CADOGAN Annual Report 2018
Front Cover Chelsea Summer Fete on Pavilion Road Current Spread World Ballet Day celebrated at the Saatchi Gallery
Contents 2
D I R E C TO R S & S E C R E TA RY
4–5
C H A I R M A N ’ S S TAT E M E N T
6–7
T H E E S TAT E TO D AY
8
CORE OBJECTIVES
9
FINANCIAL HIGHLIGHTS
10–13
OUR COMMUNIT Y
14–31
S T R AT E G I C R E P O RT
44
C O N S O L I D AT E D I N C O M E S TAT E M E N T
45
S TAT E M E N T S O F COMPREHENSIVE INCOME
46
S TAT E M E N T S O F CHANGES IN EQUIT Y
47–48
S TAT E M E N T S O F FINANCIAL POSITION
49
C O N S O L I D AT E D S TAT E M E N T O F C A S H F LO W S
50–70
32–39
N OT E S O N T H E F I N A N C I A L S TAT E M E N T S
40–41
F I V E Y E A R S U M M A RY
FINANCIAL REVIEW
D I R E C TO R S ’ R E P O RT
42–43
I N D E P E N D E N T AU D I TO R ’ S R E P O RT
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Annual Report 2018
Directors & Secretary LIFE PRESIDENT
REGISTERED OFFICE
The Earl Cadogan KBE DL
10 Duke of York Square London SW3 4LY United Kingdom
D I R E C TO R S Viscount Chelsea DL* Chairman
C O M PA N Y N U M B E R 2997357
The Hon. James Bruce* Deputy Chairman
AU D I TO R
Hugh Seaborn CVO Chief Executive
Ernst & Young LLP 1 More London Place London SE1 2AF
Sanjay Patel Finance Director Charles Ellingworth* John Gordon* Francis Salway* *
Non-executive
S E C R E TA RY Paul Loutit
Opposite Statue of Sir Hans Sloane stands outside the Cadogan offices
2
Directors & Secretary
3
Annual Report 2018
Chairman’s Statement
VISCOUNT CHELSEA
4
Chairman’s Statement
We face continued political and economic uncertainty in no small part due to the ongoing Brexit negotiations. In this context we are very well positioned and remain confident that London, the prosperity of which is vital to our business, will continue to be a world class city. In spite of this uncertain background and the slowdown in the domestic economy, I am pleased to say that 2018 was a solid year for Cadogan. From a financial perspective, one of the more satisfactory aspects of our performance has been the continued growth in income. The business delivered an increase in income of 4.8%, rising to 5.3% when taking into account the contribution of the hotel operating businesses which are now starting to make a meaningful contribution to the portfolio as developments complete. This has brought our total income to £169m (compared to £161m in 2017). In the meantime we have experienced a revaluation reduction of £89.1m equating to -1.4%. This fall in values was led by the residential portfolio (down 6.7%) and mitigated by retail (up 1.6%) and to a lesser extent, offices (up 0.2%).
holdings, has meant we have sought to contribute to vibrant communities in many different ways over the years. With this in mind I am delighted with our continued support of Cadogan Hall which has become a well-established and extremely well respected, London concert hall. In 2018 the Hall hosted 264 concerts, attracting over 156,000 people. Pavilion Road provides a broad range of artisan food and other very local shops which bring a warmth and vibrancy to the area that as a local resident myself, I relish.
“In spite of this uncertain background and the slowdown in the domestic economy, I am pleased to say that 2018 was a solid year for Cadogan.”
Looking forward it is easy to identify potential headwinds which will make 2019 more challenging. Grow th predictions for the UK economy have been reduced and there are signs that the global economy is slowing. Therefore, overall we look forward with caution but also confidence that this business is well equipped with a top quality portfolio, strong finances and an excellent team.
I would like to extend my thanks to my fellow Board Directors for all their support and wise counsel and to the extremely talented and experienced team led by my Chief Executive, Hugh Seaborn. I would also particularly like to welcome Sanjay Patel as Finance Director to the Board and I look forward to working with Sanjay over the years ahead.
This is my family’s business and we can trace its origins back over 300 years. This, together with our extensive local
VISCOUNT CHELSEA DL 24 April 2019
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Annual Report 2018
The Estate Today D E F I N E D BY O U R H E R I TA G E . D E D I C AT E D TO T H E F U T U R E .
Sloane Street
Cadogan is a dynamic property manager, investor and developer with a 300-year family history. This long heritage provides a remarkable foundation upon which to base a contemporary, forward looking business able to respond swiftly to the changing needs of our customers and markets. 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.
6
The Estate Today
C U S TO M E R C O M M I T M E N T
2 0 1 8 AWA R D S & R E C O G N I T I O N
Our commitment to delivering an outstanding experience for our customers, both living and working on the Estate, continues. We are proud to have so many long lasting relationships, which helps to build a strong sense of community across the neighbourhood.
UK Property Awards ‘Best Developer website’ for Cadogan.co.uk
The real-time feedback that we receive through our customer research partner RealService* allows us to listen and react swiftly – continually improving the customer experience and shaping our business strategy.
UK Property Awards ‘Residential Property London’ for 126 Pavilion Road
International BREEAM Awards ‘Homes – Post-Construction’ for 126 Pavilion Road
89% Of customers rate their overall satisfaction as a Cadogan customer good or excellent
Lux Global Excellence Awards ‘Best Property Management Firm, Greater London’
87%
National Considerate Constructors Scheme 32 Sloane Gardens
Of customers rate Cadogan’s responsiveness to requests as good or excellent
85%
Walpole British Luxury Awards Shortlisted for ‘Luxury with a heart’ category
Of customers rate Cadogan as either easy or very easy to do business with
London in Bloom Awards Gold for Cadogan Place South Gardens
*RealService is a leading independent customer experience consultancy
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Core Objects
Core Objectives 1
To protect and enhance the Estate’s position as one of the world’s leading locations in which to live, work and visit. 2
To safeguard its future and protect the portfolio as a long-term investment – creating and maintaining outstanding buildings and environment. 3
To make a positive contribution towards a sustainable environment and a thriving community. 4
To deliver excellent customer service, aiming to be good neighbours and ensuring that integrity is at the heart of all business decisions. 5
To recruit and retain an exceptionally talented team and to use the best external advisers.
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Financial Highlights
Financial Highlights GROSS RENTS FIVE YEAR GROWTH
O P E R AT I N G P RO F I T B E F O R E C A P I TA L I T E M S
6.4% PA
£98.1m 2 0 1 8 £160.0m
2018 2017
£152.6m
2017
£142.7m
2016 2015
£93.8m
2016
£129.7m
2014
£98.1m
2018
£92.6m
2015
£119.9m
£82.8m
2014
£72.4m
G R O S S P R O P E RT Y VA LU E FIVE YEAR GROWTH
NET ASSETS PER SHARE
6.7% PA
£38.0 2 0 1 8
2018
£6,160.6m
2018
£38.0
2017
£6,148.1m
2017
£38.7
2016
£5,985.5m £5,793.9m
2015 2014
2015
£5,175.2m
BAL ANCE SHEET GEARING (FRS 102 BASIS)
8.2% PA
16.3% 2 0 1 8 2018
2017
3.2%
2017
2014
£30.5
TOTA L R E T U R N F I V E Y E A R AV E R A G E
-0.3%
2015
£35.7
2014
2018 2016
£37.6
2016
4.6% 17.7% 16.9%
13.9%
2016
13.7%
2015
13.7%
2014
9
16.3%
16.0%
Annual Report 2018
Our Community
Chelsea Summer Fete
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.
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Our Community
KXU Spinathon Fundraiser
COMMUNIT Y Chelsea’s neighbourhood is vibrant and full of character. We actively and regularly contribute to this thriving community – working closely with local groups, charities, educational and religious bodies as well as supporting local cultural attractions: – T he Cadogan family has donated more than £12million over the last 5 years, to both local and national charitable causes –H omelessness is a rising 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 awareness and funds – over £200,000 in 2018
Kensington and Chelsea Art Weekend
– ‘ Fashion Re-Told’ saw the ‘world’s chicest charity shop’ pop-up on Sloane Street – this collaboration with Harrods raised over £110,000 for the NSPCC during May 2018 – F urther donations, typically of up to £200,000 each year, are made to support essential community facilities such as cultural centres, shelters, local churches and schools –P artner with the Kensington & Chelsea Foundation, who help local charities operating at grass roots level across the borough – Over £1.3 million committed each year to subsidise affordable, community and key worker housing –C reate and support over 60 exciting and inclusive events for the enjoyment of the local community, this year including the inaugural Kensington & Chelsea Arts Weekend –S upport key neighbourhood institutions including Saatchi Gallery, Chelsea Physic Garden and Cadogan Hall
‘Fashion Re-Told’ charity pop-up on Sloane Street
– Staff policies on charitable matchfunding and volunteering
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Annual Report 2018
H E R I TA G E A N D C O N S E RVAT I O N Conservation of the Estate’s rich heritage is essential. This includes cyclical repair and maintenance of our existing buildings following a strategic Conservation Management Plan, often using traditional skills and materials: – Restoring original shopfront exteriors to several buildings along the King’s Road (numbers 23, 74, 102 and 110–112) – to enhance the aesthetic and retain the heritage of the area –R enovating Rossetti Studios to enhance their original live-work use for artists, restoring them in a manner that respects their original function and maintaining their purpose –N earing completion of the Duke of York Restaurant – the result of an architectural competition to enhance Chelsea’s reputation for design excellence, with a contemporary building that perfectly complements its historic surroundings
Rossetti Studios
Duke of York Restaurant (CGI)
12
Our Community
E N V I RO N M E N T – E N S U R I N G A S U S TA I N A B L E F U T U R E Our long-term approach means we naturally think of our impact on future generations and seek to actively manage our environmental footprint: from ensuring historic buildings are as efficient as possible to introducing the latest sustainable tech, reducing waste and continually seeking ways to reduce energy consumption: – Employ green technologies and recycle materials wherever possible – in 2018, 92% of our residential and commercial projects achieved BREEAM ‘Very good’ or above –D edicated to improving energy performance across our portfolio
Mini-beast hotel in Cadogan Place South
–B enchmark all sites against the ‘Considerate Constructors Scheme’ – Achieve a minimum 90% recycling on all of our construction sites – 98% of waste from our major projects was diverted from landfill Looking ahead to 2019, the Estate will be setting out its 10-year vision with the launch of Chelsea 2030 – a strategy that will build on the work that has been achieved to date by setting annual targets for the business to achieve. By setting ambitious targets and implementing innovative environmental initiatives, we believe that our economic endeavours are entirely compatible with a more environmentally sustainable business model. Cadogan Place South (Open Garden Squares)
Chelsea in Bloom
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Annual Report 2018
Strategic Report
HUGH SE ABORN, CHIEF EXECUTIVE
The business has proved resilient in 2018 despite virtually flat capital values.
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Strategic Report
The 2018 financial year has been characterised by very slightly lower capital values overall, supported by modest growth in the commercial portfolio which was offset by residential values declining. This pattern of positive commercial and flat or negative residential has prevailed over the past four years. In this context, 2018 proved resilient for the operational business in spite of the political and economic adversity. Total income grew by 5.3% to £169.4m (from £160.9m in 2017) 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), has increased from £93.8m to £98.1m up 4.6%. In 2018, we invested £160.8m in purchases and development which will produce further rental income over time.
our clear focus on enhancing Chelsea and Knightsbridge so that the whole is greater than the sum of its parts. Through this approach we expect to generate healthy and sustainable financial performance over extended time horizons. These results demonstrate the continued success of our attractive and vibrant destinations within which our holdings are situated, combined with a careful curation of the tenant mix, and the strength of London as a world class city despite the fragile domestic political environment. The occupational markets in which we operate have proved resilient in 2018, perhaps more so than we might have expected, and we have achieved good letting activity through the year. This allows us to achieve minimal vacancies across all parts of the portfolio while maintaining rental levels.
This solid performance reflects our consistent focus on quality, ensuring that we deliver the optimal space to the market, that we provide exemplary customer service and maintain
Key financial highlights of 2018 are set out overleaf.
Pont Street
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Annual Report 2018
Property Portfolio
Giorgio Armani flagship on Sloane Street
Overall, the portfolio valuation, on a like for like basis, has declined by 1.4%. Notwithstanding this, due to new investment through purchases and development through the year, the portfolio has grown to ÂŁ6.16bn (ÂŁ6.15bn in 2017). This continues the pattern of more subdued capital performance since 2016, which followed several years of double digit growth.
16
Strategic Report
Retail, our largest sector at 50.8% of the portfolio, produced the strongest valuation performance although this was only up marginally at 1.6% to £3.13bn. This figure was the result of static yields, resilient occupational markets and some opportunities to capture growth through asset management activity which led to an increase in rents of 6.5% to £86.5m per annum.
The residential sector was subject to a valuation decline of -6.7%, after adjusting for purchases, sales and capital expenditure. Gross rents rose by 5.4% due to acquisitions and refurbishments. The impact of the relative valuation movements has been that residential now represents just 29.9% of the portfolio compared to 48.4% ten years ago in 2008.
Offices were slightly up at 0.2% to £722m after a particularly strong previous year and with limited opportunities, as the portfolio was virtually fully occupied.
Investment performance highlights TOTA L P RO P E RT Y P O RT F O L I O
R E S I D E N T I A L P O RT F O L I O D O W N
£6.2bn
6.7%
DECRE A SE OF
1.4%
C O M M E RC I A L P O RT F O L I O U P
1.1%
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Annual Report 2018
Retail Retail is our largest sector, for the first time accounting for over half (50.8%) by capital value and 53.5% by income.
We see our role as curating an environment where “bricks and mortar” shops can thrive. This means creating a vibrant, enticing London neighbourhood where customers want to spend time. We look to do this through a combination of developing the right physical space, ensuring the wider environment complements the premium retail offer and selecting a leading range of outstanding restaurants, cafes and bars. Consumers are seeking a more engaging, memorable and social shopping experience, with food, drink, wellbeing and leisure playing an increasingly important role as a driver for footfall and “glue” for retail.
Consumer spending patterns, tastes and expectations are changing at a quickening pace largely due to the availability of online options making consumers better informed, and conventional shops now form just one aspect of the sales journey. As a consequence retail is going through a major change, much of which we all read about regularly in the press. It is vital that retail property owners adapt swiftly to this. At Cadogan we have been responding over several years by becoming much more of a service provider, more responsive and customer focused. This allows us to work closely with our retailers to understand their priorities and incorporate these into 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.
R E TA I L
We continue to work with the Royal Borough of Kensington and Chelsea on proposals to improve the Sloane Street public realm following a very positive public consultation in 2017, when 75% of respondents supported the proposals. The aim is to create an environment that is elegant and attractive for pedestrians while having a neutral impact on vehicular traffic. 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 and compelling environment.
2018 £M
2017 £M
G RO S S VA LU E
3,130.4
3,072.0
G RO S S R E N T S
86.5
81.2
* - adjusted for purchases, sales and capital expenditure
Rag and Bone flagship on Sloane Square
18
% CHANGE 1.6%* 6.5%
Strategic Report
19
Annual Report 2018
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Strategic Report
R E TA I L C O N T I N U E D The outlook for retail continues to be challenging as the structural changes in the sector, combined with domestic economic slowdown and limited house price growth, impacts adversely upon consumer spending. However, shops will continue to be a vital element of retailers’ offer when considered alongside online channels to form a true multichannel approach. Retailers will continue to require high quality physical destinations and those owners that are able to deliver space in an attractive environment, within an interesting mix of uses and operators in the best retail pitches will thrive.
Pink Shirtmakers, known for its high quality men’s shirts and the cult French brand BA&SH. In the meantime, the arrival of Balenciaga, the Spanish high fashion house on Sloane Street, reinforced the luxury line up and reputation of this street as one of the world’s best known luxury destinations. The final phase of our artisan food street, Pavilion Road, has progressed well with lettings to a general store, fishmonger, men’s barber and a shoe repairer. Once these units are trading this project will be complete and we will have delivered what local residents told us they wanted, namely independently owned “useful” shops selling quality produce. Our aim was to create a street with numerous, frequent transactions that generated a bustle of activity and encouraged a stronger sense of community.
The demand for our retail space remained healthy throughout 2018 with 36 lettings producing £5.8m per annum after rent frees. The King’s Road was an area of particular activity and the breadth of offer was strengthened by the arrival of a number of new brands including two leading US leisure businesses Peloton and Soul Cycle, the Italian footwear brand Superga famous for its iconic sneakers,
We seek to acquire properties at value, which have the potential to deliver healthy investment returns and contribute to the wider estate. In this respect 2018 was a quiet year in which we acquired a single King’s Road shop let to Kiehl’s, the American skincare brand.
“Our aim was to create a street with numerous, frequent transactions that generated a bustle of activity and encouraged a stronger sense of community.”
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Annual Report 2018
Offices Offices account for 11.7% of the portfolio by capital value of £722m, up very marginally by 0.2% on the previous year. By income, offices represent 18.3% of the total portfolio and gross rents rose by 2.4% (up 27.2% in 2017) over the year primarily due to indexed reviews of existing leases. Our offices are virtually fully let with almost no vacancies through the year.
OFFICES
Although less well recognised as a London office location due to the limited volume of stock, we experience healthy demand for space with incoming businesses often identifying the attractive environment and lifestyle benefits as influencing factors. Our offices play an important part in the portfolio, for bringing both healthy income and people to the area at different times, contributing to local vibrancy.
2018 £M
2017 £M
G RO S S VA LU E
721.7
717.6
0.2%*
G RO S S R E N T S
29.7
29.0
2.4%
* - adjusted for purchases, sales and capital expenditure
10 Duke of York Square
22
% CHANGE
Strategic Report
23
Annual Report 2018
Residential The gross value of our residential portfolio represents just 29.9% (32.3% in 2017) of the total, from 48.4% ten years ago in 2008. This reflects an ongoing movement towards commercial and particularly retail, from what was historically, a largely residential estate. However 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 stewards of the area.
The value of enfranchisement sales during 2018 was £25.2m compared to £46.7m in 2017, and about one third of the 10 year average of £74m. These sales represent the disposal of interests in 49 units (2017 – 53 units) comprising three houses and 46 flats. This was complemented by voluntary sales totalling £26.1m (2017 – nil) which was dominated by the sale of a large house on Cadogan Square. Despite the softer market, profit from the enfranchisement sales was £4.1m or 19.2%, which is in line with our experience over recent years (£6.9m and 17.2% in 2017). The voluntary disposals achieved a profit on value of £3.8m.
The reduction in the size of the residential portfolio primarily reflects the fall in values this year, down 6.7% to £1.84bn (£1.99bn in 2017 when it was down 0.9%). This represents the steepest decline we have experienced in recent years, including in 2008 when the fall was 5.6%, and follows flat or marginally falling values since the property cycle turned in 2014.
We also hold a private rented sector portfolio of over 700 units which has remained largely fully occupied through 2018. We are maintaining 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 2018 the average length of stay by departing tenants increased to 3 years.
Income from residential represents 21.5% (21.8% in 2017) of the portfolio. This lower relative income 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 the commercial portfolio.
RESIDENTIAL
The prime central London residential sales market has become characterised by low levels of activity and agents and commentators continue to predict a subdued outlook over the next few years.
2018 £M
2017 £M
G RO S S VA LU E
1,841.6
1,992.0
G RO S S R E N T S
34.9
33.1
* - adjusted for purchases, sales and capital expenditure
24
% CHANGE -6.7%* 5.4%
Strategic Report
28–30 Cadogan Place
28–30 Cadogan Place
155 Sloane Street
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Annual Report 2018
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. This year for the first time, it also includes properties newly acquired in our regional portfolio. Leisure and Other accounts for 7.6% of the value of the portfolio, which is up from 6% in 2017. This strong growth is because of the newly acquired properties in the regional portfolio, in which investment commenced during 2018. This regional portfolio, which stood at £53m at the year end, provides the business with higher income levels than is typically achievable of the Chelsea estate.
Aside from the regional portfolio, this sector 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 value of these uses far outweighs their size in the portfolio. Hotels are a growing sector. We took the strategic decision several years ago, to upgrade those we own and retain operational control whilst delegating to specialist operators. 11 Cadogan Gardens is a 56 room boutique hotel which we have internally refurbished (including extending the restaurant called Hans’ Bar and Grill) which is run by Iconic Luxury Hotels. The restoration of the Cadogan Hotel advanced well in 2018 and it re-opened early in 2019 as part of the enviable portfolio of international hotels and trains run by Belmond in partnership with the highly acclaimed young British chef Adam Handling.
The capital value of Leisure and Other fell by 1.7% mainly due to the transactional costs associated with the new regional acquisitions, and income increased by 32.9% reflecting the stronger income characteristics of these investments.
L E I S U R E & OT H E R
2018 £M
2017 £M
G RO S S VA LU E
466.8
366.5
G RO S S R E N T S
10.9
8. 2
* - adjusted for purchases, sales and capital expenditure
26
% CHANGE -1.7%* 32.9%
Strategic Report
Belmond Cadogan Hotel
Bread Ahead, Pavilion Road
Royal Court Theatre
Saatchi Gallery
Harry’s Dolce Vita, Chelsea in Bloom
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Annual Report 2018
Developments In order to deliver consistently high quality outcomes we continually invest in maintenance, refurbishment and redevelopment. This activity means we are able to maintain and improve the wider environment and deliver homes and business space that meets the needs of our customers, present and future. In 2018 our total spend on redevelopment and major refurbishments was £86.9m (£69.7m in 2017) which represents a high for the business.
will deliver 180,000 sq ft of new space including a large screen Curzon cinema, a pub, offices, roof top bar, flagship shops, affordable and market flats and an enhanced Waitrose supermarket. Local communities are central to what we do and as an owner of extensive property holdings in a concentrated area, we are very aware that our actions can affect those around us, particularly in relation to 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, and thereafter to communicate thoroughly so that those who wish to be, are kept fully informed. Our aim is to be the most trusted local developer.
The substantial element of construction has been in respect of three schemes: Belmond Cadogan Hotel is now complete and open; 1 Sloane Gardens, where we are working in partnership with the fêted Parisian hotelier Jean-Louis Costes (due to open next year); and 196/222 King’s Road, our largest scheme, which
Redevelopment scheme, 196–197 Sloane Street
28
Strategic Report
29
Annual Report 2018
Outlook There is no doubt that the political negotiations towards an exit from the European Union are contributing to uncertainty and in the short term I expect discretionary activity in our markets to be subdued as a consequence.
and effective team; and exceptional property portfolio in an enviable location. I am confident that we are very well equipped to negotiate short term uncertainties and challenges and continue to deliver sustainable returns over long time horizons.
In the meantime, Cadogan continues to respond swiftly to changing markets and take steps to make the business more resilient so that we are well placed to weather adversity and take advantage of opportunities. We have a family and Board that supports and encourages a long term approach to managing the Chelsea estate; a business that is structured accordingly with low and long funding within a strong balance sheet; a highly talented
I am most grateful to the entire Cadogan team as it is their hard work, their commitment and their ideas which enable us to report the business progress and achievements recorded in this report. HUGH SEABORN Chief Executive 24 April 2019
KXU gym workout on Pavilion Road (credit, Eva Espresso)
30
Strategic Report
31
Annual Report 2018
Financial Review
S A N JAY PAT E L , F I N A N C E D I R E C TO R
32
Financial Review
Although there was a like for like fall in the Estate’s capital values in 2018 of 1.4%, rental growth and revenue profit both increased when compared to 2017. Rents grew by 4.8% and our operating profit before capital items recorded an improvement over 2017 of 4.6%.
As a result of the adoption of 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 property market fell in value during the year and resulted in a net revaluation loss of £89.1m recorded in the income statement compared to the revaluation gain of £107.8m in 2017.
The growth in rental income reflected the benefit of development investment and both retail and residential rents grew in the year as a result of new lettings and mixed retail and residential developments coming to the market, primarily on the King’s Road. Rents in the retail and residential sectors grew by 6.5% and 5.4%, respectively.
The overall figure for taxation in the income statement for 2018 was a credit of £365,000. The charge for current taxation in the year amounted to £14.6m, an increase over 2017 as a result of the increase in operating profitability.
The profit from the sale of investment properties in 2018 contributed £8.0m compared to £6.9m in 2017. There were a similar number of transactions completed but an increase in the margin over book value.
The dividend paid to shareholders in December 2018 was £58.3m. There was an increase of 5% in the underlying dividend, which was £37.6m. In addition this year 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 £20.7m. The total dividend was paid in December 2018.
“The profit from the sale of investment properties in 2018 contributed £8.0m compared to£6.9m in 2017.”
33
Annual Report 2018
David Wynne sculpture, Cadogan Place North
34
Financial Review
C A D O G A N ’ S TA X C O N T R I B U T I O N 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.
TOTA L U K TA X CONTRIBUTION
2018 £m
TRADING HIGHLIGHTS
R E N TA L I N C O M E UP 4.8%
£160m
2017 £m
Tax paid by Cadogan UK Corporation Tax
RESIDENTIAL SALES UP 10.3%
14.7
10.4
SDLT
3.7
2.3
Employer’s National Insurance
0.8
0.8
Non domestic rates and Council Tax
1.6
1.5
R E V E N U E P RO F I T UP 4.6%
Section 106 agreements
2.1
0.1
Irrecoverable VAT
5.1
5.7
£98.1m
Other
0.6
0.5
28.6
21.3
PAYE and Employees’ National Insurance
2.3
2.4
VAT
8.9
13.8
11.2
16.2
£51.5m
P RO F I T O N S A L E O F I N V E S T M E N T P RO P E RT I E S U P 1 5. 9 %
Tax collected and paid over by Cadogan
TOTAL
£39.8
£8m LO S S B E F O R E TA X AT I O N
( I N C LU D I N G R E VA LUAT I O N LO S S E S )
£37.5
£19m
35
Annual Report 2018
Balance Sheet & Borrowing The value of our properties at the end of 2018 was £6.16bn, a small increase when compared to theprevious year’s figure of £6.15bn. On a like for like basis this reflected a small fall in value of 1.4% compared to 2017 growth of 1.8%. This and the increased dividend distribution were the primary reasons for the fall in group shareholders’ funds to £4.57bn with net assets per share falling to £38.05 from £38.66, a decrease of 1.5%.
Year end borrowings were £732.9m. The increase from the previous year end figure of £689.1m arose principally as a result of the amounts drawn in the year on the new £200m revolving credit facility which was entered into to fund the purchase of investment property. There was a further private placement during the year raising an additional £120m of unsecured loan notes of which £95m has been deferred into future periods. This was arranged in August and the £25m drawn in 2018 was utilised to finance the first maturing loan notes from the 2008 private placement.
The group’s property operations continued to be strongly cash generative. However, the year’s property investment and development activity together with the increased interim dividend paid, resulted in a net cash outflow which utilised all surplus cash balances in the year leaving a bank overdraft at the end of 2018 of £10.1m.
There was an increase in year-end balance sheet gearing to 16.3% from 13.9% while our interest cover increased to 2.9 times, comfortably in excess of our financial covenants. At the year-end we had total undrawn facilities available to the group of £190m under revolving credit facility arrangements.
36
Financial Review
37
Annual Report 2018
Approach to Risk Management S T R AT E G I C R I S K S
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.
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 which increases the risks to retail property owners and which our close estate management strategy responds to. 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.
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.
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 5.2% of the total portfolio value and the highest individual rent 3.9% of total annual rental income.
Cadogan is a long term property investor with a clear focus on high quality property assets located in central London. Because of its private ownership and long-term outlook the group aims for, and is able to achieve, a high level of resilience in all areas of the business. Cadogan assess risk under three principal headings.
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.
– Strategic risk – Financial risk – Operational risk
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
38
Financial Review
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.
competing schemes in the same area. Cadogan consults widely on development schemes to ensure that schemes are designed to the highest quality and to assist in obtaining the most appropriate planning consent. Risks associated with London’s position as a global capital – London’s position as a global capital has been a significant factor in the overall prosperity of central London in recent years. There are risks to this position from a number of factors, most significantly from the Brexit negotiations, from terrorism, from under-investment in infrastructure and from adverse changes to the tax regime, particularly affecting overseas investors. The group cannot manage or control these risks but Cadogan takes an active role in lobbying through organisations such as London First and the British Property Federation amongst others, to ensure that the long-term health of London is at the forefront of the minds of national and local government.
O P E R AT I O N A L R I S K S Property loss and damage – All the group’s properties are insured against loss or damage on a full reinstatement basis, including three years loss of rental income. Cover includes terrorism risk which is provided by a major insurer and member of Pool Re. Health and safety risks – The group accords a high priority to health and safety issues. Health and safety issues are always discussed at the monthly Property Management Committee meeting and all incidents are reported and reviewed on a monthly basis. From time to time the group undertakes external reviews and audits of its health and safety policies and procedures, the results of which have confirmed the quality and integrity of health and safety practices.
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.
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.
Refinancing risk – The group seeks to manage refinancing risk through the use of a spread of loan maturities. In normal circumstances loan terms are for an initial period of 10 years or more. The incidence of maturities is spread to ensure that major re-financings are spaced out over time. Foreign currencies – Some of the private placings of debt which the group has undertaken have included a significant proportion of US dollar borrowings. All exposure to US dollars in relation to both interest and capital repayments has been swapped into sterling on the date on which the loans were committed, and as a result there is no residual foreign exchange risk exposure to the group. Operationally the group has no foreign currency exposure.
S A N JAY PAT E L Finance Director 24 April 2019
39
Annual Report 2018
Directors’ Report C H A R I TA B L E C O N T R I B U T I O N S
The directors present their report and the financial statements for the year ended 31 December 2018.
The group’s charitable contributions for the year were £78,000 (2017 – £259,000). In addition, the Cadogan Charity, a shareholder in the company, makes donations to a variety of local and national charities
P R I N C I PA L A C T I V I T Y A N D R E V I E W O F 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 2018 and its future prospects is contained in the Financial Review on pages 32 to 39.
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 14 to 31.
DIVIDENDS Interim dividends of £58,259,000 (2017 – £20,770,000) were declared and paid during the year.
The group has considerable financial resources derived from an established investment property portfolio in prime central London. The group has substantial long-term committed financing arrangements and also has access to overdraft and revolving credit facilities from its bankers. Taking these factors into account the directors believe that the group is well placed to manage its business risks successfully.
RISK MANAGEMENT A summary of the principal risks and uncertainties has been included in the Financial Review on pages 38 to 39. D I R E C TO R S All the directors holding office during the financial year and up to the date of this report are listed on page 2 except Mr S Patel who was appointed to the board on 18 March 2019. Mr J G Bentley resigned as a director on 31 October 2018.
After making enquiries, the directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements.
The ultimate holding company maintains liability insurance for its directors and officers and for those of its subsidiaries in respect of proceedings brought by third parties, subject to the conditions set out in section 234 of the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of approving the Directors’ Report.
D I R E C TO R S ’ R E S P O N S I B I L I T I E S S TAT E M E N T 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
40
Directors’ Report
D I S C LO S U R E O F I N F O R M AT I O N TO T H E AU D I TO R
in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the group for that period. In preparing those financial statements, the directors are required to:
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.
– select suitable accounting policies and then apply them consistently; – make judgements and estimates that are reasonable and prudent;
AU D I TO R
– state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
A resolution concerning the re-appointment of Ernst & Young LLP as auditor will be proposed at the forthcoming annual general meeting.
– prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
By order of the board. PAU L LO U T I T Secretary 24 April 2019
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.
41
Annual Report 2018
Independent Auditor’s Report TO T H E M E M B E R S O F T H E C A D O G A N G RO U P L I M I T E D
OPINION
C O N C LU S I O N S R E L AT I N G TO G O I N G C O N C E R N
We have audited the financial statements of Cadogan Group Limited (‘the parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 which comprise the Consolidated Income Statement, the Consolidated and Company Statement of Financial Position, the Consolidated and Company Statement of Changes in Equity and the related notes 1 to 23, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
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 group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
In our opinion, the financial statements:
OT H E R I N F O R M AT I O N
– give a true and fair view of the group’s and of the parent company’s affairs as at 31 December 2018 and of the group’s loss for the year then ended;
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.
– have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
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.
– have been prepared in accordance with the requirements of the Companies Act 2006. BASIS FOR OPINION
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We have nothing to report in this regard.
42
Independent Auditor’s Report
O P I N I O N S O N OT H E R M AT T E R S P R E S C R I B E D BY T H E C O M PA N I E S A C T 2 0 0 6
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
In our opinion, based on the work undertaken in the course of the audit: – 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
AU D I TO R ’ S R E S P O N S I B I L I T I E S F O R T H E AU D I T O F T H E F I N A N C I A L S TAT E M E N T S Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
– the strategic report and directors’ report have been prepared in accordance with applicable legal requirements. M AT T E R S O N W H I C H W E A R E R E Q U I R E D TO R E P O RT BY E XC E P T I O N In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report.
– adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
U S E O F O U R R E P O RT
– the parent company 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.
– 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 R E S P O N S I B I L I T I E S O F D I R E C TO R S
B O B F O R SY T H Senior statutory auditor for and on behalf of Ernst & Young LLP, Statutory Auditor London 25 April 2019
As explained more fully in the directors’ responsibilities statement set out on pages 40–41, 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. 43
Annual Report 2018
C O N S O L I D AT E D I N C O M E S TAT E M E N T FOR THE YE AR ENDED 31 DECEMBER 2018
Note
2018 £000
2017 £000 As restated
2
169,443
160,896
Cost of sales
(51,195)
(50,156)
GROSS PROFIT
118,248
110,740
Administrative expenses
(20,143)
(16,939)
98,105
93,801
8,008
6,905
TURNOVER Continuing operations
OPERATING PROFIT BEFORE CAPITAL ITEMS Profit on sale of investment properties
3
(89,134)
Gain/(reduction) in revaluation of investment properties Profit on the sale of other fixed assets OPERATING PROFIT
5
Interest receivable Interest payable and similar expenses
4
PROFIT/(LOSS) BEFORE TAXATION Tax (charge)/credit on profit/(loss)
7
PROFIT/(LOSS) AFTER TAXATION ATTRIBUTABLE TO SHAREHOLDERS EARNINGS/(LOSS) PER SHARE
Notes 1 to 23 form an integral part of these financial statements.
44
-
11
16,979
208,539
112
208
(36,129)
(36,772)
(19,038)
171,975
365 (18,673)
10
107,822
(15.6)p
(26,253) 145,722 121.4p
Annual Report 2018
C O N S O L I D AT E D A N D C O M PA N Y S TAT E M E N T OF COMPREHENSIVE INCOME FOR THE YE AR ENDED 31 DECEMBER 2018
C O N S O L I D AT E D S TAT E M E N T O F C O M P R E H E N S I V E I N C O M E 2018 £000
(18,673)
Profit /(loss) for the year attributable to shareholders Net gain/(loss) recognised on cash flow hedges arising during the year
3,052
2017 £000 As restated
145,722 (2,247)
(520)
544
Re-measurement gain/(loss) recognised on defined benefit pension scheme
803
38
Movement on deferred tax relating to pension liability
(136)
(6)
Movement on deferred tax relating to cash flow hedges
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR
3,199 (15,474)
(1,671) 144,051
C O M PA N Y STAT E M E N T O F C O M P R E H E N S I V E I N C O M E 2018 £000
2017 £000
Profit for the year attributable to shareholders
91,967
98,058
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
91,967
98,058
Notes 1 to 23 form an integral part of these financial statements.
45
Annual Report 2018
S TAT E M E N T S O F C H A N G E S I N E Q U I T Y FOR THE YE AR ENDED 31 DECEMBER 2018
C O N S O L I D AT E D S TAT E M E N T O F C H A N G E S I N E Q U I T Y Called up share capital
Non-distributable reserve
Profit and loss account
Shareholders’ equity
£’000
£’000
£’000
£’000
120,000
3,210,639
1,129,716
4,460,355
-
55,651
-
55,651
120,000
3,266,290
1,129,716
4,516,006
Profit for year
-
58,211
87,511
145,722
Other comprehensive income/(loss)
-
(1,703)
Total comprehensive income for the year
-
56,508
Equity dividends paid
-
-
At 31 December 2017
120,000
3,322,798
1,196,489
4,639,287
At 1 January 2018 – As restated
120,000
3,322,798
1,196,489
4,639,287
At 1 January 2017 Prior period adjustment At 1 January 2017 – As restated
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
2,532 (106,728)
32
(1,671)
87,543
144,051
(20,770)
(20,770)
90,587 667
(18,673) 3,199
91,254
(15,474)
(58,259)
(58,259)
1,229,484
4,565,554
Called up share capital
Profit and loss account
Shareholders’ equity
£’000
£’000
£’000
120,000
1,142,955
1,262,955
Profit for year
-
98,058
98,058
Total comprehensive income for the year
-
98,058
98,058
Equity dividends paid
-
(20,770)
(20,770)
At 31 December 2017
120,000
1,220,243
1,340,243
At 1 January 2018
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
C O M PA N Y STAT E M E N T O F C H A N G E S I N E Q U I T Y
At 1 January 2017
Notes 1 to 23 form an integral part of these financial statements.
46
1,253,951
1,373,951
Annual Report 2018
C O N S O L I D AT E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N AT 3 1 D E C E M B E R 2 0 1 8
Note
2018 £000
2017 £000 As restated
11
6,162,223
6,149,300
Derivative financial instruments expiring in more than one year
20
86,723
67,560
Derivative financial instruments expiring within one year
20
-
9,455
61
31
36,733
32,571
-
46,451
123,517
156,068
FIXED ASSETS Tangible fixed assets CURRENT ASSETS
Stock Debtors
13
Cash at bank and in hand
18(b)
CREDITORS amounts falling due within one year Bank overdraft
18(b)
10,052
-
Bank loans and other borrowings
15(a)
4,000
37,568
Trade and other creditors
14
71,911
65,383
4,712
4,810
90,675
107,761
32,842
48,307
6,195,065
6,197,607
815,632
728,549
808,741
823,070
4,570,692
4,645,988
5,138
6,701
4,565,554
4,639,287
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
3,216,070
3,322,798
Profit and loss account
17
1,229,484
1,196,489
4,565,554
4,639,287
EQUITY SHAREHOLDERS’ FUNDS
Viscount Chelsea DL – Director Hugh Seaborn – Director 24 April 2019 Notes 1 to 23 form an integral part of these financial statements.
47
Annual Report 2018
C O M PA N Y S TAT E M E N T O F F I N A N C I A L P O S I T I O N 31 DECEMBER 2018
Note
2018 £000
2017 £000
12
117,317
117,317
1,256,743
1,223,025
109
99
-
-
109
99
NET CURRENT ASSETS
1,256,634
1,222,926
TOTAL ASSETS LESS CURRENT LIABILITIES
1,373,951
1,340,243
NET ASSETS
1,373,951
1,340,243
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
1,253,951
1,220,243
1,373,951
1,340,243
EQUITY SHAREHOLDERS’ FUNDS
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.
Viscount Chelsea DL – Director Hugh Seaborn – Director 24 April 2019 Notes 1 to 23 form an integral part of these financial statements.
48
Annual Report 2018
C O N S O L I D AT E D S TAT E M E N T O F C A S H F LO W S FOR THE YE AR ENDED 31 DECEMBER 2018
Note
Net cash inflow from operating activities
18(a)
2018 ÂŁ000
2017 ÂŁ000
79,122
80,360
119
209
Investing activities Interest received
(138,869)
Payments to acquire tangible fixed assets
(90,426)
Receipts from sales of tangible fixed assets
51,565
46,468
Net cash outflow from investing activities
(87,185)
(43,749)
(37,068)
(36,594)
(3,113)
(4,000)
Financing activities Interest paid Net movement in long term borrowings
50,000
Net movement in short term borrowings
-
Equity dividends paid
(58,259)
(20,770)
Net cash outflow from financing activities
(48,440)
(61,364)
Decrease in cash and cash equivalents
(56,503)
(24,753)
Cash and cash equivalents at 1 January
46,451
71,204
(10,052)
46,451
Cash and cash equivalents at 31 December
18(b)
Notes 1 to 23 form an integral part of these financial statements.
49
Annual Report 2018
N OT E S TO T H E F I N A N C I A L S TAT E M E N T S FOR THE YE AR ENDED 31 DECEMBER 2018
( B ) J U D G E M E N T S A N D K E Y S O U RC E S O F E S T I M AT I O N U N C E RTA I N T Y 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:
1 ACCOUNTING POLICIES ( A ) S TAT E M E N T O F C O M P L I A N C E 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 24 April 2019.
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.
The financial statements have been prepared on a historical cost basis except investment properties and derivative financial instruments that have been measured at their fair value. The financial statements are prepared in sterling which is the functional currency of the group and rounded to the nearest £’000. Basis of consolidation The group financial statements consolidate the financial statements of Cadogan Group Limited and all its subsidiary undertakings drawn up to 31 December each year. No income statement is presented for Cadogan Group Limited as permitted by section 408 of the Companies Act 2006.
( C ) E S T I M AT E S A N D A S S U M P T I O N S 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.
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.
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.
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Annual Report 2018
1 ACCOUNTING POLICIES (CONTINUED)
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.
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 2018. 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 property under construction are measured based on estimates prepared by independent real estate valuation experts. The key assumptions used to determine the fair value of investment property are further explained in note 11.
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.
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.
Estimation of derivative financial instruments The group carries its derivatives financial instruments at fair value, with changes in fair value being recognised in the non-distributable reserve for the effective portion, and the income statement for the ineffective portion in line with the adoption of hedge accounting. The group engaged independent valuation specialists to determine fair value at 31 December 2018. The valuation techniques applied to fair value these derivatives employ the use of market observable inputs and include swap models which use present value calculations. The model incorporates various inputs including the credit quality of counterparties and forward rates. All swap contracts are fully cash collateralised, thereby eliminating both counterparty and the group’s own non-performance risk.
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. Taxation The group establishes provisions based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience with previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority.
51
Annual Report 2018
( E ) TA N G I B L E F I X E D A S S E T S 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.
1 ACCOUNTING POLICIES (CONTINUED) (D) TURNOVER AND REVENUE RECO GNITION 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. Turnover in the hotel and concert hall operations represents amounts derived from the provision of goods and services, stated net of VAT.
Depreciation is provided on all plant and equipment, at rates calculated to write off the cost, less estimated residual value, of each asset on a systematic basis over its expected useful life as follows: Plant and equipment
The following criteria must also be met before revenue is recognised:
10% to 20%
The carrying values of tangible fixed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value not to be recoverable.
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.
(F) L AND AND BUILDINGS Land and buildings represent owner occupied properties and are initially recognised at cost which includes purchase cost and any directly attributable expenditure of a capital nature only. They are included in the financial statements at fair value at the year end.
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.
The surplus or deficit on revaluation is recognised in the nondistributable 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. ( G ) I N V E S T M E N T P RO P E RT Y 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.
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.
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.
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Annual Report 2018
(J) LEASES The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in the arrangement.
1 ACCOUNTING POLICIES (CONTINUED) Subsequent to initial recognition, investment property is stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of investment properties are included in the income statement in the period in which they arise, including the corresponding tax effect. For the purposes of these financial statements, in order to avoid double counting, the fair value reported in the financial statements is reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives. 
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.
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.
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.
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.
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.
( H) P RO F I T O N SA L E O F I N V E ST M E N T P RO P E RT I E S 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.
( K ) C A S H AT B A N K A N D I N H A N D Cash in the statement of financial position comprises cash at bank and in hand, and is stated net of outstanding bank overdrafts. ( L ) LO A N N OT E S 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.
(I) INVESTMENTS Investments in subsidiary undertakings are included at cost, less a provision for impairment in value where applicable.
( M ) S H O RT T E R M D E BTO R S A N D C R E D I TO R S 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.
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Annual Report 2018
1 ACCOUNTING POLICIES (CONTINUED)
• the instrument must be related to a firm foreign currency commitment;
( N ) TA X AT I O N 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.
• it must involve the same currency as the hedged item; and • it must reduce the risk of foreign currency exchange movements on the group’s operations.
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.
The group’s criteria for interest rate swaps are:
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.
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.
• 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.
(O) FOREIGN CURRENCIES Transactions in foreign currencies are initially recorded in the entity’s functional currency by applying the spot exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the income statement.
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.
( P ) D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S AND HED GE 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 effective portion of the gain or loss on the hedging instrument is recognised in the Statement of Comprehensive Income (“SOCI”) in the non-distributable reserve, while any ineffective portion is recognised immediately in the income statement. Amounts recognised as other comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised.
The criteria for forward foreign currency contracts are:
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Annual Report 2018
1 ACCOUNTING POLICIES (CONTINUED)
(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.
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.
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. ( R ) R E C L A S S I F I C AT I O N O F D E R I VAT I V E FINANCIAL INSTRUMENTS As described in Accounting Policies (Note 1(p)), the group uses forward foreign currency contracts and interest rate swaps to reduce exposure to foreign exchange rates and interest rates respectively. Such derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative, although for 2016, 2017 and 2018 they have all been in-the-money assets. In prior years these derivative financial assets had been set off against the loans which they hedge. For 2018 the related derivative asset has been reclassified as a separate asset under “Current assets” and shown as “Derivative financial instruments expiring in more than one year” and the 2017 comparatives re-stated on the same basis to reflect the requirements of FRS 102, the relevant accounting standard.
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.
The effect of the restatement is to increase the balance sheet amounts for: “Bank loans and other long term borrowings” by £86,723,000, £67,560,000 and £107,703,000 as at 31 December 2018, 31 December 2017 and 1 January 2017 respectively; and “Bank loans and other borrowings” by £9,455,000 as at 31 January 2017. The amounts disclosed as “Derivative financial instruments expiring in more than one year” and “Derivative financial instruments expiring within a year” within “Current assets” on the balance sheet have increased by the same respective amounts at the same dates. The reclassification has no impact on net assets, income, cash flows or distributable profits.
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
55
Annual Report 2018
2 T U R N O V E R A N D A N A LYS I S BY C L A S S O F B U S I N E S S Turnover, group profit/(loss) before taxation and net assets are analysed as follows: Property investment
Hotels and Concert Hall
Total
Total
2018 £000
2017 £000
2018 £000
2017 £000
2018 £000
2017 £000
Turnover 160,025
152,640
7,901
7,048
167,926
159,688
Other income
1,517
1,208
-
-
1,517
1,208
Total turnover
161,542
153,848
7,901
7,048
169,443
160,896
18,129
208,305
(1,150)
Gross rental income and other sales
Operating profit/(loss) 16,979
208,539
Net interest payable
(36,017)
(36,564)
Profit/(loss) before taxation
(19,038)
171,975
Continuing operations
234
Net assets Continuing operations
4,470,930
4,573,974
94,624
65,313
4,565,554
4,639,287
All operations take place within the United Kingdom. The group operates in two principal areas of activity, property investment and hotels and concert hall activities.
3 P R O F I T O N S A L E O F I N V E ST M E N T P R O P E RT I E S
Profits on sales of freeholds and receipt of long lease premiums, less directly related costs and expenses
2018 £000
2017 £000
8,008
6,905
2018 £000
2017 £000
35,967
36,576
6,656
(28,441)
(6,656)
28,441
4 I N T E R E ST PAYA B L E A N D S I M I L A R E X P E N S E S
Interest on bank loans and other borrowings Foreign exchange (gain)/loss on hedged loans Financial derivative (gain)/loss Interest on net defined pension liability
56
162
196
36,129
36,772
Annual Report 2018
5 O P E R AT I N G P R O F I T 2018 £000
2017 £000
379
643
11
6
Audit of the financial statements – includes £63,000 in respect of the company (2017 – £58,000)
228
212
Other fees to auditors – tax services
276
322
Other fees to auditors – other services
279
141
Operating profit is stated after charging: Depreciation Hire of plant and equipment Auditors’ remuneration:
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.
6 D I R EC TO R S A N D E M P L OY E E S
Aggregate directors’ remuneration in respect of qualifying services
2018 £000
2017 £000
1,873
1,801
Included within directors’ remuneration above are contributions to money purchase pension schemes for one director amounting to £37,000 (2017: one director – £36,000). The remuneration, excluding pension contributions, of the highest paid director was £1,090,000 (2017 – £992,000). Pension contributions of the highest paid director were nil (2017 - nil). 2018 £000
2017 £000
6,145
6,295
806
752
Employee costs: Wages and salaries Social security costs Pension costs – defined contribution scheme
579
517
7,530
7,564
The average monthly number of persons employed by the group, including executive directors, during the year was 90 (2017 – 101). 68 (2017 – 67) persons were employed within the property investment business and 22 (2017 – 34) persons were employed within the concert hall and hotels business. Staff costs for the company were in respect of directors’ remuneration and amounted to £368,000 (2017 – £325,000). There were no pension contributions made by the company in the year (2017 – nil).
57
Annual Report 2018
7 TA X AT I O N ( A ) TA X O N P R O F I T/ ( LO S S ) The tax charge/(credit) is made up as follows:
2018 £000
2017 £000 As restated
13,419
10,472
Current tax: UK corporation tax
1,201
Adjustments in respect of previous years
14,620
Total current tax
(245) 10,227
Deferred tax: Origination and reversal of timing differences On freehold and investment properties
2,130
1,007
(17,115)
13,528
-
Prior period adjustment (see note 7 (d)) Total deferred tax Tax charge/(credit) on profit /(loss)
1,491
(14,985)
16,026
(365)
26,253
( B ) TA X I N C LU D E D I N S TAT E M E N T O F TOTA L C O M P R E H E N S I V E I N C O M E 2018 £000
2017 £000
Actuarial gain on pension scheme
136
6
Hedge accounting adjustments
520
(544)
Total deferred tax
656
(538)
Total tax charge/(credit) on other comprehensive income
656
(538)
The tax charge/(credit) is made up as follows:
( C ) FA C TO R S A F F E C T I N G TA X C H A RG E F O R T H E Y E A R The tax charge for the current year is lower than (2017 – lower than) the current standard rate of corporation tax in the UK of 19.00% (2017 – 19.25%). The difference is explained as follows:
Standard tax rate Actual current tax rate Difference
2018 %
2017 %
19
19
2
15
(17)
(4)
Explained by: 3
-
Change in tax law and rates
(9)
-
Historical cost of property non-deductible for tax purposes
(2)
-
Indexation deductible for tax purposes
-
(3)
Gains previously rolled over crystallised
(5)
-
Over provision in respect of prior period
(4)
(1)
(17)
(5)
Expenses not deductible for tax purposes
58
Annual Report 2018
7 TA X AT I O N ( C O N T I N U E D ) ( D ) D E F E R R E D TA X The deferred tax included in the statement of financial position is as follows:
Included in provision for liabilities and charges
2018 £000
2017 £000 As restated
808,741
823,070
14,924
13,126
The liability/(asset) for deferred tax comprises the following: Accelerated capital allowances
(224)
Short lease premiums received
795,359
On freehold and investment properties Pension costs Hedge accounting adjustments Losses carried forward
At 1 January
(1,139)
(78)
(597)
(367)
(459)
808,741
823,070
823,070
863,233
At 1 January – as restated
823,070
Income statement
(14,985) -
Income statement – prior period adjustment
656
Other comprehensive income
812,474
(873)
-
Prior period adjustment (see below)
(335)
Total deferred tax
(14,329)
At 31 December
808,741
(55,651) 807,582 14,535 1,491 (538) 15,488 823,070
The company expects no deferred tax liabilities to reverse in 2019.
Prior period adjustment: The prior year adjustment arises from the recalculation of the deferred tax arising on freehold and investment properties stated in the accounts. The adjustment primarily relates to a restatement of the balance presented in the statement of financial position prior to 1 January 2017 and has resulted in a decrease in the deferred tax liability of £54,160,000 in the year ended 31 December 2017, increasing equity shareholders’ funds by an equal amount. The issue was discovered following a detailed review of historical costs, indexation and the treatment of rolled over gains on leasehold transactions across the property portfolio where it was identified that the base cost of the portfolio used in the calculations had been understated resulting in an over provision of deferred tax recorded in the accounts.
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Annual Report 2018
7 TA X AT I O N ( C O N T I N U E D ) ( E ) FA C TO R S T H AT M AY A F F E C T F U T U R E TA X C H A R G E S The UK corporation tax rate for the whole of 2018 was 19%. Accordingly the group’s result for the accounting period is taxed at an effective rate of 19.00% (2017 – 19.25%). The corporation tax rate will reduce to 17% from April 2020. At the balance sheet date, the reduction to 17% from April 2020 has been substantively enacted and hence in accordance with Accounting Standards, the impact of these reductions has been reflected in the group’s financial statements at 31 December 2018. The rate changes will also impact the amount of future tax payments to be made by the group.
8 DIVIDENDS
Interim dividend paid on 18 December 2018 Interim dividend paid on 15 December 2017
2018 £000
2017 £000
58,259
-
-
20,770
58,259
20,770
2018 £000
2017 £000
33,708
77,288
(110,640)
47,664
(76,932)
124,952
9 R E TA I N E D P R O F I T/ ( L O S S ) F O R T H E Y E A R 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 £91,967,000 (2017 – £98,058,000).
10 E A R N I N G S / ( LO S S ) P E R S H A R E The calculation of earnings/(loss) per ordinary share for 2018 is based on the deficit attributable to ordinary shareholders of £18,673,000 (2017 – earnings of £145,722,000) and on 120,000,000 ordinary shares (2017 – 120,000,000 ordinary shares) being the effective number of such shares in issue during the year. This calculation relates to both the basic and diluted earnings/(loss) per share as there is no potential future shares or share options in the company.
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Annual Report 2018
11 TA N G I B L E F I X E D A S S E T S Group Freehold investment properties £000
Freehold land and buildings £000
6,119,182
28,890
Total properties £000
Plant and equipment £000
Total £000
6,148,072
10,313
6,158,385
Cost or valuation At 1 January 2018 Revaluation
(88,044)
Additions
(1,090)
145,125
Disposals
-
(43,495)
At 31 December 2018
-
(89,134) 145,125 (43,495)
807 (36)
(89,134) 145,932 (43,531)
6,132,768
27,800
6,160,568
11,084
6,171,652
At 1 January 2018
-
-
-
9,085
9,085
Charge for the year
-
-
-
379
379
Disposals
-
-
-
(35)
(35)
At 31 December 2018
-
-
-
9,429
9,429
At 31 December 2018
6,132,768
27,800
6,160,568
1,655
6,162,223
At 31 December 2017
6,119,182
28,890
6,148,072
1,228
6,149,300
Depreciation
Net book value
The valuation of the group’s freehold properties at 31 December 2018 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 RICS Valuation – Professional Standards Global – January 2014 and the RICS Valuation Professional Standards UK January 2014 (revised 2015), (“The Red Book”). The key assumptions used to determine the fair value of investment property are set out below: Fair Value
Range (weighted average)
Property Type
2018 £m
Residential
1,842
1,992 Direct capital comparison, investment & residual
• Freehold vacant Average of £1,785 Average of £1,908 possession values per square foot • Discounts for nature of 0% - 25% 0% - 25% occupation • Capitalisation and 4.75% - 5.50% 4.75% - 5.50% deferment rates
Commercial
4,319
4,156 Income capitalisation
• ERV per sq. ft. Office/medical Retail (Zone A) • Equivalent yields
2017 £m Valuation Technique
Key inputs
2018
£20 - £100 £85 - £1,120 2.1%-5.0% (4.01%)
2017
£20 - £100 £90 - £1,120 2.1%-5.0% (3.56%)
The historical cost of freehold properties at 31 December 2018 was £2,146,966,000 (2017 £2,008,094,000). These amounts are stated after the deduction of accumulated impairment losses of £2,611,000 (2017 – £2,611,000).
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Annual Report 2018
12 F I X E D A S S E T I N V E ST M E N T S Company ÂŁ000
Investment in subsidiary companies at cost At 31 December 2018 and 31 December 2017
117,317
Details of the investments in which the company holds 20% or more of the nominal value of any class of share capital are as follows: Nature of business
Company
Held directly Cadogan Estates Limited Chelsea Land Limited
Proportion of voting rights & shares held
% Property investment Intermediate holding company
100 100
Property investment Property investment Venue management Property investment Property investment Hotel operator Hotel operator Non-trading Property investment Non-trading Non-trading Non-trading Non-trading Non-trading Property investment Property management Non-trading Non-trading Property investment Property management Property management Property management
100 100 100 100 100 100 100 100 100 100 100 100 100 69 66 53 50 50 40 25 25 20
Held indirectly Cadogan Estates Property Investments Limited Cadogan Developments Limited Cadogan Hall Limited Cadogan Holdings Limited Cadogan Income Properties Limited Cadogan Hotel Partners Limited Leda Hotels Limited Chelsea Land Developments Limited Frederick Court Limited Sloane Gardens Hotel Limited Cadogan Estates Management Limited Cadogan Group Management Limited Sloane Rewards Limited Hugo House Limited 13/14 Herbert Crescent Residents Limited Sloane Court East Garden Limited 7 Redburn Street Limited 15 Redburn Street Limited Cadogan House Residents Limited 2 Sloane Terrace Limited 76 Sloane Street (Management) Limited 15/16 Herbert Crescent Residents Association Limited
All of the above investments are holdings of ordinary shares. All companies are registered in England.
62
Annual Report 2018
13 D E BTO R S Group 2018 £000
2017 £000
Trade debtors
8,760
6,203
Other debtors
5,231
4,798
22,742
21,570
36,733
32,571
Accrued income
14 T R A D E A N D OT H E R C R E D I TO R S
Group
Trade creditors Other creditors and accruals Social security and other taxation Deferred income
Company
2018 £000
2017 £000
2018 £000
2017 £000
2,328
2,436
-
-
31,932
25,325
61
59
269
401
48
40
37,382
37,221
-
-
71,911
65,383
109
99
15 B O R R O W I N G S ( A ) B A N K LO A N S A N D OT H E R B O R R O W I N G S Group 2018 £000
2017 £000
4,000
4,000
-
29,568
Amounts falling within one year: 6.941% commercial mortgage loan 2025 6.45% $40m unsecured loan notes due 2018 7.33% £4m unsecured loan notes due 2018 Other long term borrowings falling within one year
-
4,000
4,000
37,568
At 31 December 2018 the group had committed but undrawn credit facilities of £190m (2017 - £40m) under revolving credit facility arrangements expiring in February 2021.
63
Annual Report 2018
15 B O R R O W I N G S ( C O N T I N U E D ) ( B ) OT H E R LO N G T E R M B O R R O W I N G S Group 2018 £000
2017 £000
Revolving credit facility
50,000
-
6.941% commercial mortgage loan 2025
16,000
16,000
6.60% $45m unsecured loan notes 2020
35,242
33,264
5.04% £45m unsecured loan notes 2021
45,000
45,000
3.45% £15m unsecured loan notes due 2022
15,000
15,000
Amounts falling due in two to five years:
6.75% $23m unsecured loan notes 2023
18,012
-
179,254
109,264
Amounts falling due after more than five years: -
17,002
6.941% commercial mortgage loan 2025
48,000
52,000
3.75% £50m unsecured loan notes 2026
50,000
50,000
6.75% $23m unsecured loan notes 2023
3.88% £15m unsecured loan notes 2027
15,000
15,000
5.25% $60m unsecured loan notes 2028
46,989
44,352
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
46,989
44,352
3.87% £25m unsecured loan notes 2034
25,000
25,000
5.77% $90m unsecured loan notes 2036
70,483
66,529
4.09% £25m unsecured loan notes 2039
25,000
25,000
6.01% £30m unsecured loan notes 2041
30,000
30,000
6.87% £20m unsecured loan notes 2042
20,000
20,000
4.38% £25m unsecured loan notes 2044
25,000
25,000
5.92% $30m unsecured loan notes 2046
23,494
22,176
5.11% £25m unsecured loan notes 2046
25,000
25,000
7.40% $58m unsecured loan notes 2051
45,423
42,874
5.13% £40m unsecured loan notes 2056
40,000
40,000
Total other long term borrowings expiring in more than one year
64
636,378
619,285
815,632
728,549
Annual Report 2018
15 B O R R O W I N G S ( C O N T I N U E D ) ( B ) OT H E R LO N G T E R M B O R R O W I N G S ( C O N T I N U E D ) The commercial mortgage loan is secured by fixed charges over specific freehold investment properties of the group, £769,632,000 (2017 – £766,117,000) of the total bank loans and other borrowings is subject to fixed rates of interest to maturity which average 5.11% (2017 – 5.30%). 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% (2017 – 6.04%). This, combined with the fixed interest rates payable on the sterling loans gives an overall effective interest rate across all the series of notes, fixed until maturity, of 4.91% (2017 – 5.11%).
16 C A L L E D U P S H A R E C A P I TA L 2018 Authorised, allotted, issued and fully paid
2017 Authorised, allotted, issued and fully paid
Number of shares
£000
Number of shares
£000
120,000,000
120,000
120,000,000
120,000
Ordinary shares of £1 each
17 R E S E RV E S N O N - D I S T R I B U TA B L E R E S E RV E 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.
P R O F I T A N D LO S S A C C O U N T This is the distributable reserve represented by the retained profit and loss.
65
Annual Report 2018
18 N OT E S TO T H E STAT E M E N T O F C A S H F L O W S
( A ) R E C O N C I L I AT I O N O F P R O F I T TO N E T C A S H I N F LO W F RO M O P E R AT I N G A C T I V I T I E S Group 2018 £000
2017 £000
(19,038)
171,975
Revaluation of investment properties
89,134
(107,822)
Depreciation of tangible fixed assets
379
Group profit /(loss) for the year Adjustments to reconcile profit for the year to net cash flow from operating activities:
(8,008)
Profit on sale of investment properties
-
Profit on sale of other fixed assets
(922)
Difference between pension charge and cash contributions
36,017
Net finance cost
643 (6,905) (11) (920) 36,564
Working capital movements: Increase in stock Increase in debtors
(30)
(11)
(4,169)
(5,713)
477
Increase in creditors
2,952
Taxation: Corporation tax paid Net cash inflow from operating activities
(14,718)
(10,392)
79,122
80,360
( B ) C A S H A N D C A S H E Q U I VA L E N T S Cash and cash equivalents comprise the following: Group
Cash at bank and in hand Bank overdraft
2018 £000
2017 £000
-
46,451
(10,052)
66
-
Annual Report 2018
19 P E N S I O N A R R A N G E M E N T S 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 £922,000 (2017 – £920,000) was paid by the group as a contribution to the shortfall, a further £830,000 will be paid in the year ended 31 December 2019. The most recent comprehensive actuarial valuation of the Scheme was carried out as at 25 December 2016. The results of that valuation were updated to 31 December 2018 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: 2018
2017
Discount rate
2.90% pa
2.60% pa
Fixed 5% pension increases
5.00% pa
5.00% pa
Fixed 5% revaluation in deferment
5.00% pa
5.00% pa
Retirements
All members retire at age 60
All members retire at age 60
Post retirement mortality assumption
80% S2NxA based on year of birth using the CMI 2015 core projection model with a long term improvement rate of 1.0% per annum
80% S2NxA based on year of birth using the CMI 2015 core projection model with a long term improvement rate of 1.0% per annum
Tax-free cash
No allowance
No allowance
ASSETS The major categories of assets as a proportion of total assets are as follows: Asset category
2018 %
2017 %
Growth Assets:
27
27
73
73
100
100
Dynamic Real Return Fund (27%) Protection Assets: Corporate Bond Fund (34%) Over 15 year Gilt Index Fund (39%) Total
The actual return on the Scheme’s assets was a decrease of £737,000 (2017: increase of £1,966,000). The assets do not include any investment in shares or property of the group. 67
Annual Report 2018
19 P E N S I O N A R R A N G E M E N T S ( C O N T I N U E D ) A M O U N T S R E C O G N I S E D I N T H E S TAT E M E N T O F F I N A N C I A L P O S I T I O N 2018 £000
2017 £000
37,830
38,664
(42,968)
(45,365)
(5,138)
(6,701)
2018 £000
2017 £000
Interest cost
(1,166)
(1,239)
Expected return on assets
1,004
1,043
Fair value of plan assets Present value of plan funded obligations Defined benefit pension liability
A M O U N T S R E C O G N I S E D I N T H E I N C O M E S TAT E M E N T O V E R T H E Y E A R
Total recognised in the income statement
(162)
(196)
2018 £000
2017 £000
(1,741)
923
R E C O G N I S E D I N OT H E R C O M P R E H E N S I V E I N C O M E O V E R T H E Y E A R
Gain/(loss) on scheme assets in excess of interest
-
Experience gains on liabilities
2,544
Losses from changes to assumptions Re-measurement gains and losses recognised in other comprehensive income
138 (1,023)
803
38
2018 £000
2017 £000
38,664
37,788
1,004
1,043
922
920
R E C O N C I L I AT I O N O F A S S E T S A N D D E F I N E D B E N E F I T O B L I G AT I O N 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
(1,019)
Return on plan assets less interest
(1,741)
Fair value of assets at 31 December
37,830
68
(2,010) 923 38,664
Annual Report 2018
19 P E N S I O N A R R A N G E M E N T S ( C O N T I N U E D ) The change in present value of the defined benefit obligation over the year was: 2018 £000
2017 £000
45,365
45,251
Interest cost
1,166
1,239
Benefits paid
(1,019)
(2,010)
Defined benefit obligation at 1 January
Experience gains on liabilities
-
Changes to assumptions
(2,544)
Defined benefit obligation at 31 December
42,968
(138) 1,023 45,365
DEFINED CONTRIBUTION SCHEMES The pension charge in respect of defined contribution schemes represents contributions payable by the group to such schemes and amounted to £579,000 (2017 – £517,000), of which nil (2017 – nil) was unpaid at the balance sheet date.
20 H E D G I N G A C T I V I T I E S A N D D E R I VAT I V E S The group has entered into foreign currency and interest rate swap contracts with notional amounts of $366m (2017 $406m) 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 £86,723,000 (2017 - £77,015,000). 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 2018, 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. 2018 £000
2017 £000
Value at 1 January
77,015
107,703
Net changes in fair value through the income statement
6,656
(28,441)
3,052
(2,247)
Net changes in fair value through other comprehensive Income Value at 31 December
86,723
69
77,015
Annual Report 2018
21 C A P I TA L A N D OT H E R C O M M I T M E N T S Group 2018 £000
2017 £000
129,383
109,968
Outstanding capital commitments were as follows: Capital expenditure contracted for but not provided for in the financial statements
There were no outstanding commitments for capital expenditure in the company at either year end.
22 R E L AT E D PA RT Y R E L AT I O N S H I P S A N D T R A N S A C T I O N S Viscount Chelsea D.L., Chairman and director of Cadogan Group Limited, rents a residential property owned by the group. The rent paid by Viscount Chelsea totals £82,658 per annum. At 31 December 2018 the outstanding balance owed to the group was £5,200 (2017 - nil). The annual rental charge is at market rate. John Gordon, a director of Cadogan Group Limited, also rents a residential property owned by the group. The rent paid by Mr Gordon totals £17,195 per annum. At 31 December 2018 the outstanding balance owed to the group was nil (2017 - nil). The annual rental charge is at market rate.
23 U LT I M AT E O W N E R S H I P The ultimate holding company is Cadogan Settled Estates Limited, which is registered in England and Wales and which is ultimately controlled by The Eighth Earl Cadogan’s 6 December 1961 Settlement. The consolidated financial statements of Cadogan Settled Estates Limited may be obtained from The Registrar of Companies, Companies House, Crown Way, Cardiff, CF14 3UZ.
70
Annual Report 2018
F I V E Y E A R S U M M A RY
2018
2017 Restated
2016 Restated
2015
2014
6,160.6
6,148.1
5,985.5
5,793.9
5,175.2
Net assets Properties at valuation
£m
Net borrowings
£m
742.2
642.7
619.7
588.6
583.5
Equity shareholders’ funds
£m
4,565.6
4,639.3
4,516.0
4,282.8
3,655.2
Net assets per share
£
38.05
38.66
37.63
35.69
30.46
Gross rents
£m
160.0
152.6
142.7
129.7
119.9
Profit on sale of investment properties
£m
8.0
6.9
10.7
9.5
17.4
Operating profit – before revaluation
£m
106.1
100.7
103.3
92.3
89.8
Revaluation in year
£m
(89.1)
107.8
139.4
595.0
615.7
Operating profit
£m
17.0
208.5
242.7
687.3
705.5
Net interest payable
£m
36.0
36.5
36.4
36.7
34.4
Profit/(loss) before taxation
£m
(19.0)
172.0
206.3
650.6
671.1
Taxation
£m
(0.3)
26.3
14.9
140.3
Profit/(loss) after taxation
£m
(18.7)
145.7
216.5
635.7
530.8
Earnings/(loss) for ordinary shareholders
£m
(18.7)
145.7
216.5
635.7
530.8
Earnings/(loss) per share
p
(15.6)
121.4
180.4
529.7
442.3
Balance sheet gearing
%
16.26
13.85
13.72
13.74
15.96
Gross rents/interest cover
times
4.44
4.18
3.92
3.52
3.49
Interest cover
times
2.95
2.76
2.84
2.51
2.61
Earnings
(10.2)
Key financial ratios
71
10 Duke of York Square London SW3 4LY T. 020 7730 4567 www.cadogan.co.uk