Risks and how we manage them

We assess all the risks facing our business and put risk management at the centre of our decision-making.

Our Board recognises the importance of identifying and actively monitoring the full range of financial and non-financial risks facing the business. By regularly reviewing the risk appetite of the business, the Board ensures that the risk exposure remains appropriate at any point in the cycle. Whilst responsibility for risk management clearly rests with the Board, the management of risk is embedded as part of our everyday business activities and culture and all our employees are responsible for maintaining the control framework.

Importantly, the Board perceives risk not only as having a potential negative influence on the business but also as an opportunity that can be a source of financial outperformance.

For effective risk management, it is necessary that the identification, assessment and management of known and emerging risks form part of a dynamic process.

We manage risk by operating a 'Three lines of defence' risk and control model. The first line lies with operational management implementing and maintaining effective internal controls. They are supported by a number of oversight functions which form the second line. Internal Audit serves as the third line, tasked with reviewing controls and risk management procedures, identifying areas for improvement and reporting to Senior Management and the Audit Committee. Due to its independence and objectivity, Internal Audit is able to provide reliable assurance on the effectiveness of the overall governance, risk management and internal control processes.

Risk Description: People

Inability to attract, retain and develop the right people.

Impact

  • Lack the skills necessary to deliver the business objectives.

Mitigation

  • Competitive remuneration plans.
  • Appropriate mix of insourcing and outsourcing.
  • Clear employee objectives and development plans.
  • Annual employee engagement survey.
  • Succession planning and talent management.

Strategic objectives

  •  Deliver sustainable long-term shareholder returns
  • Attract, develop, retain and motivate high performance individuals

Risk Description: Liability structure

Lack of availability of bank funding.

Impact

  • Increased cost of borrowing.
  • Limits ability to meet existing debt maturities and fund forward cash requirements.

Mitigation

  • £1.1bn revolving credit facility in place, which matures in 2016 and a £135m bilateral facility which matures in March 2015.
  • Access to different sources of finance with most of our funding on a long-term basis and with a spread of maturity dates. The weighted average life of our debt at 31 March 2013 is 9.7 years.
  • Modest gearing (Security Group LTV at 31 March 2013 of 37.7%).

Strategic objectives

  •  Deliver sustainable long-term shareholder returns.
  • Manage our balance sheet effectively.

Liability structure is unable to adapt to changing asset strategy or property value.

Impact

  • Reduced financial and operational flexibility.
  • Missed business opportunities and higher cost of financing.

Mitigation

  • The Group's Asset and Liability Committee meets three times a year to monitor both sides of the balance sheet and recommend strategy to the Board.
  • We manage the business within an inner gearing range of 35% to 45% LTV in normal market conditions.
  • Security Group structure allows assets to be sold and ability to raise new debt.
  • Our principal debt funding structure benefits from financial default only being triggered at 1 times Security Group ICR (currently 4.1 times) or 100% Security Group LTV (currently 37.7%).
  • At less than 1.45 times ICR or greater than 65% LTV, a persuasive covenant regime applies which is designed to preserve cash for the potential protection of lenders and encourage the business to reduce debt.
  • The existing revolving credit facility provides flexibility as it allows debt to be drawn in certain circumstances even when the Security Group LTV exceeds 65%. 

Stategic objectives

  •  Deliver sustainable long-term shareholder returns.
  • Manage our balance sheet effectively.

Risk Description: Customers

Pressure on consumer spending

Impact

  • Shift in customer demand with consequent impact on new lettings, renewal of existing leases and rental growth.
  • Retail tenants unable to meet existing rental commitments.

Mitigation

  • Large and diversified tenant base (our largest tenant, Arcadia, represents only 2.3% of rents).
  • Of our income, 62.8% is derived from tenants who make less than a 1% contribution to rent roll.
  • High quality property portfolio, of which 58.9% is located in London.
  • Target for maximum percentage of leases subject to expiry in any one year.
  • Experienced leasing team.
  • Active development programme to maintain a modern portfolio well suited to occupier requirements.
  • Strong relationship with occupiers.
  • Variety of asset types and, for the Retail Portfolio, geographic spread.

Strategic objectives

  •  Deliver sustainable long-term shareholder returns.
  • Maximise the returns from the investment portfolio.
  • Ensure high levels of customer satisfaction.

Risk Description: Market cyclicality

Volatility and speed of change of asset valuations and market conditions.

Impact

  • Reduces liquidity and relative property performance.

Mitigation

  • Large multi-asset portfolio.
  • Monitor asset concentration (our largest asset is only 5.9% of the total portfolio).
  • Average investment property lot size of £67.3m.
  • Generally favour full control and ownership of assets (14.0% of assets currently in joint ventures).
  • Average unexpired lease term of 9.1 years with a maximum of 11.0% of gross rental income expiring or subject to break clauses in any single year.

Strategic objectives

  •  Deliver sustainable long-term shareholder returns.
  • Maximise the returns from the investment portfolio.

Risk Description: Acquisitions

Inability to acquire new assets to replace properties that have been sold or are in the process of being redeveloped.

Impact

  • Reduction in revenue profits.

Mitigation

  • Experienced investment team.
  • Integrated portfolio and investment management teams.
  • Ability to control level of property sales.
  • Risk analysis of speculative development pipeline on capital and income basis.
  • Strategy of flexing size of development programme according to the outlook for the market cycle.

Strategic objectives

  • Deliver sustainable long-term shareholder returns.
  • Maximise the returns from the investment portfolio.
  • Manage our balance sheet effectively.

Risk Description: Development

Occupiers reluctant to enter into commitments to take new space in our developments.

Impact

  • Negative valuation movements.
  • Reduction in income.

Mitigation

  • The impact of failing to lease the un-let element of our development programme must not exceed the Group’s retained earnings.
  • Proportion of capital employed in development programme (based on total costs to completion) will not exceed 20% of our total capital employed, save that where a material part of the development programme is pre-let, this proportion can rise to 25%.
  • Monitor the level of committed future capital expenditure on our development programme relative to the level of our undrawn debt facilities.
  • Monitor market cycle and likely tenant demand before committing to new developments.
  • Risk analysis of speculative development pipeline on capital and income basis.
  • Strategy of flexing size of development programme according to the outlook for the market cycle.

Strategic objectives

  • Deliver sustainable long-term shareholder returns.
  • Maximise the returns from the investment portfolio.
  • Manage our balance sheet effectively.
  • Maximise development performance.

Risk description: Health & safety

Accidents causing injury to employees, contractors, tenants and visitors to our properties.

Impact

  • Criminal/civil proceedings and resultant reputational damage.

Mitigation

  • Board responsibility for health and safety.
  • Quarterly Board reporting.
  • Dedicated specialist personnel.
  • Annual cycle of health and safety audits.
  • Established policy and procedures including ISO 18001 certification.

Strategic objectives

  •  Deliver sustainable long-term shareholder returns.
  • Ensure high levels of customer satisfaction.

Risk description: Environment

Properties do not comply with legislation or meet customer expectations.

Impact

  • Increased cost base.
  • Inability to attract or retain tenants.

Mitigation

  • Board responsibility for environment.
  • Dedicated specialist personnel.
  • Established policy and procedures including ISO 14001 certified environmental management system.
  • Active involvement in legislative working parties.
  • Active environmental programme addressing key areas of energy and waste.

Strategic objectives

  •  Deliver sustainable shareholder returns.
  • Ensure high levels of customer satisfaction.
  • Continually improve sustainability performance.
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