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Annual Report 2019


Contents

Directors and Secretary Strategic Objectives Financial Highlights Chairman’s Statement Strategic Report Directors’ Report Independent Auditor’s Report Consolidated Income Statement Statements of Comprehensive Income Statements of Changes in Equity Statements of Financial Position Consolidated Statement of Cash Flows Notes to the Financial Statements Five Year Summary

2 3 4 6 8 48 50 52 53 54 55 57 58 80

1


Cadogan Annual Report 2019

Directors and Secretary Life President

The Earl Cadogan KBE DL Directors Chairman

Viscount Chelsea DL* Deputy Chairman

The Hon. James Bruce* Chief Executive

Hugh Seaborn CVO Finance Director

Sanjay Patel

Charles Ellingworth* John Gordon* Harry Morley* Francis Salway* *

Non-executive

Secretary

Paul Loutit

Registered Office

10 Duke of York Square London SW3 4LY United Kingdom Company Number

2997357 Auditor

Ernst & Young LLP 1 More London Place London SE1 2AF 2


Strategic Objectives

Strategic Objectives The Cadogan Estate

Our core objectives

Defined by our heritage. Dedicated to the future.

— To protect and enhance the Estate’s position as one of the world’s leading locations in which to live, work and visit.

Cadogan is a dynamic asset 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, dynamic business able to anticipate and respond swiftly to the changing needs of our customers and markets. Cadogan’s long association with Chelsea began when Charles, Baron Cadogan, wed Elizabeth Sloane in 1717, some 300 years ago. Since that time, the family and place have grown together – evolving the Cadogan Estate into one of London’s most characterful and distinctive neighbourhoods.

— We have a proud heritage and aim always to safeguard our future and protect our portfolio as a long-term investment – creating and maintaining outstanding buildings and environment. — As long term stewards of Chelsea, we have a responsibility to make a positive contribution towards a sustainable environment and a thriving community. — Our reputation is paramount. We always select the best external advisers and recruit the strongest internal team to deliver excellent customer service, be good neighbours and ensure that integrity is at the heart of all business decisions.

Stewardship and community are our watchwords. Our long term commitment comes with 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.

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Cadogan Annual Report 2019

Financial Highlights Gross rents Five year growth

6.8% pa 2019

£166.7m

2018

£160.0m

2017

£152.6m

2016

£142.7m

2015

£129.7m

Gross property value Five year growth

1.5% pa 2019

£5,573.6m

2018

£6,160.6m

2017

£6,148.1m

2016

£5,985.5m

2015

£5,793.9m

Total return Five year average

2.8% pa 2019

(9.5%)

2018

(0.3%)

2017

3.2%

2016 2015

4

4.6% 17.7%


Financial Highlights

Operating profit before capital items

£105.8m 2019 2019

£105.8m

2018

£98.1m

2017

£93.8m

2016

£92.6m

2015

£82.8m

Net assets per share

£34.1 2019 2019

£34.1

2018

£38.0

2017

£38.7

2016

£37.6

2015

£35.7

Balance sheet gearing (FRS 102 basis)

19.7% 2019 2019

19.7%

2018 2017

16.3% 13.9%

2016

13.7%

2015

13.7%

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Cadogan Annual Report 2019

Chairman’s Statement I am presenting the Chairman’s statement for the 2019 results, which have since been overshadowed by the COVID-19 crisis. Most of 2019 was dominated by continued political and economic uncertainty caused by, among other things, the ongoing Brexit negotiations and the third general election in four years. Just as it appeared we were emerging from this difficult period with a strong start to 2020, the COVID-19 pandemic struck, with immediate economic and social consequences for the UK and world economy. I am pleased to report that Cadogan’s response was immediate and proactive. Firstly, we ensured the safety of our employees and contractors. Then we engaged with our customers, offering practical and financial assistance to the most vulnerable businesses and made sure that our suppliers were paid promptly. Simultaneously we provided support to the local community and the NHS. With our low gearing and strong balance sheet, we are very well positioned, whatever the shape of the eventual recovery, and remain confident that London will continue to attract investment from all over the world and remain one of the few truly global capitals. Rental income continued to grow in 2019 despite the uncertainty I have referred to above. The business delivered an increase in gross rental income of 4.2%, rising to 9.7% when taking into account the income from the hotel operating businesses which was boosted by the successful reopening of the Cadogan Hotel after a four year extensive restoration and refurbishment. I was very proud to be present at the ceremony early last year, for the reopening of the hotel as the Belmond Cadogan Hotel, now operated by the LVMH-owned Belmond Group.

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Chairman's Statement

Our total income rose to £185.9m (compared to £169.4m in 2018). Despite the solid growth in income we have experienced a revaluation reduction of £581.4m equating to -9.4%. This fall in values was led by retail (down 12.6%) and residential (down 10.7%) and mitigated by offices (up 2.7%). This is a long term family business with a 300 year commitment to Chelsea. We have continued to contribute to local communities in varied ways. I particularly enjoy our continued support of Cadogan Hall which is now a well-established and extremely well respected, London concert hall. I feel our portfolio of flats provided at subsidised rents as key worker and social housing, has an important place in allowing those who support the community to live within this community. I live in Chelsea and as such I know I am not alone in enjoying the warmth and life that Pavilion Road has attracted. The popularity of these artisan food shops during the COVID-19 lockdown was tremendous. This important role as a significant landowner, in creating special places which people enjoy and which contribute to local life, is also reflected in our work in partnership with the Royal Borough of Kensington and Chelsea (RBKC), to improve significantly the streetscape of Sloane Street. This major investment will reinforce the street’s position as the pre-eminent location for the world’s top luxury retailers as well as a great place in which to live, work and shop.

Looking forward, COVID-19 has overlaid the existing political uncertainty caused by the UK’s continuing Brexit negotiations. The length and depth of the recession that will follow this crisis remains unclear. I will continue to expect my team to manage our business for the long term. Therefore, as I look forward with caution it is also with confidence that we are well equipped with a top-quality portfolio, strong finances and an excellent team. The response to the COVID-19 virus has impacted on lives across the country. Everyone’s health has been subject to a deadly threat and my thoughts are firmly with those many families that have lost loved ones. No one will have escaped the anxiety and uncertainty that the virus has introduced. Very many people have been affected financially and there is greater hardship in many quarters. We have also been drawn together even while in isolation, through the universal admiration for the people who have supported us all through this strange time. The list is long, but foremost amongst these are those who work within the National Health Service from the people treating patients to the cleaners making the wards and treatment rooms safe. I would like to thank the Cadogan team led by the Chief Executive, Hugh Seaborn and the Finance Director Sanjay Patel, who have taken the challenges in their stride and worked tirelessly to support our partners, be they the large number of businesses and contractors that work on our behalf to maintain and enhance the Estate, or our commercial and residential customers and the local community and charities. I would like to welcome Harry Morley to the Board, who joins us as a non-executive director, and I look forward to working with Harry over the years ahead. I would also like to extend my thanks to my fellow Board Directors for all their support and wise counsel which has never been more important than now. Viscount Chelsea DL 25 June 2020

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Cadogan Annual Report 2019

Strategic Report

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Strategic Report

Overview The COVID-19 pandemic and its impact on the economy and on our way of life overshadows our 2019 results. I start my report, therefore, summarising the new challenges presented by COVID-19, how we have responded so far and the overriding priorities on which we are focusing our business in 2020. COVID-19 and its challenges The COVID-19 virus has undermined global economic growth prospects. It is not possible to predict the length of the pandemic nor how and when growth will re-emerge as containment measures are relaxed. The immediate impact has been widespread but felt most keenly by hospitality and retail businesses which need contact with their customers to prosper. Our portfolio has extensive exposure to this sector through shops, restaurants, health and beauty businesses and hotels which together comprise 56% of our value. The result has been relatively low rent collection for the March 2020 quarter as occupiers have had to close their premises during the lockdown, and we expect this to be repeated in the June quarter as businesses face the costs of restocking and paying wages after a period of low turnover.

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Cadogan Annual Report 2019

Immediate Priorities

Our key priorities during this crisis are as follows: The first priority from the start has been to protect the health and wellbeing of our staff and contractors that work on the Estate while maintaining business activity and responding to the challenges faced by our occupiers and other stakeholders. The business is working remotely and the new arrangements have worked well. The second is to support our occupiers by providing targeted support in the form of offering monthly payments or deferred rents to the most vulnerable retail, leisure, food and beverage and office occupiers as well as residential customers. This reflects our values as a long term, responsible business and an important steward of the area in which we have operated successfully for over 300 years. The third is to conserve cash and reduce discretionary spend to preserve liquidity headroom. Substantial discretionary spend budgeted for 2020 has been deferred until there is greater visibility of the future. There is more detail on this in the Financial Review section later.

The fourth is to carry on doing what we have always done unselfconsciously, which is to be a good corporate citizen. This includes the following, some of which we will say more on later in the Annual Report: — Supporting our occupiers as described above. In March alone we provided over £10m of financial support in the form of rent-frees, rent deferrals and monthly payment terms to small businesses and residential occupiers — Providing support to the NHS directly, with free parking and sleeping accommodation, financial donations to local hospitals and to pay for materials used to make protective gowns for NHS staff — Supporting the local community through charitable donations in addition to our long term funding of the running costs of the Kensington and Chelsea Foundation, which channels donations to numerous small local charities that are able to identify the most vulnerable members of the community and improve the lives of people who need help the most.

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Strategic Report

The fifth and final priority is preparing for reopening and recovery. As we have dealt with the most pressing priorities, our team is now focussed on the important tasks of preparing for the recovery, including the reopening of shops, offices, hospitality and leisure businesses following the end of lockdown. This includes everything ranging from preparing an integrated marketing plan to help drive footfall and spend back to the area, to helping our occupiers to reopen safely with safe distancing measures in place, to proactively starting lease renewal discussions well in advance of upcoming expiries. We have also provided webinars for our construction partners and small businesses to advise on matters such as restarting work on construction sites safely and information on government and other support available to small businesses.

The pandemic has accelerated the structural changes already underway in retail resulting in more transactions moving online. However, due to our experience with retailers we remain confident even through the challenging weeks of the lockdown, that successful retailers will continue to need shops to build brand awareness, develop the customer experience as well as to transact from. The quality of the location of these shops will become even more critical which plays to the strengths of the Cadogan estate management approach. We have well established strategies carefully targeted to mitigate the structural changes in retail and to provide compelling destinations. These range from our curation of the wider area including painstaking occupier selection providing a compelling mix of local independents with exciting international flagships. The provision of beautiful outside spaces with which people make an emotional connection, such as the Duke of York’s Square and Pavilion Road. The layering of a variety of uses that contribute to breathing life and personality into the area from cultural venues such as Cadogan Hall, to the wide variety and style of food and drink. 11


Cadogan Annual Report 2019

COVID-19 Support Package We have taken the approach of doing what we can to support occupiers and the wider community, to protect the character of Chelsea and our business for the long term. This is consistent with our values as long term stewards of the area. We have established a Business Community Fund which has set aside funding for the foreseeable future that will deliver financial help, cash flow support and resources to our tenants, as well as other partners and local charities that are most in need. It is important that we seek to safeguard the things that make Chelsea special and also contribute to ensure that the most vulnerable are protected.

12


Strategic Report

Core initiatives that the Business Community Fund covers include:

A commitment to a dedicated destination marketing, events and tourism programme, over the next three years

— Initial emergency rent support measures given in the March quarter — A commitment to fund rent relief for over 30 hospitality sector occupiers throughout 2020 by switching them to turnover based leases

A number of grants made available to safeguard future creative talent in the key sectors synonymous with Chelsea including fashion, arts & crafts, music and food

— Extended rental support of other smaller and independent retailers on a case-by-case basis — Rent support for cultural attractions, hotels, gyms, beauty and wellness operators and medical uses — Allow rental payments to be made monthly in arrears for many commercial leases across the Estate until the end of the year

A donation to Chelsea & Westminster Hospital’s COVID-19 Rapid Response Fund, which has supported COVID-19 research and new treatment trials, provided patients with activity packs and technology so that they can communicate with loved ones, and initiated a memory box project to help the bereaved cope with loss. The funds have also contributed to a staff wellbeing programme to help frontline workers relax, refuel and re-energise before and after gruelling shifts

Ongoing provision of car parking spaces plus hotel accommodation at 11 Cadogan Gardens for NHS frontline workers at both Chelsea & Westminster Hospital and the Royal Brompton

The delivery of grocery baskets and Easter treats, in partnership with Partridges, to essential workers and their families through Holy Trinity School and our own subsidised key worker accommodation

Charitable donation to the Kensington & Chelsea Foundation which has helped provide over 1000 care packages a week to those most vulnerable, and supported numerous other micro charities in the borough which have provided foodbanks, shelters, mental wellbeing, educational support of vulnerable children, supporting connectivity of hospital patients with loved ones; and online services and platforms for a number of local minority groups, amongst other equally deserving causes

Sponsored accommodation and funding to ensure the provision of 1,500 medical gowns per day to local hospitals via The Fashion School. Over 32,000 gowns were delivered during the peak of the crisis

We have been able to act swiftly, be responsive and customer focussed and now we are turning our attention to supporting beyond the immediate short term. Our aim is to ensure Chelsea remains a compelling and vibrant destination and this means supporting the recovery of numerous fashion and lifestyle brands, best in their field artisans, independents and restaurants so that Chelsea can thrive once again.

13


Cadogan Annual Report 2019

Overview of 2019

It was a year for caution and for consolidation and in this context the business made solid progress in 2019. Total income grew by 9.7% to £185.9m (from £169.4m in 2018) and operating profit before capital items (an indicator of underlying operating performance as it excludes profit on the sale of investment properties and revaluation movements), increased from £98.1m to £105.8m up 7.8%. The strong performance of income and operational profit performance was offset by a reduction of 9.4% (-£581.4m) in the capital value of the portfolio. In December 2019 we demerged our two operating hotels, the Belmond Cadogan and 11 Cadogan Gardens, to the direct ownership of the trust settlements that ultimately own Cadogan Group. Their results will not be reported as part of Cadogan Group from 2020 onwards. In 2019 the Group’s share of income from the hotels in the period up to demerger was £15.0m (2018: £5.3m), the increase over 2018 largely driven by the very successful reopening in February 2019 of the Belmond Cadogan Hotel after an extensive refurbishment and restoration. In 2019, we invested £146.6m in purchases and development which will produce further rental income over time. This was less than the previous year and budget, mainly because of our caution which resulted in suspending most acquisition activity in the second half of the year in light of increasing uncertainty around Brexit and the general election.

We continued to increase the food, leisure and drink uses across the Estate during 2019 which, combined with our strong marketing and events programme and the Tutankhamun exhibition at the Saatchi Gallery, attracted just over 35 million visitors to the area in 2019, the largest number recorded, representing an increase of 1.5 million visitors compared to each of the previous 4 years. Footfall was up 4.1% on the previous year and significantly outperformed the West End (-1.3%) and UK (-2.2%) indicating the relative strength of Chelsea and Knightsbridge as a prime central London retail destination. This strong operational performance reflects our consistent focus on quality, delivering commercial and residential of the highest standard to the market, providing exceptional customer service evidenced by high Net Promoter Scores, and maintaining our commitment to enhancing the public realm.

Key financial highlights of 2019 are set out opposite. 14


Strategic Report

Property Portfolio Investment Performance Highlights

Total property portfolio value of £5.6 billion Decrease of 9.4% adjusting for purchases, sales and capital expenditure

Commercial portfolio declined in value by 9.0%

Residential portfolio declined in value by 10.7%

Retail portfolio decreased by 12.6% Office portfolio increased by 2.7%

Overall, the portfolio valuation, on a like for like basis, declined by -9.4%.

Retail, our largest sector at 49.9% of the portfolio, produced the weakest valuation performance, down -12.6% to £2.78bn. This figure was the result mainly of a widening in some yields and weaker occupational markets. Retail rental income increased by 3.8% to £89.9m per annum (53.8% of the total rent roll).

Offices which represent 13.4% of the portfolio, were subject to a valuation increase of 2.7% to £744m after a strong previous year and with limited vacancies as the portfolio has remained fully occupied. Office rental income increased by 12.7% to £33.5m (20.0% of the total rent roll).

The residential sector representing 29.1% of the portfolio, was subject to a valuation decline of -10.7% to £1.62bn, after adjusting for purchases, sales and capital expenditure. Gross rents for the market let portfolio rose by 2.1% due to acquisitions and refurbishments, to £33.1m. Adding ground rents from long leaseholds of £2.5m, residential comprised 21.3% of the total rent roll. 15


Cadogan Annual Report 2019

Retail is our largest sector, accounting for just under half (49.9%) by capital value and 53.8% of income.

16


Strategic Report

Retail Consumer spending patterns, tastes and expectations have been evolving at a fast pace over a number of years largely due to the movement of consumer transactions online. COVID-19 has accelerated this change and retailers and property owners are continuing to adapt to these structural changes. It remains the case that retailers will continue to need shops to build their brand awareness and provide shoppers with an experience that translates into more sales (off and online) and stronger margins. We anticipate that this will be particularly the case for luxury brands, which is where our retail destinations are positioned.

At Cadogan we have been anticipating these changes and responding over several years by increasingly becoming a service provider, strengthening our customer focus and responding to the changing needs and requirements of our customers and the markets within which they operate. This allows us to work closely with our retail brands to better understand their priorities and reflect these in our estate management strategies. Our aim is to deliver compelling and vibrant destinations through the careful curation of the retail offer, by attracting leading fashion and lifestyle brands, from international luxury flagships to “cool” contemporary lifestyle brands and best in their field independent artisans. We are fortunate through our concentration of holdings, to be able to curate a thriving retail environment supporting successful shops. This is achieved by creating a London neighbourhood which attracts consumers more frequently and encourages them to stay for longer. We look to achieve this through a combination of developing the right physical space, ensuring the wider environment complements the premium retail offer, selecting a leading range of outstanding restaurants, cafés and bars and the curation of events and destination marketing. The structural theme continues of consumers seeking engaging, memorable and social experiences, with exciting shopping combined with food, drink, wellbeing, beauty and leisure.

2019 £M

2018 £M

% INCREASE

G RO S S VA LU E

2,779.4

3,130.4

-12.6%

G RO S S R E N T S

89.9

86.5

3.8%

R E TA I L

*

* Adjusted for purchases, sales and capital expenditure

17


Cadogan Annual Report 2019

Our ambitious proposals to improve the Sloane Street public realm to dramatically enhance the pedestrian experience while having a neutral impact on vehicles, prepared in partnership with the Royal Borough of Kensington and Chelsea, were given final approval in 2019 following positive public consultations. The carefully phased works will take up to three years to complete. The willingness to fund these public realm works reflects our long term commitment to this area and our strong interest in creating a more attractive environment.

The outlook for retail has become even more challenging. The on-going structural changes as transactions move online, have accelerated due to the response to COVID-19. This has been exacerbated by the damaging impact of the lockdown on the financial position of retail businesses and the likelihood of a recession to follow. However, shops will continue to be a vital element of retailers’ offer when considered alongside online channels to form a truly omnichannel approach. Retailers will continue to require high quality physical destinations and those property owners that are able to deliver space in an attractive environment, within a compelling mix of uses and operators in the best retail pitches, will thrive. 18


Strategic Report

The final letting on our newly created artisan food street, Pavilion Road, completed in 2019. This project has delivered exactly what local residents told us that they wanted most, namely independently owned, “useful” shops selling high quality produce. I have been delighted to see Pavilion Road receive acclaim from residents, visitors and the press and we are aiming to enhance its attractions further during 2020 by working with RBKC to pedestrianise this space. Our acquisition strategy is to seek to invest in properties at value, which have the potential to deliver healthy investment returns and contribute to our wider estate management. Activity was limited in 2019 as we adopted a cautious approach in light of the political uncertainty. The main acquisition in 2019 was Royal Avenue House which largely comprised well located and let retail units and extended our influence on King’s Road, as well as adding £1.8m to the rent roll.

Although the market was subdued given the backdrop of increased Brexit and political uncertainty, our letting activity was healthy with 32 lettings producing £5.3m per annum after rent frees. The King’s Road and Duke of York Square were strengthened by the arrival of a number of attractive brands including Essential Antwerp, Sunspel, Soul Cycle, ME+EM, Moscot and Balibaris. Further, Zadig and Voltaire upsized their King’s Road shop, creating their London flagship. We continued to deliver on our strategy of increasing the food, drink and leisure uses across the Estate with the opening of Vardo restaurant on Duke of York Square, The Sea, The Sea (fishmonger and seafood restaurant) on Pavilion Road, Urban Retreat (beauty and wellbeing) and Soul Cycle (fitness). We secured a number of temporary lettings to introduce exciting, up-and-coming brands and enhance the animation of the area with names such as Castore, Dundas, Rixo and Cefinn.

19


Cadogan Annual Report 2019

Our offices are virtually fully let with almost no vacancies through the year. Offices Offices account for 13.4% of the portfolio by capital value of £744m, up by 1.6% on the previous year. By income, offices represent 20.0% of the total portfolio and gross rents rose by 12.7% over the year primarily due to the end of a rent free period following the letting last year of one of our largest office buildings, and index linked rent reviews. Our offices are virtually fully let with almost no vacancies through the year. Our strengths as an office location include the proximity to residential areas, attractive environment and lifestyle benefits of the locality, and the limited supply of quality space. The office sector contributes to our estate management approach by introducing office occupiers to the area and contributing to activity as well as providing the business with a healthy growing income.

Credit: Marshall Wace

Credit: Marshall Wace

2019 £M

2018 £M

% CHANGE

G RO S S VA LU E

744.4

721.7

2.7%

G RO S S R E N T S

33.5

29.7

12.7%

OFFICES

* Adjusted for purchases, sales and capital expenditure

20

*


Strategic Report

21


Cadogan Annual Report 2019

Residential remains our second largest sector (after retail) and is an important part of the portfolio.

Residential The gross value of our residential portfolio represents 29.1% (29.9% in 2018) of the total. Residential remains our second largest sector (after retail) and is an important part of the portfolio as it diversifies performance, drives our customer service credentials and reflects our character as a local landowner and steward of the area. The diversification value of residential is evidenced by its relatively strong rent collection performance in the current COVID-19 crisis. The reduction in the size of the residential portfolio primarily reflects the fall in values this year, down 10.7% to ÂŁ1.62bn (ÂŁ1.84bn in 2018 when it was down 6.7%). This represents the steepest decline we have experienced in recent years. The steep fall in values this year is the fifth year of flat or marginally falling values since the property cycle turned in 2014. 22


Strategic Report

Income from residential represents 21.3% (21.5% in 2018) of the portfolio. The lower relative income produced by residential as compared to the commercial portfolio, reflects the combination of reversionary long leases which produce very little income (but provides a return when the long leaseholders choose to enfranchise), and the private rented sector portfolio which generates a yield that tends to be lower than for commercial property. The value of enfranchisement sales during 2019 was £40.6m compared to £25.2m in 2018, but significantly lower than the 10 year average of £74m. These sales represent the disposal of interests in 49 units (2018 – 49 units) comprising six houses and 43 flats. Proceeds from four voluntary sales totalled only £4.7m (2018 – £26.1m) reflecting a more subdued market in 2019. Because of the softer market conditions, profits from the enfranchisement sales amounted to £5.0m or 14.1%, which was in line with our expectation but below our experience over recent years (£4.1m and 19.2% in 2018). We also hold a private rented sector portfolio of over 700 units which has remained largely fully occupied through 2019. We have maintained our focus on delivering the best quality accommodation to the market coupled to exemplary customer service with the aim of engendering strong loyalty and retaining tenants over time. In 2019 the average length of stay by departing tenants increased from 3 to 3.69 years. New lets (most of which will have undergone a refresh) achieved rental uplifts on average of 8.5% compared to the previous rent, and 4.0% compared to the market valuation in 2019. For a brief period after the general election and before the lockdown, there was an increase in residential property sales signalling perhaps that values had bottomed out after a long period of correction. It remains to be seen whether this higher level of activity will return after the crisis.

2019 £M

2018 £M

%

G RO S S VA LU E

1,620.4

1,841.6

-10.7%

G RO S S R E N T S

35.6

34.9

2.0%

RESIDENTIAL

*

* Adjusted for purchases, sales and capital expenditure

23


Cadogan Annual Report 2019

Leisure & Other This category comprises hotels, restaurants, pubs and a variety of other properties such as schools, cultural and artistic venues, car parks and medical uses. Leisure and Other accounts for 7.7% of the value of the portfolio, which is up slightly from 7.6% in 2018. The reduction in value was mainly as a result of the demerger of the two hotels, Belmond Cadogan and 11 Cadogan Gardens, which took place in December 2019. Since 2018 this category has also included properties in our newly established regional portfolio. This regional portfolio, which stood at £77m at the year end (£53m in 2018), provides the business with higher income levels than is typically achievable from the Chelsea estate.

The capital value of Leisure and Other fell by 1.2% mainly due to the transaction costs associated with the regional acquisitions, and income increased by 10.1% reflecting the stronger income characteristics of the investments outside London. This sector, aside from the regional portfolio, is vitally important in supporting our strongly held stewardship values. As a business focused on contributing to the communities within which we operate both now and in the future, as well as enhancing Chelsea as a destination, the impacts of these uses far outweighs their size in the portfolio.

2019 £M

2018 £M

%

G RO S S VA LU E

429.5

466.8

-1.2%

G RO S S R E N T S

12.0

10.9

10.1%

LEISURE & OTHER

* Adjusted for purchases, sales and capital expenditure

24

*


Strategic Report

Leisure and Other accounts for 7.7% of the value of the portfolio, which is up slightly from 7.6% in 2018.

25


Cadogan Annual Report 2019

Developments

We are constantly investing in the upgrading of the Estate through maintenance, restoration, refurbishment and redevelopment activities.

26


Strategic Report

This allows us to maintain and improve the wider environment and deliver homes and business space that meet the needs of our customers. In 2019 our total expenditure on redevelopment and major refurbishments was £66.5m (£86.9m in 2018), the decrease being due to fewer projects under construction during 2019 following a number of completions in 2018 and the beginning of 2019. A substantial element of construction activity during 2019 was in three schemes: Belmond Cadogan Hotel, which completed and opened very successfully and to great acclaim, in February 2019; 1 Sloane Gardens, where we are working in partnership with the celebrated Parisian hotelier and restaurateur Jean-Louis Costes; and 196/222 King’s Road, our largest scheme, which will comprise a Curzon cinema, roof top bar, a public house, offices, flagship shops, affordable and market flats and an enhanced Waitrose supermarket.

As part of our commitment to the Chelsea community, we are keeping the Waitrose supermarket open for business for most of the period while we undertake this extensive scheme. This has proved to be even more important for people living locally through the COVID-19 lockdown period in 2020. This is just one an example of how we can impact upon the lives of people living nearby. We are very aware that our actions can and do impact upon those around us, most immediately through redevelopment activity and building works. In response to this we aim to be exemplary in the way in which we consult and engage locally when preparing a scheme, because it is important to us to understand local concerns and consider how we can respond to them. Thereafter we communicate thoroughly to keep people fully informed and maintain a dialogue where necessary. Our aim through this approach is to be the most trusted local developer and therefore be able to adapt and respond to changing needs to ensure the area remains relevant and desirable to present and future generations of residents and visitors.

27


Cadogan Annual Report 2019

Outlook

The COVID-19 virus and the resultant response has undermined economic activity globally. At the time of writing, in the UK the period of the pandemic, including the potential for re-escalation once containment measures are relaxed, is unpredictable.

In the UK as in much of the rest of the world, governments and the central banks – in our case the Bank of England – have proved willing to soften the impact and support recovery, albeit at huge cost. As a result, the economic challenge is not one of liquidity – borrowing will remain available and at low cost – but rather consumption and, for our business, this is ultimately tenant demand. The consequence is that the focus is now on how to restart business without compromising the health or safety of the public.

Businesses most affected have inevitably been those which are consumer facing. We are exposed to such businesses over about half of our activities, and as such we have felt the impact of the crisis and expect to continue to do so as it evolves. The structural shift in consumer behaviour towards online retailing has accelerated and will not reverse. Other behavioural changes such as the potential for placing higher value on the quality and safety of the environment or of an increase in home working, will become clear over the longer term. As I set out at the beginning of my statement, Cadogan has from the outset taken a proactive approach with clear priorities for dealing with the crisis. This has included setting out a path for emerging successfully as the lockdown restrictions start to be relaxed. We will continue to support our employees, occupiers, other stakeholders and the local community through this period, however long it lasts, while maintaining a strong balance sheet and liquidity.

28


Strategic Report

With this in mind, I would also like to extend my gratitude to our contractors, advisors and all those businesses that have supported us through this challenging time while undoubtedly facing adversity of their own. It is at times like these that the strength of these working relationships is tried and tested and if successful, reinforced.

Our long history provides strong foundations upon which to base a dynamic contemporary business which is able to innovate and adapt in response to crises such as this one, to the resultant changing needs and desires of our customers and to fast moving markets. This is a business that has the confidence through our consistent family ownership, conservatively structured finances and an intimate understanding of our portfolio and markets, to adopt the long view while ensuring we get it right in the short term too.

I cannot express my appreciation enough for the way in which the entire Cadogan team has responded to the new demands and priorities presented by this crisis. It is their hard work, adaptability, commitment and dedication at this time of great adversity that has allowed Cadogan to respond so swiftly and decisively. Hugh Seaborn Chief Executive 25 June 2020

This immediate crisis will pass and it will be the careful forward planning we have put in place and evolving strategies for changing circumstances, coupled to a highly able and talented team that provides our ability to adapt swiftly to changing circumstances, that means I can be confident that we will prosper.

29


Cadogan Annual Report 2019

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Strategic Report

The Estate Today Customer Commitment

Our ultimate business aim is to provide homes and business space that meet the needs of our customers, coupled to providing an exemplary service. To achieve this our commitment is to deliver an outstanding experience for our customers living and working on the Estate. This approach contributes to long lasting customer relationships, which we value greatly as they contribute towards a strong sense of community across the neighbourhood as well as supporting the business. We commit to listen carefully to feedback from our customers and to act and respond accordingly where we can. We receive real-time feedback through our customer research partner RealService* which provides us with the means to continually improve the customer experience and helps shape our business strategy. RealService is a leading independent customer experience consultancy.

*

The following is an extract of the key customer service indicators for 2019;

90%

of customers rate their overall satisfaction as a Cadogan customer good or excellent (89% in 2018)

88%

of customers rate Cadogan’s responsiveness to requests as good or excellent (87% in 2018)

83% of customers rate Cadogan as either easy or very easy to do business with (85% in 2018)

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Cadogan Annual Report 2019

Communication and Engagement

We seek to maintain a regular dialogue with all our occupier customers throughout the year which helps us to keep them informed, to understand their priorities and to be able to respond to them. In addition, we aim to communicate thoroughly with stakeholders including local communities and visitors to the area. Local Engagement We are constantly investing in the upgrading of the Estate through maintenance, restoration, refurbishment and redevelopment activities. This allows us to maintain and improve the wider environment and deliver homes and business space that meet the needs of our customers. Our aim is to be exemplary in the way in which we consult and engage locally when preparing a scheme, because it is important to us to understand local views and consider how we can respond to them. Thereafter we communicate thoroughly to keep people fully informed and maintain a dialogue where necessary. Through this approach we want to be the most trusted local developer and therefore be able to adapt and respond to the changing needs of society, customers and markets to ensure the area remains relevant and desirable to present and future generations of residents and visitors.

Customer and Stakeholder Communication We host quarterly seminars to update our retail customers on neighbourhood news, the arrival of new brands, footfall and consumer information, construction activities and our events and marketing programme. Every customer receives a welcome pack on arrival. This extensive information helps them become familiar with the area and with their new home or business space, as well as informing them of the services that we provide. Our premium concierge service, Cadogan Concierge, is a complimentary service provided to assist customers in their day to day lives and responsibilities.

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We publish regular newsletters for different audiences, magazines such as Sloane Square and Cadogan VIP, and shopping guides for the area. We also host a wide range of digital channels that inform our engaged community ‘what’s on’ locally. Our multilingual Welcome Ambassadors provide a friendly face on the street to visitors who may need assistance. We have Area Supervisors who live on the Estate and are key to our customer facing service provision. They are our first responders, our eyes and ears, carry out regular inspections of all buildings and they are central to our 24/7 emergency response capability. The regular feedback on this team consistently follows themes of how approachable, friendly, helpful and knowledgeable they are.


Strategic Report

We work with a wide range of external advisors, contractors, suppliers and partners, and we particularly value long term relationships with people and organisations that share our values and our desire to deliver high quality results. Our suppliers are expected to operate ethically and responsibly, to ensure high standards of health and safety, to have respect for people and to support a positive relationship with our customers and within the communities within which we operate. We pride ourselves on being a good client that consistently pays on time and treats our suppliers fairly and transparently while expecting commercially competitive outcomes. We select suppliers carefully because we see them as an extension of our own team, working in genuine collaboration, motivated by the same values and highest of standards.

Our Suppliers

We seek sustainable, long term, collaborative relationships with our suppliers. A relationship built on mutual trust, transparency and reciprocal dialogue so that together, we can deliver the best outcomes. We seek to adopt best practice and new and innovative ways of working which we look to our suppliers to contribute to and support.

Most recently in response to COVID-19 we hosted a construction webinar for some of our smaller contractors. Attended by over 60 businesses we provided advice and support on how to manage works on site whilst meeting health and safety requirements. The feedback has been that this was hugely valuable and reflected the partnership approach we adopt. 33


Cadogan Annual Report 2019

Stewardship

Stewardship and community are integral to Cadogan. Our long-term commitment comes with 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 – continually evolving to ensure it remains vibrant for future generations. Stewardship in the Community Chelsea is vibrant and full of character. We actively seek ways to contribute to thriving local communities including working closely with local groups, charities, educational and religious bodies as well as supporting local cultural attractions: — The Cadogan family charitable foundation has donated more than £12million over the last 5 years, to local and national charitable causes — Cadogan owns and operates Cadogan Hall, a 900 seat concert hall. This is a philanthropic enterprise aimed at contributing to the broad and varied cultural offer of Chelsea

— Kensington and Chelsea is known as a wealthy borough but how challenging life is for very many people here can be overlooked. As a result, we have identified the Kensington & Chelsea Foundation as our key charity partner. Cadogan is their Principal Funder. The Foundation is able to understand local needs and identify local grassroots charities that are well placed to improve peoples’ lives. As well as meeting the lion’s share of the Foundation’s operational costs we have supported particular programmes in 2019 and our support has contributed towards delivering 32 projects to 21 organisations and reaching 2,400 people

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Strategic Report

— £1.1 million committed each year as rental subsidies for affordable, community and key worker housing. This allows many people who support local communities to live within these communities — Homelessness continues to be a concern across the Capital. Cadogan has partnered with LandAid, a charity whose mission is to end youth homelessness, and continues to support and host the annual Glassdoor sleepout in Duke of York Square to raise money and awareness, over £190,000 in 2019. Since 2013, the annual event has hosted over 1,300 individuals and raised over £1.2 million — We feel it is important to encourage more diverse entrants to the property sector. Therefore, we support the Pathways to Property initiative by the Reading Real Estate Foundation, for year 12 students in UK state schools and colleges who would like to find out more about a career in the property sector. This includes providing work experience to young people who might otherwise not be able to secure such opportunities — In support of charity World Horse Welfare, we hosted a number of celebrity-painted horse sculptures during August 2019, which culminated in an auction that raised £100,000 — ‘The Merry Little Christmas Concert’ at Holy Trinity Church in collaboration with NSPCC raised over £34,000 for Childline to support children at Christmas — An additional £150,000 each year is given to support essential community facilities such as cultural centres, shelters, local churches and schools — We create, host or sponsor over 65 exciting and inclusive events for the enjoyment of the local community, including Chelsea in Bloom, Strawberries and Screen and The Chelsea Christmas Grotto in partnership with Sharky and George

— To celebrate the completion of Pavilion Road we created London’s first ‘Edible Trail’ along the road, encouraging residents and visitors alike to try their hand at foraging and experience sustainably grown produce — This year we introduced the inaugural Chelsea Awards to the event’s calendar. A celebration of Chelsea’s favourites, from artisans and small businesses to shops and restaurants and the individuals and collaborations that enhance everyday life by going the extra mile — We provide ongoing support to key neighbourhood institutions including Saatchi Gallery, Chelsea Physic Garden, The Royal Court Theatre and Cadogan Hall — We have staff policies on charitable match-funding and volunteering. 35


Cadogan Annual Report 2019

Our response to COVID-19

Our social response has never been so critical as it is during the COVID-19 crisis. Besides supporting over 250 tenants our initial emergency support measures have focussed on the most vulnerable and isolated within the community, key workers and local NHS Trusts. The measures we have taken so far have included the following:

— Initial emergency rent support measures provided in the March 2020 quarter — A commitment to fund rent relief for over 30 hospitality sector occupiers throughout 2020 by switching them to turnover based leases — Extended rental support to other smaller and independent retailers on a case-bycase basis — Rent support for cultural attractions, hotels, gyms, beauty and wellness operators and medical uses — Permitted rental payments to be made monthly in arrears for many commercial leases until the end of the year — Supported Chelsea & Westminster Hospital’s COVID-19 Rapid Response Fund, which has supported COVID-19 research and new treatment trials, provided patients with activity packs and technology so that they can communicate with loved ones, and initiated a memory box project to help those who have been bereaved cope with loss. The funds have also contributed to a staff wellbeing programme to help frontline workers relax, refuel and re-energise before and after gruelling shifts — Supported the NHS directly with provision of car parking spaces plus hotel accommodation at 11 Cadogan Gardens for NHS frontline workers at both Chelsea & Westminster Hospital and the Royal Brompton

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Strategic Report

— The delivery of grocery baskets and Easter treats, in partnership with Partridges, to lift the morale of essential workers and their families through Holy Trinity School and our own subsidised key worker accommodation — Supported the Kensington & Chelsea Foundation which has helped provide over 1,000 care packages a week to those most vulnerable, and supported numerous other micro charities in the borough which have provided foodbanks, shelters, mental wellbeing, educational support of vulnerable children, supporting connectivity of hospital patients with loved ones; and online services and platforms for a number of local minority groups, amongst other equally deserving causes

Credit: John Cameron

— Ongoing provision of webinars that cover professional advice on legal, tax and health and safety matters to support local businesses and our construction partners — Sponsored accommodation and funding which contributed to the provision of 1,500 PPE gowns per day to local hospitals via The Fashion School in Chelsea. Over 32,000 gowns were delivered during the peak of the crisis — Committed to a dedicated destination marketing, events and tourism programme, over the next three years to help restart the local economy. Our aim is to ensure Chelsea remains a compelling and vibrant destination and this means supporting the recovery of numerous fashion and lifestyle brands, best in their field artisans, independents and restaurants so that Chelsea can thrive once again.

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Cadogan Annual Report 2019

Stewardship through Heritage and Conservation

Conservation of the Estate’s rich heritage is essential. This includes cyclical repair and maintenance of our existing buildings consistent with our strategic Conservation Management Plan, often using traditional skills and materials to ensure the best of modern design is in harmony with heritage surroundings. Examples include: — Rossetti Studios is a Grade II Listed building originally constructed as eight artist’s studios. The restoration works are now complete and have respected their original function, enhanced their character and history whilst refurbishing them to a modern day standard. We will make sure they are occupied by practicing artists to contribute towards Chelsea’s rich artistic pedigree — The Duke of York Square Restaurant is a result of a public architectural competition, respecting and complementing its heritage surroundings, while representing the best in contemporary design. Prior to COVID-19, the restaurant was open for business trading as Vardo

— Our plans at 196-222 King’s Road will amongst other things, restore the historic façade of the original Art Deco Gaumont Theatre building — The Belmond Cadogan Hotel was a sensitive restoration, bringing the renowned Cadogan Hotel back to life, weaving past and present together to resume its position at the heart of Chelsea and Knightsbridge society. The rejuvenation has enhanced the appearance of the hotel which sits within the Hans Town Conservation Area; showcasing the finest craftsmanship and sensitivity to its original features. 38


Strategic Report

Environmental Stewardship

Our long-term vision means we think carefully about our impact on future generations and the environment. From ensuring our historic buildings are as efficient as possible, to minimising water consumption and waste generation, we are continually seeking ways to reduce our impact on the environment. Measures have included:

— Engaging with our construction partners to improve waste management practices leading to an average 98% construction waste recycling rate for 2019 — Reusing waste coffee grounds from coffee retailers across the Estate as fertiliser in our gardens — Working with our Pavilion Road retailers to trial an exciting new e-cargo bike delivery service, aimed at reducing traffic and improving local air quality — Continuously upgrading our properties with energy and water efficient technologies, to reduce emissions and save utility costs. For all major commercial projects, we target and achieve a minimum BREEAM rating of ‘Very Good’ for refurbishments and ‘Excellent’ for new builds

— Bringing the pop-up Ugly Butterfly to the King’s Road in collaboration with awardwinning chef and restaurateur Adam Handling, Quintessentially Foundation and the Felix Project. This ground breaking, zero-waste restaurant and sustainability hub created delicious food from ingredients which are usually discarded — Reviewing our green spaces to promote biodiversity and changing our summer planting regimes to reduce water demand and increase climate resilience — Benchmarking all large sites against the ‘Considerate Constructors Scheme’. Looking ahead to 2020 we will be launching an ambitious new 10 year sustainability strategy which will set new, ambitious targets which we will work on achieving in partnership with key partners and stakeholders so we can collectively continue to improve Chelsea’s environment.

39


Cadogan Annual Report 2019

2019 Awards and Recognition

The following is a list of recent awards:

Relais & Chateaux Hotels, 11 Cadogan Gardens, the first London hotel to become a member of the global association

Ahead Awards, ‘Lobby & Public Spaces’ for the Belmond Cadogan Hotel

UK Property Awards, ‘Best new hotel construction and design’ for the Belmond Cadogan Hotel

LABC Building Excellence Awards, ‘Best small new housing development regional and UK’ for 8–14 Cadogan Lane

London Lifestyle Awards, ‘Best Lifestyle Street’ for Duke of York Square

London in Bloom, ‘Best small park/garden in London’ for Cadogan Place South Garden

Walpole British Luxury, Shortlisted for ‘Cultural Contribution’ for Chelsea in Bloom

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Strategic Report

Statement of Compliance with section 172 of Companies Act 2006

Throughout 2019, the Directors have performed their duty to promote the success of the Company under section 172 of the Companies Act 2006, taking consideration of:

— the likely long term consequences of decisions — the interests of stakeholders, including amongst others: employees, customers, suppliers, local authorities and local communities, by engaging with them to understand the issues to which they must have regard — the impact of our actions on our local communities and the environment — the company’s purpose and values including maintaining a reputation for high standards of business conduct; and — the need to act fairly between members of the company.

The Cadogan Group has an association of over 300 years with Chelsea, where it has been and remains the largest landowner. The Group has always taken a long term view, promoted by its members who see it as their duty to hand over the business to the next generation in a better condition than when they inherited it, and strongly supported by the Board. The Group’s success is judged by its members not only on measures of commercial returns but also its reputation, based on the way it deals with and treats its stakeholders and local communities. Our core objectives, set out in page 3 of this report, encapsulate the above. More information on the Group, its purpose and relationships with stakeholders is provided in the Strategic Report at pages 8 to 29, The Estate Today at pages 31 to 41 and our website at cadogan.co.uk.

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Cadogan Annual Report 2019

Financial Review Rental income rose to £166.7m Increase of 4.2 %

Residential sales decreased to £45.0m Decrease of 12.6%

Operating profit before capital items increased to £105.8m Increase of 7.9%

Profit on sale of investment properties reduced to £4.9m Decrease of 38.8%

Loss on ordinary activities before taxation (including revaluation losses) of £521.7m 42

Trading Highlights

Although there was a like for like fall in the Estate’s capital values in 2019 of 9.4%, rental growth and revenue profit both increased when compared to 2018. Rents grew by 4.2% and our operating profit before capital items recorded an improvement over 2018 of 7.9%. The growth in rental income reflected mainly a combination of indexed reviews, property acquisitions and the benefit of development investment. Retail, office and residential rents grew in the year by 3.8%, 12.7% and 2.0%, respectively. The profit from the sale of investment properties in 2019 contributed £4.9m compared to £8.0m in 2018. There were a similar number of transactions completed but of lower average value and a decrease in the margin over book value. In accordance with Financial Reporting Standard (FRS) 102, the consolidated income statement reflects the movement on the annual revaluation of the investment property portfolio. As has been highlighted, the residential and retail portfolios fell in value during the year resulting


Strategic Report

in a net revaluation loss of £581.4m recorded in the income statement compared to a revaluation loss of £89.1m in 2018. The charge for current taxation in the year amounted to £9.4m, a decrease compared to 2018 despite the increase in operating profit, mainly as a result of the decrease in profit on voluntary sales. The overall figure for taxation in the income statement for 2019 was a credit of £76.0m, arising mainly as a result of a deferred tax credit on the revaluation loss. The dividend paid to shareholders in December 2019 was £41.4m. There was an increase of 5% in the underlying dividend, which was £39.4m. The major shareholder did not waive any element of their dividend and there was an additional part distribution to the major shareholder of dividends waived in previous years, totalling £2.0m. The total dividend was paid in November 2019. Cadogan is mindful of its tax obligations and is liable for, and collects on behalf of HMRC, various taxes in its operations. The table below 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 the direct tax charge shown in our accounts, demonstrating our wider contribution to the UK economy. In addition to the tax set out in the table, Cadogan Group’s dividends flow through to a number of family trusts and are (save in the case of a charitable trust) subject to income tax. Furthermore, a substantial proportion of the dividend is used to provide for the 10-yearly charge to inheritance tax in relation to certain of the trust assets. In the case of the principal trust the next 10-yearly charge, due in 2022, is currently estimated at in excess of £140m before allowing for the tax charge on extracting the funds. TOTAL UK TAX CONTRIBUTION

2019 £M

2018 £M

UK Corporation Tax

11.7

14.7

SDLT

3.5

3.7

Employer’s National Insurance

0.9

0.8

Non-domestic rates and Council Tax

1.9

1.6

Section 106 agreements

0.1

2.1

Irrecoverable VAT

5.1

5.1

Other

0.3

0.6

23.5

28.6

PAYE and Employees’ National Insurance

2.4

2.3

VAT

11.0

8.9

13.4

11.2

£36.9

£39.9

Tax paid by Cadogan

Tax collected and paid over by Cadogan

TOTAL

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Cadogan Annual Report 2019

Balance Sheet and Borrowings

Approach to Risk Management

The value of our properties at the end of 2019 was £5.57bn, a decrease compared to the previous year’s figure of £6.16bn. On a like for like basis this reflected a reduction in value of 9.4% compared to a fall in 2018 of 1.4%. This and the dividend distribution were the primary reasons for the fall in group shareholders’ funds to £4.09bn with net assets per share falling to £34.07 from £38.05, a decrease of 10.5%.

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 property operations continued to be strongly cashed generative. However, the year’s property investment and development activity together with the interim dividend paid, resulted in a net cash outflow. Year end borrowings were £790.6m. The increase from the previous year end figure of £732.9m arose principally as a result of the amounts drawn in the year on the £200m revolving credit facility and the first deferred drawdown of £40m of the £120m private placement arranged in August 2018. At 31 December 2019 the average maturity of our debt was 10.54 years and the average effective rate of interest across all loans reduced from 4.91% in 2018 to 4.78%. Apart from the revolving credit facilities, all our debt is at fixed rates. There was an increase in year-end balance sheet gearing to 19.7% from 16.3%. Gearing as measured under our loan covenants, increased to 17.1% from 13.8%, mainly as a result of the decrease in property values, while interest cover increased to 3.0 times from 2.9 times, comfortably in excess of our financial covenants. At the year-end we had total undrawn facilities available to the group of £155m under revolving credit facility arrangements. Following the year end, on 3 April 2020 we refinanced our revolving credit facilities, increasing them by £60m to £300m for a minimum duration of 3 years with two 1-year extension options exercisable after the first and second anniversary of the start date. Impact assessment of COVID-19 We have undertaken a stress test with a severe downside COVID-19 scenario reflecting pessimistic assumptions for rent decline, debt write-off and reductions in property values to assess the potential impact on headroom for liquidity and loan covenant compliance, taking into account mitigations available. Details of the stress test are provided in the Going Concern section of the Directors’ Report on pages 48 to 49 and the conclusion was that, in the severe downside scenarios modelled, we would satisfy all our loan covenants in both years. With the mitigation measures already put in place, which include reducing development expenditure, suspending budgeted acquisitions and reducing discretionary expenditure, we would have unused bank facilities at the end of 2020 and through to the end of 2021 in excess of £100m. See the Going Concern section in the Directors’ Report on pages 48 to 49.

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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 assesses risk under three principal headings: — Strategic risk — Financial risk — Operational risk The impact of COVID-19 cuts across all three risk headings that we consider. A summary of the impact of COVID-19 on the business, steps taken and outlook is included in the Chief Executive’s review on pages 8 to 13 and pages 28 to 29 and the results of stress tests on liquidity and borrowing covenants are summarised in the Financial Review on page 44 and Directors’ Report on pages 48 to 49 (Going Concern). 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. Retail is subject to structural changes, such as the ongoing shift to online transactions, which increases the risks to retail property owners and which our close estate management strategy responds to. COVID-19 could have a short and long term impact on occupational demand for different uses. 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.


Strategic Report

Geographic concentration – the group accepts the risks inherent in the small geographic area in which the group’s properties are concentrated. The group’s properties are primarily 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 5.3% of the total portfolio value and the highest individual rent 3.7% 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. In addition, there are statutory and regulatory risks which are closely monitored. 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 underinvestment 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.

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. COVID-19 illustrated the limitations of insurance cover and highlights the importance of maintaining a strong financial position and liquidity headroom to enable the business to withstand uninsurable or unknown future events. 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. Sanjay Patel Finance Director 25 June 2020

Refinancing risk – The group seeks to manage refinancing risk through the use of a spread of loan maturities. In normal circumstances loan terms, other than bank loans, 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

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Cadogan Annual Report 2019

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Strategic Report

47


Cadogan Annual Report 2019

Directors’ Report The directors present their report and the financial statements for the year ended 31 December 2019. Principal Activity and Review of the Business 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 2019 and its future prospects is contained in the Strategic Report on pages 8 to 45.

Dividends Interim dividends of £41,437,000 (2018 – £58,259,000) 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 44 to 45.

Directors Of the directors listed on page 2, all held office for the financial year and up to the date of this report, except Sanjay Patel who was appointed to the board on 18 March 2019 and Harry Morley who was appointed to the board on 1 January 2020. 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.

48

Charitable Contributions The group’s charitable contributions for the year were £134,000 (2018 – £78,000). In addition, the Cadogan Charity, a shareholder in the company, makes donations to a variety of local and national charities.

Going Concern 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 8 to 45. The group has considerable financial resources derived from an established investment property portfolio in prime central London. The group has substantial longterm committed financing arrangements and also has access to overdraft and revolving credit facilities from its bankers. Following the year end, on 3 April 2020 we refinanced our revolving credit facilities, increasing them by £60m to £300m for a minimum duration of 3 years with two 1-year extension options exercisable after the first and second anniversary of the start date. The directors have considered the appropriateness of adopting the going concern basis in preparing the financial statements for the year ended 31 December 2019, focusing in particular on the impact of COVID-19 on the economy, consumers and our tenants. The assessment is based on the group’s financial forecasts for the periods to 31 December 2021 overlaid with a severe downside COVID-19 scenario. The severe downside COVID-19 scenario reflects pessimistic assumptions for rent decline, debt write-off


Directors’ Report

and reductions in property values to assess the potential impact on headroom for liquidity and loan covenant compliance, taking into account mitigations available. For 2020 we have included the following principal assumptions: — Commercial rental income for the second to fourth quarters reduced by 65% and all written off — Reduced development expenditure, suspension of all budgeted acquisitions and reduced discretionary expenditure — A fall in property value of 10%. We have included the following principal assumptions for 2021: — A 20% decline in rental income from retail, leisure and hospitality tenants from the previous forecast for 2021 — Development expenditure reduced by 20% and acquisitions reduced by 50% — A fall in property value of 10% (in addition to the 10% reduction assumed for 2020). For both years, we have assumed there would be no new financing undertaken other than the revolving credit facilities in April 2020 referred to above, the repayment of a maturing private placement loan note of £23m in August 2020, the receipt of £55m in 2021 from a delayed drawdown of a private placement undertaken in 2018 and the repayment in 2021 of £45m of a maturing private placement. The going concern scenarios modelled demonstrate that the group over the period to 31 December 2021 has significant liquidity to fund its ongoing operations and is operating with significant headroom above its debt financing covenants without the need to rely on raising new financing. Asset values would have to fall by 48% from 2019 closing values as at 31 December 2020 and by 46% as at 31 December 2021 to breach the gearing covenant. To breach the interest cover covenant, profits would have to fall by 84% compared to the pre-COVID forecast for 2020 (the worst case scenario assumes a reduction in profits of 70%) and by 86% in 2021 compared to the revised profit based on the assumptions above. Based on these considerations, what we know today about the impact of COVID-19 and the directors’ knowledge of Cadogan’s property portfolio and the market in which we operate, 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.

Directors’ Responsibilities Statement

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: — select suitable accounting policies and then apply them consistently; — make judgements and estimates that are reasonable and prudent; — state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and — 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. 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.

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 June 2020

The directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom

49


Cadogan Annual Report 2019

Independent Auditor’s Report to the Members of Cadogan Group Limited Opinion We have audited the financial statements of Cadogan Group Limited for the year ended 31 December 2019 which comprise the Income Statement, Statement of Comprehensive Income, Statement of Changes of Equity, Statement of Financial Position and the related notes 1 to 24, 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: — give a true and fair view of the group’s and of the parent company’s affairs as at 31 December 2019 and of the group’s loss for the year then ended; — have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and — 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 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.

Emphasis of matter We draw attention to both the Strategic Report and accounting policies of the financial statements, which

50

describes the economic and social disruption the company is facing as a result of COVID-19 which is impacting liquidity of both the group and its key tenants. Our opinion is not modified in respect of this matter.

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: — the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or — the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the 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


Independent Auditor’s Report

In our opinion, based on the work undertaken in the course of the audit:

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.

— 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

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

— the strategic report and directors’ report have been prepared in accordance with applicable legal requirements.

Use of our report

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

Matters on which we are required to report by exception In the light of the knowledge and understanding of the 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: — adequate accounting records have not been kept or returns adequate for our audit have not been received from branches not visited by us; or — the financial statements are not in agreement with the accounting records and returns; or

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 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. Bob Forsyth Senior statutory auditor for and on behalf of Ernst & Young LLP, Statutory Auditor, London 26 June 2020

— certain disclosures of directors’ remuneration specified by law are not made; or — we have not received all the information and explanations we require for our audit.

Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 49 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. In preparing the financial statements, the directors are responsible for assessing the 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 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

51


Cadogan Annual Report 2019

Consolidated Income Statement For the year ended 31 December 2019 Note

TURNOVER

2019 £000 Discontinued Operations

2  019 £000 Total

185,927

170,963

14,964

Cost of sales

(47,409)

(8,080) (55,489)

GROSS PROFIT

123,554

6,884

Administrative expenses

(18,199)

(6,392)

OPERATING PROFIT/(LOSS) BEFORE CAPITAL ITEMS

105,355

4,907

Profit on sale of investment properties

2

2019 £000 Continuing Operations

3

Reduction in revaluation of investment properties Loss on the sale of discontinued operations

OPERATING PROFIT/(LOSS)

-

5

Interest receivable Interest payable and similar expenses

4

(508,437) 7

LOSS AFTER TAXATION ATTRIBUTABLE TO SHAREHOLDERS LOSS PER SHARE

115,871

2,377

118,248

(24,591)

(16,977)

(3,166)

(20,143)

492

105,847

98,894

-

4,907

8,008

-

8,008

(89,134)

-

(89,134)

130,438

(13,290) (484,387)

17,768

7

40

108

(37,373)

(36,129)

(13,283) (521,720)

(18,253)

-

-

76,008

(13,283) (445,712)

10

Notes 1 to 24 form an integral part of these financial statements.

52

(2,922)

-

76,008 (432,429)

(48,273)

(13,782)

(37,373)

Total Restated

5,299

(13,782)

33

LOSS BEFORE TAXATION Tax credit on loss

(471,097)

2018 £000

164,144

- (581,359)

(581,359)

2018 2018 £000 £000 Continuing Discontinued Operations Operations Restated Restated

(371.4)p

450 (17,803)

(789)

-

(789)

4 (785) (85) (870)

169,443

(51,195)

98,105

-

16,979

112 (36,129) (19,038) 365 (18,673) (15.6)p


Cadogan Annual Report 2019

Consolidated and Company Statement of Comprehensive Income For the year ended 31 December 2019 Consolidated Statement of Comprehensive Income 2019 £000

Loss for the year attributable to shareholders

(445,712)

Net gain recognised on cash flow hedges arising during the year

13,350

Movement on deferred tax relating to cash flow hedges

(2,269)

Re-measurement (loss)/gain recognised on defined benefit pension scheme Movement on deferred tax relating to pension liability TOTAL OTHER COMPREHENSIVE INCOME FOR THE YEAR

TOTAL COMPREHENSIVE LOSS FOR THE YEAR

2018 £000

(18,673) 3,052 (520)

(989)

803

168

(136)

10,260

(435,452)

3,199

(15,474)

Company Statement of Comprehensive Income 2019 £000

2018 £000

Profit for the year attributable to shareholders

68,398

91,967

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

68,398

91,967

Notes 1 to 24 form an integral part of these financial statements.

53


Cadogan Annual Report 2019

Statements of Changes in Equity For the year ended 31 December 2019 Consolidated Statement of Changes in Equity

At 1 January 2018

Called up share capital £000

Nondistributable reserve £000

Profit and loss account £000

Shareholders’ equity £000

120,000

3,322,798

1,196,489

4,639,287

Profit/(loss) for year

-

(109,260)

Other comprehensive income

-

Total comprehensive income for the year

-

Equity dividends paid

-

-

At 31 December 2018

120,000

3,216,070

1,229,484

4,565,554

At 1 January 2019

120,000

3,216,070

1,229,484

4,565,554

2,532 (106,728)

667

(18,673) 3,199

91,254

(15,474)

(58,259)

(58,259)

Profit/(loss) for year

-

Other comprehensive income

-

Total comprehensive income for the year

-

Equity dividends paid

-

-

120,000

2,753,653

1,215,012

4,088,665

Called up share capital £000

Profit and loss account £000

Shareholders’ equity £000

120,000

1,220,243

1,340,243

Profit for year

-

91,967

91,967

Total comprehensive income for the year

-

91,967

91,967

Equity dividends paid

-

(58,259)

(58,259)

At 31 December 2018

120,000

1,253,951

1,373,951

At 1 January 2019

120,000

1,253,951

1,373,951

Profit for year

-

68,398

68,398

Total comprehensive income for the year

-

68,398

68,398

Equity dividends paid

-

(41,437)

(41,437)

At 31 December 2019

(473,498)

90,587

11,081 (462,417)

27,786 (821) 26,965 (41,437)

(445,712) 10,260 (435,452) (41,437)

Company Statement of Changes in Equity

At 1 January 2018

At 31 December 2019

Notes 1 to 24 form an integral part of these financial statements.

54

120,000

1,280,912

1,400,912


Cadogan Annual Report 2019

Consolidated Statement of Financial Position 31 December 2019 Note

2019 £000

2018 £000

11

5,574,647

6,162,223

Derivative financial instruments expiring in more than one year

20

78,387

86,723

Derivative financial instruments expiring within one year

20

11,344

-

7

61

126,672

36,733

216,410

123,517

FIXED ASSETS Tangible fixed assets

CURRENT ASSETS

Stock Debtors

13

CREDITORS amounts falling due within one year Bank overdraft

18(b)

15,020

10,052

Bank loans and other borrowings

15(a)

37,970

4,000

14

77,931

71,911

2,488

4,712

133,409

90,675

83,001

32,842

5,657,648

6,195,065

842,318

815,632

721,231

808,741

4,094,099

4,570,692

5,434

5,138

4,088,665

4,565,554

Trade and other creditors Corporation tax

NET CURRENT ASSETS

TOTAL ASSETS LESS CURRENT LIABILITIES

CREDITORS amounts falling due after more than one year Bank loans and other long term borrowings

15(b)

PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation

7

NET ASSETS EXCLUDING PENSION LIABILITY Defined benefit pension liability

19

NET ASSETS

CAPITAL AND RESERVES Called up share capital

16

120,000

120,000

Non-distributable reserve

17

2,753,653

3,216,070

Profit and loss account

17

1,215,012

1,229,484

4,088,665

4,565,554

EQUITY SHAREHOLDERS’ FUNDS

Viscount Chelsea DL Director Hugh Seaborn Director 25 June 2020 Notes 1 to 24 form an integral part of these financial statements. 55


Cadogan Annual Report 2019

Company Statement of Financial Position 31 December 2019 Note

2019 £000

2018 £000

12

117,317

117,317

1,283,720

1,256,743

125

109

-

-

125

109

NET CURRENT ASSETS

1,283,595

1,256,634

TOTAL ASSETS LESS CURRENT LIABILITIES

1,400,912

1,373,951

NET ASSETS

1,400,912

1,373,951

FIXED ASSETS Investments

CURRENT ASSETS Amounts due from subsidiary undertakings

CREDITORS amounts falling due within one year Other creditors

14

Taxation

CAPITAL AND RESERVES Called up share capital

16

120,000

120,000

Profit and loss account

17

1,280,912

1,253,951

1,400,912

1,373,951

EQUITY SHAREHOLDERS’ FUNDS

Viscount Chelsea DL Director Hugh Seaborn Director 25 June 2020 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. Notes 1 to 24 form an integral part of these financial statements.

56


Cadogan Annual Report 2019

Consolidated Statement of Cash Flows For the year ended 31 December 2019 Note

Net cash inflow from operating activities

18(a)

2019 ÂŁ000

2018 ÂŁ000

93,654

79,122

40

119

Investing activities Interest received Payments to acquire tangible fixed assets

(137,017)

Receipts from sales of tangible fixed assets

45,040

51,565

Net cash outflow from investing activities

(91,937)

(87,185)

(36,248)

(37,068)

(138,869)

Financing activities Interest paid Net movement in long term borrowings

36,000

Net movement in short term borrowings

35,000

50,000

Equity dividends paid

(41,437)

(58,259)

Net cash outflow from financing activities

(6,685)

(48,440)

Decrease in cash and cash equivalents

(4,968)

(56,503)

(10,052)

46,451

(15,020)

(10,052)

Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December

18(b)

(3,113)

Notes 1 to 24 form an integral part of these financial statements.

57


Cadogan Annual Report 2019

Notes to the Financial Statements For the year ended 31 December 2019 1. Accounting Policies

For 2020 we have included the following principal assumptions:

(a) Statement of compliance

— Commercial rental income for the second to fourth quarters reduced by 65% and all written off

Cadogan Group Limited is a private company limited by shares incorporated in England (registered number 2997357). 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. Basis of preparation The financial statements of Cadogan Group Limited were authorised for issue by the Board of Directors on 25 June 2020. 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. Going Concern 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 8 to 45. The group has considerable financial resources derived from an established investment property portfolio in prime central London. The group has substantial longterm committed financing arrangements and also has access to overdraft and revolving credit facilities from its bankers. Following the year end, on 3 April 2020 we refinanced our revolving credit facilities, increasing them by £60m to £300m for a minimum duration of 3 years with two 1-year extension options exercisable after the first and second anniversary of the start date. The directors have considered the appropriateness of adopting the going concern basis in preparing the financial statements for the year ended 31 December 2019, focusing in particular on the impact of COVID-19 on the economy, consumers and our tenants. The assessment is based on the group’s financial forecasts for the periods to 31 December 2021 overlaid with a severe downside COVID-19 scenario. The severe downside COVID-19 scenario reflects pessimistic assumptions for rent decline, debt write-off and reductions in property values to assess the potential impact on headroom for liquidity and loan covenant compliance, taking into account mitigations available.

58

— Reduced development expenditure, suspension of all budgeted acquisitions and reduced discretionary expenditure — A fall in property value of 10%. We have included the following principal assumptions for 2021: — A 20% decline in rental income from retail, leisure and hospitality tenants from the previous forecast for 2021 — Development expenditure reduced by 20% and acquisitions reduced by 50% — A fall in property value of 10% (in addition to the 10% reduction assumed for 2020). For both years, we have assumed there would be no new financing undertaken other than the revolving credit facilities in April 2020 referred to above, the repayment of a maturing private placement loan note of £23m in August 2020, the receipt of £55m in 2021 from a delayed drawdown of a private placement undertaken in 2018 and the repayment in 2021 of £45m of a maturing private placement. The going concern scenarios modelled demonstrate that the group over the period to 31 December 2021 has significant liquidity to fund its ongoing operations and is operating with significant headroom above its debt financing covenants without the need to rely on raising new financing. Asset values would have to fall by 48% from 2019 closing values as at 31 December 2020 and by 46% as at 31 December 2021 to breach the gearing covenant. To breach the interest cover covenant, profits would have to fall by 84% compared to the pre-COVID forecast for 2020 (the worst case scenario assumes a reduction in profits of 70%) and by 86% in 2021 compared to the revised profit based on the assumptions above. Based on these considerations, what we know today about the impact of COVID-19 and the directors’ knowledge of Cadogan’s property portfolio and the market in which we operate, 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. Basis of consolidation The group financial statements consolidate the financial statements of Cadogan Group Limited and all its subsidiary


Notes to the Financial Statements

1. Accounting Policies (continued) 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.

(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.

(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 2019. 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 and estimated rental values. Investment properties 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. Capital gains tax and deferred tax liability The group establishes provisions based on reasonable estimates, for possible consequences of audits by the tax authorities. 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. 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. 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.

(d) Turnover and revenue recognition Revenue 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.

59


Cadogan Annual Report 2019

1. Accounting Policies (continued)

(g) Investment property

Turnover in the hotel and concert hall operations represents amounts derived from the provision of goods and services, stated net of VAT.

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.

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 recognised in the income statement on a straight-line basis over the lease term, 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.

(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:

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. 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

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.

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. Such transactions are recognised on the exchange of contracts, providing that no material conditions remain outstanding.

(f) Land and buildings

(i) Investments

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.

Investments in subsidiary undertakings are included at cost, less a provision for impairment in value where applicable.

Plant and equipment

10% to 20%

The surplus or deficit on revaluation is recognised in the non-distributable reserve and accumulated in the reserve unless a deficit, or its reversal, is below original cost in which case it is recognised in the income statement for the year.

60

(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


Notes to the Financial Statements

1. Accounting Policies (continued)

(o) Foreign currencies

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.

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.

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.

(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:

(k) Cash at bank and in hand

— the instrument must be related to a firm foreign currency commitment;

Cash in the statement of financial position comprises cash at bank and in hand, and is stated net of outstanding bank overdrafts.

— it must involve the same currency as the hedged item; and

(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.

(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 substantially enacted at the balance sheet date. Deferred tax relating to investment property that is measured at fair value is measured using the tax rates and allowances that apply on the sale of the asset.

— it must reduce the risk of foreign currency exchange movements on the group’s operations. The group’s criteria for interest rate swaps are: — the instrument must be related to an asset or a liability; and — 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 undertaking 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

61


Cadogan Annual Report 2019

1. Accounting Policies (continued) of Comprehensive Income (“SOCI�) in the nondistributable 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. 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 employees 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 obligations (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.

62


Notes to the Financial Statements

2. Turnover and analysis by class of business Turnover, group loss before taxation and net assets are analysed as follows: Property investment

Hotels and Concert Hall

Total

Total

2019 £000

2018 £000

2019 £000

2018 £000 Restated

2019 £000

2018 £000 Restated

166,737

160,025

2,857

2,602

169,594

162,627

1,369

1,517

-

-

1,369

1,517

168,106

161,542

2,857

2,602

170,963

164,144

-

-

14,964

5,299

14,964

5,299

168,106

161,542

17,821

7,901

185,927

169,443

(470,797)

18,129

(13,782) (484,579)

Turnover Continuing operations Gross rental income and other sales Other income

Discontinued operations Sales Total turnover

Operating profit/(loss) Continuing operations Discontinued operations

(300)

(361)

(471,097)

-

492

(789)

(13,290)

18,129

192

(1,150)

(484,387)

Net interest payable Loss before taxation

Net Assets

4,078,305

4,470,930

10,360

94,624

17,768 (789) 16,979

(37,333)

(36,017)

(521,720)

(19,038)

4,088,665

4,565,554

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. The discontinued operations relate to the hotel activities that were de-merged from the property group on 27 November 2019.

63


Cadogan Annual Report 2019

3. Profit on sale of investment properties

Profits on sales of freeholds and receipt of long lease premiums, less directly related costs and expenses

2019 £000

2018 £000

4,907

8,008

2019 £000

2018 £000

37,236

35,967

(10,342)

6,656

10,342

(6,656)

4. Interest payable and similar expenses

Interest on bank loans and other borrowings Foreign exchange (gain)/loss on hedged loans Financial derivative (gain)/loss Interest on net defined pension liability

137

162

37,373

36,129

2019 £000

2018 £000

308

379

-

11

342

228

237

276

-

279

5. Operating profit

Operating profit is stated after charging: Depreciation Hire of plant and equipment Auditors’ remuneration: Audit of the financial statements – includes £79,000 in respect of the company (2018 – £63,000) Other fees to auditors — tax services — other services

Non-audit remuneration for the company is not disclosed in the individual financial statements as the consolidated financial statements are required to comply with regulation 5(1)(b) of Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2018 and present this information on a consolidated basis.

64


Notes to the Financial Statements

6. Directors and employees

Aggregate directors’ remuneration in respect of qualifying services

2019 £000

2018 £000

2,043

1,873

Included within directors’ remuneration above are contributions to money purchase pension schemes for one director amounting to £38,000 (2018: one director – £37,000). The remuneration, excluding pension contributions, of the highest paid director was £1,066,000 (2018 – £1,090,000). Pension contributions of the highest paid director were nil (2018 – nil).

2019 £000

2018 £000

Wages and salaries

6,630

6,145

Social security costs

849

806

Pension costs – defined contribution scheme

609

579

8,088

7,530

Employee costs:

The average monthly number of persons employed by the group, including executive directors, during the year was 90 (2018 – 90). 67 (2018 – 68) persons were employed within the property investment business and 23 (2018 – 22) persons were employed within the concert hall and hotels business. Staff costs for the company were in respect of directors’ remuneration and amounted to £382,000 (2018 – £368,000). There were no pension contributions made by the company in the year (2018 – nil).

65


Cadogan Annual Report 2019

7. Taxation (a) Tax on loss The tax credit is made up as follows: 2019 £000

2018 £000

9,687

13,419

Current tax: UK corporation tax Adjustments in respect of previous years Total current tax

(247)

1,201

9,440

14,620

2,198

2,130

Deferred tax: Origination and reversal of timing differences On freehold and investment properties

(87,646)

(17,115)

Total deferred tax

(85,448)

(14,985)

Tax credit on loss

(76,008)

(365)

(b) Tax included in statement of total comprehensive income The tax charge is made up as follows: 2019 £000

2018 £000

(168)

136

Deferred tax: Actuarial gain/(loss) on pension scheme

2,269

520

Total deferred tax

2,101

656

Total tax charge on other comprehensive income

2,101

656

Hedge accounting adjustments

66


Notes to the Financial Statements

7. Taxation (continued) (c) Factors affecting tax charge for the year The tax charge for the current year is lower than (2018 – lower than) the current standard rate of corporation tax in the UK of 19.00% (2018 – 19.00%). The difference is explained as follows: 2019 %

2018 %

Standard tax rate

19

19

Actual current tax rate

15

2

Difference

(4)

(17)

-

3

Change in tax law and rates

(2)

(9)

Historical cost of property non-deductible for tax purposes

(2)

(2)

Gains previously rolled over crystallised

-

(5)

Over provision in respect of prior period

-

(4)

(4)

(17)

Explained by: Expenses not deductible for tax purposes

(d) Deferred tax The deferred tax included in the statement of financial position is as follows:

Included in provision for liabilities and charges

2019 £000

2018 £000

721,231

808,741

16,956

14,924

The liability/(asset) for deferred tax comprises the following: Accelerated capital allowances Short lease premiums received On freehold and investment properties

(116) 703,123

(224) 795,359

Pension costs

(924)

(873)

Hedge accounting adjustments

2,192

(78)

-

(367)

Losses carried forward

721,231

808,741

At 1 January

808,741

823,070

Income statement – deferred tax credit

(85,448)

(14,985)

Income statement – loss on sale of subsidiary undertakings Other comprehensive income

(4,163) 2,101

656

Total deferred tax

(87,510)

(14,329)

At 31 December

721,231

808,741

The company expects no deferred tax liabilities to reverse in 2020.

67


Cadogan Annual Report 2019

7. Taxation (continued) (e) Factors that may affect future tax charges The UK corporation tax rate for the whole of 2019 was 19%. Accordingly, the group’s result for the accounting period is taxed at an effective rate of 19.00% (2018 – 19.00%). The corporation tax rate was due to reduce to 17% from April 2020 but this rate reduction has been cancelled and the rate of corporation tax will remain at 19% from 1 April 2020, as confirmed in the March 2020 Budget. At the balance sheet date, the reduction to 17% from April 2020 had been substantively enacted and hence in accordance with Accounting Standards, the impact of these reductions has been reflected in the group’s financial statements at 31 December 2019. The cancellation of the rate reduction to 17% will impact the amount of future deferred tax liabilities to be recognised by the group.

8. Dividends 2019 £000

2018 £000

Interim dividend paid on 13 November 2019

41,437

-

Interim dividend paid on 18 December 2018

-

58,259

41,437

58,259

2019 £000

2018 £000

26,961

33,708

(414,110)

(110,640)

(387,149)

(76,932)

9. Retained profit/(loss) for the year

The profit/(loss) for the year has been retained by: The Company Subsidiaries

The parent company’s profit before dividends for the financial year was £68,398,000 (2018 – £91,967,000).

10. Loss per share The calculation of loss per ordinary share for 2019 is based on the deficit attributable to ordinary shareholders of £445,712,000 (2018 – deficit of £18,673,000) and on 120,000,000 ordinary shares (2018 – 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 loss per share as there is no potential future shares or share options in the company.

68


Notes to the Financial Statements

11. Tangible fixed assets Group Freehold investment properties £000

Freehold land and buildings £000

Total properties £000

Plant and equipment £000

Total £000

6,132,768

27,800

6,160,568

11,084

6,171,652

Cost or valuation At 1 January 2019 Revaluation

(581,087)

(272)

(581,359)

Additions

132,703

-

132,703

Disposals

(138,213)

-

(138,213)

At 31 December 2019

372 (2,418)

(581,359) 133,075 (140,631)

5,546,171

27,528

5,573,699

9,038

5,582,737

At 1 January 2019

-

-

-

9,429

9,429

Charge for the year

-

-

-

308

308

Disposals

-

-

-

(1,647)

(1,647)

At 31 December 2019

-

-

-

8,090

8,090

At 31 December 2019

5,546,171

27,528

5,573,699

948

5,574,647

At 31 December 2018

6,132,768

27,800

6,160,568

1,655

6,162,223

Depreciation

Net book value

The valuation of the group’s freehold properties at 31 December 2019 was carried out by CBRE Limited (commercial properties) and Cluttons (residential properties), both firms are independent and regulated by the Royal Institution of Chartered Surveyors (RICS), on the basis of fair value, in accordance with the version of the RICS Valuation – Global Standards (incorporating the International Valuation Standards) and the UK supplement (“The Red Book”) as at the Valuation Date. The key assumptions used to determine the fair value of investment property are set out overleaf:

69


Cadogan Annual Report 2019

11. Tangible fixed assets (continued) Fair Value

Range (weighted average)

Property Type

2019 £m

2018 £m

Residential

1,620

1,842

Commercial

3,954

4,319

Valuation Technique

Direct capital comparison, investment & residual

Income capitalisation

2019

2018

• Freehold vacant possession values per square foot

Average of £1,612

Average of £1,785

• Discounts for nature of occupation

0%-25%

0%-25%

• Capitalisation and deferment rates

4.00%5.50%

4.75%5.50%

£20-£103 £65-£1,050 2.1%-5.6% (3.69%)

£20-£100 £85-£1,120 2.1%-5.0% (4.01%)

Key inputs

• ERV per sq. ft. Office/medical Retail (Zone A) • Equivalent yields

The historical cost of freehold properties at 31 December 2019 was £2,121,240,000 (2018 – £2,146,966,000). These amounts are stated after the deduction of accumulated impairment losses of £2,611,000 (2018 – £2,611,000).

12. Fixed asset investments Company £000

Investment in subsidiary companies at cost At 31 December 2019 and 31 December 2018

70

117,317


Notes to the Financial Statements

12. Fixed asset investments (continued) 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:

Nature of business

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

Company

Held directly Cadogan Estates Limited* Chelsea Land Limited* Held indirectly

Chelsea Land Developments Limited*

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

Sloane Rewards 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

Frederick Court Limited*

13/14 Herbert Crescent Residents Limited Sloane Court East Garden Limited*

Property investment

40

2 Sloane Terrace Limited

Cadogan House Residents Limited

Property management

25

76 Sloane Street (Management) Limited

Property management

25

15/16 Herbert Crescent Residents Association Limited

Property management

20

All of the above investments are holdings of ordinary shares. All companies are registered in England. Location of Registered offices Companies marked * – 10 Duke of York Square, London, SW3 4LY Hugo House Limited – Hugo House, 178-180 Sloane Street, SW1X 9QL 13/14 Herbert Crescent Residents Limited – 6 Sloane Street, London, SW1X 9LF Cadogan House Residents Limited – 2 Tower Centre, Hoddesdon, EN11 8UR 2 Sloane Terrace Limited – 2 Sloane Terrace, London, SW1X 9DQ 76 Sloane Street (Management) Limited – 76 Sloane Street, London, SW1X 9SF 15/16 Herbert Crescent Residents Association Limited – 15/16 Herbert Crescent, London, SW1X 0HB Disposal of subsidiaries On 27 November 2019, the group completed the sales of Cadogan Hotel Partners Limited and Leda Hotels Limited, to a related party Cadogan Group Holdings Limited, for a consideration of £82,666,000 of which all was through an inter-company loan account. The carrying value of the net assets of the two companies at the date of disposal was £96,448,000 leading to a loss of £13,782,000 being recognised on disposal. The losses attributable to members of the parent company included profits of £492,000 generated by the two companies up to their date of disposal on 27 November 2019. The net cash flow effect of the disposal was nil. There was no tax arising on the disposal of the subsidiaries.

71


Cadogan Annual Report 2019

13. Debtors Group 2019 £000

2018 £000

Trade debtors

10,842

8,760

Other debtors

10,182

5,231

Accrued income

22,982

22,742

Amounts owed to group undertakings

82,666

-

126,672

36,733

14. Trade and other creditors Group

Trade creditors Other creditors and accruals Social security and other taxation Deferred income

Company

2019 £000

2018 £000

2019 £000

2018 £000

208

2,328

-

-

38,372

31,932

78

61

365

269

47

48

38,986

37,382

-

-

77,931

71,911

125

109

15. Borrowings (a) Bank loans and other borrowings Group 2019 £000

2018 £000

6.941% commercial mortgage loan 2025

4,000

4,000

6.60% $45m unsecured loan notes 2020

33,970

-

Other long term borrowings falling due within one year

37,970

4,000

Amounts falling due within one year:

At 31 December 2019 the group had committed but undrawn credit facilities of £155m (2018 – £190m) under revolving credit facility arrangements expiring in February 2021.

72


Notes to the Financial Statements

15. Borrowings (continued) b) Other long term borrowings Group 2019 £000

2018 £000

Revolving credit facility

85,000

50,000

6.941% commercial mortgage loan 2025

16,000

16,000

6.60% $45m unsecured loan notes 2020

-

35,242

5.04% £45m unsecured loan notes 2021

45,000

45,000

3.45% £15m unsecured loan notes due 2022

15,000

15,000

6.75% $23m unsecured loan notes 2023

17,362

18,012

178,362

179,254

6.941% commercial mortgage loan 2025

44,000

48,000

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

45,293

46,989

2.51% £25m unsecured loan notes 2028

25,000

25,000

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

45,293

46,989

3.87% £25m unsecured loan notes 2034

25,000

25,000

5.77% $90m unsecured loan notes 2036

67,940

70,483

4.09% £25m unsecured loan notes 2039

25,000

25,000

2.79% £25m unsecured loan notes 2039

40,000

-

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

22,647

23,494

5.11% £25m unsecured loan notes 2046

25,000

25,000

7.40% $58m unsecured loan notes 2051

43,783

45,423

5.13% £40m unsecured loan notes 2056

40,000

40,000

663,956

636,378

842,318

815,632

Amounts falling due in two to five years:

Amounts falling due after more than five years:

Total other long term borrowings expiring in more than one year

The commercial mortgage loan is secured by fixed charges over specific freehold investment properties of the group, £795,288,000 (2018 – £769,632,000) of the total bank loans and other borrowings is subject to fixed rates of interest to maturity which average 4.97% (2018 – 5.11%). All the interest payments and principal repayments relating to the loan notes issued in US dollars were swapped into sterling at fixed exchange rates (see note 20). 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 5.72% (2018 – 5.72%). 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 4.78% (2018 – 4.91%). 73


Cadogan Annual Report 2019

16. Called up share capital 2019 Authorised, allotted, issued and fully paid

Ordinary shares of £1 each

2018 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: — 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; — Increases and decreases in fair value of an individual investment property unless a deficit below original cost or its reversal and is expected to be permanent; — Increases and decreases in fair value of freehold land and building unless a deficit, or its reversal, is below original cost in which case it is recognised in the profit and loss account; and — 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.

74


Notes to the Financial Statements

18. Notes to the statement of cash flows (a) Reconciliation of profit to net cash inflow from operating activities Group 2019 £000

2018 £000

(521,720)

(19,038)

Revaluation of investment properties

581,359

89,134

Depreciation of tangible fixed assets

308

379

Group loss for the year

Adjustments to reconcile loss for the year to net cash flow from operating activities:

Profit on sale of investment properties

(4,907)

Loss on disposal of subsidiaries

13,782

Difference between pension charge and cash contributions Net finance cost

(830) 37,333

(8,008) (922) 36,017

Working capital movements: Decrease/(increase) in stock

54

Increase in debtors

(9,053)

Increase in creditors

8,992

(30) (4,169) 477

Taxation: Corporation tax paid

(11,664)

(14,718)

Net cash inflow from operating activities

93,654

79,122

(b) Cash and cash equivalents Cash and cash equivalents comprise the following: Group

Bank overdraft

2019 £000

2018 £000

15,020

10,052

75


Cadogan Annual Report 2019

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. During the year £830,000 (2018 – £922,000) was paid by the group as a contribution to the shortfall, a further £830,000 will be paid in the year ended 31 December 2020. The most recent comprehensive actuarial valuation of the Scheme was carried out as at 25 December 2016 and the next valuation of the Scheme is due at 31 December 2019. In the event that the valuation reveals a larger deficit than expected the company may be required to increase contributions above those set out in the existing Schedule of Conditions. The results of the 2016 valuation were updated to 31 December 2019 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: 2019

2018

Discount rate

2.10% pa

2.90% pa

Fixed 5% pension increases

5.00% pa

5.00% pa

Fixed 5% revaluation in deferment

5.00% pa

5.00% pa

Retirements

Post retirement mortality assumption

Tax-free cash

All members retire at age 60 80% of the S2NxA tables with CMI 2018 projections using a long term improvement rate of 1% per annum

80% of the S2NxA tables with CMI 2015 projections using a long term improvement rate of 1% per annum

No allowance

Assets The major categories of assets as a proportion of total assets are as follows: Asset category

Growth Assets:

2019 %

2018 %

26

27

74

73

100

100

Dynamic Real Return Fund (26%, 2018 – 27%) Protection Assets: Corporate Bond Fund (34%, 2018 – 34%) Over 15 year Gilt Index Fund (40%, 2018 – 39%) Total

The actual return on the Scheme’s assets was an increase of £4,348,000 (2018: decrease of £737,000). The assets do not include any investment in shares or property of the group.

76


Notes to the Financial Statements

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

2019 £000

2018 £000

41,966

37,830

(47,400)

(42,968)

(5,434)

(5,138)

Amounts recognised in the income statement over the year 2019 £000

2018 £000

Interest cost

(1,231)

(1,166)

Expected return on assets

1,094

1,004

Total recognised in the income statement

(137)

(162)

2019 £000

2018 £000

Recognised in other comprehensive income over the year

Gain/(loss) on scheme assets in excess of interest

3,254

Gains on changes to demographic assumptions

3,098

Gains/(losses) from changes to financial assumptions

(7,341)

2,544

(989)

803

2019 £000

2018 £000

37,830

38,664

1,094

1,004

830

922

Re-measurement gains and losses recognised in other comprehensive income

(1,741) -

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

(1,042)

(1,019)

3,254

(1,741)

41,966

37,830

77


Cadogan Annual Report 2019

19. Pension arrangements (continued) The change in present value of the defined benefit obligation over the year was: 2019 £000

2018 £000

42,968

45,365

Interest cost

1,231

1,166

Benefits paid

(1,042)

(1,019)

Experience gains on liabilities

(3,098)

Defined benefit obligation at 1 January

Changes to assumptions Defined benefit obligation at 31 December

7,341 47,400

(2,544) 42,968

Defined contribution schemes The pension charge in respect of defined contribution schemes represents contributions payable by the group to such schemes and amounted to £609,000 (2018 – £579,000), of which nil (2018 – 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 $366m (2018 – $366m) whereby it pays a fixed rate of interest of between 5.20% and 7.35%. 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 2020 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 £89,731,000 (2018 – £86,723,000). 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 2019, 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. 2019 £000

2018 £000

86,723

77,015

(10,342)

6,656

Net changes in fair value through other comprehensive Income

13,350

3,052

Value at 31 December

89,731

86,723

Value at 1 January

Net changes in fair value through the income statement

78


Notes to the Financial Statements

21. Capital and other commitments Group 2019 £000

2018 £000

152,283

129,383

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. The group had the following future minimum operating lease receivables under non-cancellable operating leases in respect of investment properties at the year end: 2019 £000

2018 £000

Within one year

154,293

162,193

Between one and five years

421,310

462,095

439,894

502,865

1,015,497

1,127,153

Due:

More than five years

22. Events after the balance sheet date The Government put the UK into lockdown on 23 March after the declaration by The World Health Organisation that COVID-19 had become a global pandemic. The majority of commercial businesses on the Estate closed from that date. Our offices also closed, with the majority of staff working successfully from home. We continued to maintain an on the ground presence throughout the lockdown to provide security for the Estate and support to residential and commercial occupiers. With the announcement in late May of a gradual relaxation of the lockdown, our staff and contractors prepared for the gradual reopening of businesses, putting in place strong health and safety measures including enhanced cleaning, security and social distancing guidelines for businesses, residents and visitors to the area to maintain a safe environment. Further details about our response and priorities for dealing with the crisis are provided on pages 8 to 13 of the Strategic Report. While it is still too early to assess the long-term impact of COVID-19 on our business, there has already been an impact on income in the short term and potentially on property values depending on the depth, length and severity of the crisis. An impact assessment on the business has been undertaken and its results summarised in the Financial Review section of the Strategic Report on page 44 and a Going Concern assessment is summarised on pages 48 to 49 in the Directors’ Report. The directors do not consider the impact of COVID-19 to be an adjusting post-balance sheet event at 31 December 2019 on the basis that on that date COVID-19 had not been declared a global pandemic, there were no known cases in the UK and no anticipation that it would spread within Europe and the UK at the rate and to the extent that it eventually did. We have therefore made no adjustments in these financial statements to account for the impact of COVID-19 based on what was known about the virus at 31 December 2019.

23. Related party relationships and transactions Viscount Chelsea DL, Chairman and director of Cadogan Group Limited, rents a residential property owned by the group. The rent paid by Viscount Chelsea in the year totalled £279,572. At 31 December 2019 the outstanding balance owed to the group was £2,600 (2018 – £5,200). 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 in the year totalled £15,180. At 31 December 2019 the outstanding balance owed to the group was nil (2018 – nil). The annual rental charge is at market rate.

24. Ultimate ownership The ultimate holding company is Cadogan Settled Estates Holdings 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 Holdings Limited may be obtained from The Registrar of Companies, Companies House, Crown Way, Cardiff, CF14 3UZ. 79


Cadogan Annual Report 2019

Five Year Summary 2019

2018

2017

2016

2015

Net assets Properties at valuation

£m

5,573.7

6,160.6

6,148.1

5,985.5

5,793.9

Net borrowings

£m

805.6

742.2

642.7

619.7

588.6

Equity shareholders’ funds

£m

4,088.7

4,565.6

4,639.3

4,516.0

4,282.8

£

34.07

38.05

38.66

37.63

35.69

Gross rents

£m

166.7

160.0

152.6

142.7

129.7

Profit on sale of investment properties

£m

4.9

8.0

6.9

10.7

9.5

Operating profit – before revaluation

£m

110.8

106.1

100.7

103.3

92.3

Revaluation in year

£m

(581.4)

107.8

139.4

595.0

Loss on disposal of subsidiaries

£m

(13.8)

-

-

-

-

Operating profit/(loss)

£m

(484.4)

17.0

208.5

242.7

687.3

Net interest payable

£m

36.0

36.5

36.4

36.7

Profit/(loss) before taxation

£m

(521.7)

(19.0)

172.0

206.3

650.6

Taxation

£m

(76.0)

(0.3)

26.3

Profit/(loss) after taxation

£m

(445.7)

(18.7)

145.7

216.5

635.7

Earnings/(loss) for ordinary shareholders

£m

(445.7)

(18.7)

145.7

216.5

635.7

p

(371.4)

(15.6)

121.4

180.4

529.7

%

19.70

16.26

13.85

13.72

13.74

Gross rents/interest cover

times

4.47

4.44

4.18

3.92

3.52

Interest cover

times

2.97

2.95

2.76

2.84

2.51

Net assets per share

Earnings

Earnings/(loss) per share

37.3

(89.1)

(10.2)

14.9

Key financial ratios Balance sheet gearing

80


10 Duke of York Square London SW3 4LY T. 020 7730 4567 cadogan.co.uk

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Annual Report 2019  

Annual Report 2019  

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