SEGRO plc ANNUAL FINANCIAL REPORT SEGRO plc (the Company) Availability of 2012 Annual Report and Accounts The 2012 Annual Report and Accounts is now available to view at www.SEGRO.com/investors. The following documents are scheduled to be mailed to registered shareholders of the Company on 15 March 2013: * 2012 Annual Report and Accounts; * Notice of the 2013 Annual General Meeting; and * Form of Proxy for the 2013 Annual General Meeting. In accordance with Listing Rule 9.6.1 a copy of each of these documents will be submitted to the National Storage Mechanism and will be available for viewing on 15 March 2012 or shortly thereafter. The Notice of the 2012 Annual General Meeting will be available to view on the Company's website from this date. The information below, which is extracted from the 2012 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 27 February 2013 announcement of its 2012 Final Results (available at www.SEGRO.com). This material is not a substitute for reading the full 2012 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2012 Annual Report and Accounts. PRINCIPAL RISKS AND UNCERTAINTIES MANAGING RISK RESPONSIBILITY The Group recognises that its ability to manage risk consistently across the organisation is central to its success. It defines risk as the potential effect of uncertainty on its ability to achieve its objectives, while risk management ensures a structured approach to decision-making that aims to reduce the uncertainty surrounding expected outcomes, balanced against the objective of creating value for its shareholders. APPROACH TO MANAGING RISK The Board has overall responsibility for ensuring that risk is effectively managed across the Group and, on behalf of the Board, the Audit Committee reviews the effectiveness of the Group's risk management process. The risk management process is designed to identify, evaluate and manage the significant risks that the Group faces. The process aims to manage, rather than eliminate, the risk of failure to achieve business objectives, and therefore can only provide reasonable and not absolute assurance. Appetite towards risk is considered at Board meetings whenever significant strategic, financial or operational decisions are made, and is a key part of ongoing discussions about strategy. The individual risks faced by the Group do not typically change materially from year to year; however, the magnitude and importance of these risks can change significantly. The Board recognises that it has limited control over many of the external risks it faces, such as the macro-economic environment, but it reviews the impact of such risks on the business and actively considers them in its decision-making. For example, during 2012 the Board regularly considered the financial difficulties in the Eurozone and assessed the impact of them on the Group's investment and divestment decisions. The Board monitors internal risks and ensures that controls are in place to manage them. During the year, the Group revised its governance process for major investment transactions to ensure that the risks involved in due diligence or contract negotiations are more formally considered before proceeding with any transaction and that any specific risks being assessed are in line with the Group's risk appetite. Risks are considered within each area of the business, taking into account both the unmitigated risk (assuming that controls fail) and residual risk (with controls operating normally). The most significant risks are detailed in the Group Risk Register. Each risk is owned by a member of the Executive Committee and assigned to a manager who is required to develop a plan to manage or mitigate individual risks to an agreed position. The relatively small management team allows management to respond quickly to changing events so as to reduce any adverse effects on the Group's risk profile. During the year, the Executive Committee and the Board have reviewed the effectiveness of the Group's risk management framework and practices. The Group has identified certain areas for improvement in 2013, such as a greater focus on seeking to anticipate valuation movements. The Group has a Risk Management Committee responsible for regularly reviewing the Group Risk Register, monitoring the most important controls and prioritising risk management activities. The Executive Committee considers emerging risks and their impact on the Group Risk Register. The Board reviews the principal risks twice a year and the Audit Committee receives a report twice a year on how the Group Risk Register has been compiled. Details of the principal risks and uncertainties facing the Group are set out below. PRINCIPAL RISKS AND UNCERTAINTIES The principal risks and uncertainties have the potential to affect SEGRO's business materially - either favourably or unfavourably. The principal risks and uncertainties facing the Group are described below, along with the potential areas of impact on the Group's key performance indicators (KPIs) and the principal activities that are in place to manage such risks. The direction of change in the level of the risk during the course of 2012 is given, along with commentary on any changes occurring and key links to further relevant information provided in other sections of this report. UNCERTAINTIES These represent the risk factors over which the Group has limited control, and so they are rigorously monitored. The most significant of these risk factors and some of the major potential impacts on the Group are set out below: PRINCIPLE UNCERTAINTIES POTENTIAL IMPACTS CHANGES IN MACRO-ECONOMIC CONDITIONS Bank covenant breaches Global market and economic conditions have been Changes in the challenging, with tighter credit conditions and availability and cost of slower growth in most major economies during the finance last few years. Although signs of recovery may exist, there are continued concerns about government Fluctuations in currency austerity measures, Eurozone sovereign and bank exchange rates debt, the availability and cost of credit and geopolitical issues that all contribute to increased Changes in expected market volatility and uncertain expectations for the returns on investments global economy. Changes in asset values CHANGES IN GOVERNMENT POLICIES Increases in customer Changes in government regulation or policy at insolvencies European Union (EU), national and local levels could impact on the Group. For example, unfavourable Occupier requirements not changes in tax and planning regulations or changes met to existing or planned infrastructure investment (including transport) might change the value of the Changes in occupier demand Group's property portfolio or influence development decisions. Changes in rental income CHANGES IN THE COMMERCIAL ENVIRONMENT Changes in operating costs Changes in consumer behaviour, sustainability Regulatory requirements regulations or customer preferences could impact the not met / compliance attractiveness of the Group's properties to certain breaches industry sectors. For example, the increase in online commerce is stimulating the demand for logistics and distribution space located near major transport hubs and conurbations. Competitor behaviour could also have a bearing on the Group's plans - particularly in relation to competition for acquisitions, tenants and land for development. PRINCIPAL RISKS Not all of the risks listed here are within the control of the Group, and other factors besides those listed may affect the performance of our business. Some risks may be unknown at present, and other risks that are currently regarded as immaterial and therefore not detailed here, could turn out to be material in the future. Risks are classified as 'principal' according to their potential level of materiality after mitigating actions have been taken into consideration as determined by the risk management process. The principal risks that the Group reported last year have evolved in nature, as has the Group's response to them. Consideration of the Group's current risk environment, as well as its strategic priorities, has resulted in an additional risk not being classified as principal risks, and this is described in the table below. Additionally, there are also a number of risks that have been de-classified as a principal risk since last year. There are a number of reasons for this, including: the risk has been re-categorised as a principal uncertainty; there is duplication of an issue; mitigating actions have reduced the level of risk and/or natural hedging has occurred between risks and/or the uncertainty surrounding the risk has been reduced. The declassified risks are: 'failure to maintain an appropriate and cost-effective capital structure'; 'the availability and cost of borrowing'; and 'fluctuations in foreign exchange rates'. The following table details each of the Group's current principal risks, and these are arranged by five risk groupings - referred to as risk categories that cover strategic risks, financial risks, operational risks, investment risks and compliance/regulatory risks. The purpose of grouping risks into risk categories is to assist the systematic identification of risks in a consistent manner. It also helps to identify the root causes of these risks, and the KPIs most directly impacted by each category are also identified. The Group's strategy and KPIs are detailed in the Chief Executive's Review on pages 10 to 19. STRATEGIC RISKS The current or prospective risks to earning and capital arising from changes in the business environment and from adverse business decisions, failed implementation of decisions or lack of responsiveness to changes in the business environment. KPIs IMPACTED: TPR, TSR, EPRA ADJUSTED EPS, NAV, LTV, VACANCY RATE RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 PORTFOLIO SHAPE AND → A strategic review of The reshaping PERFORMANCE the portfolio was strategy and the completed and assets progress made Management considers identified for during 2012 are that if the Group holds disposal. The described in the the wrong shape reshaping strategy is Chief Executive's portfolio then being implemented over Review. non-performing assets the medium term and or the wrong type of should result in SEGRO assets may dilute holding an appropriate portfolio returns balance of high resulting in relative quality `stabilised' underperformance of TPR and `opportunity' and TSR against the assets necessary to market and external achieve the returns expectations. that our shareholders require. PACE OF STRATEGIC → The pace of strategic Considerable CHANGE charge, including progress has been balancing our made against three If SEGRO does not strategic priorities of the four deliver its stated against each other strategic strategic changes at (for example reducing priorities the right pace and leverage against announced in within an acceptable reinvesting in new, November 2011, the timeframe then investor core assets), will exception being, expectations may not be continue to be reducing financial met and improved carefully considered leverage. shareholder returns may by both the Board and not be delivered. the Executive The strategic Committee during 2013, priorities and the alongside the KPIs progress made established in against these November 2011 to priorities are monitor performance. detailed in the Clear targets have Chief Executive's been established for Review. further progress to be made in 2013, which have been built into the personal objectives of senior managers. IMPACT OF THE EUROZONE → We remain alert to the The Financial ECONOMIC ENVIRONMENT potential financial Review on pages 38 and operational risks to 39 provides A deterioration in to the business further detail of economic conditions in arising from a the Group's foreign the Eurozone could deterioration in exchange exposure result in a loss in economic conditions in to the euro and the value or reduction in the Eurozone. We will policies and the income to the Group, by continue to maintain a hedging adversely impacting high level of currency arrangements in economic performance in translation hedging place to manage the markets in which we against the impact of this exposure. hold property assets in a weaker euro and to Continental Europe. If closely monitor our this deterioration also exposure to major resulted in a weakening tenants in the of the euro against Eurozone. sterling this would have an adverse Geographically, the currency translation portfolio is located impact of the reported predominantly in the sterling income and relatively stronger asset values from our European economies. euro denominated The split by property operations. values is: UK 66%, France 11%, Germany 8%, Poland 7%, Belgium 3%, Netherlands 2%, Italy 2% and Czech Republic 1%. FINANCIAL RISKS The risks to the cash flows, equity capital and solvency of the Group resulting from the debt funding arrangements of the Group and movement in external financial variables that have a significant impact on the Group, such as interest rates, foreign exchange rates and the creditworthiness of the Group's major financial counterparties. KPIs IMPACTED: TSR, EPRA ADJUSTED EPS, NAV, LTV RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 SOLVENCY AND COVENANT → Funding and covenant Further details of BREACH ratio headroom are Treasury Policy, closely monitored by funding headroom, A material fall in the Group Treasury, the financial covenant Group's property asset Treasury Committee and ratios and related values or rental income the Board. headroom and could lead to a breach sensitivities are of financial covenants The impact of major provided in the within its debt funding investment decisions Financial Review on arrangements. This on covenant and pages 36 to 39. could result in the funding headroom is cancellation of debt also considered by the funding which could, in Investment Committee turn, leave the Group as part of the without sufficient approval process for long-term resources these decisions. (solvency) to meet its commitments. OPERATIONAL RISKS The risk of loss and/or missed opportunities resulting from inadequate or failed internal processes, people or systems or from external events. KPIs IMPACTED: TOTAL COST RATIO, CUSTOMER SATISFACTION, EPRA VACANCY RATE, EPRA ADJUSTED EPS RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 OPERATIONAL DELIVERY → In 2012, various Sustainability, operational processes performance The Group's ability to were subject to relative to maintain its internal audit. This operational reputation, revenues has provided assurance delivery is and shareholder value that our processes are detailed in the could be damaged by essentially robust, Corporate operational failures but with some scope Responsibility such as: for improvement . Review on pages 24 to 31. - Health and Safety We will ensure that incidents operational processes That section sets remain well controlled out the identified - Environmental damage during 2013, and will areas for seek to implement improvement in - Business systems or identified operational IT disruption improvements to these processes and the processes. Group's approach to - Failing to attract, managing people. retains and motivate key staff - Breach of anti-bribery and corruption legislation INVESTMENT/REAL ESTATE RISKS The risks associated with capital allocation including the acquisition, disposal and development of assets and the valuation of the Group's portfolio. KPIs IMPACTED; TPR, TSR AND NAV RISK CHANGE MITIGATING ACTIONS COMMENTARY SINCE 2011 MARKET CYCLE → The Board, Executive The market outlook Committee and is detailed in the The property market is Investment Committee Chief Executive's cyclical and there is monitor the property Review on page 16. an inherent risk that market cycle on a the Group could either continual basis and misinterpret the market seek to adapt the or fail to react Group's capital appropriately to investment/divestment changing market strategy in conditions, which could anticipation of result in capital being changing market invested or disposals conditions. taking place at the wrong time in the cycle. APPROPRIATNESS OF ↓ Formal asset The approach to INVESTMENT PLANS management plans are investment and prepared annually for development is Decisions to buy, hold, all estates to ensure detailed in the sell or develop assets that capital Performance Review could be flawed due to allocation is on pages 20 to 21. inadequate analysis, optimised across the inappropriate portfolio. The plans assumptions, poor due are used to determine diligence or changes in where to invest the economic or capital in existing operating environment. assets and to identify assets for disposal. The Group's major development projects are generally pre-let to customers on a long lease. Speculative development is carefully monitored by the Investment Committee and is limited to locations where supply is limited and demand is expected to be strong. A new comprehensive Capital Investment Policy covering evaluation, due diligence, approval and execution, has been developed and implemented. PORTFOLIO VALUATION NEW The Group's re-shaping The reshaping strategy is focused on strategy is If we fail to increasing exposure to detailed in the anticipate portfolio attractive assets in Chief Executive's valuation changes we core locations and Review on page 10. may fail to take action disposing of non-core to sell assets. The progress made under-performing assets during 2012 in or we may not be able The Group's investment reshaping the to manage shareholder team is responsible portfolio is also expectations for the regular detailed in the appropriately, assessment of Performance Review resulting in TPR investment market on page 11 to 12. underperformance or conditions and for potential damage to our managing the biannual reputation with external valuations. investors and, ultimately, to an This risk is also increase in our cost of regularly monitored by capital. the Investment Committee which also provides oversight of and challenge to the annual asset planning process. An investor relations process is in place to maintain positive shareholder relationship and manage shareholder expectations. COMPLIANCE RISKS The risk of legal or regulatory sanctions, material financial loss, or loss of reputation that the Group may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its business activities. THERE ARE CURRENTLY NO RISKS WITHIN THIS CATEGORY THAT MEET THE CRITERIA FOR CLASSIFACTION OF A PRINCIPAL RISK Currently there are no compliance risks which, taking into account the impact of mitigating actions, including continued assessments and internal controls, are considered to be principal risks. RELATED PARTY TRANSACTIONS GROUP Transactions during the year between the Group and its joint ventures are disclosed below: 2012 2011 £m £m New loans during the year 1.2 0.7 Loans repaid during the year - (0.4) Loans outstanding at the year end 172.1 127.0 Dividends received 18.7 8.3 Management fee income 7.4 5.9 COMPANY Transactions between the Company and its subsidiaries eliminate on consolidation and are not disclosed in this note. Amounts due from subsidiaries are disclosed in note 18 and amounts due to subsidiaries are disclosed in note 19. None of the above Group or Company balances are secured. All of the above transactions are made on terms equivalent to those that prevail in arm's length transactions. REMUNERATION OF KEY MANAGEMENT PERSONNEL Key management personnel comprise Executive and Non-Executive Directors and any other members of the Executive Committee, as outlined in the Governance Report on pages 46 to 51. Key management personnel compensation is shown in the table below: 2012 2011 £m £m Salaries and short-term benefits 3.5 4.4 Termination benefits - 0.6 Post employment benefits 0.1 0.2 Share-based payments 0.6 0.1 TOTAL REMUNERATION 4.2 5.3 More detailed information concerning directors' remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans as required by the Companies Act 2006, is shown in the audited part of the Report on Directors' Remuneration on pages 57 to 65. STATEMENT OF DIRECTORS' RESPONSIBILITIES The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the parent Company financial statements under IFRSs as adopted by the EU. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors: * properly select and apply accounting policies; * present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and * make an assessment of the Company's ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. RESPONSIBILITY STATEMENT We confirm that to the best of our knowledge: * the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and * the management report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board David Sleath Justin Read Chief Executive Group Finance Director 26 February 2013 26 February 2013 FORWARD LOOKING STATEMENTS This Annual Report contains certain forward looking statements with respect to SEGRO's expectations and plans, strategy, management objectives, future developments and performance, costs, revenues and other trend information. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. Certain statements have been made with reference to forecast process changes, economic conditions and the current regulatory environment. Any forward looking statements made by or on behalf of SEGRO speak only as of the date they are made. SEGRO does not undertake to update forward looking statements to reflect any changes in SEGRO's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this Annual Report should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance. Robin Healy Deputy Company Secretary +44 (0) 20 7451 9082 END -0- Mar/08/2013 12:00 GMT
SEGRO PLC: Annual Financial Report
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