While our primary objective is to deliver returns consistently ahead of our cost of capital, we also seek to minimise the cost of our capital through the appropriate mix of equity and debt finance, and to ensure that we have access to sufficient financial resources to implement our business plans. Optimising and flexing the allocation of capital across our portfolio, including between our investment and development activities, is key to our business and ensuring that we maximise returns on a risk-adjusted basis through the property cycle. Accordingly, we operate with four key ‘givens’: – conservative leverage to enhance, not drive, returns; – sustainable ordinary dividends; – disciplined capital allocation; and – balance sheet efficiency – track record of accretively raising and returning capital. Our preference for low financial leverage helps to provide downside protection when operating in the cyclical central London property market and to maintain the financial flexibility to allow us to act quickly on new investment opportunities as they arise.
Key Metrics
|
|
March 2022 |
March 2023 |
|
Net debt excluding JVs (£m) |
531.2 |
457.7 |
|
Net gearing |
25.4% |
24.0% |
|
Total net debt including 50% JV non-recourse debt (£m) |
502.3 |
440.0 |
|
EPRA LTV |
20.5% |
19.8% |
|
Interest cover |
n/a |
10.2x |
|
Weighted average interest rate |
2.5% |
2.7% |
|
Weighted average cost of debt |
2.9% |
3.0% |
|
% of debt fixed/hedged |
84% |
97% |
|
Cash and undrawn facilities (£m) |
391 |
457 |
Revolving bank facility
The Group signed a £450 million ESG-linked unsecured revolving credit facility (“RCF”) at a headline margin of 90 basis points over LIBOR (transitioned to SONIA as of December 2021) with a group of five existing relationship banks on 31 January 2020. The facility had an initial five-year term, with £400m now extended to 31 January 2027.
This innovative facility, the first to be issued by a UK REIT, incorporates three ESG-linked KPIs which align with our ambitious sustainability strategy.
The facility is fully available for general corporate purposes and includes our standard unsecured financial covenants (see below):
- The ratio of Consolidated Net Borrowings to Consolidated Shareholders’ Funds must not exceed 1.25:1
- The ratio of Unencumbered Asset Value to Consolidated Unsecured Borrowings must not be less than 1.66:1
- The ratio of Consolidated Profits Before Interest and Tax to Consolidated Net Interest must not be less than 1.35:1
The headline margin payable on the facility depends on a ratchet mechanism based on the ratio of Consolidated Net Borrowings to Consolidated Shareholders’ Funds. The margin ratchet is 90 - 150 basis points (over SONIA).
The participating banks are Santander, NatWest, Wells Fargo, Lloyds Bank plc and Bank of China. Santander acted as the Sustainability Co-ordinator.
Our ESG linked KPI’s include annual pre-agreed targets and are based on:
- Reducing our portfolio energy intensity;
- Reducing the embodied carbon of our new build developments and major refurbishments; and
- Increasing the biodiversity net gain across our portfolio.
These targets further incentivise the Group to accelerate the decarbonisation of our business and support continued behavioural change within the Group and across our supply chain.
We measure performance against each KPI annually. A margin decrease or increase of up to 2.5 basis points will be applied to the headline margin on the basis of this performance. All margin adjustments are given by GPE to registered charities focused on environmental initiatives.
Private placement notes
In 2020, the Group raised £150 million through the issue of 12 and 15 year US private placement notes. The Sterling denominated unsecured notes have a weighted average coupon of 2.8% (representing a spread over relevant Gilts of 249bp). The notes were placed with six investors, including two new investors to GPE, and have identical financial covenants to the Group’s £450 million revolving credit facility.
In 2018, the Group raised £100 million through the issue of 10, 12 and 15 year US private placement notes. The Sterling denominated unsecured notes have a weighted average fixed rate coupon of c.2.8% (representing a spread to the relevant Gilts of just over 100bp). The notes were placed with seven existing lenders to GPE, and have identical financial covenants to the Group’s £450 million revolving credit facility.
In 2017, the Group raised £175m through the issue of seven year US private placement notes. These notes are also Sterling denominated and unsecured, and have a fixed rate coupon of 2.15%. These notes were placed with eight lenders, and also have identical financial covenants to the Group’s £450 million revolving credit facility.
Debenture
In February 2018, the Group tendered its £142.9 million 5.625% First Mortgage Debenture Stock due January 2029. The tender offer achieved approximately 85% take-up (£121.0 million nominal) at a cash cost of £159.5 million, leaving a revised nominal value of £21.9 million. Details of the tender offer can be found here:
Under the terms of the debenture, the Group is required to charge a pool of properties.
The Group is required to provide the following information in respect of the charged properties to Royal Exchange Trust Company Limited (as trustee) on an annual basis:
- a third party valuation of the properties; and
- a report by the auditors on the net annual income arising from the properties.
If the above information shows that:
- the aggregate value of the properties is more than one and two-thirds times the aggregate nominal amount of the Stock; and
- the net annual income arising from the properties is not less than the gross annual interest on the Stock,
the Group may withdraw charged properties from the security pool provided that these tests continue to be met.
If the above information shows that:
- the aggregate value of the properties is less than one and one-half times the aggregate nominal amount of the Stock; or
- the net annual income arising from the properties is less than the gross annual interest on the Stock,
the Group is obliged to provide additional security so that the aggregate value of the properties is a minimum of one and two-thirds times the aggregate nominal amount of the Stock, and the net annual income arising from the properties is a minimum of the gross annual interest on the Stock.
The Group has the right to substitute security pool properties for others of at least equal value and income.
As at 31 March 2022 (annual covenant), there was significant headroom on both. This gives rise to an asset cover ratio and an income cover ratio of 5.45 times and 3.0 times respectively.
The following property was included within the security pool as at 31 March 2022:
- Elsley House, 20/30 Great Titchfield Street, London W1
Trustee
Royal Exchange Trust Company Limited
4th Floor
40 Duke's Place
London EC3A 7NH
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Joint venture debt
The Great Victoria Partnership prepaid its £80 million (GPE share: £40 million) secured loan in October 2020. Following this prepayment, the Group’s joint ventures have no further third party loans.
Interest rate management
As the effect of changes in interest rates can have a considerable impact on the Group’s reported profits, it is appropriate to ensure that the Group’s net exposure to such changes is managed within acceptable limits.
The Group seeks to achieve this by having a target of 70% - 100% of total debt being fixed rate.
The Group typically makes use of vanilla (rather than exotic) interest rate derivatives such as swaps, caps and swaptions.
At 31 March 2022, 84% of the Group’s total drawn debt was fixed rate or hedged.