operation as this has an impact on the Estate as a place to live, work and visit. We have two further hotels which are subject to extensive refurbishment, namely the Belmond Cadogan, Sloane Street, which we plan to open shortly in partnership with Belmond, and One Sloane Gardens which is due to complete at a later date, and which we are working on together with the fashionable Parisian hotelier Jean Louis Costes. We expect both these hotels to add greatly to the character of the area as well as contributing to the income of the business.
201 7 £M
201 6 £M
% CHANGE
G RO SS VA LU E
367
348
-4.6%*
G RO SS RE N TS
8.2
8.3
-1.2%
* - adjusted for purchases, sales and capital expenditure
26
Annual Report 2017
Belmond Cadogan Hotel on Sloane Street, due to reopen in 2018
Leisure & Other
27
Developments Our continual investment in the Estate through maintenance, refurbishment and redevelopment, allows us to maintain the quality of the built environment and ensures we are able to deliver space that meets the needs and requirements of contemporary occupiers. By so doing, we are able to attract the best businesses to the area. In 2017 we invested £54.9m in development and this will rise in 2018 as an increasing element of our development pipeline of £450m moves to construction. In terms of construction cost, most of this activity is in just three schemes, mainly the two hotels I have referred to above, and 196/222 King’s Road. This latter scheme is the restoration and redevelopment of the Habitat / Waitrose site on King’s Road which was consented to in late 2015 and will provide 180,000 sq ft of space including a cinema, a public house, offices, a rooftop bar, supermarket, flagship shops and affordable and market let residential flats. Cadogan is committed to developing in a responsible and sustainable manner and our success in this area has been recognised in 2017. Over 90% of our projects were rated very good or above in terms of BREEAM criteria and we benchmark all development sites against Considerate Construction Scheme criteria. We also challenge ourselves to develop in innovative ways, such as the completion and let ting of our energy neutral
28
Annual Report 2017
PassivHaus project, 126 Pavilion Road. This was a success recognised by the Building Research Establishment (BRE); it won an international BREEAM award in the category ‘Homes Projects - Post Construction’. Throughout our long history, Cadogan has worked with some of the world’s most inspired designers and architects, from William Morris on the “Cathedral of the Arts and Crafts movement”, Holy Trinity Church, Sloane Street; to the first example of glass curtain walling in the UK at Peter Jones, and Arne Jacobsen’s modern icon, The Danish Embassy on Sloane Street. Recently our new state-ofthe-art restaurant under construction at 9 Duke of York Square has already won a New London Architecture award. The contemporary design is located in an historic environment which is partly Grade II Listed, and work started during 2017. We aim to put community at the centre of what we do. Therefore we seek to be exemplary in the way in which we engage and consult with local residents and other stakeholders, when preparing a scheme. On major schemes, a communication strategy is established to ensure the right people are kept informed in the most appropriate way. Through a conscientious approach to consultation and communication we aim to understand and adapt to local priorities, and to ensure our intentions and motives are well understood and we are recognised as a trusted local developer.
Duke of York Restaurant
Hotel Costes in Paris, due to open at One Sloane Gardens
196 – 222 King’s Road
Developments
29
Prospects The prospects for the domestic economy depend on the impact of the UK’s final settlement for exit from the European Union and the continuing strength and prosperity of the London economy. Most predictions suggest low levels of UK economic growth as political uncertainty impacts on business activity, until Brexit negotiations are concluded and the transition period is underway. The intention to “normalise” interest rates is slowly getting under way. In November 2017 we witnessed the first interest rate rise in over 10 years when the Bank of England announced that it expected to raise rates gradually over time as the economy strengthened. The benchmark UK ten year gilt yield remains at a similar level as it was in the beginning of 2017 and continues, for the time being, to present support for property valuations. The share prices of the UK quoted proper ty sec tor, par ticularly those with a London focus, trade at marked
30
Annual Report 2017
discounts to their net asset values, suggesting equity investors’ pessimism of real estate valuations. However, the London commercial property market has proved more resilient than many expected since the EU referendum result, and value reductions have been minimal. In this context, Cadogan has a focus on an enviable portfolio of high quality assets in a prime location within a conservative financial structure. As a business we continue to maintain very low vacancy levels across all our property sectors and invest in our development programme with the aim of reaping benefits in future years. We are confident, through our focus on our customers and an estate management strategy that seeks to ensure that the whole is greater than the sum of the parts, that we will provide consistent and attractive returns over the long term. HUGH SEABORN 25 April 2018
Al fresco dining at Duke of York Square
Prospects
31
Financial Review Office rents grew after some promising lettings during the year and were our best performers in both capital and rental growth. Currently, we have little surplus space available to the market and our investment plans for this sector are to ensure that it remains in balance within the Estate. Our major development activity is focussed on our hotel strategy and the mixed-use development at 196222 King’s Road.
Jeremy Bentley, Finance Director
2017 was a year where the Estate’s portfolio growth of 1.8% was at a similar level to the previous year and far from the buoyant levels experienced in 2013-15. Rents grew by 7.0% driven by some strong letting transactions and new stock coming to market and letting well. We continue to control the level of our administration and operating expenses but as a result of the high levels of investment in the Estate, the revenue element of which is written off to the profit and loss account, we do not see a marked improvement in our operating profit this year.
32
Annual Report 2017
Both retail rents and residential rents grew in the year as a result of successful lettings to new tenants and new residential developments coming to market such as 28-30 Cadogan Place. We continue to monitor when tenants vacate and existing units are refreshed and we arrange marketing accordingly so that the impact of voids is minimised. The profit from the sale of investment properties through enfranchisement was muted in 2017 contributing £6.9m compared to £10.7m in 2016 as we saw less transactions completed together with a slight reduction in the margin over book value. As a result of the adoption of Financial Repor ting Standard (FRS) 102, the consolidated income statement reflects the gain on the annual revaluation of the
investment property portfolio. As has been highlighted, the property market has lost some of the buoyancy of prior years and the revaluation gain in the income statement is £107.8m, a reduction from 2016’s performance. As in 2016, the underlying dividend increase in the year was 5% and £20.8m was paid to shareholders in December 2017. The major shareholder decided to waive an element of their dividend, preferring to leave it invested in the business. Cadogan is mindful of its tax obligations and is liable for, and collects on behalf of HMRC, various taxes in its operations. The table opposite shows the tax paid by Cadogan and that collected and remitted to HMRC by Cadogan. As in previous years, the tax collected is significantly greater than our direct tax charge shown in our accounts, demonstrating our wider contribution to the UK economy.
Trading Highlights C A D O GA N ’ S TA X CO N T R I B U T I O N
RENTAL INCOME UP 7.0 %
TOTAL UK TAX CONTRIBUTION
2017 2016 £m
£m
10.4
7.0
SDLT
2.3
4.3
Employer’s National Insurance
0.8
0.7
Non domestic rates and Council Tax
1.5
1.9
Section 106 agreements
0.1
0.3
Irrecoverable VAT
5.7
5.2
Other
0.5
0.4
21.3
19.8
£152.6m
Tax paid by Cadogan UK Corporation Tax
Tax collected and paid over by Cadogan PAYE and Employees’ National Insurance VAT
TOTAL
2.4
2.3
13.8
10.6
16.2
12.9
37.5
32.7
RESIDENTIAL ENFRANCHISEMENT SALES
£46.5m OPERATING PROFIT BEFORE CAPITAL ITEMS UP 1.2%
£93.8m PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
£172.0m EARNINGS PER SHARE DOWN 32.0%
122.7
PENCE PER SHARE
Balance Sheet & Borrowings 2017 saw further muted growth in the property portfolio of 1.8%, compared to 2016’s growth of 2.4%, taking the value of our properties to £6.15bn. This growth was the primary driver of the rise in group shareholders’ funds to £4.59bn with net assets per share rising to £38.21 from £37.17, an increase of 2.8%. The group property operations continued to be strongly cash generative but the year ’s proper ty investment and development activity resulted in a net cash outflow reducing the year-end closing cash balances to £46.5m from £71.2m in 2016. The group’s long-term debt position varied slightly as the sterling value of the US dollar notes fell but was matched by the group’s interest rate derivatives to ensure that the overall liability position is protected.
34
Annual Report 2017
There was a slight increase in year-end balance sheet gearing to 14.0% from 13.9% with our interest cover remaining at 2.8 times, comfortably in excess of our internal and external financial covenants. There were no changes to our borrowing arrangements which remain long-term in nature and with fixed interest coupons. At the year-end we have total undrawn facilities available to the group of £106.5m, being a mix of cash on deposit and arranged short-term banking facilities. The group also has £110m available from pre-arranged uncommitted facilities.
The new public courtyard at George House, connecting Pavilion Road and Sloane Street
Balance Sheet & Borrowings
35
Approach to Risk Management Management of risk is an essential element in any modern business and Cadogan has a well-developed strategy and process for risk management. Overall responsibility for risk management lies with the group board, which recognises that there are inherent risks in running any business and which is responsible for determining the group’s risk appetite and for ensuring that the group’s risk management system properly identifies, understands and manages all relevant risks. The group’s risk appetite and processes for managing risk are regularly reviewed by the board. The Finance Director, supported by the senior management team is responsible for compiling the Risk Register which is updated on a regular basis. The Risk Register identifies the principal risks impacting on the business and the group’s financial position, it provides an assessment of the likelihood of the identified risks materialising and includes an estimate of the potential impact of each area of risk on the business. The Register is formally reviewed by the board at least annually and this forms an important part of the overall risk management process. The group also makes use of appropriate external specialists to advise on compliance with established policies and external regulations. Cadogan is a long term property investor with a clear focus on high quality property assets located in central London. Because of its private ownership and long-term outlook the group aims for, and is able to achieve, a high level of resilience in all areas of the business. Cadogan assess risk under three principal headings. yy
Strategic risk
yy
Financial risk
yy
Operational risk
36
Annual Report 2017
STRATEGIC RISKS Property market risks – the risks arising from property cycles and from shorter term unexpected changes in the market for property investment, development and occupation. Most property markets are cyclical, and this is particularly true of central London. As a long-term investor the group is less reliant than others on predicting property market cycles and aims to manage the impact of the property cycle and any other short-term fluctuations in values or activity levels by ensuring a relatively high proportion of committed long term loan finance, planning for significant headroom against external financial covenants and high levels of available liquidity. These factors also assist the group in managing cash flow and liquidity risks. Geographic concentration – the group accepts the risks inherent in the small geographic area in which the group’s properties are concentrated. All of the group’s properties are located in Kensington and Chelsea which for many years has been an area renowned for long-term prosperity and economic resilience. The group also seeks to balance this geographic concentration through a diversified portfolio of uses and through close attention to the balance between sectors. The largest individual property represents 5.2% of the total portfolio value and the highest individual rent 4.3% of total annual rental income. The group monitors and is actively involved in consultation with the Royal Borough of Kensington and Chelsea where it considers that it could be affected by changes or developments to local planning policies. The group is committed to close liaison with stakeholders and the community to ensure that its strategy and developments are understood externally. Development risks – Cadogan regularly undertakes substantial development projects, but carefully considers the timing to ensure that the group’s exposure to development risk is controlled, both relative to the overall portfolio and to potentially competing schemes in the same area. Cadogan consults widely on development schemes to ensure that schemes are designed
to the highest quality and to assist in obtaining the most appropriate planning consent. Risks associated with London’s position as a global capital – London’s position as a global capital has been a significant factor in the overall prosperity of central London in recent years. There are risks to this position from a number of factors, most significantly from the Brexit negotiations, from terrorism, from under-investment in infrastructure and from adverse changes to the tax regime, particularly affecting overseas investors. The group cannot manage or control these risks but Cadogan takes an active role in lobbying through organisations such as London First and the British Property Federation amongst others, to ensure that the long-term health of London is at the forefront of the minds of national and local government.
FINANCIAL RISKS Interest rate risk – The majority of long-term borrowings are at fixed rates of interest, achieved either by agreement with the lender, or through the interest rate derivatives market. The board requires at least 75% of long-term debt to be subject to fixed rates of interest. The group does not undertake financial instrument transactions that are speculative or unrelated to trading activities. Board approval is required for the use of any new financial instrument. Refinancing risk – The group seeks to manage refinancing risk through the use of a spread of loan maturities. In normal circumstances loan terms are for an initial period of 10 years or more. The incidence of maturities is spread to ensure that major re-financings are spaced out over time. Foreign currencies – Some of the private placings of debt which the group has undertaken have included a significant proportion of US dollar borrowings. All exposure to US dollars in relation to both interest and capital repayments has been swapped into sterling on the date on which the loans were committed, and as a result there is no residual foreign exchange risk exposure to the group. Operationally the group has no foreign currency exposure.
Compliance with financial covenants – The group has provided financial covenants to its lenders to support its unsecured borrowings. The group’s financial position is regularly monitored against the covenant requirements to ensure that the group has significant financial headroom and is not at risk of breaching any of the covenants. Scenario planning is used to assess the sensitivity of potential changes to the principal financial measures which might impact the ability to meet covenant requirements.
OPERATIONAL RISKS Property loss and damage – All the group’s properties are insured against loss or damage on a full reinstatement basis, including three years loss of rental income. Cover includes terrorism risk which is provided by a major insurer and member of Pool Re. Health and safety risks – The group accords a high priority to health and safety issues. Health and safety issues are always discussed at the monthly Property Management Committee meeting and all incidents are reported and reviewed on a monthly basis. From time to time the group undertakes external reviews and audits of its health and safety policies and procedures, the results of which have confirmed the quality and integrity of health and safety practices. IT, telecommunications and business continuity risks – The group ensures its IT and telecommunications systems are robust and fit for purpose, with an emphasis on the development of inherent resilience and backup capability. The group has a detailed business continuity plan which is reviewed and updated annually. The group undertakes regular external cyber security reviews and implements any resulting recommendations for security improvements. JEREMY BENTLEY 25 April 2018
Approach to Risk Management
37
Directors’ Report The directors present their report and the financial statements for the year ended 31 December 2017. PRINCIPAL ACTIVITY AND REVIEW OF THE BUSINESS
GOING CONCERN
The principal activity of the group during the year continued to be property investment. The group’s other activities include the operation of hotels and a concert hall. A review of the group’s business during 2017 and its future prospects is contained in the Strategic Report on pages 7 to 37.
The group’s business activities, together with the factors likely to affect its future development, its financial position, financial risk management objectives, details of its financial instruments and derivative activities, and its exposures to price, credit, liquidity and cash flow risk are set out in the Strategic Report on pages 7 to 37.
DIVIDENDS Interim dividends of £20,770,000 (2016 – £19,078,000) were declared and paid during the year.
RISK MANAGEMENT A summary of the principal risks and uncertainties has been included in the Strategic Report on pages 36 to 37.
DIRECTORS
The group has considerable financial resources derived from an established investment property portfolio in prime central London. The group has substantial long-term committed financing arrangements and also has access to overdraft and revolving credit facilities from its bankers. Taking these factors into account the directors believe that the group is well placed to manage its business risks successfully.
All the directors holding office during the financial year and up to the date of this report are listed on page 2 except Mr J G Bentley who was appointed to the board on 3 July 2017. Mr R J Grant resigned as a director on 3 July 2017.
After making enquiries, the directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements.
The ultimate holding company maintains liability insurance for its directors and officers and for those of its subsidiaries in respect of proceedings brought by third parties, subject to the conditions set out in section 234 of the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of approving the Directors’ Report.
The directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.
CHARITABLE CONTRIBUTIONS The group’s charitable contributions for the year were £259,000 (2016 – £73,000). In addition, the Cadogan Charity, a shareholder in the company, makes donations to a variety of local and national charities.
38
Annual Report 2017
DIRECTORS’ RESPONSIBILITIES STATEMENT
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102. 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 those financial statements, the directors are required to:
yy
select suitable accounting policies and then apply them consistently;
yy
make judgements and estimates that are reasonable and prudent;
yy
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
yy
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 disclose with reasonable accuracy at any time the financial position of the group and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
LIFE PRESIDENT
The Earl Cadogan KBE DL
N O N - E X EC U T I V E D I R EC TO R S
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
DISCLOSURE OF INFORMATION TO THE AUDITOR So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the group’s auditor, each director has taken all the steps that he is obliged to take as a director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information.
The Hon. James Bruce - Deputy Chairman
Charles Ellingworth
John Gordon
Francis Salway
AUDITOR A resolution concerning the re-appointment of Ernst & Young LLP as auditor will be proposed at the forthcoming annual general meeting. By order of the board PAUL LOUTIT Secretary 25 April 2018 Registered No: 2997357
Directors’ Report
39
I N D E P E N D E N T AU D I TO R ’ S R E P O RT TO T H E M E M B E R S O F C A D O GA N G RO U P L I M I T E D
OPINION We have audited the financial statements of Cadogan Group Limited (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2017 which comprise the Consolidated Income Statement, the Consolidated and Company Statement of Comprehensive Income, the Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Statement of Financial Position and the Consolidated Statement of Cash Flows and the related notes 1 to 23, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice). In our opinion, the financial statements: yy
give a true and fair view of the group’s and of the parent company’s affairs as at 31 December 2017 and of the group’s profit for the year then ended;
yy
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
yy
have been prepared in accordance with the requirements of the Companies Act 2006.
BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
USE OF OUR REPORT This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might
40
Annual Report 2017
state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
CONCLUSIONS RELATING TO GOING CONCERN We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: yy
the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
yy
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
OTHER INFORMATION The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard.
OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, based on the work undertaken in the course of the audit: yy
the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
yy
the strategic report and directors’ report have been prepared in accordance with applicable legal requirements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: yy
adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
yy
the parent company financial statements are not in agreement with the accounting records and returns; or
yy
certain disclosures of directors’ remuneration specified by law are not made; or
yy
we have not received all the information and explanations we require for our audit
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Eamonn McGrath (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 25 April 2018
RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors’ responsibilities statement set out on pages 38 to 39, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Independent Auditor’s Report
41
CO N S O L I DAT E D I N CO M E STAT E M E N T FO R T H E Y E A R E N D E D 31 D EC E M B E R 2017
2017
2016
Note
£000
£000
2
160,896
149,692
Cost of sales
(50,156)
(40,638)
GROSS PROFIT
110,740
109,054
Administrative expenses
(16,939)
(16,409)
93,801
92,645
6,905
10,724
107,822
139,375
11
-
208,539
242,744
208
478
TURNOVER Continuing operations
OPERATING PROFIT BEFORE CAPITAL ITEMS Profit on sale of investment properties
3
Gain in revaluation of investment properties Profit on the sale of other fixed assets OPERATING PROFIT
5
Interest receivable Interest payable and similar charges
4
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Tax (charge)/credit on profit on ordinary activities
7
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION ATTRIBUTABLE TO SHAREHOLDERS
(36,772)
(36,925)
171,975
206,297
(24,762)
10,203
147,213
216,500
Dividends
8
(20,770)
(19,078)
RETAINED PROFIT FOR THE YEAR
9
126,443
197,422
10
122.7p
180.4p
EARNINGS PER SHARE
Notes 1 to 23 form an integral part of these financial statements.
42
Annual Report 2017
CO N S O L I DAT E D A N D C O M PA N Y STAT E M E N T O F CO M P R E H E N S I V E I N C O M E FO R T H E Y E A R E N D E D 31 D EC E M B E R 2017
CONSOLI DATED STATE M E N T O F CO M PRE H E N SI V E I NCOM E 2017
2016
£000
£000
Profit for the year attributable to shareholders
147,213
216,500
Net loss recognised on cash flow hedges arising during the year
(1,703)
(14,531)
Re-measurement gain/(loss) recognised on defined benefit pension scheme
38
(6,349)
Movement on deferred tax relating to pension liability
(6)
1,060
TOTAL OTHER COMPREHENSIVE LOSS FOR THE YEAR
(1,671)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
(19,820)
145,542
198,680
2017
2016
£000
£000
Profit for the year attributable to shareholders
98,058
99,843
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
98,058
99,843
COM PANY STATE M E N T O F CO M PRE H E N S IVE INCOM E
Notes 1 to 23 form an integral part of these financial statements.
31 December 2017
43
CO N S O L I DAT E D A N D C O M PA N Y STAT E M E N T O F C H A N G E S I N EQ U I T Y FO R T H E Y E A R E N D E D 31 D EC E M B E R 2017
CONSOLI DATE D STATE M E N T O F CH A N G E S IN EQ U I T Y Called up share capital
Non-distributable reserve
Profit and loss account
Shareholders’ equity
£’000
£’000
£’000
£’000
120,000
3,110,036
1,052,717
4,282,753
Profit for year
-
115,134
101,366
216,500
Other comprehensive loss
-
(14,531)
Total comprehensive income for the year
-
100,603
Equity dividends paid
-
-
At 31 December 2016
120,000
3,210,639
1,129,716
4,460,355
At 1 January 2017
120,000
3,210,639
1,129,716
4,460,355
Profit for year
-
59,702
87,511
147,213
Other comprehensive income/(loss)
-
(1,703)
32
Total comprehensive income for the year
-
57,999
Equity dividends paid
-
-
At 31 December 2017
120,000
3,268,638
At 1 January 2016
(5,289)
(19,820)
96,077
196,680
(19,078)
(19,078)
(1,671)
87,543
145,542
(20,770)
(20,770)
1,196,489
4,585,127
COMPANY STATE M E N T O F CH A N G E S IN EQ U IT Y Called up share capital
Profit and loss account
Shareholders’ equity
£’000
£’000
£’000
120,000
1,062,190
1,182,190
Profit for year
-
99,843
99,843
Total comprehensive income for the year
-
99,843
99,843
Equity dividends paid
-
(19,078)
(19,078)
At 31 December 2016
120,000
1,142,955
1,262,955
At 1 January 2017
120,000
1,142,955
1,262,955
Profit for year
-
98,058
98,058
Total comprehensive income for the year
-
98,058
98,058
Equity dividends paid
-
(20,770)
(20,770)
At 31 December 2017
120,000
At 1 January 2016
Notes 1 to 23 form an integral part of these financial statements.
44
Annual Report 2017
1,220,243
1,340,243
C O N S O L I DAT E D STAT E M E N T O F F I N A N C I A L P O S I T I O N AT 31 D EC E M B E R 2017
2017
2016
Note
£000
£000
11
6,149,300
5,987,128
31
20
32,571
26,859
46,451
71,204
79,053
98,083
FIXED ASSETS Tangible fixed assets CURRENT ASSETS Stock Debtors
13
Cash at bank and in hand
18(b)
CREDITORS amounts falling due within one year Bank loans and other borrowings
15
28,113
4,000
Trade and other creditors
14
65,383
58,330
4,810
4,975
98,306
67,305
(19,253)
30,778
Corporation tax
NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES
6,130,047
6,017,906
15
660,989
686,855
7
877,230
863,233
4,591,828
4,467,818
6,701
7,463
4,585,127
4,460,355
CREDITORS amounts falling due after more than one year Bank loans and other long term borrowings PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation NET ASSETS EXCLUDING PENSION LIABILITY Defined benefit pension liability
19
NET ASSETS CAPITAL AND RESERVES Share capital
16
120,000
120,000
Non-distributable reserve
17
3,268,638
3,210,639
Profit and loss account
17
1,196,489
1,129,716
4,585,127
4,460,355
EQUITY SHAREHOLDERS’ FUNDS
Viscount Chelsea Hugh Seaborn 25 April 2018
- Director - Director
Notes 1 to 23 form an integral part of these financial statements.
31 December 2017
45
CO M PA N Y STAT E M E N T O F F I N A N C I A L P O S I T I O N AT 31 D EC E M B E R 2017
2017
2016
Note
£000
£000
12
117,317
117,317
1,223,025
1,145,737
99
99
FIXED ASSETS Investments CURRENT ASSETS Amounts due from subsidiary undertakings CREDITORS amounts falling due within one year Other creditors
14 -
Taxation
99
99
NET CURRENT ASSETS
1,222,926
1,145,638
TOTAL ASSETS LESS CURRENT LIABILITIES
1,340,243
1,262,955
NET ASSETS
1,340,243
1,262,955
CAPITAL AND RESERVES Share capital
16
120,000
120,000
Profit and loss account
17
1,220,243
1,142,955
1,340,243
1,262,955
EQUITY SHAREHOLDERS’ FUNDS
Viscount Chelsea Hugh Seaborn 25 April 2018
- Director - Director
Notes 1 to 23 form an integral part of these financial statements.
46
Annual Report 2017
CO N S O L I DAT E D STAT E M E N T O F C A S H F LO W S FO R T H E Y E A R E N D E D 31 D EC E M B E R 2017
Note Net cash inflow from operating activities
18(a)
2017
2016
ÂŁ000
ÂŁ000
80,360
85,088
209
479
Investing activities Interest received
(90,426)
(99,816)
Receipts from sales of tangible fixed assets
46,468
56,745
Net cash outflow from investing activities
(43,749)
(42,592)
(36,594)
(36,920)
(4,000)
(4,000)
Equity dividends paid
(20,770)
(19,078)
Net cash outflow from financing activities
(61,364)
(59,998)
Decrease in cash and cash equivalents
(24,753)
(17,502)
Cash and cash equivalents at 1 January
71,204
88,706
46,451
71,204
Payments to acquire tangible fixed assets
Financing activities Interest paid Repayment of long term borrowings
Cash and cash equivalents at 31 December
18(b)
Notes 1 to 23 form an integral part of these financial statements.
31 December 2017
47
N OT E S O N T H E F I N A N C I A L STAT E M E N TS FO R T H E Y E A R E N D E D 31 D EC E M B E R 2017
1 ACCOUNTING POLICIES (A) STATEMENT OF COMPLIANCE Cadogan Group Limited is a limited liability company incorporated in England. The Registered Office is 10 Duke of York Square, London, SW3 4LY. The group’s and company’s financial statements have been prepared in compliance with FRS 102 as it applies to the financial statements of the group for the year ended 31 December 2017. Basis of preparation The financial statements of Cadogan Group Limited were authorised for issue by the Board of Directors on 25 April 2018. The financial statements have been prepared on a historical cost basis except investment properties and derivative financial instruments that have been measured at their fair value. The financial statements are prepared in sterling which is the functional currency of the group and rounded to the nearest £’000. Basis of consolidation The group financial statements consolidate the financial statements of Cadogan Group Limited and all its subsidiary undertakings drawn up to 31 December each year. No income statement is presented for Cadogan Group Limited as permitted by section 408 of the Companies Act 2006. Subsidiaries are consolidated from the date of their acquisition, being the date on which the group obtains control and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefits from its activities.
48
Annual Report 2017
(B) JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the year. However, the nature of estimation means that actual outcomes could differ from those estimates. The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements: Operating lease commitments The group has entered into commercial property leases as a lessor on its investment property portfolio. The classification of such leases as operating or finance lease requires the group to determine, based on an evaluation of the terms and conditions of the arrangements, whether it retains the significant risks and rewards of ownership of these assets and accordingly whether the lease requires an asset and liability to be recognised in the statement of financial position. Pension and other post-employment benefits The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and the long term nature of these plans, such estimates are subject to significant uncertainty. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population bonds on which the discount rate is based, on the basis that they do not represent high quality bonds. The mortality rate is based on publicly available mortality tables for the UK. Future salary increases and pension increases are based on expected future inflation rates for the UK. Further details are given in note 19.
1 ACCOUNTING POLICIES (CONTINUED) Taxation The group establishes provisions based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience with previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Management estimation is required to determine the amount of deferred tax assets that can be recognised, based upon likely timing and level of future taxable profits together with an assessment of the effect of future tax planning strategies. Further details are contained in note 7.
(C) ESTIMATES AND ASSUMPTIONS The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The group based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the group. Such changes are reflected in the assumptions when they occur. Revaluation of investment properties The group carries its investment property at fair value, with changes in fair value being recognised in the income statement. The group engaged independent valuation specialists to determine fair value at 31 December 2017. The valuers used market value, in accordance with the Appraisal of Valuation Manual of the Royal Institution of Chartered Surveyors. The determined fair value of the investment property is most sensitive to the estimated yield as well as the long term vacancy rate. Investment property under construction are measured based on estimates prepared by independent real estate valuation experts. The key assumptions used to determine the fair value of investment property are further explained in note 11.
Estimation of net realisable value for properties under development Development property is stated at the lower of cost and net realisable value (NRV). NRV for completed development property is assessed by reference to market conditions and prices existing at the reporting date and is determined by the group, based on comparable transactions identified by the group for properties in the same geographical market serving the same real estate segment. NRV in respect of development property under construction is assessed with reference to market prices at the reporting date for similar completed property, less estimated costs to complete construction and an estimate of the time value of money to the date of completion. Estimation of derivative financial instruments The group carries its derivatives financial instruments at fair value, with changes in fair value being recognised in the nondistributable reserve for the effective portion, and the income statement for the ineffective portion in line with the adoption of hedge accounting. The group engaged independent valuation specialists to determine fair value at 31 December 2017. The valuation techniques applied to fair value these derivatives employ the use of market observable inputs and include swap models which use present value calculations. The model incorporates various inputs including the credit quality of counterparties and forward rates. All swap contracts are fully cash collateralised, thereby eliminating both counterparty and the group’s own non-performance risk.
31 December 2017
49
1 ACCOUNTING POLICIES (CONTINUED) (D) TURNOVER AND REVENUE RECOGNITION Turnover is recognised to the extent that the group obtains the right to consideration in exchange for its performance. Revenue is measured at the fair value of the consideration received, net of VAT and comprises gross rents including reverse premium received on early lease termination, commissions and other fees receivable. Turnover in the hotel and concert hall operations represents amounts derived from the provision of goods and services, stated net of VAT. The following criteria must also be met before revenue is recognised: Rental income The group is the lessor in operating leases. Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease terms and is included in revenue in the income statement due to its operating nature, except for contingent rental income which is recognised when it arises. Tenant lease incentives are recognised as a reduction of rental revenue on a straight-line basis over the term of the lease. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the directors are reasonably certain that the tenant will exercise that option. Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the income statement when the right to receive them arises. Interest income Interest income is recognised as it accrues using the effective interest rate (EIR) method. The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the income statement.
50
Annual Report 2017
(E) TANGIBLE FIXED ASSETS Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Such cost includes costs directly attributable to making the asset capable of operating as intended. Depreciation is provided on all plant and equipment, at rates calculated to write off the cost, less estimated residual value, of each asset on a systematic basis over its expected useful life as follows: Plant and equipment 10% to 20% The carrying values of tangible fixed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value not to be recoverable.
(F) LAND AND BUILDINGS Land and buildings represent owner occupied properties and are initially recognised at cost which includes purchase cost and any directly attributable expenditure of a capital nature only. They are included in the financial statements at fair value at the year end. The surplus or deficit on revaluation is recognised in the nondistributable reserve and accumulated in the reserve unless a deficit below original cost, or its reversal, on an individual property is expected to be permanent in which case it is recognised in the income statement for the year.
(G) INVESTMENT PROPERTY Investment property comprises completed property and property under construction or re-development that is held to earn rentals or for capital appreciation or both. Property held under a lease is classified as investment property when it is held to earn rentals or for capital appreciation or both, rather than for sale in the ordinary course of business or for use in production or administrative functions. Investment property is measured initially at cost, including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.
1 ACCOUNTING POLICIES (CONTINUED) Subsequent to initial recognition, investment property is stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of investment properties are included in the income statement in the period in which they arise, including the corresponding tax effect. For the purposes of these financial statements, in order to avoid double counting, the fair value reported in the financial statements is reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives. Transfers are made to (or from) investment property only when there is a change in use. For a transfer from investment property to owner-occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. Investment property is derecognised either when it has been disposed of or when it is permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in the income statement in the period of de-recognition.
(H) PROFIT ON SALE OF INVESTMENT PROPERTIES Profits or losses on the sale of investment properties are calculated by reference to the book value at the end of the previous year, adjusted for any subsequent capital expenditure, and are shown as exceptional items. Such transactions are recognised on the exchange of contracts, providing that no material conditions remain outstanding.
(I) INVESTMENTS Investments in subsidiary undertakings are included at cost, less a provision for impairment in value where applicable.
Group as a lessee A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the group is classified as a finance lease. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the income statement on a straight-line basis over the lease term, except for contingent rental payments which are expensed when they arise. Group as a lessor Leases in which the group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Contingent rents are recognised as revenue in the period in which they are earned.
(K) CASH AT BANK AND IN HAND Cash in the statement of financial position comprises cash at bank and in hand, and is stated net of outstanding bank overdrafts.
(L) LOAN NOTES All interest bearing loans and borrowings which are basic financial instruments are initially recorded at the present value of future payments discounted at a market rate of interest for a similar loan. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.
(M) SHORT TERM DEBTORS AND CREDITORS Debtors and creditors with no stated interest rate and receivable or payable within one year are recorded at transaction price. Any losses arising from impairment are recognised in the income statement in administrative expenses.
(J) LEASES The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in the arrangement.
31 December 2017
51
1 ACCOUNTING POLICIES (CONTINUED) (N) TAXATION Current taxation including UK corporation tax is provided at the amounts expected to be paid (or recovered) using the tax rates and laws that have been substantially enacted at the balance sheet date. Deferred tax is recognised in respect of all material timing differences between taxable profits and total comprehensive income that arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
(O) FOREIGN CURRENCIES Transactions in foreign currencies are initially recorded in the entity’s functional currency by applying the spot exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the income statement.
(P) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING The group uses forward foreign currency contracts to reduce exposure to foreign exchange rates. The group also uses interest rate swaps to adjust interest rate exposures. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The criteria for forward foreign currency contracts are: yy
the instrument must be related to a firm foreign currency commitment;
yy
it must involve the same currency as the hedged item; and
yy
it must reduce the risk of foreign currency exchange movements on the group’s operations
52
Annual Report 2017
The group’s criteria for interest rate swaps are: yy
the instrument must be related to an asset or a liability; and
yy
it must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa.
At the inception of a hedge relationship, the group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for under taking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Cash flow hedges For the purpose of cash flow hedge accounting, hedges are classified as cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment. The effective portion of the gain or loss on the hedging instrument is recognised in the Statement of Comprehensive Income (“SOCI”) in the non-distributable reserve, while any ineffective portion is recognised immediately in the income statement. Amounts recognised as other comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in the SOCI are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover (as part of the hedging strategy), or if its designation as a hedge is revoked, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognised in SOCI remains separately in equity until the forecast transaction occurs or the firm commitment is met.
1 ACCOUNTING POLICIES (CONTINUED) When a derivative is held as an economic hedge for a period beyond 12 months after the end of the reporting period, the derivative is classified as non-current consistent with the classification of the underlying item. A derivative instrument that is a designated and effective hedging instrument is classified consistent with the classification of the underlying hedged item.
(Q) PENSION BENEFITS For defined benefit schemes, the regular cost of providing pensions to employee during the year is charged to operating profit in the year. The full cost of providing amendments to benefits in respect of past service is also charged to operating profit in the year. The net interest element is determined by multiplying the net defined benefit liability by the discount rate, at the start of the period taking into account any changes in the net defined benefit liability during the period as a result of contribution and benefit payments. The net interest is recognised in profit or loss as other finance revenue or costs. Re-measurements, comprising actuarial gains and losses, the effect of the asset ceiling and the return on the net defined benefit liability (excluding amounts included in net interest) are recognised immediately in other comprehensive income in the period in which they occur. The defined net benefit pension asset or liability in the statement of financial position comprises the total for each plan of the present value of the defined benefit obligation (using a discount rate based on high quality corporate bonds), less the fair value of plan assets out of which the obligations are to be settled directly. Fair value is based on market price information and in the case of quoted securities is the published bid price. For defined contribution schemes, the value of amounts charged to the income statement in respect of pension costs is the value of the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayment in the statement of financial position.
31 December 2017
53
2 TURNOVER AND SEGMENTAL ANALYSIS Turnover, group profit on ordinary activities before tax and net assets are analysed as follows: Property investment
Hotels and Concert Hall
Total
Total
2017
2016
2017
2016
2017
2016
£000
£000
£000
£000
£000
£000
152,640
142,695
7,048
5,679
159,688
148,374
Other income
1,208
1,318
-
-
1,208
1,318
Total turnover
153,848
144,013
7,048
5,679
160,896
149,692
Turnover Gross rental income and other sales
Operating profit/(loss) Continuing operations
208,305
243,493
234
208,539
242,744
(36,564)
(36,447)
171,975
206,297
4,585,127
4,460,355
(749)
Net interest payable Profit on ordinary activities before taxation Net assets Continuing operations
4,519,814
4,394,541
65,313
65,814
All operations take place within the United Kingdom. The group operates in two principal areas of activity, property investment and hotels and concert hall activities.
3 PROFIT ON SALE OF INVESTMENT PROPERTIES
Profits on sales of freeholds and receipt of long lease premiums, less directly related costs and expenses
2017
2016
£000
£000
6,905
10,724
2017
2016
£000
£000
36,576
36,866
(28,441)
53,100
28,441
(53,100)
4 INTEREST PAYABLE AND SIMILAR CHARGES
Interest on bank loans and other borrowings Foreign exchange (gain)/loss on hedged loans Financial derivative (gain)/loss Interest on net defined pension liability
54
Annual Report 2017
196
59
36,772
36,925
5 OPERATING PROFIT
2017
2016
£000
£000
643
918
6
-
Audit of the financial statements – includes £58,000 in respect of the company (2016 – £58,000)
212
220
Other fees to auditors – tax services
322
240
141
36
2017
2016
£000
£000
1,801
1,943
2017
2016
£000
£000
6,295
6,641
Social security costs
752
807
Pension costs – defined contribution scheme
517
505
7,564
7,953
Operating profit is stated after charging: Depreciation Hire of plant and equipment Auditors’ remuneration:
other services
6 DIRECTORS AND EMPLOYEES
Aggregate directors’ emoluments in respect of qualifying services
Included within directors’ emoluments above are contributions to money purchase pension schemes for one director amounting to £36,000 (2016: 1 director – £35,000). The emoluments, excluding pension contributions, of the highest paid director were £992,000 (2016 – £959,000). Pension contributions of the highest paid director were nil (2016 - nil).
Employee costs: Wages and salaries
The average monthly number of persons employed by the group, including executive directors, during the year was 101 (2016 – 125). 67 (2016 – 65) persons were employed within the property investment business and 34 (2016 – 60) persons were employed within the concert hall and hotels business.
31 December 2017
55
7 TAXATION (A) TAX ON PROFIT ON ORDINARY ACTIVITIES
The tax charge is made up as follows:
2017
2016
£000
£000
10,472
10,925
Current tax: UK corporation tax Adjustments in respect of previous years Total current tax
(245)
(297)
10,227
10,628
1,007
1,328
Deferred tax: Origination and reversal of timing differences Effect of decreased tax rate on opening liability
-
(50,828)
On freehold and investment properties
13,528
28,669
Total deferred tax
14,535
(20,831)
Tax charge/(credit) on profit on ordinary activities
24,762
(10,203)
(B) TAX INCLUDED IN STATEMENT OF TOTAL COMPREHENSIVE INCOME
The tax charge is made up as follows:
2017
2016
£000
£000
Deferred tax: Actuarial gain/(loss) on pension scheme Hedge accounting adjustments Effect of decreased tax rate on deferred tax balance
6 (544) -
(1,079) (2,814) (144)
Total deferred tax
(538)
(4,037)
Total tax credit on other comprehensive income
(538)
(4,037)
56
Annual Report 2017
7 TAXATION (CONTINUED) (C) FACTORS AFFECTING TAX CHARGE FOR THE YEAR The tax charge for the current year is lower than (2016 – lower than) the current standard rate of corporation tax in the UK of 19.25% (2016 – 20.00%). The difference is explained as follows:
2017
2016
%
%
Standard tax rate
19
20
Actual current tax rate
14
(5)
Difference
(5)
(25)
Change in tax law and rates
(2)
(25)
Indexation deductible for tax purposes
(5)
-
Over provision in respect of prior period
2
-
Explained by:
(5)
(25)
(D) DEFERRED TAX The deferred tax included in the statement of financial position is as follows:
Included in provision for liabilities and charges
2017
2016
£000
£000
877,230
863,233
13,126
11,891
The liability/(asset) for deferred tax comprises the following: Accelerated capital allowances Short lease premiums received On freehold and investment properties
(335)
(442)
866,634
853,105
(1,139)
(1,269)
Hedge accounting adjustments
(597)
(52)
Losses carried forward
(459)
Pension costs
At 1 January Income statement Other comprehensive income Total deferred tax At 31 December
-
877,230
863,233
863,233
888,101
14,535
(20,831)
(538)
(4,037)
13,997
(24,868)
877,230
863,233
The company expects no deferred tax liabilities to reverse in 2018.
31 December 2017
57
7 TAXATION (CONTINUED) (E) FACTORS THAT MAY AFFECT FUTURE TAX CHARGES The UK corporation tax rate reduced from 20% to 19% from April 2017. Accordingly the group’s result for the accounting period is taxed at an effective rate of 19.25% (2016 – 20.00%). The corporation tax rate will reduce to 17% from April 2020. At the balance sheet date, the reduction to 17% from April 2020 has been substantively enacted and hence in accordance with Accounting Standards, the impact of these reductions have been reflected in the group’s financial statements at 31 December 2017. The rate changes will also impact the amount of future tax payments to be made by the group.
8 DIVIDENDS 2017
2016
£000
£000
Interim dividend paid on 15 December 2017
20,770
-
Interim dividend paid on 15 December 2016
-
19,078
20,770
19,078
2017
2016
£000
£000
The company
77,288
80,765
Subsidiaries
49,155
116,657
126,443
197,422
9 RETAINED PROFIT FOR THE YEAR
The profit for the year has been retained by:
The parent company’s profit before dividends for the financial year was £98,058,000 (2016 – £99,843,000).
10 EARNINGS PER SHARE The calculation of earnings per ordinary share for 2017 is based on earnings attributable to ordinary shareholders of £147,213,000 (2016 – £216,500,000) and on 120,000,000 ordinary shares (2016 – 120,000,000 ordinary shares) being the effective number of such shares in issue during the year. This calculation relates to both the basic and diluted earnings per share as there is no potential future shares or share options in the company.
58
Annual Report 2017
11 TANGIBLE FIXED ASSETS Group Freehold investment properties
Freehold land and buildings
£000
£000
5,956,561
28,900
Total properties
Plant and equipment
Total
£000
£000
£000
5,985,461
10,192
5,995,653
107,822
-
107,822
Cost or valuation At 1 January 2017 Revaluation
107,832
Additions
94,336
-
94,336
204
94,540
Disposals
(39,547)
-
(39,547)
(83)
(39,630)
At 31 December 2017
(10)
6,119,182
28,890
6,148,072
10,313
6,158,385
At 1 January 2017
-
-
-
8,525
8,525
Charge for the year
-
-
-
643
643
Disposals
-
-
-
(83)
(83)
At 31 December 2017
-
-
-
9,085
9,085
At 31 December 2017
6,119,182
28,890
6,148,072
1,228
6,149,300
At 31 December 2016
5,956,561
28,900
5,985,461
1,667
5,987,128
Depreciation
Net book value
The valuation of the group’s freehold properties at 31 December 2017 was carried out by CBRE Limited (commercial properties) and Cluttons (residential properties), both firms are regulated by the Royal Institution of Chartered Surveyors (RICS), on the basis of fair value, in accordance with The RICS Valuation – Professional Standards Global – January 2014 and the RICS Valuation Professional Standards UK January 2014 (revised 2015), (“The Red Book”). The key assumptions used to determine the fair value of investment property are set out below:
Fair Value 2017 Property Type Residential
Commercial
£m
1,992
4,156
2016 £m Valuation Technique
2,025 Direct capital comparison, investment & residual
3,960 Income capitalisation
Range (weighted average) Key inputs • Freehold vacant possession values per square foot • Discounts for nature of occupation • Capitalisation and deferment rates • ERV per sq. ft. Office/medical Retail (Zone A) • Equivalent yields
2017
2016
Average of £1,908
Average of £1,984
0% - 25%
0% - 25%
4.75% - 5.50%
4.75% - 5.50%
£20 - £100 £18 - £100 £90 - £1,120 £90 - £1,080 2.1%-5.0% (3.56%) 2.1%-6.0% (3.61%)
The historical cost of freehold properties at 31 December 2017 was £2,008,094,000 (2016 –£1,918,713,000). These amounts are stated after the deduction of accumulated impairment losses of £2,611,000 (2016 – £2,611,000).
31 December 2017
59
12 FIXED ASSET INVESTMENTS Company ÂŁ000 Investment in subsidiary companies at cost At 31 December 2017 and 31 December 2016
117,317
Details of the investments in which the company holds 20% or more of the nominal value of any class of share capital are as follows:
Company
Nature of business
Held directly Cadogan Estates Limited
Proportion of voting rights & shares held %
Property investment
100
Intermediate holding company
100
Cadogan Estates Property Investments Limited
Property investment
100
Cadogan Developments Limited
Property investment
100
Cadogan Hall Limited
Venue management
100
Cadogan Holdings Limited
Property investment
100
Cadogan Income Properties Limited
Property investment
100
Cadogan Hotel Partners Limited
Hotel operator
100
Leda Hotels Limited
Hotel operator
100
Non-trading
100
Property investment
100
Sloane Gardens Hotel Limited
Non-trading
100
Cadogan Estates Management Limited
Non-trading
100
Cadogan Group Management Limited
Non-trading
100
Hugo House Limited
Non-trading
69
Property investment
66
Property management
53
7 Redburn Street Limited
Non-trading
50
15 Redburn Street Limited
Non-trading
50
Property investment
40
2 Sloane Terrace Limited
Property management
25
76 Sloane Street (Management) Limited
Property management
25
15/16 Herbert Crescent Residents Association Limited
Property management
20
Chelsea Land Limited Held indirectly
Chelsea Land Developments Limited Frederick Court Limited
13/14 Herbert Crescent Residents Limited Sloane Court East Garden Limited
Cadogan House Residents Limited
All of the above investments are holdings of ordinary shares. All companies are registered in England.
60
Annual Report 2017
13 DEBTORS Group 2017
2016
£000
£000
Trade debtors
6,203
4,667
Other debtors
4,798
5,118
Accrued income
21,570
17,074
32,571
26,859
14 TRADE AND OTHER CREDITORS Group
Trade creditors Other creditors and accruals Social security and other taxation Deferred income
Company
2017
2016
2017
2016
£000
£000
£000
£000
2,436
1,256
-
-
25,325
22,083
59
59
401
487
40
40
37,221
34,504
-
-
65,383
58,330
99
99
15 BORROWINGS (A) BANK LOANS AND OVERDRAFTS At 31 December 2017 the group had committed but undrawn credit facilities of £40 million (2016 - £40 million) under a revolving credit facility arrangement.
(B) OTHER LONG TERM BORROWINGS Group 2017
2016
£000
£000
4,000
4,000
29,568
-
4,000
-
37,568
4,000
Amounts falling within one year: 6.941% commercial mortgage loan 2025 6.45% $40 million unsecured loan notes due 2018 7.33% £4 million unsecured loan notes due 2018
Derivative financial instruments expiring within one year (note 20)
(9,455)
Other long term borrowings falling within one year
28,113
31 December 2017
4,000
61
15 BORROWINGS (CONTINUED) (B) OTHER LONG TERM BORROWINGS (CONTINUED) Group 2017
2016
£000
£000
16,000
16,000
6.45% $40m unsecured loan notes 2018
-
32,370
7.33% £4m unsecured loan notes 2018
-
4,000
6.60% $45m unsecured loan notes 2020
33,264
36,417
5.04% £45m unsecured loan notes 2021
45,000
45,000
3.45% £15 million unsecured loan notes due 2022
15,000
-
109,264
133,787
3.45% £15m unsecured loan notes 2022
-
15,000
6.75% $23m unsecured loan notes 2023
17,002
18,613
6.941% commercial mortgage loan 2025
52,000
56,000
3.75% £50m unsecured loan notes 2026
50,000
50,000
3.88% £15m unsecured loan notes 2027
15,000
15,000
5.25% $60m unsecured loan notes 2028
44,352
48,555
3.62% £25m unsecured loan notes 2029
25,000
25,000
4.07% £50m unsecured loan notes 2030
50,000
50,000
5.53% $60m unsecured loan notes 2032
44,352
48,555
3.87% £25m unsecured loan notes 2034
25,000
25,000
5.77% $90m unsecured loan notes 2036
66,529
72,833
4.09% £25m unsecured loan notes 2039
25,000
25,000
6.01% £30m unsecured loan notes 2041
30,000
30,000
6.87% £20m unsecured loan notes 2042
20,000
20,000
4.38% £25m unsecured loan notes 2044
25,000
25,000
5.92% $30m unsecured loan notes 2046
22,176
24,278
5.11% £25m unsecured loan notes 2046
25,000
25,000
7.40% $58m unsecured loan notes 2051
42,874
46,937
5.13% £40m unsecured loan notes 2056
40,000
40,000
619,285
660,771
Derivative financial instruments expiring in more than one year (note 20)
(67,560)
(107,703)
Total other long term borrowings expiring in more than one year
660,989
686,855
Amounts falling due in two to five years: 6.941% commercial mortgage loan 2025
Amounts falling due after more than five years:
62
Annual Report 2017
15 BORROWINGS (CONTINUED) (B) OTHER LONG TERM BORROWINGS (CONTINUED) The commercial mortgage loan is secured by fixed charges over specific freehold investment properties of the group, £766,117,000 (2016 – £ 798,558,000) of the total bank loans and long term borrowings is subject to fixed rates of interest to maturity which average 5.30% (2016 – 5.31%). All the interest payments and principal repayments relating to the loan notes issued in US dollars were swapped into sterling at fixed exchange rates. This currency swap has the effect of reducing the effective interest rate on the US dollar loans from the rates shown above to an average effective rate of 6.04% (2016 – 6.04%). This, combined with the fixed interest rates payable on the sterling loans gives an overall effective interest rate across all the series of notes, fixed until maturity, of 5.11% (2016 – 5.11%).
16 SHARE CAPITAL
Ordinary shares of £1 each
2017 Authorised, allotted, issued and fully paid
2016 Authorised, allotted, issued and fully paid
Number of shares
£000
Number of shares
£000
120,000,000
120,000
120,000,000
120,000
17 RESERVES NON-DISTRIBUTABLE RESERVE This reserve is used to record: yy
Increases in fair value of freehold and leasehold investment properties and decreases to the extent that such decreases relate to the increase on the same asset. This is offset by the removal of any historic fair value relating to leasehold investment properties which have been disposed in the year. These figures are stated net of the associated deferred tax asset or liability;
yy
Increases and decreases in fair value of freehold land and building unless a deficit below original cost or its reversal on an individual investment property is expected to be permanent; and
yy
Increases and decreases in the net fair value of derivative financial instruments. The figure is stated net of the associated deferred tax asset or liability.
PROFIT AND LOSS ACCOUNT This is the distributable reserve represented by the retained profit and loss.
31 December 2017
63
18 NOTES TO THE STATEMENT OF CASH FLOWS (A) RECONCILIATION OF PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Group
Group profit for the year
2017
2016
£000
£000
171,975
206,297
(107,822)
(139,375)
Adjustments to reconcile profit for the year to net cash flow from operating activities: Gain on revaluation of investment properties Depreciation of tangible fixed assets Profit on sale of investment properties Profit on sale of other fixed assets Difference between pension charge and cash contributions Net finance cost
643 (6,905) (11) (920) 36,564
918 (10,724) (841) 36,447
Working capital movements: (11)
(8)
Increase in debtors
(5,713)
(4,169)
Increase in creditors
2,952
3,505
Increase in stock
Taxation: Corporation tax paid Net cash inflow from operating activities
(10,392)
(6,962)
80,360
85,088
(B) CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise the following: Group
Cash at bank and in hand
64
Annual Report 2017
2017
2016
£000
£000
46,451
71,204
19 PENSION ARRANGEMENTS The group operates both defined benefit and defined contribution funded pension schemes for its employees. The assets of these schemes are held separately from those of the group in independently administered funds.
DEFINED BENEFIT SCHEME The group’s defined benefit pension scheme, which is closed to new members and was closed to future accrual for active members on 31 March 2014, is called the Cadogan Pension & Assurance Scheme (“the Scheme”). The following disclosures exclude any allowance for defined contribution schemes operated by the group. The liability value does not include allowance for any discretionary benefits. The Scheme is subject to the Statutory Funding Objective under the Pensions Act 2004. A valuation of the Scheme is carried out at least once every three years to determine whether the Statutory Funding Objective is met. As part of the process the group must agree with the Trustees of the scheme the contributions to be paid to address any shortfall against the Statutory Funding Objective. The most recent comprehensive actuarial valuation of the Scheme was carried out as at 25 December 2016. The results of that valuation were updated to 31 December 2017 allowing for cash flows in and out of the Scheme and changes to assumptions over the period.
ASSUMPTIONS The principal assumptions used to calculate Scheme liabilities include:
2017
2016
Discount rate
2.60% pa
2.80% pa
Fixed 5% pension increases
5.00% pa
5.00% pa
Fixed 5% revaluation in deferment
5.00% pa
5.00% pa
Retirements
All members retire at age 60
All members retire at age 60
Post retirement mortality assumption
80% S2NxA based on year of birth using the CMI 2015 core projection model with a long term improvement rate of 1.0% per annum
80% S2NxA based on year of birth using the CMI 2013 core projection model with a long term improvement rate of 1.0% per annum
Tax-free cash
No allowance
No allowance
ASSETS The major categories of assets as a proportion of total assets are as follows:
2017
2016
Asset category
%
%
Growth Assets:
27
26
73
74
100
100
Dynamic Real Return Fund (27%) Protection Assets: Corporate Bond Fund (34%) Over 15 year Gilt Index Fund (39%) Total
The actual return on the Scheme’s assets was £1,966,000 (2016 - £4,166,000). The assets do not include any investment in shares or property of the group.
31 December 2017
65
19 PENSION ARRANGEMENTS (CONTINUED) AMOUNTS RECOGNISED IN THE STATEMENT OF FINANCIAL POSITION
Fair value of plan assets Present value of plan funded obligations Defined benefit pension liability
2017
2016
£000
£000
38,664
37,788
(45,365)
(45,251)
(6,701)
(7,463)
AMOUNTS RECOGNISED IN THE INCOME STATEMENT OVER THE YEAR
Interest cost Expected return on assets Total recognised in the income statement
2017
2016
£000
£000
(1,239)
(1,404)
1,043
1,345
(196)
(59)
RECOGNISED IN OTHER COMPREHENSIVE INCOME OVER THE YEAR 2017
2016
£000
£000
Gain on scheme assets in excess of interest
923
2,821
Experience gains on liabilities
138
-
Losses from changes to assumptions Re-measurement gains and losses recognised in other comprehensive income
(1,023) 38
(9,170) (6,349)
RECONCILIATION OF ASSETS AND DEFINED BENEFIT OBLIGATION The change in fair value of assets over the year was:
Fair value of assets at 1 January Interest on assets Employer contributions Benefits paid Return on plan assets less interest Fair value of assets at 31 December
66
Annual Report 2017
2017
2016
£000
£000
37,788
33,622
1,043
1,345
920
841
(2,010)
(841)
923
2,821
38,664
37,788
19 PENSION ARRANGEMENTS (CONTINUED) The change in present value of the defined benefit obligation over the year was: 2017
2016
£000
£000
45,251
35,518
-
-
Interest cost
1,239
1,404
Benefits paid
(2,010)
(841)
Experience gains on liabilities
(138)
-
Changes to assumptions
1,023
9,170
45,365
45,251
Defined benefit obligation at 1 January Current service cost
Defined benefit obligation at 31 December
DEFINED CONTRIBUTION SCHEMES The pension charge in respect of defined contribution schemes represents contributions payable by the group to such schemes and amounted to £517,000 (2016 – £505,000), of which nil (2016 – nil) was unpaid at the balance sheet date.
20 HEDGING ACTIVITIES AND DERIVATIVES The group has entered into foreign currency and interest rate swap contracts with notional amounts of $406,000,000 (2016 $406,000,000) whereby it pays a fixed rate of interest of between 5.20% and .35%. The swaps are used to hedge the exposure to the variable foreign currency and interest rate payments on the US dollar variable rate unsecured loans (note 15). The loans and interest rate swaps have the same critical terms and are fully effective. Cash flows are expected to occur between June 2018 and June 2051 and will be recognised through the income statement at that time. The aggregate fair value of the interest rate swaps at the end of the reporting period was an asset of £77,015,000 (2016 £107,703,000). The group enters into foreign currency and interest rate swap contracts with various counterparties, principally financial institutions with investment grade credit ratings. The valuation techniques applied to fair value these derivatives employ the use of market observable inputs and include swap models which use present value calculations. The model incorporates various inputs including the credit quality of counterparties and forward rates. As at 31 December 2017, the marked-to-market value of derivative asset positions is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment of these derivatives designated in hedge relationships recognised at fair value.
31 December 2017
67
20 HEDGING ACTIVITIES AND DERIVATIVES (CONTINUED) RECOGNISED IN OTHER COMPREHENSIVE INCOME OVER THE YEAR 2017
2016
£000
£000
Value at 1 January
107,703
72,110
Net changes in fair value through the income statement
(28,441)
53,100
Net changes in fair value through other comprehensive Income
(2,247)
(17,507)
Value at 31 December
77,015
107,703
2017
2016
£000
£000
109,968
120,019
21 CAPITAL AND OTHER COMMITMENTS
Outstanding capital commitments were as follows: Capital expenditure contracted for but not provided for in the financial statements
There were no outstanding commitments for capital expenditure in the company at either year end.
22 R ELATED PARTY RELATIONSHIPS AND TRANSACTIONS Viscount Chelsea D.L., Chairman and director of Cadogan Group Limited, rents a residential property owned by the group. The rent paid by Viscount Chelsea totals £31,200 per annum. At 31 December 2017 the outstanding balance owed to the group was nil (2016 - nil). The annual rental charge is at market rate. John Gordon, a director of Cadogan Group Limited, also rents a residential property owned by the group. The rent paid by Mr Gordon totals £15,733 per annum. At 31 December 2017 the outstanding balance owed to the group was nil (2016 - nil). The annual rental charge is at market rate. The Earl Cadogan KBE D.L., Life President of Cadogan Group Limited, purchased a motor vehicle from the group for £11,135, its market value, for cash consideration. No amounts were owing to the group at 31 December 2017.
23 ULTIMATE OWNERSHIP The ultimate holding company is Cadogan Settled Estates Limited, which is registered in England and Wales and which is ultimately controlled by The Eighth Earl Cadogan’s 6 December 1961 Settlement. The consolidated financial statements of Cadogan Settled Estates Limited may be obtained from The Registrar of Companies, Companies House, Crown Way, Cardiff, CF14 3UZ.
68
Annual Report 2017
F I V E Y E A R SU M M A RY
2017
2016
2015
2014
2013
Net assets Properties at valuation
£m
6,148.1
5,985.5
5,793.9
5,175.2
4,456.0
Net borrowings
£m
642.7
619.7
588.6
583.5
515.6
Equity shareholders’ funds
£m
4,585.1
4,460.4
4,282.8
3,655.2
3,158.3
£
38.21
37.17
35.69
30.46
26.32
Gross rents
£m
152.6
142.7
129.7
119.9
117.1
Profit on sale of investment properties
£m
6.9
10.7
9.5
17.4
27.3
Operating profit – before revaluation gains
£m
100.7
103.3
92.3
89.8
104.9
Revaluation gains in year
£m
107.8
139.4
595.0
615.7
539.8
Operating profit
£m
208.5
242.7
687.3
705.5
644.7
Net interest payable
£m
36.5
36.4
36.7
34.4
31.1
Profit before taxation
£m
172.0
206.3
650.6
671.1
613.6
Taxation
£m
24.8
(10.2)
14.9
140.3
2.6
Profit after taxation
£m
147.2
216.5
635.7
530.8
611.0
Earnings for ordinary shareholders
£m
147.2
216.5
635.7
530.8
611.0
p
122.7
180.4
529.7
442.3
509.2
%
14.02
13.89
13.74
15.96
16.33
Gross rents/interest cover
times
4.18
3.92
3.52
3.49
3.77
Interest cover
times
2.76
2.84
2.51
2.61
3.37
Net assets per share
Earnings
Earnings per share
Key financial ratios Balance sheet gearing
31 December 2017
69
10 Duke of York Square London SW3 4LY T. 020 7730 4567 www.cadogan.co.uk
A
Annual Report 2017