30 April
2021
STANDARD LIFE INVESTMENTS PROPERTY
INCOME TRUST LIMITED
LEI: 549300HHFBWZRKC7RW84
RESULTS IN RESPECT OF THE YEAR ENDED
31 DECEMBER 2020
2020 Financial Review
- Financial Resources of £55 million as at 31 December 2020 (2019: £37 million) available
for investment to enhance earnings in the form of the Company’s low
cost revolving credit facility.
- Low Loan to Value of 23.0% (2019: 24.6%) as at year end
compared to Association of Investment Companies ("AIC") peer group
average of 31.0%.
- Dividends paid of 3.808p in the year (2019: 4.76p). This
equates to 80% of the level paid in 2019. Dividends were reduced in
the year as rent collection fell due to COVID-19. Dividends paid in
2020 equated to a yield of 6.3% based on the share price as at
31 December 2020 compared to FTSE
Index yield of 3.4% and the FTSE All-Share REIT Index yield of
3.1%.
- NAV total return of –4.6% (2019: 4.1%) as valuations came under
pressure, particularly in the first half of the year, due to
COVID-19. NAV has outperformed AIC peer group over longer term
delivering a total return of 140.2% compared to AIC peer group
total return of 32.4% over 10 years.
- Share price total return of –29.8% (2019: 18.0%) as sentiment
towards the UK commercial real estate sector was negatively
impacted by COVID-19. The share price has delivered strong returns
over the longer terms with a share price total return over 10 years
of 70.3% compared to the AIC peer group of 10.8%.
- Share buybacks totalling £6m as at 23
April 2021 at significant discounts to NAV which are
accretive to both NAV performance and earnings.
2020 Portfolio Review
- Portfolio total return of -1.8% (2019: 4.8%) marginally below
that of the benchmark return of –1.6% (2019: 1.3%) as both capital
and income returns were impacted by COVID-19.
- Rent collection for 2020 of 93.6% of rent due (2019: 99%) as
tenant base, geared towards Industrials, proved resilient in a
COVID-19 environment.
- Occupancy rate of 91.7% (2019: 93.4%) compares favourably to
the MSCI benchmark rate of 90.8% (2019: 92.4%).
- A total of 15 lease renewals and restructurings were
undertaken, securing £2,587,491 pa in rent, and a total of 8
lettings securing £890,369pa
- 5 rent reviews were settled with uplifts in rent, securing an
additional £58,256pa (an average increase of 19% on previous
rent).
- In 2020 we completed our largest solar PV scheme to date; a 918
kWp scheme in Sandy to supply electricity to our occupier Flamingo
Flowers. The Company now has 6 operational PV schemes totalling 1.2
MWp, and has another 20 schemes in various stages of
implementation.
- Portfolio well positioned: Portfolio is well positioned towards
sectors forecast to outperform by our Investment Manager with a
48.2% (2019: 51.2%) weighting in Industrials (MSCI benchmark:
35.1%, 2019: 30.7%).
PERFORMANCE SUMMARY
Earnings and Dividends |
|
|
2020 |
2019 |
IFRS earnings per
share |
|
|
(3.88) |
3.98 |
EPRA earnings per
share (p) (excluding capital items & swap movements)* |
|
|
4.10 |
4.76 |
Dividends declared per
ordinary share (p) |
|
|
3.808 |
4.76 |
Dividend cover
(%) |
|
|
108 |
100 |
Dividend yield
(%)** |
|
|
6.3 |
5.2 |
FTSE All-Share Real
Estate Investment Trusts Index Yield (%) |
|
|
3.1 |
3.9 |
FTSE All-Share Index
Yield (%) |
|
|
3.4 |
4.1 |
Ongoing
Charges*** |
|
|
|
|
As a % of average net
assets including direct property costs |
|
|
2.0 |
2.0 |
As a % of average net
assets excluding direct property costs |
|
|
1.2 |
1.2 |
Capital Values & Gearing |
|
31 December
2020 |
31 December
2019 |
Change
% |
Total assets
(£million) |
|
459.6 |
505.8 |
(9.1) |
Net asset value per
share (p) (note 21) |
|
82.0 |
89.9 |
(8.8) |
Ordinary Share Price
(p) |
|
60.0 |
91.0 |
(34.1) |
Premium/(Discount) to
NAV (%) |
|
(26.8) |
1.2 |
|
Loan to Value
(%)† |
|
23.0 |
24.6 |
|
Total Return |
1 year % return |
3 year % return |
5 year % return |
10 year % return |
NAV‡ |
(4.6) |
8.8 |
30.0 |
140.2 |
Share Price‡ |
(29.8) |
(24.0) |
(7.6) |
70.3 |
FTSE All-Share Real
Estate Investment Trusts Index |
(16.2) |
(4.1) |
0.2 |
95.2 |
FTSE All-Share
Index |
(9.8) |
(2.7) |
28.5 |
71.9 |
Property Returns & Statistics (%) |
|
|
31 December
2020 |
31 December
2019 |
Property income
return |
|
|
4.9 |
5.2 |
MSCI Benchmark income
return |
|
|
4.7 |
4.7 |
Property total
return |
|
|
(1.8) |
4.8 |
MSCI Benchmark total
return |
|
|
(1.6) |
1.3 |
Void rate |
|
|
8.3 |
6.6 |
* Calculated as profit for the period before tax (excluding
capital items & swaps costs) divided by weighted average number
of shares in issue in the period. EPRA stands for European Public
Real Estate Association.
** Based on dividend paid of 3.808p and the share price at
31 December 2020 of 60.0p.
*** Calculated as investment manager fees, auditor’s fees,
directors’ fees and other administrative expenses divided by the
average NAV for the year.
† Calculated as bank borrowings less all cash as a percentage of
the open market value of the property portfolio as at the end of
each year.
‡ Assumes re-investment of dividends excluding transaction
costs.
Sources: Aberdeen Standard Investments, MSCI.
STRATEGIC REPORT – CHAIRMAN’S
STATEMENT
BACKGROUND
The last 12 months have been among the most tumultuous in modern
times. The tragic human impact of COVID-19 has touched every
country across the world and the economic impact will be felt for
years to come in the form of much higher state borrowing which, at
some point, will have to be repaid. The roll-out of the vaccines
has provided some much needed hope, particularly in the UK where
the death toll per capita has been one of the highest in the world.
New variants allowing, vaccine rollouts should result in lockdowns
continuing to be eased and more normality returning to everyday
life. Two other events that would normally have been the most
significant in any other year, namely the Brexit deal agreed
between the UK and the EU and the election of a new President in
the United States, should also
decrease the political uncertainty that has been so evident in
recent years.
REAL ESTATE MARKET
The UK Commercial real estate market is linked to the
performance of the UK economy. The fact that the UK economy shrank
by the largest amount in over 300 years gives a context in which to
view the overall performance of the commercial real estate market.
With limited investment transactions, rising capitalisation yields
and falling rental values in many sectors, the MSCI benchmark (UK
Monthly Index Funds Quarterly Property Index) recorded a total
return of -1.6% with a capital return of –6.1% in 2020. The
divergence across sectors has been marked with COVID-19
accelerating trends that were already evident before the pandemic
with the industrial sector delivering a total return of 8.6% as the
move towards online retail continued apace. This trend, and the
fact most shops could not physically open for large parts of the
year, resulted in the retail sector returning –11.5% in 2020.
The ‘Other’ sector, a large component of which is leisure, also
came under pressure as restaurants, pubs and cinemas closed through
the various lockdowns returning –7.5%. Finally, while the death of
the office may be overstated, office values came under pressure
resulting in a total return of –1.8%.
A key focus across the industry has been rent collection. The
various lockdowns have impacted detrimentally the ability of some
tenants to pay rent which in turn has resulted in a number of
listed property REITs reducing dividends. The main exception being
those that have tenants purely from the logistics or supermarket
sectors, two sectors that have fared well in the COVID-19
environment.
PORTFOLIO AND CORPORATE
PERFORMANCE
Against this background the performance of the portfolio was a
tale of two halves. Values fell in the first six months of the year
when COVID-19 first appeared, effectively closing the economy
driving valuations down with material uncertainty clauses becoming
prevalent across the valuation industry. However, the portfolio
rebounded strongly in the second half of the year as property
fundamentals came to the fore. This resulted in the portfolio
producing a total return of –1.8%, marginally below that of the
benchmark. This was made up of an income return of 4.9% being
offset by a capital return of –6.4%. The Investment Manager’s
report provides a full analysis of the portfolio performance.
This portfolio performance contributed to a NAV total return of
–4.6% in the year as the NAV was also impacted by gearing and the
negative movement in the Company’s swap liability of £1.5
million.
The swap liability now stands at £3.7 million which will reduce
to zero as the fixed term loan approaches maturity in 2023.
The total return to shareholders in the period was –29.8% as the
share price fell due to sentiment towards the commercial real
estate industry deteriorating over concerns around rent collection
levels and reduced dividends and asset values. The discount at
which the Company’s shares traded to NAV stood at 25.5% as at 31
March which is broadly in-line with other diversified REITs. Given
these types of discount levels during the year the Board took the
investment decision to undertake a share buyback programme, and as
at 23 April 2021 has bought back £6
million of shares at an average discount of 26%, thereby increasing
both the NAV and earnings per share.
These share buybacks contrast sharply with the pre COVID-19
world in February 2020 when the
premium rating of the Company allowed it to issue 1 million new
shares at a price of over 6% above NAV.
Whilst in the short term returns have been impacted by COVID-19,
the Company continues to have a strong longer term track record
with a NAV total return of 140.2% and share price total return of
70.3% over ten years to end of 2020 compared to the equivalent AIC
peer group total return of 32.4% and 10.8% respectively. Open ended
property funds returned 47.2% over the same period, with these
funds having been closed for redemption for a significant period of
time during the pandemic.
RENT COLLECTION AND DIVIDENDS
Throughout the period of the pandemic, the Board and its
Investment Manager have been very conscious of the Company’s
Environmental, Social and Governance (“ESG”) obligations as a
responsible landlord. The Company is acutely aware of the pressure
that lockdown has had on our tenants’ businesses and has worked
with tenants to agree rental deferments, rent free periods in
exchange for amended lease terms (generally an extension of leases)
and, in some extreme cases, rental write offs (generally with the
smallest tenants who have no means of paying). At the close of
business on 31 March 2021, the
Company had received payments reflecting 93.6% of rents billed in
relation to 2020. Further detail on ESG, rent collection and
interaction with tenants is included in the Investment Manager’s
Report.
COVID-19 has placed great strain on the revenue accounts of a
number of property companies resulting in many postponing dividends
for a period of time until the outlook for rent collection became
clearer. The Board is very cognisant of the importance of income to
our shareholders. Throughout the period of the pandemic the Company
has continued to pay a divided with payments of 3.808 pence per share being paid in 2020, 80% of
the level paid in 2019. In addition to the fourth interim dividend
paid in February 2021 and in-line
with the REIT rules, the Company has announced it will also pay a
fifth interim dividend in relation to 2020 of 0.381p on
18 May 2021 to shareholders on the
register at 30 April 2021.
The Board will continue to monitor the progress of the vaccine
roll out on lockdown restrictions, rent collection and hence
earnings on a quarterly basis. Furthermore, the Company in future
will need to acquire properties that are well equipped and relevant
for a post COVID world, which will tend to offer more modest income
yields. A key aim, barring any further lockdowns, is to increase
the dividend back to a level that is sustainable given the current
portfolio as well as future investment and letting activity.
FINANCIAL RESOURCES & PORTFOLIO
ACTIVITY
The Company is in a strong financial position. At the year end,
the Company had a prudent Loan to Value (“LTV”) of 23.0% compared
to a peer group average of 31.0% with only the £110 million term
loan drawn. The quarterly loan covenants for the whole of 2020 were
also comfortably met with rental income having to fall by 77% and
property values by 54% from year end levels before covenants are
endangered. In addition, the Company has significant financial
resources available for investment comprising all £55 million of
its flexible, low cost revolving credit facility. Post year end the
sale of £10.4m of assets also gives the Company additional
firepower. In terms of the utilisation of these resources, the
Company will look to invest in assets that fit the portfolio
strategy including consideration of assets such as forestry that
will help offset the Company’s carbon footprint. In addition, it
will continue to selectively buy back shares at discount levels the
Board believe represents a good use of capital.
ANNUAL GENERAL MEETING (“AGM)
The Board has been monitoring closely the ongoing impact of the
Covid-19 pandemic upon the arrangements for the Company's upcoming
AGM on 16 June 2021. At the time of
writing, elements of the National Lockdown remain in place and
shareholder attendance at AGMs is not legally permissible.
Therefore, in order to provide certainty, whilst encouraging and
promoting interaction and engagement with our shareholders, the
Board has decided to hold an interactive Online Shareholder
Presentation which will be held at 11.00
a.m. on Friday, 4 June 2021.
At the presentation, shareholders will receive updates from the
Chairman and Manager and there will be the opportunity for an
interactive question and answer session. Following the online
presentation, shareholders will still have time during which to
submit their proxy votes prior to the AGM and I would encourage all
shareholders to lodge their votes in advance in this manner.
Further information on how to register for the event can be found
on https://www.workcast.com/register?cpak=4594420195653739.
The AGM on 16 June 2021 will, by
necessity, be a functional only closed AGM, and it will be held at
09:00 at the offices of Dickson Minto WS at 16 Charlotte Square,
Edinburgh EH2 4DF. Arrangements
will be made by the Company to ensure that the minimum number of
shareholders required to form a quorum will attend the meeting in
order that the meeting may proceed and the business be concluded.
The Board considers these arrangements to be in the best interests
of shareholders given the current circumstances.
The Board strongly discourages shareholders from attending the
AGM and entry will be refused if Government guidance so requires or
if the Chairman considers it to be necessary. Instead, shareholders
are encouraged to exercise their votes in respect of the meeting in
advance. Any questions from shareholders who are unable to join the
Online Shareholder Presentation may be submitted to the company
secretary at: Property.Income@aberdeenstandard.com. The Board
and/or the Manager will seek to respond to all such questions
received either before, or after the AGM.
On behalf of the Board I should like to thank shareholders in
advance for their co-operation and understanding and I very much
look forward to presenting to as many shareholders as possible at
the Online Shareholder Presentation.
OUTLOOK
The COVID-19 pandemic has resulted in the UK suffering an
unprecedented economic shock, with GDP falling by 9.9% in 2020.
However, assuming the vaccine programme continues to be successful
and is not thrown off course by variants of the disease
necessitating another lockdown, the economy should grow strongly in
2021. Our Investment Manager forecasts GDP growth of 6.2% on that
basis.
From a real estate perspective, overall the market is not
expected to perform as well as the wider economy and returns will
be heavily polarized between sectors and even within sectors.
COVID-19 has accelerated the structural trend towards online
retail, benefitting industrials and away from the high street and
shopping centres. As lockdown is eased and shops begin to reopen
this trend will moderate but it is unlikely to reverse over the
medium term given the convenience of online shopping. Moving onto
offices, there continues to be a place for offices in any
diversified portfolio, but in the future it is likely that offices
will act more as hubs for collaboration with occupiers looking for
more modern buildings in prime locations that promote
wellbeing.
This, in turn, will result in older, more secondary offices
falling out of favour. Leisure should recover as lockdown eases and
has the potential to perform relatively well when the public gain
the confidence to go back to restaurants, pubs and cinemas.
SLIPIT is structurally well aligned to take advantage of the
trends referred to above. The portfolio is significantly overweight
to the industrial sector with a weighting of 48% at the year end
with only 12% of the portfolio being in retail at the same date.
The Company has a strong balance sheet with relatively low gearing
and significant financial resources to invest into both our
existing portfolio, such as the modernisation of our largest office
investment at Hagley Road in Birmingham, as well as new investment
opportunities and NAV accretive share buybacks. In addition, the
Company continues to pay out an attractive dividend to shareholders
in a world where low interest rates will continue to be the
norm.
Overall, your Company has strong foundations at both a portfolio
and corporate level which has enabled it to meet the challenges
posed by the current difficult situation as well as being
relatively well positioned for the future.
James
Clifton-Brown Chairman
29 April
2021
STRATEGIC REPORT – STAKEHOLDER
ENGAGEMENT
This section, which serves as the Company’s section 172
statement, explains how the Directors have promoted the success of
the Company for the benefit of its members as a whole during the
financial year to 31 December 2020,
taking into account the likely long term consequences of decisions,
the need to foster relationships with all stakeholders and the
impact of the Company’s operations on the environment, in
accordance with the AIC Code on Corporate Governance.
THE ROLE OF THE DIRECTORS
The Company is a REIT and has no executive directors or
employees and is governed by the Board of Directors. Its main
stakeholders are Shareholders, the Investment Manager, Tenants,
Service Providers, Debt Providers, the Environment and the
Community.
As set out in the Corporate Governance Report, the Board has
delegated day-to-day management of the assets to the Investment
Manager and either directly or through the Investment Manager, the
Company employs key suppliers to provide services in relation to
property management, health & safety, valuation, legal and tax
requirements, auditing, depositary obligations and share
registration, amongst others. All decisions relating to the
Company’s investment policy, investment objective, dividend policy,
gearing, corporate governance and strategy in general are reserved
for the Board. The Board meets quarterly, with numerous other
ad-hoc meetings, and receives full information on the Company’s
performance, financial position and any other relevant information.
At least once a year, the Board also holds a meeting specifically
to review the Group’s strategy.
The Board regularly reviews the performance of the Investment
Manager, and its other service providers, to ensure they manage the
Company, and its stakeholders, effectively and that their continued
appointment is in the best long term interests of the stakeholders
as a whole.
The Board also reviews its own performance annually to ensure it
is meeting its obligations to stakeholders. Engagement with key
stakeholders is considered formally as part of the annual
evaluation process.
STRATEGIC ACTIVITY DURING THE YEAR
Notable transactions where the interests of stakeholders were
actively considered by the Board during the year, and subsequently,
include:
• All decisions relating to the
Company's dividends – the Board recognised the importance of
dividends to its shareholders especially when the COVID-19 crisis
had forced many companies, across multiple sectors of the economy,
to cancel or suspend their dividends. Despite some disruption to
cash collection during the financial year, the Company continued to
pay out a dividend during the pandemic with payments made in 2020
totalling 3.8p per share which equates to 80% of the 2019
level.
• Issuance and buyback of shares – in
February 2020, the Board approved the
issue of 1 million new ordinary shares at a 6% premium to NAV with
the proceeds used to reduce the Company's borrowings and was
invested in accordance with the Company's investment policy. During
the year, the Company bought back 2,548,997 ordinary shares into
treasury. The Board believes that investment by the Company in its
own shares at the levels of discount to net asset value during the
year and subsequently offers an attractive investment opportunity
for its shareholders given the financial resources the Company has
at its disposal.
• Ongoing investment activity – the
Company, with oversight from the Board, undertook strategic
activity in selling a small non air conditioned office in Derby
following a regear of the lease and a standalone retail warehouse
let to Smyth’s Toys. The most significant sale (in late December)
was of four multi-let industrial estates for £37.75m. Industrial is
a favoured sector but the Company wanted to realise the positive
performance delivered on these assets recognising that future
performance within the industrial sector is likely to be more
polarised, with logistics performing better than small multi-let
units. All of these sales reflected the Investment Manager's
changing expectations for some assets following COVID-19. The sale
proceeds were used to repay the £35m drawn under the Revolving
Credit Facility (RCF) and also meant the Company had resources for
investment and share buy backs.
The Board’s primary focus is to promote the long term success of
the Company for the benefit of its stakeholders as a whole. The
Board oversees the delivery of the investment objective, policy and
strategy, as agreed by the Company’s shareholders. As set out
above, the Board considers the long term consequences of its
decisions on its stakeholders to ensure the long term
sustainability of the Company.
SHAREHOLDERS
Shareholders are key stakeholders and the Board places great
importance on communication with them. The Board welcomes all
shareholders’ views and aims to act fairly to all shareholders. The
Board believes that the Company’s shareholders seek an attractive
and sustainable level of income, the prospect of growth of income
and capital in the longer term, a well-executed sustainable
investment policy, responsible capital allocation and value for
money.
The Investment Manager and Company’s Broker regularly meet with
shareholders, and prospective shareholders, to discuss Company
initiatives and seek feedback. The views of shareholders are
discussed by the Board at every Board meeting, and action taken to
address any shareholder concerns. The Investment Manager provides
regular updates to shareholders and the market through the Annual
Report, Half-Yearly Report, Quarterly Net Asset Value
announcements, Company Factsheets and its website.
The Chair offers to meet with key shareholders at least
annually, and other Directors are available to meet shareholders as
required. This allows the Board to hear feedback directly from
shareholders on the Company’s ongoing strategy. Despite the
challenges arising from COVID-19, the Investment Manager undertook
several meetings with large shareholders to provide reports on the
progress of the Company and receive feedback, which was then
provided to the full Board.
The Company’s AGM provides a forum, both formal and informal,
for shareholders to meet and discuss issues with the Directors and
Investment Manager of the Company. The Board would ordinarily
encourage as many shareholders as possible to attend the Company’s
AGM to engage directly with the Board. The Board has been
monitoring closely the ongoing impact of the COVID-19 pandemic upon
the arrangements for the Company’s upcoming AGM on Wednesday,
16 June 2021. At the time of writing,
elements of the National Lockdown remain in place and shareholder
attendance at AGMs is not legally permissible. Therefore, in order
to provide certainty, whilst encouraging and promoting interaction
and engagement with the Company’s shareholders, the AGM will be a
closed meeting, with the minimum representatives present to form a
quorum.
However, as set out in the Chairman’s statement, the Board has
decided to hold an interactive Online Presentation and Shareholder
Question and Answer Session with the Manager which will be held at
11.00am on Friday 4 June 2021. Following the online presentation,
shareholders will still have time during which to submit their
proxy votes prior to the AGM and the Board encourages all
shareholders to lodge their votes in advance. Full details on how
to register for the Q&A can be found in the Chairman’s
statement. Shareholders are encouraged to submit questions in
advance of the Q&A by email to:
property.income@aberdeenstandard.com.
TENANTS
Another key stakeholder group is that of the underlying tenants
that occupy space in the properties that the Company owns. The
Investment Manager works closely with tenants to understand their
needs through regular communication and visits to properties.
The Board believes that tenants benefit from a trusting and long
term working relationship with the Investment Manager, sustainable
buildings and tenancies, value for money and a focus on the
community, health & safety and the environment.
The Investment Manager consults with tenants and, on the Board’s
behalf, invests in our buildings to improve the quality and
experience for our occupiers as well as reduce voids and improve
values, helping to produce stronger returns. The Board receives
reports on tenant engagement and interaction at every Board
meeting. The Board also expects the Investment Manager to undertake
extensive financial due diligence on potential tenants to mitigate
the risk of tenant failure or inability to let properties.
During the COVID-19 pandemic, the Company’s Investment Manager
has worked closely with tenants to understand their needs. The
Board believes that this is a crisis that impacts on individuals as
much as companies and takes the Social aspects of ESG very
seriously. The Board firmly believes that by helping tenants now
and building relationships the Company will have better occupancy
over future months and years, which will in turn benefit the
Company’s cash flow.
DEBT PROVIDER
The Company has a term loan facility and revolving credit
facility with The Royal Bank of Scotland International Limited
(“RBSI”). RBSI seeks responsible portfolio management and ongoing
compliance with the Company’s loan covenants. The Company maintains
a positive working relationship with RBSI and provides regular
updates on business activity and compliance with its loan
covenants.
THE COMMUNITY AND THE ENVIRONMENT
The Board and the Investment Manager are committed to investing
in a responsible manner. There are a number of geopolitical,
technological, social and demographic trends underway globally that
can, and do, influence real estate investments – many of these
changes fall under the umbrella of ESG considerations. As a result,
the Investment Manager fully integrates ESG factors into its
investment decision making and governance process.
The Board has adopted the Investment Manager’s ESG Policy and
associated operational procedures and is committed to environmental
management in all phases of the investment process.
The Company aims to invest responsibly, to achieve environmental
and social benefits alongside returns. By integrating ESG factors
into the investment process, the Company aims to maximise the
performance of the assets and minimise exposure to risk.
INVESTMENT MANAGER
The Chairman’s Statement and Investment Manager’s Report detail
the key investment decisions taken during the year and
subsequently. The Investment Manager has continued to manage the
Company’s assets in accordance with the mandate provided by
shareholders, with the oversight of the Board. The Board receives
presentations from the Investment Manager at every Board meeting to
help it to exercise effective oversight of the Investment Manager
and the Company’s Strategy. The Board formally reviews the
performance of the Investment Manager, and the fees it receives, at
least annually.
OTHER SERVICE PROVIDERS
The Board via the Management Engagement Committee also ensures
that the views of its service providers are heard and at least
annually reviews these relationships in detail. The aim is to
ensure that contractual arrangements remain in line with best
practice, services being offered meet the requirements and needs of
the Company and performance is in line with the expectations of the
Board, Investment Manager and other relevant stakeholders. Reviews
will include those of the company secretary, broker, share
registrar and audit.
STRATEGIC REPORT – STRATEGIC
OVERVIEW
OBJECTIVE
The objective, and purpose, of the Group is to provide
shareholders with an attractive level of income together with the
prospect of income and capital growth.
INVESTMENT POLICY AND BUSINESS
MODEL
The Board intends to achieve the investment objective by
investing in a diversified portfolio of UK commercial properties.
The majority of the portfolio will be invested in direct holdings
within the three main commercial property sectors of retail, office
and industrial although the Group may also invest in other
commercial property such as hotels, nursing homes and student
housing.
Investment in property development and investment in
co-investment vehicles, where there is more than one investor, is
permitted up to a maximum of 10% of the property portfolio.
In order to manage risk, without compromising flexibility, the
Board applies the following restrictions to the property portfolio,
in normal market conditions:
• No property will be greater by value
than 15% of total assets.
• No tenant (excluding the Government)
will be responsible for more than 20% of the Group’s rent roll.
• Gearing, calculated as borrowings as a
percentage of gross assets, will not exceed 65%. The Board’s
current intention is that the Group’s Loan to Value ratio
(calculated as borrowings less all cash as a proportion of property
portfolio valuation) will not exceed 45%.
As part of its strategy, the Board has contractually delegated
the management of the property portfolio, and other services, to
Aberdeen Standard Fund Managers Limited (“the Investment
Manager”).
STRATEGY
Each year the Board undertakes a strategic review, with the help
of its Investment Manager and other advisers.
The overall intention is to continue to distribute an attractive
income return alongside growth in the NAV and a good overall total
return relative to the peer group.
At the property level, it is intended that the Group remains
primarily invested in the commercial sector, while keeping a
watching brief on other classes such as student accommodation and
care homes as well as other sectors which will enable the Company
to meets its environmental targets.
The Group is principally invested in office, industrial and
retail properties and intends to remain so but will keep alert to
other opportunities. In addition consideration will be given to
acquiring assets that will enable the Company to meet its ESG
objectives.
The Board’s preference is to buy into good, but not necessarily
prime, locations, where it perceives there will be good continuing
tenant demand, and to seek out properties where the asset
management skills of the Investment Manager can be used to
beneficial effect. The Board will continue to have very careful
regard to tenant profiles.
As part of this investment strategy, the Group recognises that
tenants are a key stakeholder and aims to foster a culture whereby
the experience of tenants is seen as paramount to the future
success of the Group. The Investment Manager works closely with
tenants to understand their needs through regular communication and
visits to properties.
Where required, and in consultation with tenants, the Group
refurbishes and manages the owned assets to improve the tenants’
experience, including consideration of health & safety and
environmental factors, with the aim being to generate greater
tenant satisfaction and retention and hence lower voids, higher
rental values and stronger returns.
The Board continues to seek out opportunities for further,
controlled growth in the Group.
The Group continues to maintain a tax efficient structure,
having migrated its tax residence to the UK and becoming a UK REIT
on 1 January 2015.
THE BOARD
As at 31 December 2020, the Board
consisted of a non-executive Chairman and four non-executive
Directors. The names and biographies of those directors who held
office at 31 December 2020 and at the
date of this report appear in the Annual Report and indicate their
range of property, investment, commercial and financial experience.
There is also a commitment to achieve the proper levels of
diversity.
Robert Peto stepped down from the
Board on 25 August 2020 and was
succeeded as Chair by James
Clifton-Brown. Sarah Slater
succeeded James as the Chair of the Property Valuation
Committee.
KEY PERFORMANCE INDICATORS
The Board meets quarterly and at each meeting reviews
performance against a number of key measures which are considered
to be alternative performance measures (“APMs”). These APMs are in
line with recognised industry performance measures both in the Real
Estate and Investment Trust industry and help to assess the overall
performance of the portfolio and the wider Group:
Property income and total return
against the Quarterly Version of the MSCI Balanced Monthly Funds
Index (“the Index”).
The Index provides a benchmark for the performance of the
Group’s property portfolio and enables the Board to assess how the
portfolio is performing relative to the market. A comparison is
made of the Group’s property returns against the Index over a
variety of time periods (quarter, annual, three years, five years
and ten years).
Property voids.
Property voids are unlet properties. The Board reviews the level
of property voids within the Group’s portfolio on a quarterly basis
and compares the level to the market average, as measured by the
IPD. The Board seeks to ensure that, when a property becomes void,
the Investment Manager gives proper priority to seeking a new
tenant to maintain income.
Rent collection dates.
The Board assesses rent collection by reviewing the percentage
of rents collected within 21 days of each quarter end.
Net asset value total return.
The net asset value (“NAV”) total return reflects both the net
asset value growth of the Group and also the dividends paid to
shareholders. The Board regards this as the best overall measure of
value delivered to shareholders. The Board assesses the NAV total
return of the Group over various time periods (quarter, annual,
three years and five years) and compares the Group’s returns to
those of its peer group of listed, closed-ended property investment
companies.
Premium or discount of the share price
to net asset value.
The Board closely monitors the premium or discount of the share
price to the NAV and believes that a key driver for the level of
the premium or discount is the Group’s long-term investment
performance. However, there can be short-term volatility in the
premium or discount and the Board takes powers at each Annual
General Meeting (“AGM”) to enable it to issue or buy back shares
with a view to limiting this volatility.
Dividend per share and dividend
cover.
A key objective of the Group is to provide an attractive,
sustainable level of income to shareholders and the Board reviews,
at each Board meeting, the level of dividend per share and the
dividend cover, in conjunction with detailed financial forecasts,
to ensure that this objective is being met and is sustainable.
The Board considers the performance measures both over various
time periods and against similar funds.
A record of these measures is disclosed in the Financial and
Property Highlights, Chairman’s Statement and Investment Manager’s
Report.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board ensures that proper consideration of risk is
undertaken in all aspects of the Group’s business on a regular
basis. During the year, the Board carried out an assessment of the
risk profile of the Group, including consideration of risk
appetite, risk tolerance and risk strategy. The Board regularly
reviews the principal and emerging risks of the Group, seeking
assurance that these risks are appropriately rated and ensuring
that appropriate risk mitigation is in place.
The Group’s assets consist of direct investments in UK
commercial property. Its principal risks are therefore related to
the commercial property market in general, but also the particular
circumstances of the properties in which it is invested, and their
tenants. The Board and Investment Manager seek to mitigate these
risks through a strong initial due diligence process, continual
review of the portfolio and active asset management initiatives.
All of the properties in the portfolio are insured, providing
protection against risks to the properties and also protection in
case of injury to third parties in relation to the properties.
The overarching risk that has emerged is COVID-19, the global
pandemic that has impacted all areas of society in the UK and
abroad. This pandemic has caused significant loss of life and
global economic disruption. It arguably affects all areas of risk
on which the Company reports and has increased the risk profile of
the Company. In the section following, particular consideration has
been given to how COVID-19 is impacting on the specific risks that
are reviewed at each Board meeting.
The Group and its objectives become
unattractive to investors, leading to widening of the discount.
This risk is mitigated through regular contact with
shareholders, a regular review of share price performance and the
level of the discount or premium at which the shares trade to net
asset value and regular meetings with the Group’s broker to discuss
these points and address any issues that arise. COVID-19 has
increased the volatility of the Company’s share price and,
reflecting wider market sentiment, has resulted in the Company’s
shares trading at a discount to prevailing NAV of 25.5% as at
31 March 2021, in-line with other
diversified peers in the Company's AIC peer group.
Net revenue falls such that the Group
cannot sustain its level of dividend, for example due to tenant
failure or inability to let properties.
This risk is mitigated through regular review of forecast
dividend cover and of tenant mix, risk and profile. Due diligence
work on potential tenants is undertaken before entering into new
lease arrangements and tenants are kept under constant review
through regular contact and various reports both from the managing
agents and the Investment Manager’s own reporting process.
Contingency plans are put in place at units that have tenants
that are believed to be in financial trouble. The Group subscribes
to the MSCI Iris Report which updates the credit and risk ranking
of the tenants and income stream, and compares it to the rest of
the UK real estate market.
An emerging risk in the year was the poor performance of the
retail sector due to a number of high profile administrations and
store closures in this sector as most retail units were closed for
part of the year and into 2021.
The Group has partially mitigated this risk by having an
underweight position to the retail sector with only 11.7% exposure
to this sector against the benchmark weighting of 22.8% as at the
end of December 2020.
The lockdown of many businesses as a result of COVID-19 has
resulted in a significant fall of rental collection rates. Rent
collection for 2020 was 93.6% resulting in a fall in EPRA earnings
during the year. The Company reduced its dividend to reflect this
fall in rental levels and the continued uncertainty, paying out a
dividend that equated to 80% if its 2019 level.
Uncertainty or change in the
macroeconomic environment results in property becoming an
undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and
discussion with, the Investment Manager and other advisers.
Macroeconomic conditions form part of the decision making process
for purchases and sales of properties and for sector allocation
decisions.
The impact of COVID-19 on the UK economy has been severe with
the largest fall in GDP in over 300 years. This has impacted both
property values and the ability of tenants to pay rent. Assuming
the vaccination programme works and lockdown continues to be eased
then UK GDP should grow strongly in the current year. The impact of
the trade deal with the EU will also require to be monitored to
ensure it does not have a negative impact on the UK economy.
Breach of loan covenants.
This risk is mitigated by the Investment Manager monitoring the
loan covenants on a regular basis and providing a quarterly
certificate to the bank confirming compliance with the covenants.
Compliance is also reviewed by the Board each quarter and there is
regular dialogue between the Investment Manager and RBS, the
lending bank, on Group activity and performance. Throughout 2020
the loan covenants were comfortably met. As at 31 December the Loan
to Value Ratio reported to RBS was 25% (limit of 60%) and interest
cover of 678% (limit 175%).
Environmental.
Environmental risk is considered as part of each purchase and
monitored on an ongoing basis by the Investment Manager. However,
with extreme weather events both in the UK and globally becoming a
more regular occurrence due to climate change, the impact of the
environment on the property portfolio and on the wider UK economy
is seen as an increasing risk.
Please see the Environmental, Social and Governance Policy
section and the Investment Manager's Report for further details on
how the Company addresses environmental risk, including climate
change.
Other risks faced by the Group include the following:
• Strategic – incorrect strategy,
including sector and property allocation and use of gearing, could
all lead to a poor return for shareholders.
• Tax efficiency – the structure
of the Group or changes to legislation could result in the Group no
longer being a tax efficient investment vehicle for
shareholders.
• Regulatory – breach of
regulatory rules could lead to the suspension of the Group’s Stock
Exchange Listing, financial penalties or a qualified audit
report.
• Financial – inadequate controls
by the Investment Manager or third party service providers could
lead to misappropriation of assets. Inappropriate accounting
policies or failure to comply with accounting standards could lead
to misreporting or breaches of regulations.
• Operational – failure of the
Investment Manager’s accounting systems or disruption to the
Investment Manager’s business, or that of third party service
providers, could lead to an inability to provide accurate reporting
and monitoring, leading to loss of shareholder confidence.
• Cyber Risk – Business
continuity or other risks to any of the Company’s service providers
or properties, following a catastrophic event e.g. terrorist
attack, cyber-attack, power disruptions or civil unrest, leading to
disruption of service, loss of data etc.
The Board seeks to mitigate and manage all risks through
continual review, policy setting and enforcement of contractual
obligations. It also regularly monitors the investment environment
and the management of the Group’s property portfolio, levels of
gearing and the overall structure of the Group.
Details of the Group’s internal controls are described in more
detail in the Corporate Governance Report in the Annual Report.
SOCIAL, COMMUNITY AND EMPLOYEE
RESPONSIBILITIES
The Group has no direct social, community or employee
responsibilities. The Group has no employees and accordingly no
requirement to report separately in this area as the management of
the portfolio has been delegated to the Investment Manager. In
light of the nature of the Group’s business there are no relevant
human rights issues and hence there is no requirement for a human
rights policy. The Board, through its Investment Manager, does,
however, closely monitor the policies of its suppliers to ensure
that proper provision is in place.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
POLICY
Approach to ESG
The Company adopts the Investment Manager’s policy and approach
to integrating ESG and this has been used as the basis for
establishing the Company’s ESG objectives.
The Investment Manager views ESG as a fundamental part of its
business. Whilst real estate investment provides valuable economic
benefits and returns for investors it has – by its nature – the
potential to affect environmental and social outcomes, both
positively and negatively.
The Investment Manager’s approach is underpinned by the
following three over-arching principles:
• Transparency, Integrity and
Reporting: being transparent in the ways in which we
communicate and discuss our strategy, approach and performance with
our investors and stakeholders.
• Capability and Collaboration:
drawing together and harnessing the capabilities and insights of
our platforms, with those of our investment, supply chain and
industry partners.
• Investment Process and Asset
Management: integrating ESG into decision making, governance,
underwriting decisions and asset management approach. This includes
the identification and management of material ESG risks and
opportunities across the portfolio.
Of particular focus is responding to climate change, both in
terms of resilience to climate impacts and in reducing emissions
from the Company’s activities. The Investment Manager has recently
published a framework for achieving net-zero greenhouse gas
emissions across the real estate assets it manages and the Company
is among the first to start this process, as outlined in the
Investment Manager’s Report.
EPRA Sustainability Best Practice
Recommendations Guidelines
We have adopted the 2017 EPRA Sustainability Best Practice
Recommendations Guidelines (sBPR) to inform the scope of indicators
we report against. We have reported against all EPRA sBPR
indicators that are material to the Company. We also report
additional data not required by the EPRA sBPR where we believe it
to be relevant (e.g. like-for-like greenhouse gas emissions).
A full outline of the scope of reporting and materiality review
in relation to EPRA sBPR indicators is included in Appendix X which
also provides disclosures required under Streamlined Energy and
Carbon Reporting (SECR).
Operational Performance Summary
The Investment Manager has processes in place to ensure
operational sustainability performance is monitored and actions are
implemented to drive continual improvement. The effect of COVID-19
on occupancy has had an impact on energy consumption and greenhouse
gas emissions. It is unfortunately not possible to fully
disaggregate this impact from improvement measures undertaken at
assets. The performance figures for 2020 should be viewed in this
context.
Like-for-like landlord electricity and gas consumption reduced
year-on-year across the Company’s assets, by 12% and 1%
respectively. This helped drive a 17% reduction in like-for-like
greenhouse gas emissions associated with landlord-procured
energy.
Full details of performance against material EPRA sBPR
indicators are included in the Annual Report.
2020 GRESB Assessment
The GRESB Assessment is the leading global sustainability
benchmark for real estate vehicles. The Company has been submitted
to GRESB since 2012. In the 2020 assessment, the Company achieved a
score of 62 and a two star rating. The 2020 GRESB assessment
represented a major overhaul of the benchmark which affected
certain types of portfolio more than others and means comparisons
with previous years are not possible. Our focus on ESG, and in
particular on improving coverage of tenant data, will help improve
the Company’s GRESB score in future years.
HEALTH & SAFETY
Alongside these environmental principles the Group has a health
& safety policy which demonstrates commitment to providing safe
and secure buildings that promote a healthy working/customer
experience that supports a healthy lifestyle. The Group, through
the Investment Manager, manages and controls health & safety
risks as systematically as any other critical business activity
using technologically advanced systems and environmentally
protective materials and equipment. The aim is to achieve a health
& safety performance the Group can be proud of and allow the
Group to earn the confidence and trust of tenants, customers,
employees, shareholders and society at large. The Board reviews
health & safety on a regular basis in Board meetings.
VIABILITY STATEMENT
The Board considers viability as part of its ongoing programme
of financial reporting and monitoring risk. The Board continually
reviews the prospects for the Company over the longer term taking
into account the Company’s current financial position, its
operating model, and the diversified constituents of its portfolio.
In addition the Board considers strong initial due diligence
processes, the continued review of the portfolio and the active
asset management initiatives. Given the above, the Board believes
that the Company has a sound basis upon which to continue to
deliver returns over the long term.
In terms of viability, the Board has considered the nature of
the Group’s assets and liabilities and associated cash flows and
has determined that five years is the maximum timescale over which
the performance of the Group can be forecast with a material degree
of accuracy and so is an appropriate period over which to consider
the Group’s viability.
The Board has also carried out a robust assessment of the
principal and emerging risks faced by the Group. The main risks
which the Board considers will affect the business model are:
future performance, solvency, liquidity, tenant failure leading to
a fall in dividend cover and macroeconomic uncertainty.
These risks have all been considered in light of the financial
and economic impact arising from COVID-19.
The Board takes any potential risks to the ongoing success of
the Group, and its ability to perform, very seriously and works
hard to ensure that risks are consistent with the Group’s risk
appetite at all times. In assessing the Group’s viability, the
Board has carried out thorough reviews of the following:
• Detailed NAV, cash resources and
income forecasts, prepared by the Company’s Investment Manager, for
a five year period under both normal and stressed conditions;
• Additional modelling that has been
undertaken around the potential impact of COVID-19 on rent
collection, cash flow, dividend cover, Net Asset Value and loan
covenants;
• The Group’s ability to pay its
operational expenses, bank interest, tax and dividends over a five
year period;
• Future debt repayment dates and debt
covenants, in particular those in relation to LTV and interest
cover;
• The ability of the Company to
refinance its debt facilities in April
2023;
• Demand for the Company’s shares and
levels of premium or discount at which the shares trade to NAV;
Views of shareholders; and
• The valuation and liquidity of the
Group’s property portfolio, the Investment Manager’s portfolio
strategy for the future and the market outlook.
Despite the uncertainty in the UK regarding the ongoing impact
of the COVID-19 pandemic, the Board has a reasonable expectation
that the Group will be able to continue in operation and meet its
liabilities as they fall due over the next five years. This
assessment is based on the current financial position of the
Company, its performance track record and feedback it receives from
shareholders.
APPROVAL OF STRATEGIC REPORT
The Strategic Report comprises the Financial and Portfolio
Highlights, Performance Summary, Chairman’s Statement, Strategic
Overview and Investment Manager’s Report. The Strategic Report was
approved by the Board and signed on its behalf by:
James Clifton-Brown Chairman
29 April 2021
STRATEGIC REPORT – INVESTMENT
MANAGER’S REPORT
MARKET REVIEW
2020 will be a year remembered by everyone. UK gross domestic
product (GDP) fell by 9.9%, the largest annual decline in output in
300 years. The effects of the pandemic were far reaching, with no
sector of the economy coming out unscathed, including real
estate.
Furthermore, the lockdown measures implemented at the end of
2020 are likely to result in the economy shrinking by 4% in the
first quarter of 2021. Assuming the vaccine roll out continues
smoothly, the UK economy is expected to see growth return only in
the second half of 2021.
Returns in the UK real estate market turned negative in 2020,
with a total return of -2.3% (per the MSCI Quarterly Index), the
first negative calendar year since 2008. As was the case
pre-pandemic, returns at the sector level remained highly polarised
with industrials and residential the only two sectors to post
positive total returns during 2020. The industrial sector was the
stand out performer, recording another strong year with returns of
9.2%, aided by capital value growth of 4.6%. Both South East and
rest of UK industrials had a strong 2020, with total returns of
10.1% and 7.6% respectively. The retail sector continued to weigh
on all commercial property returns with a total return of –12.4%
and values falling by –17.1% over the course of the year. At -1.0%
in Q4, the office sector saw its weakest quarterly return since Q3
2016, contributing an annual return of –1.7%.
The fourth quarter rally in 2019 for the FTSE UK REIT index was
quickly unwound in the first quarter of 2020 as the pandemic took
hold. During the first quarter of 2020, the index recorded a total
return of –27%, and despite a late vaccine relief rally in the
final months of 2020, the FTSE UK REIT index delivered a total
return of –16.2% for the full year, with the FTSE All-Share Index
returning –9.8%. The hierarchy of favoured sectors remained broadly
the same, with the variance in NAVs between the most and least
favoured sectors becoming more pronounced. Industrial names
benefited from a clear acceleration in structural shifts towards
online retailing, largely to the detriment of retail REITs. As a
result, pricing held up better for the former, whereas pricing for
retail REITs continued to trade at deep discounts to NAV. With
uncertainty surrounding the outlook for the office occupational
market, London office developers
continued to trade at discounts to NAV.
COVID-19 has created near-term cyclical headwinds for the UK
real estate sector, whilst providing the catalyst for acceleration
in structural trends that were already underway pre-pandemic. The
requirement for more flexible workplace arrangements is evident in
the office sector and a number of companies are reassessing their
requirements in light of more flexible working arrangements and
lower expected growth. Take-up decreased across major office
markets and availability rates rose sharply. Demand for the best
quality space has proven to be more resilient and this is likely to
be the case going forward for the sector. The clear beneficiary in
the acceleration of structural changes was the industrial and
logistics sector. The logistics sector recorded its strongest year
of take-up on record in 2020 as the closure of non-essential retail
units, for a large part of the year, facilitated a greater
transition to online retailing. Despite the obvious challenges, the
COVID-19 impact on UK retail has not been homogenous across all
retail sub-sectors as illustrated by the resilience of supermarket
trading. In fact, the supermarket sector benefitted from
unprecedented Christmas demand in 2020, with take home grocery
sales rising 11.4% year-on-year over the 12 weeks to 27 December 2020 according to Kantar data.
OFFICE
The office sector delivered a total return of –1.7% in 2020
according to the MSCI Quarterly Index. However, the headline number
masks significant variation in returns both geographically and even
within cities. Within Central
London there was a clear divergence in performance, where
City offices recorded a total return of 1.1% with values declining
by –2.2% in 2020. Conversely West End offices recorded a total
return of –5.8% in 2020, with values down –8.8% over the year.
Regional offices experienced capital value declines of –4.2%,
resulting in a marginally positive total return of 0.3% over the
year. The performance of offices is perhaps unsurprising given that
the pandemic has resulted in a noticeable deterioration in the
occupational market. Aside from the short-term cyclical disruption
COVID-19 has undoubtedly created, it has also accelerated longer
term structural challenges for the sector. The increased prominence
of working from home for the majority of office based staff has
resulted in some occupiers putting requirements for future space on
hold while they evaluate how to deal with more agile working
arrangements. The result is that take-up was down over 50% in 2020
and by the end of December both vacancy and availability rates in
Central London had increased to
8.1% and 10% respectively. However, it is important to highlight a
clear distinction by building quality. The availability of Grade A
office space remains well balanced in the capital, as it does in
key regional markets, especially for larger floorplates. But there
has been a sharp increase in sub-let or so called grey space coming
to the market, accounting for 75% of the total in London.
Similar trends were witnessed in the regional office markets,
with the take up dropping by 33% on the ten-year average within the
largest nine regional office markets. There remains scant evidence
of the weak occupational market putting material downward pressure
on headline rents at this point, but the momentum by the end of
2020 was negative as rents declined by –0.8% over the course of the
year. We therefore expect to see further rental declines in
2021 as more evidence becomes apparent. The office sector will
remain an area of significant change, with a greater divergence in
returns expected between offices that meet occupier needs, and
those that do not.
RETAIL
According to the MSCI Quarterly Index, the retail sector
delivered a total return of –12.3% in 2020, with values falling by
16.9%. That overall performance masks significant dispersion within
the sector, however. Shopping centre values collapsed by just under
30% over the last 12 months, dwarfing the 17% fall in values seen
in 2019. Average shopping centre values now sit 66% below their
2007 peak level and, with virtually no investment market liquidity,
pricing suggests further falls in 2021. In complete contrast,
supermarket values rose by 1.4% in 2020, with their status as
essential infrastructure and their long, secure income profiles
proving highly attractive to investors. Retail warehouses, which
represent a broad church of assets, sit right in-between, with
values down 15.7% on average over the last 12 months. Solus
(standalone) units, many let to DIY or discount operators on long
leases, lost only 8.7% of value on average.
By the end of the year, solus units had stabilised and began to
see modest capital growth. However, the largest parks, often with
more exposure to the fashion sector, saw values fall by nearly 21%
in 2020. Meanwhile, high streets have also suffered from a collapse
in footfall and the enforced closure of fashion occupiers. For the
first time, Central London has not
been immune, with values down 16.9%, compared with a 20% decline
for all shops nationally. Indeed, London suffered the most of any region in the
final quarter. The impact of COVID-19 on international travel and
office-related footfall going forward is a major threat to retail
and hospitality businesses in London, where rents and business rates have
soared over the last 10 years. While the government has provided
significant support and protection for retailers since the pandemic
began, with the recent budget extending some of these measures such
as business rates holidays and a new restart grant, the eventual
ending of these measures could herald further business failures and
rising vacancy rates. The polarisation between positive performance
from assets in essential retail use, relying on predictable, local
catchment spending, and discretionary retail that is hamstrung by
travel limitations and trading restrictions may continue for much
of 2021. In the longer term, the acceleration of sales
transitioning online during the pandemic and greater prevalence of
turnover-based rental payments is expected to mean a further
rebasing of rents across discretionary retail locations. In
contrast, however, the step change in online grocery spend likely
underpins the importance and performance prospects of the dominant,
well-configured supermarkets that are crucial for fulfilment and
last-mile distribution.
INDUSTRIAL
Industrials maintained their position as the best performing UK
commercial real estate sector for the fourth consecutive year. The
sector delivered a total return of 9.2% in 2020, with values rising
by 4.6% according to the MSCI Quarterly Index. Sentiment towards
the sector remains very positive given the favourable structural
drivers of the occupier market, especially for space constrained
logistics in urban areas. This is particularly the case in the
South East where the segment recorded a total return of 10.1%
driven by capital growth of 5.9%. Performance for London industrials was the strongest,
delivering a total return of 7.9% in Q4 and 12.3% for the calendar
year.
Despite a year categorised by multiple lockdowns, impeding
travel and inspections, investment levels reached £10.1bn in 2020,
the highest level recorded since 2017. As a result, the industrial
sector accounted for 22% of all UK investment transactions during
the year, the highest market share on record. The pandemic clearly
resulted in an acceleration in the transition to online retailing
which was reflected in the occupational market. The UK logistics
sector experienced a record year of take-up in 2020 with 50.1
million sq. ft. of new leases agreed on warehouse space, 12.7
million sq. ft. ahead of the previous record set in 2016 according
to Savills. Leases agreed with Amazon accounted for a quarter of
all take-up, but the sector would still have broken new records
even if Amazon and short-term deals were removed. Aided by a record
year of take-up, the vacancy rate for the logistics sector now
stands at 5.7% at the national level and an even lower 3.5% in
London and the South East. Market
fundamentals remain supportive for continued rental growth driven
by a structurally supportive demand outlook.
ALTERNATIVES
The UK real estate alternative sector, or “Other Property” as it
is categorised by MSCI, represents real estate which falls outside
the traditional ‘Retail’, ‘Office’ or ‘Industrial’ definitions.
This sector recorded a total return of –5.3% in 2020. This is
predominantly due to the large weighting of leisure and hotels
within the sample. Returns for these segments during the year were
–14.6% and –2.6% respectively. Both of these consumer facing
segments have borne the brunt of the challenges created as a result
of the pandemic, with the path to recovery expected to be gradual
and not without its challenges, especially for the hospitality
sector. Outwith these two sectors, the Purpose Built Student
Accommodation (PBSA) sector continued to attract investor interest,
despite lockdowns inhibiting the return of students to university.
In the face of a challenging occupational backdrop, the sector
still managed to deliver a total return of 4.9% in the year to
September 2020 according to CBRE.
As was the case with the majority of sectors, the returns within
the sector were highly polarised. Prime assets which are aligned to
top tier universities significantly outperformed secondary assets.
Early indications from UCAS illustrate that applications for the
2021/22 academic year look positive, and provided a vaccine can be
rolled out by September 2021, the
sector should see this converted to PBSA bookings.
Investor interest in the build to rent (BtR) sector continued
unabated in 2020, recording its highest annual investment total on
record at £3.5 billion, with a number of new entrants to the market
announced during 2020. Although these sectors remain nascent
compared to more developed international markets, there remains
significant interest given their more resilient performance during
the pandemic.
MARKET OUTLOOK
2021 is expected to be a year of two halves. The national
lockdown and restrictions on travel along with the impact of the
final Brexit deal will have a negative impact on the economy and
real estate market in the first half of the year. However the
second half is expected to be significantly different as the
economy reopens with strong growth albeit from a low base. The
economic shocks from COVID-19, as well as the after effects of
Brexit are going to create a challenging macroeconomic environment
and after the strong bounce back we are likely to be in a new
period of low growth and low interest rates.
The low interest rate environment is likely to support continued
demand for real estate as an income producing real asset. The
weight of money available to invest in real estate is going to be
supportive of values, however we expect a strong differential in
performance both across sectors, and within sectors.
The theme of Industrial performing well and Retail poorly is
expected to continue, but become more nuanced. Shopping centres and
fashion-led retail is likely to continue to see falling capital and
rental values, whilst food and budget retail should hold up well.
Logistics remains a strong sub sector with continued demand pushing
rents and values up, but we suggest greater caution is required
around smaller multi let units generally rented to poorer covenants
more likely to struggle in a weaker economic environment. The
office market is in a period of change and is likely to see rental
value falls and reduced demand: however, it is a sector that is
likely also to see the best properties do better and the weaker
ones worse as users and buyers become more selective.
Income will be the main driver of returns over the next few
years. Long let secure income is trading at ever lower yields, and
those seeking a greater yield are going to have to take an active
approach of investing in assets with shorter leases but more
sustainable income through diversification and good quality assets
that meet occupier needs.
PERFORMANCE
There are a number of measures we use to assess performance.
These are detailed below, and range from the performance of the
investments to what shareholders have experienced.
Portfolio return:
A comparison of the investment portfolio return against the MSCI
benchmark is the best measure of how the underlying portfolio is
performing. 2020 was a difficult year for the Company, with all
assets written down in value in the first half of the year,
reflecting the sentiment surrounding the national lockdown.
As the year progressed this was in part unwound, particularly in
the industrial / logistics space. One of the characteristics of the
market in 2020 was a wider than normal dispersion of returns both
between sectors, but also within sectors. The Company’s portfolio
total return slightly underperformed the MSCI benchmark in 2020 but
still compares favourably to the index over 3, 5, and 10 years. The
chart below shows these returns.
NAV return:
The NAV total return is probably the best measure of the sum of
the investment manager’s effort. As can be expected at a time of
negative capital value movement the NAV is impacted by the debt
utilized to invest in additional properties. Also during 2020 the
liability held in the accounts for the interest swap increased to
£3.74m, which also had a negative impact on the NAV – this will
revert to £0 on maturity (April 2023)
and so the NAV will benefit in the future. The Company’s NAV total
return v that of the AIC Property Direct UK sector, and also the IA
open ended funds sector are shown in the table below.
Share Price total return:
This measure is least reflective of the investment managers’
input, but is of course most reflective of the experience of the
shareholder. The share price moved quite dramatically over 2020 –
trading at a premium to NAV at the beginning of the year but moving
to a significant discount as the pandemic developed. Towards the
end of 2020 the Company started to buy back its own shares as an
investment as the shares were perceived as good value relative to
other investment opportunities available to the Investment
Manager.
NAV Total Returns
to 31 December 2020 |
1 year
(%) |
3 years
(%) |
5 years
(%) |
10
years (%) |
Standard Life
Investments Property Income Trust |
(4.6) |
8.8 |
30.0 |
140.2 |
AIC
Property Direct – UK sector (weighted average)
Investment Association Open Ended Commercial Property Funds
sector |
1.2
(3.6) |
15.6
0.4 |
24.9
8.6 |
32.4
47.2 |
Source: AIC, Aberdeen Standard Investments
|
Share Price Total
Returns to 31 December 2020 |
1 year
(%) |
3 years
(%) |
5 years
(%) |
10 years
(%) |
Standard
Life Investments Property Income Trust |
(29.8) |
(24.0) |
(7.6) |
70.3 |
FTSE
All-Share Index |
(9.8) |
(2.7) |
28.5 |
71.9 |
FTSE
All-Share REIT Index |
(16.2) |
(4.1) |
0.2 |
95.2 |
AIC
Property Direct – UK sector (weighted average) |
(2.0) |
11.6 |
20.2 |
10.8 |
|
|
|
|
|
|
Source: AIC, Aberdeen Standard Investments
VALUATION
The investment portfolio is valued on a quarterly basis by
Knight Frank LLP. At the risk of repetition, 2020 was a challenging
year for valuers. The RICS (governing body for valuers) required
valuations in March to have a material uncertainty clause for all
valuations, stating that a lower level of confidence in the
reliability of the valuation figure could be expected. By year end
the material uncertainty clause had been lifted, and greater
transaction levels provided more evidence to support
valuations.
At the 2020 year end the portfolio was valued at £437.7m
(£493.2m December 2019) and cash of
£9.4m was held (£6.5 December 2019).
The portfolio comprised of 50 assets as at 30 December (56 assets
as at December 2019). Drawn debt at
year end was £110m with none of the £55m revolving credit facility
drawn (£18m drawn December 2019).
INVESTMENT STRATEGY
The Company has a clear investment objective that drives the
activities of the Board and Investment Manager. The investment
objective is “to provide investors with an attractive income
return, with the prospects of income and capital growth, through
investing in a diversified portfolio of commercial real estate
assets in the UK.” The Board and investment Manager believe that
the dividend should be covered by income over the medium term.
That objective has been challenged in 2020 with many tenants
unable to pay rent, or paying reduced amounts during lockdown.
Although 93% of rent due was collected through 2020 it was
necessary to reduce the dividend to protect the balance sheet
during such uncertain times. The reduction in dividend was made for
the 2nd, 3rd and 4th quarters of the year, where 60% of the
previous dividend level was paid. In total this resulted in the
dividends paid in 2020 being 80% of the 2019 level. A balancing top
up payment has also been declared in April of 0.381p.
As the immediate impact of COVID-19 lockdowns eases and the
economy reopens, so one expects to see a recovery in the rents
received by the Company and, potentially enabling an increase in
the dividend again. COVID-19 has, however, accelerated trends
already seen in the market and the Board and Investment Manager
believe that some changes in emphasis in the investment strategy
are required.
Income remains a key focus, but it should not be at the expense
of total return, and it is important that we invest in assets that
can produce a reliable future income. ESG is an important
consideration and we believe that only assets that meet high ESG
standards will appeal to tenants and provide a strong resilient
income flow. As such we expect future investments to have a strong
ESG focus and that will have an impact in the yield we obtain. This
is a nuanced change of focus, with ESG driving our strategy more,
and means the portfolio yield is likely to trend to the low 5%s
from the existing 5.8%. Although these assets might have lower
yields, they are likely to have stronger net operating income
growth to support future dividend growth.
Later in the report we detail the Company’s ESG activities:
however it is worth pointing out under the investment strategy that
ESG is at the heart of everything we do. We believe that having a
portfolio which is fit for the future, will meet occupiers’ needs
and provide the strongest returns, requires a progressive approach
to ESG. As such, ESG is a key component of decision making for the
Company.
PURCHASES
One purchase was made during 2020 of a retail warehouse unit let
to B&Q for a further 11 years. The unit is in Halesowen and is
a strong performer for B&Q. The purchase price of £19.5 million
reflected an income yield of 7.5%. Although retail was considered
very unfashionable in 2020 we believe units like this, with strong
alternative use potential in the future as well as a long secure
income stream from the existing tenant provide attractive return
prospects.
The Company ended 2020 with circa £55 million available to
invest. The Investment Manager is assessing a number of
opportunities, with an expectation of investing available resources
during 2021.
SALES
Three sales were completed in 2020 totalling £51 million. In
January the Company sold a single let office building in Staines
for £10.7 million, and then in December sold a standalone retail
warehouse for £3.3 million and a portfolio of four multi let
industrial estates for £37.75 million.
After the reporting period the Company completed the sale of an
office in Derby for £4.3 million.
The sales were undertaken following an extensive review of the
portfolio which took into account concerns over the aftermath of
COVID-19 and Brexit where we identified several assets that we no
longer had confidence would deliver the return characteristics we
look for.
ASSET MANAGEMENT
The Investment Manager has an experienced asset management team
dedicated to the Company, who take an active approach to managing
the assets to add value through restructuring and extending leases,
refurbishment and upgrading of assets, and leasing of vacant
accommodation. Over the last 12 months the main focus of asset
management has been on working with tenants to understand their
needs and help them through the various trading restrictions
individual companies have experienced.
The level of tenant interaction has been very pleasing, and in
many cases we have been able to work with the tenant to agree a
suitable solution to the issues COVID-19 created. We worked closely
with our managing agents to ensure that buildings were managed in
such a way as to protect staff and users of the buildings, to
minimise operating costs, but also to properly maintain services
and equipment. Indeed, we have been able to bring forward some
planned works so that they can be undertaken when the buildings are
at very low occupancy levels.
Rent collection has been very much in the spotlight. We have
taken an approach of dealing with each tenant individually based on
their needs. We only have a small number of sole trader retail
units (e.g. tanning studios / hairdressers etc.) because of our low
retail exposure, but in those cases we have written off rent during
lockdowns as the tenant has no ability to generate income, or
indeed recoup lost earnings once they reopen. For other tenants we
have, where required, provided rent free periods in return for a
lease restructuring to extend the lease commitment, or agreed
deferments for payment.
Sadly, the Government’s restriction on enforcing lease contacts
has meant some tenants have chosen not to pay rent and not to
engage with us, despite having the ability to pay. While we have a
prudent provision for bad debts in the financial statements, we
anticipate recovery of some of the outstanding rents once we are
able to enforce lease obligations again.
Collection By Sector 2020
|
|
Gross
Demand |
%
Received |
Retail |
£3,412,470 |
82% |
Industrial |
£15,953,490 |
100% |
Office |
£10,926,581 |
91% |
Other |
£2,415,252 |
78% |
Total |
£32,707,793 |
93.6% |
|
|
|
|
During the reporting period five rent reviews were settled with
uplifts in rent, securing an additional £58,256 pa (an average
increase of 19% on previous rent). A total of 15 lease renewals and
restructurings were undertaken, securing £2,587,491 pa in rent, and
a total of eight lettings securing £890,369 pa.
DEBT
The Company utilises debt, with two forms of borrowings, both
from the Royal Bank of Scotland.
The main facility is a fully drawn term loan of £110m which matures
in April 2023. The Company entered
into an interest rate swap when the term loan was taken out, and
that is marked to market each quarter in the NAV. At the end of the
year it stood as a liability of £3.75m (£2.2m 2019). This will
revert to zero on maturity in April
2023 giving a boost to the NAV.
The Company also has a £55m revolving credit facility. Following
asset sales at the end of the year this was fully repaid, and
provides firepower for future purchases.
The Loan to Value (LTV) at year end was 23.0%, (Dec 2019 24.6%), with an all in cost of 2.7%. The
Company is comfortable with an LTV in the range of 20–35%.
With the debt facility due to mature in April 2023 the Company will formulate a strategy
to replace the existing facility in ahead of maturity.
ESG
In many ways it feels wrong to have a separate part of the
report on ESG, as it is an integral part of how we manage the
Company. ESG now features in every decision we make and by
considering ESG risks and opportunities we help protect and enhance
performance over the long term. We aim to position SLIPIT at the
forefront of ESG as we believe that buildings with strong ESG
credentials will have the greatest appeal to occupiers.
Our approach has matured significantly in recent years and will
continue to develop as we learn more about the ESG trends affecting
the built environment and the objectives of our stakeholders. It’s
a process that continually evolves but what doesn’t change is our
commitment to deliver value through improving the quality of the
built environment and to create better places for our occupiers and
local communities.
We have started to take real practical steps on several of the
most material issues for the Company. The portfolio managers have
piloted Aberdeen Standard Investment’s proprietary ESG Impact Dial
tool which we are using to baseline the ESG performance of all
Company assets and set objectives across a full range of ESG
topics.
Here, we summarise current activities and objectives related to
our current focus areas and in particular, describe our activities
on energy and carbon emissions.
CARBON REDUCTION AND ENERGY
EFFICIENCY
The Company has an active approach to managing energy efficiency
and carbon emissions across the portfolio where there is
landlord-procured energy. Since 1 April
2018 the Company has only procured Green certified
electricity for all its supplies. The realities of transforming the
Company to net-zero carbon mean we are starting to look far more
holistically at emissions from the portfolio’s properties;
including tenant emissions and embodied carbon from
developments.
Following the Investment Manager’s net zero commitment in 2019,
the Company has committed to being a pioneer portfolio and will
undertake work to develop its own net-zero pathway this year. Our
view is that by fully understanding the implications of
decarbonisation now and positioning the portfolio favourably will
help mitigate potential future value impairment due to regulatory
changes and changing occupier demands.
The kick-off phase in 2021 will involve the benchmarking of
existing assets and the definition of best-value strategies to
achieve net zero. We have already started assessing and
implementing such as energy efficiency upgrades, the
electrification of heating and renewable energy installations.
Around 85% of the Company’s current carbon footprint is due to
occupier energy consumption. One of the biggest challenges we have
experienced to date has been gaining detailed data and
understanding of tenant consumption. Knowledge is key to improving
the performance of the company, and we are trying to work with our
tenants firstly to understand and then to improve energy
consumption.
Even with an extensive programme of measures there are likely to
be residual carbon emissions from the portfolio in the future. We
have already begun exploring options to compensate for these
emissions ourselves through direct investment in afforestation
which can help avoid potential future offset costs.
The timeline overleaf summarises the high-level components of
this strategy. This will be refined further this year following
detailed pathway work.
In 2020 we completed our largest solar PV scheme to date; a 918
kWp scheme in Sandy to supply electricity to our occupier Flamingo
Flowers, more details of which is given in the infographic
overleaf. The Company now has six operational PV schemes totalling
1.2MWp and has another 20 schemes in various stages of
implementation. All the schemes involve selling generated power to
the tenant, which provides the Company with an attractive return,
reduces the carbon load on the Company, but also reduces cost for
the tenant and supports their ESG credentials.
It is very easy to just concentrate on the “E” of ESG, but the
“S” is important in how we manage buildings. Social aspects are
much harder to measure, but relate to how we create an environment
where people want to work – it helps improve morale and
productivity for our tenants and therefore improves demand /
retention at our buildings. Fifteen months ago we would have talked
about the functions we arrange on site in some of our multi let
offices, such as access to Yoga classes, great shower and changing
facilities, pop up stands supporting local charities and food bank
collections. COVID has put those on hold, but it doesn’t mean we
have stopped. Small things like arranging for the office Christmas
tree to go to a hospital children’s ward, or donating the tea and
coffee supplies from the office break out to an ICU ward for
hospital workers have continued to engage with occupiers, and
create a sense of community around our buildings.
OUTLOOK AND FUTURE STRATEGY
The one certainty we have today is that change will continue.
Many of the themes we have seen from COVID-19 will also continue;
with elevated on-line retail, a mix of home working, and a
challenging economic environment.
The increased focus on ESG is also likely to continue and that
is an area the Company is looking to be a leader. The way that the
Company can deliver its corporate objective of an attractive level
of income, with prospects of income and capital growth, is to
ensure it has a portfolio that is of sufficient ESG standards to
appeal to occupiers and thus benefit from increases in net
operating income and occupancy. A slightly lower yield today might
be required to ensure strong total returns in the future. The
Company is developing its pathway to carbon neutrality and hopes to
invest in land for reforestation in order to achieve this at a
known cost, rather than be exposed to future, potentially
expensive, carbon offset pricing.
We will retain our active approach to managing the Company,
ensuring that our assets are affordable and appeal to occupiers. We
will structure the Company to be “future fit” and ready to meet the
challenges of change.
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and the Group Consolidated Financial Statements for each year which
give a true and fair view, in accordance with the applicable
Guernsey law and those
International Financial Reporting Standards (“IFRSs”) as adopted by
the European Union.
In preparing those Consolidated Financial Statements, the
Directors are required to:
• select suitable accounting policies in
accordance with IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors and then apply them consistently;
• make judgement and estimates that are
reasonable and prudent;
• present information, including
accounting policies, in a manner that provides relevant, reliable,
comparable and understandable information;
• provide additional disclosures when
compliance with the specific requirements in IFRSs as adopted by
the European Union is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the Group’s financial position and financial performance;
• state that the Group has complied with
IFRSs as adopted by the European Union, subject to any material
departures disclosed and explained in the Group Consolidated
Financial Statements; and
• prepare the Group Consolidated
Financial Statements on a going concern basis unless it is
inappropriate to presume that the Group will continue in
business.
The Directors confirm that they have complied with the above
requirements in preparing the Consolidated Financial
Statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s
transactions and 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 (Guernsey) Law, 2008. They are also responsible
for safeguarding the assets of the Group and hence for taking
reasonable steps for the prevention and detection of fraud, error
and non compliance with law and regulations.
The maintenance and integrity of the Company’s website is the
responsibility of the Directors through its Investment Manager; the
work carried out by the auditors does not involve considerations of
these matters and, accordingly, the auditors accept no
responsibility for any change that may have occurred to the
Consolidated Financial Statements since they were initially
presented on the website. Legislation in Guernsey governing the preparation and
dissemination of the consolidated financial statements may differ
from legislation in other jurisdictions.
Responsibility Statement of the
Directors in respect of the Consolidated Annual Report under the
Disclosure and Transparency Rules.
The Directors each confirm to the best of their knowledge
that:
• the Consolidated Financial Statements,
prepared in accordance with IFRSs as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Group; and
• the management report, which is
incorporated into the Strategic Report, Directors’ Report and
Investment Manager’s Report, includes a fair review of the
development and performance of the business and the position of the
Group, together with a description of the principal risks and
uncertainties that they face.
Statement under the UK Corporate
Governance Code.
The Directors each confirm to the best of their knowledge and
belief that the Annual Report and Consolidated Financial Statements
taken as a whole are fair, balanced and understandable and provide
the information necessary to assess the Group’s position and
performance, business model and strategy.
Approved by the Board on
29 April 2021
James Clifton-Brown Chairman
FINANCIAL STATEMENTS
Consolidated
Statement of Comprehensive Income for the year ended 31
December 2020 |
Notes |
31-Dec-20
£ |
31-Dec-19
£ |
Rental income |
|
29,439,549 |
29,878,646 |
Service charge
income |
|
3,543,976 |
3,313,463 |
Surrender premium |
|
21,250 |
580,000 |
Valuation loss from
investment properties |
7 |
(27,640,224) |
(3,613,836) |
(Loss)/gain on
disposal of investment properties |
7 |
(4,806,137) |
427,304 |
Investment management
fees |
4 |
(3,198,519) |
(3,492,880) |
Valuer’s fees |
4 |
(84,638) |
(97,668) |
Auditor’s fees |
4 |
(118,400) |
(81,850) |
Directors’ fees and
subsistence |
22 |
(236,953) |
(227,276) |
Service charge
expenditure |
|
(3,543,976) |
(3,313,463) |
Other direct property
expenses |
|
(4,904,968) |
(2,935,023) |
Other administration
expenses |
|
(512,849) |
(530,862) |
Operating
(loss)/profit |
|
(12,041,889) |
19,906,555 |
Finance income |
5 |
3,896 |
15,856 |
Finance costs |
5 |
(3,744,074) |
(3,778,280) |
Loss/(profit)
for the
period
before
taxation |
|
(15,782,067) |
16,144,131 |
Taxation |
|
|
|
Tax charge |
|
— |
— |
(Loss)/Profit
for the
period,
net of
tax |
|
(15,782,067) |
16,144,131 |
Other Comprehensive Income |
|
|
|
Valuation loss on cash
flow hedge |
14 |
(1,514,638) |
(1,416,653) |
Total other
comprehensive loss |
|
(1,514,638) |
(1,416,653) |
|
|
|
|
Total comprehensive
(loss)/gain for the period, net of tax |
|
(17,296,705) |
14,727,478 |
Earnings per share |
|
2020 (p) |
2019 (p) |
Basic and diluted
earnings per share |
18 |
(3.88) |
3.98 |
EPRA earnings per
share |
18 |
4.10 |
4.76 |
Consolidated Balance Sheet as at
31 December 2020 |
|
|
|
|
|
31 December |
31 December |
ASSETS |
Notes |
2020 £ |
2019 £ |
Non-current assets
Investment properties |
7 |
428,412,375 |
477,855,299 |
Lease incentives |
7 |
5,885,270 |
5,523,822 |
Rental deposits held
on behalf of tenants |
|
855,866 |
1,298,364 |
|
|
435,153,511 |
484,677,485 |
Current assets
Investment properties held for sale |
8 |
4,300,000 |
10,700,000 |
Trade and other
receivables |
10 |
10,802,197 |
3,913,519 |
Cash and Cash
equivalents |
11 |
9,383,371 |
6,475,619 |
|
|
24,485,568 |
21,089,138 |
Total
Assets |
|
459,639,079 |
505,766,623 |
LIABILITIES |
|
|
|
Current liabilities
Trade and other payables |
12 |
13,096,054 |
9,232,072 |
Interest rate
swap |
14 |
1,472,387 |
644,465 |
|
|
14,568,441 |
9,876,537 |
Non-current liabilities
Bank borrowings |
13 |
109,542,823 |
127,316,886 |
Interest rate
swap |
14 |
2,262,867 |
1,576,151 |
Obligations under
finance leases |
15 |
902,645 |
904,121 |
Rent deposits due to
tenants |
|
855,866 |
1,298,364 |
|
|
113,564,201 |
131,095,522 |
Total
liabilities |
|
128,132,642 |
140,972,059 |
|
|
|
|
Net assets |
|
331,506,437 |
364,794,564 |
EQUITY |
|
2020 £ |
2019 £ |
Capital and reserves attributable to Company’s equity
holders
Share capital |
17 |
228,383,857 |
227,431,057 |
Treasury share
reserve |
17 |
(1,450,787) |
– |
Retained earnings |
18 |
7,339,209 |
6,168,350 |
Capital reserves |
18 |
(604,214) |
33,356,785 |
Other distributable
reserves |
18 |
97,838,372 |
97,838,372 |
Total
equity |
|
331,506,437 |
364,794,564 |
Consolidated
Statement of Changes in Equity for the year ended 31
December 2020 |
Notes |
Share Capital £ |
Treasury shares £ |
Retained Earnings £ |
Capital Reserves £ |
Other Distributable Reserves £ |
Total equity £ |
Opening balance 1
January 2020 |
|
227,431,057 |
— |
6,168,350 |
33,356,785 |
97,838,372 |
364,794,564 |
Loss for the year |
|
— |
— |
(15,782,067) |
— |
— |
(15,782,067) |
Other comprehensive
income |
|
— |
— |
— |
(1,514,638) |
— |
(1,514,638) |
Total comprehensive
loss for the period |
|
— |
— |
(15,782,067) |
(1,514,638) |
— |
(17,296,705) |
Ordinary shares issued
net of issue costs |
17 |
952,800 |
— |
— |
— |
— |
952,800 |
Ordinary shares placed
into treasury net of issue costs |
17 |
— |
(1,450,787) |
— |
— |
— |
(1,450,787) |
Dividends paid |
20 |
— |
— |
(15,493,435) |
— |
— |
(15,493,435) |
Valuation loss from
investment properties |
7 |
— |
— |
27,640,224 |
(27,640,224) |
— |
— |
Loss on disposal of
investment properties |
7 |
— |
— |
4,806,137 |
(4,806,137) |
— |
— |
Balance at 31
December 2020 |
|
228,383,857 |
(1,450,787) |
7,339,209 |
(604,214) |
97,838,372 |
331,506,437 |
Consolidated
Statement of Changes in Equity
for the year ended 31 December 2019 |
|
|
|
|
|
|
|
|
Share Capital |
Retained earnings |
Capital reserves |
Other Distributable
Reserves |
Total equity |
|
Notes |
£ |
£ |
£ |
£ |
£ |
Opening balance 1 January
2019 |
|
227,431,057 |
6,156,881 |
37,959,970 |
97,838,372 |
369,386,280 |
Profit for the year |
|
— |
16,144,131 |
— |
— |
16,144,131 |
Other comprehensive income |
|
— |
— |
(1,416,653) |
— |
(1,416,653) |
Total comprehensive
income for the period |
|
— |
16,144,131 |
(1,416,653) |
— |
14,727,478 |
Ordinary shares issued net of issue
costs |
17 |
— |
— |
— |
— |
— |
Dividends paid |
20 |
— |
(19,319,194) |
— |
— |
(19,319,194) |
Valuation loss from investment
properties |
7 |
— |
3,613,836 |
(3,613,836) |
— |
— |
Gain on disposal of investment
properties |
7 |
— |
(427,304) |
427,304 |
— |
— |
Balance at 31
December 2019 |
|
227,431,057 |
6,168,350 |
33,356,785 |
97,838,372 |
364,794,564 |
Consolidated Cash Flow Statement for the year ended 31
December 2020 |
|
|
|
Cash flows from
operating activities |
Notes |
31-Dec-20 |
31-Dec-19 |
|
|
£ |
£ |
Profit for the year
before taxation |
|
(15,782,067) |
16,144,131 |
Movement in lease
incentives |
|
(1,694,642) |
(1,881,958) |
Movement in trade and
other receivables |
|
(6,446,180) |
(400,215) |
Movement in trade and
other payables |
|
3,421,484 |
(2,216,558) |
Finance costs |
5 |
3,744,074 |
3,778,280 |
Finance income |
5 |
(3,896) |
(15,856) |
Valuation loss from
investment properties |
7 |
27,640,224 |
3,613,836 |
Loss/(gain) on
disposal of investment properties |
7 |
4,806,137 |
(427,304) |
Net cash inflow
from operating activities |
|
15,685,134 |
18,594,356 |
Cash flows from investing activities |
|
|
|
Interest received |
5 |
3,896 |
15,856 |
Purchase of investment
properties |
7 |
(21,297,754) |
(25,808,526) |
Capital expenditure on
investment properties |
7 |
(4,947,828) |
(4,628,353) |
Net proceeds from
disposal of investment properties |
7 |
50,973,863 |
35,067,304 |
Net cash inflow
from investing activities |
|
24,732,177 |
4,646,281 |
Cash flows from financing activities |
|
|
|
Proceeds on issue of
ordinary shares |
17 |
952,800 |
— |
Shares bought back
during the year |
17 |
(1,450,787) |
— |
Bank borrowing |
13 |
27,000,000 |
1,000,000 |
Repayment of RCF |
13 |
(45,000,000) |
(3,000,000) |
Bank borrowing
arrangement costs |
13 |
— |
(150,000) |
Interest paid on bank
borrowing |
5 |
(2,479,388) |
(2,986,775) |
Payments on interest
rate swaps |
5 |
(1,038,749) |
(574,021) |
Dividends paid to the
Company’s shareholders |
20 |
(15,493,435) |
(19,319,194) |
Net cash outflow
from financing activities |
|
(37,509,559) |
(25,029,990) |
Net increase/(decrease) in cash and cash equivalents |
|
2,907,752 |
(1,789,353) |
Cash and cash
equivalents at beginning of year |
11 |
6,475,619 |
8,264,972 |
Cash and cash
equivalents at end of year |
11 |
9,383,371 |
6,475,619 |
Notes to the Consolidated Financial Statements for the
year ended 31 December 2020
1 GENERAL INFORMATION
Standard Life Investment Property Income Trust Limited (“the
Company”) and its subsidiaries (together “the Group”) carries on
the business of property investment through a portfolio of freehold
and leasehold investment properties located in the United Kingdom. The Company is a limited
liability company incorporated in Guernsey, Channel
Islands. The Company has its listing on the London Stock
Exchange.
The address of the registered office is PO Box 255, Trafalgar
Court, Les Banques, St Peter Port, Guernsey.
These audited Consolidated Financial Statements were approved
for issue by the Board of Directors on 29
April 2021.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have
been prepared in accordance with International Financial Reporting
Standards as adopted by the European Union (“IFRS”), and all
applicable requirements of The Companies (Guernsey) Law, 2008. The audited Consolidated
Financial Statements of the Group have been prepared under the
historical cost convention as modified by the measurement of
investment property and derivative financial instruments at fair
value. The Consolidated Financial Statements are presented in
pounds sterling and all values are not rounded except when
otherwise indicated.
The Directors have considered the basis of preparation of the
accounts given the COVID-19 pandemic and believe that it is still
appropriate for the accounts to be prepared on the going concern
basis.
Changes in accounting policy and
disclosure
A number of new standards and amendments to standards and
interpretations are effective for annual periods beginning on or
after 1 January 2020, and have not
been applied in preparing these consolidated financial
statements.
None of these are expected to have a significant effect on the
consolidated financial statements of the Group, except the
following set out below:
• Amendments to IFRS 3, Business
Combinations – The IASB published an amendment to the requirements
of IFRS 3 in relation to whether a transaction meets the definition
of a business combination. The amendment clarifies the definition
of a business, as well as provides additional illustrative
examples, including those relevant to the real estate industry. A
significant change in the amendment is the option for an entity to
assess whether substantially all of the fair value of the gross
assets acquired is concentrated in a single asset or group of
similar assets. If such a concentration exists, the transaction is
not viewed as an acquisition of a business and no further
assessment of the business combination guidance is required. This
will be relevant where the value of the acquired entity is
concentrated in one property, or a group of similar properties. The
amendment is effective for periods beginning on or after
1 January 2020 with earlier
application permitted. There will be no impact on transition since
the amendments are effective for business combinations for which
the acquisition date is on or after the transition date.
Annual Improvements to IFRS
The Group has made no adjustments to its financial statements in
relation to IFRS Standards detailed in the annual Improvements to
IFRS 2018-2020 Cycle (effective for annual reporting periods
beginning on or after 1 January
2022). The Group will consider these amendments in due
course to see if they will have any impact on the Group.
2.2 Significant accounting judgements, estimates
and assumptions
The preparation of the Group’s Financial Statements requires
management to make judgements, estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and
liabilities, and the disclosure of contingent liabilities, at the
reporting date. However, uncertainties about these assumptions and
estimates could result in outcomes that could require a material
adjustment to the carrying amount of the asset or liability
affected in the future periods. The most significant estimates and
judgements are set out below. There were no critical accounting
judgements.
Fair value of investment
properties
Investment properties are stated at fair value as at the Balance
Sheet date. Gains or losses arising from changes in fair values are
included in the Consolidated Statement of Comprehensive Income in
the year in which they arise. The fair value of investment
properties is determined by external real estate valuation experts
using recognised valuation techniques. The fair values are
determined having regard to any recent real estate transactions
where available, with similar characteristics and locations to
those of the Group’s assets.
In most cases however, the determination of the fair value of
investment properties requires the use of valuation models which
use a number of judgements and assumptions. The only model used was
the income capitalisation method. Under the income capitalisation
method, a property’s fair value is judged based on the normalised
net operating income generated by the property, which is divided by
the capitalisation rate (discounted by the investor’s rate of
return). Under the income capitalisation method, over (above market
rent) and under-rent situations are separately capitalised
(discounted).
The sensitivity analysis in note 7 details the decrease in the
valuation of investment properties if equivalent yield increases by
50 basis points or rental rates (ERV) decreases by 5% which the
Board believes are reasonable sensitivities to apply given
historical movements in valuations.
Fair value of financial
instruments
When the fair value of financial assets and financial
liabilities recorded in the Consolidated Balance Sheet cannot be
derived from active markets, they are determined using a variety of
valuation techniques that include the use of mathematical models.
The input to these models are taken from observable markets where
possible, but where this is not feasible, a degree of judgement is
required in establishing fair value. The judgements include
considerations of liquidity and model inputs such as credit risk
(both own and counterparty’s), correlation and volatility.
Changes in assumptions about these factors could affect the
reported fair value of financial instruments. The models are
calibrated regularly and tested for validity using prices from any
observable current market transactions in the same instrument
(without modification or repackaging) or based on any available
observable market data.
The valuation of interest rate swaps used in the Balance Sheet
is provided by The Royal Bank of Scotland. These values are validated by
comparison to internally generated valuations prepared using the
fair value principles outlined above.
The sensitivity analysis in note 3 details the increase and
decrease in the valuation of interest rate swaps if market rate
interest rates had been 100 basis points higher and 100 basis
points lower.
Provision for Bad debts
Provision for bad debts are also a key estimation uncertainty.
These are measured with reference to amounts included as income at
the year end but not yet collected. In assessing whether the credit
risk of an asset has significantly increased the Group takes into
account qualitative and quantitative reasonable and supportable
forward-looking information.
Due to the impact of COVID-19 on collection rates, there has
been a significant increase in our assessed credit risk. Each
individual rental income debtor is reviewed to assess whether it is
believed there is a probability of default and expected credit loss
given the knowledge and intelligence of the individual tenant and
an appropriate provision made.
2.3 Summary of significant accounting policies A
Basis of consolidation
The audited Consolidated Financial Statements comprise the
financial statements of Standard Life Investments Property Income
Trust Limited and its material wholly owned subsidiary
undertakings.
Control is achieved when the Group is exposed, or has rights, to
variable returns from its involvement with subsidiaries and has the
ability to affect those returns through its power over the
subsidiary.
Specifically, the Group controls a subsidiary if, and only if,
it has:
• Power over the subsidiary (i.e.
existing rights that give it the current ability to direct the
relevant activities of the subsidiary)
• Exposure, or rights, to variable
returns from its involvement with the subsidiary
• The ability to use its power over the
subsidiary to affect its returns
The Group assesses whether or not it controls a subsidiary if
facts and circumstances indicate that there are changes to one or
more of the three elements of control. Consolidation of a
subsidiary begins when the Group obtains control over the
subsidiary and ceases when the Group loses control of the
subsidiary. Assets, liabilities, income and expenses of a
subsidiary acquired or disposed of during the year are included in
the consolidated statement of other comprehensive income from the
date the Group gains control until the date when the Group ceases
to control the subsidiary.
The financial statements of the subsidiaries are prepared for
the same reporting period as the parent company, using consistent
accounting policies. All intra-group balances, transactions and
unrealised gains and losses resulting from intra-group transactions
are eliminated in full.
B Functional and presentation
currency
Items included in the financial statements of each of the
Group’s entities are measured using the currency of the primary
economic environment in which the entity operates (“the functional
currency”). The Consolidated Financial Statements are presented in
pound sterling, which is also the Company’s functional
currency.
C Revenue Recognition
Revenue is recognised as follows:
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and
value added tax (“VAT”) recognised on a straight line basis over
the lease term including lease agreements with stepped rent
increases. The initial direct costs incurred in negotiating and
arranging an operating lease are recognised as an expense over the
lease term on the same basis as the lease income. The cost of any
lease incentives provided are recognised over the lease term, on a
straight line basis as a reduction of rental income. The resulting
asset is reflected as a receivable in the Consolidated Balance
Sheet. The valuation of investment properties is reduced by the
total of the unamortised lease incentive balances. Any remaining
lease incentive balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at
disposal.
Contingent rents, being those payments that are not fixed at the
inception of the lease, for example increases arising on rent
reviews, are recorded as income in periods when they are earned.
Rent reviews which remain outstanding at the year end are
recognised as income, based on estimates, when it is reasonable to
assume that they will be received.
The surrender premiums received for the year ended 2020 were
£21,250 (2019: £580,000) as detailed in the Statement of
Comprehensive Income and related to a tenant break during the
year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is
recognised once the sale transaction has been completed, regardless
of when contracts have been exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The
investment management and administration fees, finance and all
other revenue expenses are charged through the Consolidated
Statement of Comprehensive Income as and when incurred.
The Group also incurs capital expenditure which can result in
movements in the capital value of the investment properties. The
movements in capital expenditure are reflected in the Statement of
Comprehensive Income as a valuation gain/(loss). In 2020, there
were no non-income producing properties (2019: nil).
E Taxation
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted by the
reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised
in other comprehensive income and in equity respectively, and not
in the income statement. Positions taken in tax returns with
respect to situations in which applicable tax regulations are
subject to interpretation, if any, are reviewed periodically and
provisions are established where appropriate.
The Group recognises liabilities for current taxes based on
estimates of whether additional taxes will be due. When the final
tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the income
and deferred tax provisions in the period in which the
determination is made.
Deferred income tax is provided using the liability method on
all temporary differences at the reporting date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred income tax assets are
recognised only to the extent that it is probable that taxable
profit will be available against which deductible temporary
differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the
expected manner of realisation or settlement of the carrying amount
of assets and liabilities. In determining the expected manner of
realisation of an asset the Directors consider that the Group will
recover the value of investment property through sale. Deferred
income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise 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 the definition of an
investment property is met.
Investment properties are measured initially at cost including
transaction costs. Transaction costs include transfer taxes,
professional fees for legal services and initial leasing
commissions to bring the property to the condition necessary for it
to be capable of operating. The carrying amount also includes the
cost of replacing part of an existing investment property at the
time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are
stated at fair value. Fair value is based upon the market valuation
of the properties as provided by the external valuers as described
in note 2.2. Gains or losses arising from changes in the fair
values are included in the Consolidated Statement of Comprehensive
Income in the year in which they arise. For the purposes of these
financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying
amount of any accrued income resulting from the spreading of lease
incentives and/or minimum lease payments.
ii) Increased by the carrying
amount of any liability to the superior leaseholder or freeholder
(for properties held by the Group under operating leases) that has
been recognised in the Balance Sheet as a finance lease
obligation.
Acquisitions of investment properties are considered to have
taken place on exchange of contracts unless there are significant
conditions attached. For conditional exchanges acquisitions are
recognised when these conditions are satisfied. Investment
properties are derecognised when they have been disposed of or
permanently withdrawn from use and no future economic benefit is
expected from their disposal. Any gains or losses on the retirement
or disposal of investment properties are recognised in the
Consolidated Statement of Comprehensive Income in the year of
retirement or disposal.
Gains or losses on the disposal of investment properties are
determined as the difference between net disposal proceeds and the
carrying value of the asset in the previous full period financial
statements.
G Investment properties held for
sale
Non-current assets (and disposal groups) classified as held for
sale are measured at the lower of carrying amount and fair value
(except for investment property measured using fair value
model).
Non-current assets and disposal groups are classified as held
for sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is
regarded as met only when the sale is highly probable and the asset
(or disposal group) is available for immediate sale in its present
condition. Management must be committed to the sale which should be
expected to qualify for recognition as a completed sale within one
year from the date of classification.
When the Group is committed to a sale plan involving loss of
control of a subsidiary, all of the assets and liabilities of that
subsidiary (i.e. disposal group) are classified as held for sale
when the criteria described above are met, regardless of whether
the Group will retain a non-controlling interest in its former
subsidiary after the sale.
H Trade and other receivables
Trade receivables are recognised and carried at the lower of
their original invoiced value and recoverable amount. Where the
time value of money is material, receivables are carried at
amortised cost. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will
not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the
debtor, probability that the debtor will enter bankruptcy or
financial reorganisation, and default or delinquency in payments
(more than 30 days overdue) are considered indicators that the
trade receivable is impaired. The amount of the provision is the
difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the original
effective interest rate. The carrying amount of the asset is
reduced through use of an allowance account, and the amount of the
expected credit loss is recognised in the Consolidated Statement of
Comprehensive Income. When a trade receivable is uncollectible, it
is written off against the allowance account for trade receivables.
Subsequent recoveries of amounts previously written off are
credited in the Consolidated Statement of Comprehensive Income.
The Group loss allowance is based on expected credit loss as
calculated using the “provision matrix” approach and a
forward-looking component based on individual tenant profiles. The
Group considers a financial asset to be in default when the
borrower is unlikely to pay its credit obligations to the Group in
full. The Group writes off trade receivables when there is no
reasonable expectation of recovery.
I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand
deposits, and other short-term highly liquid investments readily
convertible within three months or less to known amounts of cash
and subject to insignificant risk of changes in value.
J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair
value of the consideration received, less issue costs where
applicable. After initial recognition, all interest-bearing loans
and borrowings are subsequently measured at amortised cost.
Amortised cost is calculated by taking into account any discount or
premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated Statement of Comprehensive Income
as incurred.
K Accounting for derivative financial
instruments and hedging activities
Interest rate swaps are initially recognised at fair value on
the date a derivative contract is entered into and are subsequently
remeasured at their fair value. The method of recognising the
resulting gain or loss depends on whether the derivative is
designated as a hedging instrument, and if so, the nature of the
item being hedged. The Group documents at the inception of the
transaction the relationship between hedging instruments and hedged
items, as well as its risk management objective and strategy for
undertaking various hedging transactions. The Group also documents
its assessment both at hedge inception and on an ongoing basis of
whether the derivatives that are used in hedging transactions are
highly effective in off setting changes in fair values or cash
flows of hedged items. The effective portion of changes in the fair
value of derivatives that are designated and qualify as cash flow
hedges are recognised in other comprehensive income in the
Consolidated Statement of Comprehensive Income. The gains or losses
relating to the ineffective portion are recognised in operating
profit in the Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when
the hedged transaction affects profit or loss, such as when the
hedged financial income or financial expenses are recognised.
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.
L Service charge
The Group has appointed a managing agent to deal with the
service charge at the investment properties and the Group is acting
as an agent for the service charge and not a principal. As a result
the Group recognises net service charge and void expenses in the
Consolidated Statement of Comprehensive Income. Service charge that
is payable by tenants is shown as income and a corresponding
expense in the Consolidated Statement of Comprehensive Income.
M Other financial liabilities
Trade and other payables are recognised and carried at invoiced
value as they are considered to have payment terms of 30 days or
less and are not interest bearing. The balance of trade and other
payables are considered to meet the definition of an accrual and
have been expensed through the Income Statement or Balance Sheet
depending on classification. VAT payable at the Balance Sheet date
will be settled within 31 days of the Balance Sheet date with Her
Majesty’s Revenue and Customs (“HMRC”) and deferred rental income
is rent that has been billed to tenants but relates to the period
after the Balance Sheet date. Rent deposits recognised in note 12
are those that are due within one year as a result of upcoming
tenant expiries.
3 FINANCIAL RISK MANAGEMENT
The Group’s principal financial liabilities are loans and
borrowings. The main purpose of the Group’s loans and borrowings is
to finance the acquisition and development of the Group’s property
portfolio. The Group has rent and other receivables, trade and
other payables and cash and short-term deposits that arise directly
from its operations.
The Group is exposed to market risk (including interest rate
risk and real estate risk), credit risk, capital risk and liquidity
risk. The Group is not exposed to currency risk or price risk. The
Group is engaged in a single segment of business, being property
investment in one geographical area, the United Kingdom. Therefore the Group only
engages in one form of currency being pound sterling. The Group
currently invests in direct non-listed property and is therefore
not exposed to price risk.
The Board of Directors reviews and agrees policies for managing
each of these risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial
instruments will fluctuate because of changes in market prices. The
financial instruments held by the Group that are affected by market
risk are principally the interest rate swap.
i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These
balances expose the Group to cash flow interest rate risk as the
Group’s income and operating cash flows will be affected by
movements in the market rate of interest. There is considered to be
no fair value interest rate risk in regard to these balances.
The bank borrowings as described in note 13 also expose the
Group to cash flow interest rate risk. The Group’s policy is to
manage its cash flow interest rate risk using interest rate swaps,
in which the Group has agreed to exchange the difference between
fixed and floating interest amounts based on a notional principal
amount (see note 14). The Group has floating rate borrowings of
£110,000,000. The full £110,000,000 of these borrowings has been
fixed via an interest rate swap.
The bank borrowings are carried at amortised cost and the Group
considers this to be a close approximation to fair value. The fair
value of the bank borrowings is affected by changes in the market
interest rate. The fair value of the interest rate swap is exposed
to changes in the market interest rate as their fair value is
calculated as the present value of the estimated future cash flows
under the agreements. The accounting policy for recognising the
fair value movements in the interest rate swaps is described in
note 2.3.
Trade and other receivables and trade and other payables are
interest free and have settlement dates within one year and
therefore are not considered to present a fair value interest rate
risk.
The tables below set out the carrying amount of the Group’s
financial instruments excluding the amortisation of borrowing costs
as outlined in note 13. Bank borrowings have been fixed due to an
interest rate swap and is detailed further in note 14:
At 31 December 2020 |
Fixed Rate |
Variable Rate
£ |
Interest Rate
£ |
Cash and cash equivalents |
- |
9,383,371 |
0.000% |
Bank borrowings |
110,000,000 |
- |
2.725% |
At 31 December 2019 |
Fixed Rate |
Variable Rate
£ |
Interest Rate
£ |
Cash and cash equivalents |
- |
6,475,619 |
0.020% |
Bank borrowings |
128,000,000 |
- |
2.640% |
At 31 December 2020, if market
rate interest rates had been 100 basis points higher, which is
deemed appropriate given historical movements in interest rates,
with all other variables held constant, the profit for the year
would have been £93,834 higher (2019: £115,244 lower) as a result
of the higher interest income on cash and cash equivalents. Other
Comprehensive Income and the Capital Reserve would have been
£2,507,886 higher (2019: £3,851,254 higher) as a result of an
increase in the fair value of the derivative designated as a cash
flow hedge of floating rate borrowings.
At 31 December 2020, if market
rate interest rates had been 100 basis points lower with all other
variables held constant, the profit for the year would have been
£93,834 lower (2019: £115,244 higher) as a result of the lower
interest income on cash and cash equivalents. Other Comprehensive
Income and the Capital Reserve would have been £2,519,221 lower
(2019: £3,898,889 lower) as a result of a decrease in the fair
value of the derivative designated as a cash flow hedge of floating
rate borrowings.
ii)
Real estate risk
The Group has identified the following risks associated with the
real estate portfolio. The risks following, in particular b and c
and also credit risk have increased given the COVID-19 pandemic and
the resultant effect on tenants’ ability to pay rent:
a) The cost of any development schemes may increase
if there are delays in the planning process. The Group uses
advisers who are experts in the specific planning requirements in
the scheme’s location in order to reduce the risks that may arise
in the planning process.
b) A major tenant may become insolvent causing a
significant loss of rental income and a reduction in the value of
the associated property (see also credit risk). To reduce this
risk, the Group reviews the financial status of all prospective
tenants and decides on the appropriate level of security required
via rental deposits or guarantees.
c) The exposure of the fair values of the portfolio
to market and occupier fundamentals. The Group aims to manage such
risks by taking an active approach to asset management (working
with tenants to extend leases and minimise voids), capturing profit
(selling when the property has delivered a return to the Group that
the Group believes has been maximised and the proceeds can be
reinvested into more attractive opportunities) and identifying new
investments (generally at yields that are accretive to the revenue
account and where the Group believes there will be greater
investment demand in the medium term).
Credit risk
Credit risk is the risk that a counterparty will be unable to
meet a commitment that it has entered into with the Group. In the
event of default by an occupational tenant, the Group will suffer a
rental income shortfall and incur additional related costs. The
Investment Manager regularly reviews reports produced by Dun and
Bradstreet and other sources, including the IPD IRIS report, to be
able to assess the credit worthiness of the Group’s tenants and
aims to ensure that there are no excessive concentrations of credit
risk and that the impact of default by a tenant is minimised. In
addition to this, the terms of the Group’s bank borrowings require
that the largest tenant accounts for less than 20% of the Group’s
total rental income, that the five largest tenants account for less
than 50% of the Group’s total rental income and that the ten
largest tenants account for less than 75% of the Group’s total
rental income. The maximum credit risk from the tenant arrears of
the Group at the financial year end was £6,019,917 (2019:
£2,599,862) as detailed in note 10. The Investment Manager also has
a detailed process to identify the expected credit loss from
tenants who are behind with rental payments.
This involves a review of every tenant who owes money with the
Investment Manager using their own knowledge and communications
with the tenant to assess whether a provision should be made. This
resulted in the provision for bad debts increasing to £2.58 million
at the year end (2019: £139,000).
With respect to credit risk arising from other financial assets
of the Group, which comprise cash and cash equivalents, the Group’s
exposure to credit risk arises from default of the counterparty
bank with a maximum exposure equal to the carrying value of these
instruments. As at 31 December 2020
£921,920 (2019: £3,393,849) was placed on deposit with The Royal
Bank of Scotland plc (“RBS”),
£7,749,473 (2019: £3,081,770) was held with Citibank and £711,978
(2019: £nil) was held with Barclays. The credit risk associated
with the cash deposits placed with RBS is mitigated by virtue of
the Group having a right to off-set the balance deposited against
the amount borrowed from RBS should RBS be unable to return the
deposits for any reason. Citibank is rated A-2 Stable by Standard
& Poor’s and P-2 Stable by Moody’s. RBS is rated A-1 Negative
by Standard & Poor’s and P-1 Positive by Moody’s. Barclays is
rated A-1 Negative by Standard & Poor’s and P-1 Stable by
Moody’s.
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments. The investment properties in which the Group
invests are not traded in an organised public market and may be
illiquid.
As a result, the Group may not be able to liquidate its
investments in these properties quickly at an amount close to their
fair value in order to meet its liquidity requirements.
The following table summarises the maturity profile of the
Group’s financial liabilities based on contractual undiscounted
payments.
The disclosed amounts for interest-bearing loans and interest
rate swaps in the below table are the estimated net undiscounted
cash flows.
The Group’s liquidity position is regularly monitored by
management and is reviewed quarterly by the Board of Directors.
Financial Liabilities
|
On demand |
12
months |
1 to 5 years |
>5 years |
Total |
|
Year
ended 31 December 2020 |
£ |
£ |
£ |
£ |
£ |
|
Interest-bearing loans |
— |
1,565,575 |
112,168,436 |
— |
113,734,011 |
|
Interest
rate swaps |
— |
1,431,925 |
1,789,906 |
— |
3,221,831 |
|
Trade and
other payables |
4,986,275 |
26,068 |
104,271 |
2,632,853 |
7,749,467 |
|
Rental
deposits due to tenants |
— |
736,793 |
521,194 |
334,673 |
1,592,660 |
|
|
4,986,275 |
3,760,361 |
114,583,807 |
2,967,526 |
126,297,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
demand |
12
months |
1 to
5 years |
>5
years |
Total |
Year ended 31
December 2019 |
£ |
£ |
£ |
£ |
£ |
Interest-bearing
loans |
— |
20,387,418 |
115,371,691 |
— |
135,759,109 |
Interest rate
swaps |
— |
610,082 |
1,372,685 |
— |
1,982,767 |
Trade and other
payables |
3,177,865 |
26,068 |
104,271 |
2,658,921 |
5,967,125 |
Rental deposits due to
tenants |
— |
320,878 |
514,128 |
784,237 |
1,619,243 |
|
3,177,865 |
21,344,446 |
117,362,775 |
3,443,158 |
145,328,244 |
Capital risk
The Group’s objectives when managing capital are to safeguard
the Group’s ability to continue as a going concern in order to
provide returns for shareholders and benefits for other
stakeholders and to maintain an optimal capital structure to reduce
the cost of capital.
In order to maintain or adjust the capital structure, the Group
may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares, increase or decrease
borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio.
This ratio is calculated as total borrowings divided by gross
assets and has a limit of 65% set by the Articles of Association of
the Company. Gross assets are calculated as non-current and current
assets, as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December
2020 and at 31 December 2019
were as follows:
|
2020 |
2019 |
|
£ |
£ |
Total borrowings
(excluding unamortised arrangement fees) |
110,000,000 |
128,000,000 |
Gross assets |
459,639,079 |
505,766,623 |
Gearing ratio (must not exceed 65%) |
23.93% |
25.31% |
The Group also monitors the Loan to Value ratio which is
calculated as gross assets divided by gross borrowings less cash.
As at 31 December 2020 this was 23.0%
(2019: 24.6%).
Fair values
Set out below is a comparison by class of the carrying amounts
and fair value of the Group’s financial instruments that are
carried in the financial statements.
|
Carrying Amount |
Fair Value |
|
2020 |
2019 |
2020 |
2019 |
Financial
Assets |
£ |
£ |
£ |
£ |
Cash and cash
equivalents |
9,383,371 |
6,475,619 |
9,383,371 |
6,475,619 |
Trade and other
receivables |
10,802,197 |
4,388,390 |
10,802,197 |
4,388,390 |
Financial Liabilities
Bank borrowings |
109,542,823 |
127,316,886 |
113,000,998 |
130,066,813 |
Interest rate
swaps |
3,735,254 |
2,220,616 |
3,735,254 |
2,220,616 |
Trade and other
payables |
5,797,386 |
5,320,162 |
5,797,386 |
5,320,162 |
The fair value of trade receivables and payables are materially
equivalent to their amortised cost.
The fair value of the financial assets and liabilities are
included at an estimate of the price that would be received to sell
a financial asset or paid to transfer a financial liability in an
orderly transaction between market participants at the measurement
date.
The following methods and assumptions were used to estimate the
fair value:
• Cash and cash equivalents, trade and
other receivables and trade and other payables are the same as fair
value due to the short-term maturities of these instruments.
• The fair value of bank borrowings is
estimated by discounting future cash flows using rates currently
available for debt on similar terms and remaining maturities. The
fair value approximates their carrying values gross of unamortised
transaction costs. This is considered as being valued at level 2 of
the fair value hierarchy and has not changed level since
31 December 2019.
• The fair value of the interest rate
swap contract is estimated by discounting expected future cash
flows using current market interest rates and yield curve over the
remaining term of the instrument. This is considered as being
valued at level 2 of the fair value hierarchy and has not changed
level since 31 December 2019. The
definition of the valuation techniques are explained in the
significant accounting judgements, estimates and assumptions is in
the Annual Report.
The table below shows an analysis of the fair values of
financial instruments recognised in the Balance Sheet by the level
of the fair value hierarchy:
Year ended 31
December 2020 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
Interest rate
swap |
— |
3,735,254 |
— |
3,735,254 |
Year ended 31 December 2019 |
Level 1 |
Level 2 |
Level 3 |
Total fair value |
Interest rate
swap |
— |
2,220,616 |
— |
2,220,616 |
Level 1 Quoted (unadjusted) market prices in active markets for
identical assets or liabilities.
Level 2 Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable. Level 3 Valuation techniques for which the
lowest level input that is significant to the fair value
measurement is unobservable.
Please see note 7 for details on the valuation of Investment
properties.
4 FEES
Investment management fees
On 19 December 2003 Standard Life
Investments (Corporate Funds) Limited (“the Investment Manager”)
was appointed as Investment Manager to manage the property assets
of the Group. A new Investment Management Agreement (“IMA”) was
entered into on 7 July 2014,
appointing the Investment Manager as the AIFM (“Alternative
Investment Fund Manager”). On 10 December
2018, the Investment Manager contract was novated on the
same commercial terms to Aberdeen Standard Fund Managers
Limited.
Until 30 June 2019, under the
terms of the IMA the Investment Manager was entitled to 0.75% of
total assets up to £200 million; 0.70% of total assets between £200
million and £300 million; and 0.65% of total assets in excess of
£300 million. From 1 July 2019, under
the terms of the IMA the Investment Manager is entitled to 0.70% of
total assets up to £500 million; and 0.60% of total assets in
excess of £500 million. The total fees charged for the year
amounted to £3,198,519 (2019: £3,492,880). The amount due and
payable at the year end amounted to £779,737 excluding VAT (2019:
£866,598 excluding VAT). In addition the Company paid the
Investment Manager a sum of £131,000 (2019: £109,800) to
participate in the Managers marketing programme and Investment
Trust share plan.
Administration, secretarial fees
On 19 December 2003 Northern Trust
International Fund Administration Services (Guernsey) Limited (“Northern Trust”) was
appointed administrator, secretary and registrar to the Group.
Northern Trust is entitled to an annual fee, payable quarterly in
arrears, of £65,000. Northern Trust is also entitled to
reimbursement of reasonable out of pocket expenses. Total fees and
expenses charged for the year amounted to £65,000 (2019: £65,000).
The amount due and payable at the year end amounted to £16,250
(2019: £16,250).
Valuer’s fee
Knight Frank LLP (“the Valuers”), external international real
estate consultants, was appointed as valuers in respect of the
assets comprising the property portfolio. The total valuation fees
charged for the year amounted to £84,638 (2019: £97,668). The total
valuation fee comprises a base fee for the ongoing quarterly
valuation, and a one off fee on acquisition of an asset. The amount
due and payable at the year end amounted to £18,602 excluding VAT
(2019: £20,960 excluding VAT).
The annual fee is equal to 0.017 percent of the aggregate value
of property portfolio paid quarterly.
Auditor’s fee
At the year end date Deloitte LLP continued as independent
auditor of the Group. The audit fees for the year amounted to
£118,400 (2019: £81,850) and relate to audit services provided for
the 2020 financial year. Deloitte LLP did not provide any non-
audit services in the year (2019: nil).
5 FINANCE INCOME AND COSTS
|
2020
£ |
2019
£ |
Interest income on
cash and cash equivalents |
3,896 |
15,856 |
Finance income |
3,896 |
15,856 |
Interest expense on
bank borrowings |
2,479,388 |
2,986,775 |
Payments on interest
rate swap |
1,038,749 |
574,021 |
Amortisation of
arrangement costs (see note 13) |
225,937 |
217,484 |
Finance costs |
3,744,074 |
3,778,280 |
Of the finance costs above, £339,797 of the interest expense on
bank borrowings and £282,462 of payments on interest rate swaps
were accruals at 31 December 2020 and
included in Trade and other payables.
6 TAXATION
UK REIT Status
The Group migrated tax residence to the UK and elected to be
treated as a UK REIT with effect from 1
January 2015. As a UK REIT, the income profits of the
Group’s UK property rental business are exempt from corporation tax
as are any gains it makes from the disposal of its properties,
provided they are not held for trading or sold within three years
of completion of development. The Group is otherwise subject to UK
corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to
distribute at least 90% of the income profits of the Group’s UK
property rental business. There are a number of other conditions
that also require to be met by the Company and the Group to
maintain REIT tax status. These conditions were met in the period
and the Board intends to conduct the Group’s affairs such that
these conditions continue to be met for the foreseeable future.
Accordingly, deferred tax is no longer recognised on temporary
differences relating to the property rental business.
The Company and its Guernsey
subsidiary have obtained exempt company status in Guernsey so that they are exempt from
Guernsey taxation on income
arising outside Guernsey and bank
interest receivable in Guernsey.
A reconciliation between the tax charge and the product of
accounting profit multiplied by the applicable tax rate for the
year ended 31 December 2020 and 2019
is as follows:
|
2020
£ |
2019
£ |
Surplus before tax |
(15,782,067) |
16,144,131 |
Tax calculated at UK statutory
corporate tax rate of 19% (2019: 19%) |
(2,998,593) |
3,067,385 |
UK REIT exemption on net income |
(3,166,216) |
(3,672,826) |
Valuation (gain) in respect of
investment properties not subject to tax |
6,164,809 |
605,441 |
Current income tax charge |
- |
- |
7 INVESTMENT PROPERTIES
|
UK
Industrial
2020
£ |
UK
Office
2020
£ |
UK
Retail
2020
£ |
UK
Other
2020
£ |
Total 2020
£ |
Market value at 1
January |
252,800,000 |
163,305,000 |
42,270,000 |
34,800,000 |
493,175,000 |
Purchase of investment
properties |
5,099 |
623,074 |
20,669,581 |
— |
21,297,754 |
Capital expenditure on
investment properties |
727,680 |
4,051,295 |
168,853 |
— |
4,947,828 |
Opening market value
of disposed investment properties |
(41,100,000) |
(10,700,000) |
(3,980,000) |
— |
(55,780,000) |
Valuation loss from
investment properties |
(2,093,045) |
(15,149,700) |
(8,286,927) |
(2,110,552) |
(27,640,224) |
Movement in lease
incentives receivable |
860,266 |
565,331 |
308,493 |
(39,448) |
1,694,642 |
Market value at 31
December |
211,200,000 |
142,695,000 |
51,150,000 |
32,650,000 |
437,695,000 |
Investment property
recognised as held for sale |
— |
(4,300,000) |
— |
— |
(4,300,000) |
Market value net of
held for sale at 31 December |
211,200,000 |
138,395,000 |
51,150,000 |
32,650,000 |
433,395,000 |
Right of use asset
recognised on leasehold properties |
— |
902,645 |
— |
— |
902,645 |
Adjustment for lease
incentives |
(2,499,310) |
(2,209,756) |
(609,940) |
(566,264) |
(5,885,270) |
Carrying value at 31
December |
208,700,690 |
137,087,889 |
50,540,060 |
32,083,736 |
428,412,375 |
|
UK
Industrial |
UK
Office |
UK
Retail |
UK
Other |
Total |
2019 |
2019 |
2019 |
2019 |
2019 |
£ |
£ |
£ |
£ |
£ |
Market value at 1
January |
259,150,000 |
159,630,000 |
46,530,000 |
33,800,000 |
499,110,000 |
Purchase of investment
properties |
17,025,471 |
8,783,055 |
— |
— |
25,808,526 |
Capital expenditure on
investment properties |
2,455,684 |
2,172,669 |
— |
— |
4,628,353 |
Opening market value
of disposed investment properties |
(29,540,000) |
(5,100,000) |
— |
— |
(34,640,000) |
Valuation loss from
investment properties |
3,274,144 |
(3,644,062) |
(4,256,539) |
1,012,621 |
(3,613,836) |
Movement in lease
incentives receivable |
434,701 |
1,463,338 |
(3,461) |
(12,621) |
1,881,957 |
Market value at 31
December |
252,800,000 |
163,305,000 |
42,270,000 |
34,800,000 |
493,175,000 |
Investment property
recognised as held for sale |
— |
(10,700,000) |
— |
— |
(10,700,000) |
Market value net of
held for sale at 31 December |
252,800,000 |
152,605,000 |
42,270,000 |
34,800,000 |
482,475,000 |
Right of use asset
recognised on leasehold properties |
— |
904,121 |
— |
— |
904,121 |
Adjustment for lease
incentives |
(1,999,983) |
(2,616,679) |
(301,447) |
(605,713) |
(5,523,822) |
Carrying value at 31
December |
250,800,017 |
150,892,442 |
41,968,553 |
34,194,287 |
477,855,299 |
The valuations were performed by Knight Frank LLP, accredited
external valuers with recognised and relevant professional
qualifications and recent experience of the location and category
of the investment properties being valued. The valuation model in
accordance with Royal Institute of Chartered Surveyors (‘RICS’)
requirements on disclosure for Regulated Purpose Valuations has
been applied (RICS Valuation – Professional Standards January 2014 published by the Royal Institution
of Chartered Surveyors). These valuation models are consistent with
the principles in IFRS 13. The market value provided by Knight
Frank at the year end was £437,695,000 (2019: £493,175,000) however
an adjustment has been made for lease incentives of £5,885,270
(2019: £5,523,822) that are already accounted for as an asset. In
addition, as required under IFRS 16, a right of use asset of
£902,645 has been recognised in respect of the present value of
future ground rents. As required under IFRS 16 an amount of
£902,645 has also been recognised as an obligation under finance
leases in the balance sheet. Valuation gains and losses from
investment properties are recognised in the Consolidated Statement
of Comprehensive Income for the period and are attributable to
changes in unrealised gains or losses relating to investment
properties held at the end of the reporting period.
In the
Consolidated Cash Flow Statement, proceeds from disposal of
investment properties comprise: |
|
2020
£ |
2019
£ |
Opening market value
of disposed investment properties |
55,780,000 |
34,640,000 |
( Loss)/Profit on
disposal of investment properties |
(4,806,137) |
427,304 |
Net proceeds from
disposal of investment properties |
50,973,863 |
35,067,304 |
Valuation methodology
The fair value of completed investment properties are determined
using the income capitalisation method.
The income capitalisation method is based on capitalising the
net income stream at an appropriate yield. In establishing the net
income stream the valuers have reflected the current rent (the
gross rent) payable to lease expiry, at which point the valuer has
assumed that each unit will be re-let at their opinion of ERV. The
valuers have made allowances for voids where appropriate, as well
as deducting non recoverable costs where applicable. The
appropriate yield is selected on the basis of the location of the
building, its quality, tenant credit quality and lease terms
amongst other factors.
No properties have changed valuation technique during the year.
At the Balance Sheet date the income capitalisation method is
appropriate for valuing all assets.
The Group appoints suitable valuers (such appointment is
reviewed on a periodic basis) to undertake a valuation of all the
direct real estate investments on a quarterly basis. The valuation
is undertaken in accordance with the then current RICS guidelines
and requirements as mentioned above.
The Investment Manager meets with the valuers on a quarterly
basis to ensure the valuers are aware of all relevant information
for the valuation and any change in the investment over the
quarter. The Investment Manager then reviews and discusses the
draft valuations with the valuers to ensure correct factual
assumptions are made. The valuers report a final valuation that is
then reported to the Board.
The management group that determines the Company’s valuation
policies and procedures for property valuations is the Property
Valuation Committee. The Committee reviews the quarterly property
valuation reports produced by the valuers (or such other person as
may from time to time provide such property valuation services to
the Group) before its submission to the Board, focusing in
particular on:
• significant adjustments from the
previous property valuation report;
• reviewing the individual valuations of
each property;
• compliance with applicable standards
and guidelines including those issued by RICS and the UKLA Listing
Rules;
• reviewing the findings and any
recommendations or statements made by the valuer;
• considering any further matters
relating to the valuation of the properties.
The Chairman of the Committee makes a brief report of the
findings and recommendations of the Committee to the Board after
each Committee meeting. The minutes of the Committee meetings are
circulated to the Board. The Chairman submits an annual report to
the Board summarising the Committee’s activities during the year
and the related significant results and findings.
All investment properties are classified as Level 3 in the fair
value hierarchy. There were no movements between levels during the
year.
The table below outlines the valuation techniques and inputs
used to derive Level 3 fair values for each class of investment
properties. The table includes:
• The fair value measurements at the end
of the reporting period.
• The level of the fair value hierarchy
(e.g. Level 3) within which the fair value measurements are
categorised in their entirety.
• A description of the valuation
techniques applied.
• Fair value measurements, quantitative
information about the significant unobservable inputs used in the
fair value measurement.
• The inputs used in the fair value
measurement, including the ranges of rent charged to different
units within the same building.
Country &
Class |
Fair
Value £ |
Valuation
Technique |
Key Unobservable
Input |
Range (weighted
average) |
UK Industrial |
211,200,000 |
Income
Capitalisation |
- Initial Yield |
0.00% to 8.08%
(5.54%) |
Level 3 |
|
|
- Reversionary
Yield |
4.29% to 10.29%
(6.26%) |
|
|
|
- Equivalent
Yield |
4.26% to 8.55%
(6.21%) |
|
|
|
- Estimated rental
value per sq ft |
£2.75 to £8.50
(£5.70) |
UK Office |
142,695,000 |
Income
Capitalisation |
- Initial Yield |
0.00% to 13.36%
(5.24%) |
Level 3 |
|
|
- Reversionary
Yield |
5.32% to 10.01%
(7.66%) |
|
|
|
- Equivalent
Yield |
5.23% to 8.55%
(7.11%) |
|
|
|
- Estimated rental
value per sq ft |
£10.25 to £111.00
(£25.54) |
UK Retail |
51,150,000 |
Income
Capitalisation |
- Initial Yield |
4.79% to 8.49%
(7.99%) |
Level 3 |
|
|
- Reversionary
Yield |
5.12% to 7.84%
(6.83%) |
|
|
|
- Equivalent
Yield |
5.63% to 8.05%
(7.43%) |
|
|
|
- Estimated rental
value per sq ft |
£8.35 to £90.00
(£15.53) |
UK Other |
32,650,000 |
Income
Capitalisation |
- Initial Yield |
4.91% to 6.89%
(5.90%) |
Level 3 |
|
|
- Reversionary
Yield |
5.03% to 6.90%
(5.80%) |
|
|
|
- Equivalent
Yield |
5.01% to 6.91%
(5.87%) |
|
|
|
- Estimated rental
value per sq ft |
£7.50 to £30.00
(£19.75) |
|
437,695,000 |
|
|
|
Descriptions and definitions
The table above includes the following descriptions and
definitions relating to valuation techniques and key observable
inputs made in determining the fair values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions
prevailing at the date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return
of the cash flow from the property, assuming a rise or fall to ERV
at the next review or lease termination, but with no further rental
change.
Initial yield
Initial yield is the annualised rents of a property expressed as
a percentage of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial
yield will rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot,
average ERV per square foot, initial yield and reversionary yield
as at the Balance Sheet date. |
|
2020 |
2019 |
ERV p.a. |
£32,180,024 |
£34,224,876 |
Area sq ft |
3,825,017 |
4,102,486 |
Average ERV per sq
ft |
£8.41 |
£8.34 |
Initial Yield |
5.8% |
5.2% |
Reversionary
Yield |
6.9% |
6.7% |
The table below presents the sensitivity of the valuation to
changes in the most significant assumptions underlying the
valuation of completed investment property. The Board believes
these are reasonable sensitivities given historic movements in
valuations. |
|
2020
£ |
2019
£ |
Increase in equivalent
yield of 50 bps |
(34,483,590) |
(53,790,866) |
Decrease of 5% in
ERV |
(17,437,618) |
(23,968,000) |
Below is a list of how the interrelationships in the sensitivity
analysis above can be explained. In both cases outlined in the
sensitivity table the estimated fair value would increase
(decrease) if:
• The ERV is higher (lower)
• Void periods were shorter (longer)
• The occupancy rate was higher
(lower)
• Rent free periods were shorter
(longer)
• The capitalisation rates were lower
(higher)
8 INVESTMENT PROPERTIES HELD FOR
SALE
As at 31 December 2020, the Group
was actively seeking a buyer for Interfleet House, Derby. The Group
both exchanged contracts and completed this sale on 8 January 2021 for a price of £4,346,000.
As at 31 December 2019, the Group
was actively seeking a buyer for Bourne House, Staines. The Group
both exchanged contracts and completed this sale on 3 January 2020 for a price of £10,791,000.
9 INVESTMENT IN SUBSIDIARY
UNDERTAKINGS
The Company owns 100 per cent of the issued ordinary share
capital of Standard Life Investments Property Holdings Limited, a
company with limited liability incorporated and domiciled in
Guernsey, Channel Islands, whose principal business is
property investment.
In 2015 the Group acquired 100% of the units in Standard Life
Investments SLIPIT Unit Trust, (formerly Aviva Investors UK Real
Estate Recovery II Unit
Trust) a Jersey Property Unit Trust. The acquisition included
the entire issued share capital of a General Partner which held,
through a Limited Partnership, a portfolio of 22 UK real estate
assets. The transaction completed on 23
December 2015 and the Group has treated the acquisition as a
Business Combination in accordance with IFRS 3.
The Group undertakings consist of the following 100% owned
subsidiaries at the Balance Sheet date:
• Standard Life Investments Property
Holdings Limited, a company with limited liability incorporated in
Guernsey, Channel Islands.
• Standard Life Investments (SLIPIT)
Limited Partnership, a limited partnership established in
England.
• Standard Life Investments SLIPIT
(General Partner) Limited, a company with limited liability
incorporated in England.
• Standard Life Investments SLIPIT
(Nominee) Limited, a company with limited liability incorporated
and domiciled in England.
• Hagley Road Limited, a company with
limited liability incorporated in Jersey, Channel Islands.
10 TRADE AND OTHER RECEIVABLES
|
2020
£ |
2019
£ |
Trade receivables |
8,603,476 |
2,738,455 |
Less: provision for
impairment of trade receivables |
(2,583,559) |
(138,593) |
Trade receivables
(net) |
6,019,917 |
2,599,862 |
Rental deposits held
on behalf of tenants |
736,793 |
320,878 |
Other receivables |
4,045,487 |
992,779 |
Total trade and other
receivables |
10,802,197 |
3,913,519 |
The increase in other receivables is predominantly due to monies
receivable following the sale of the Industrial portfolio in
December 2020 plus rental income
amounts due from JLL following the change in process from
May 2020 whereby JLL invoice and
collect the rents.
Reconciliation for changes in the provision for impairment of
trade receivables:
|
2020
£ |
2019
£ |
Opening balance |
(138,593) |
(99,395) |
Charge for the
year |
(2,444,966) |
(39,198) |
Reversal of
provision |
— |
— |
Closing balance |
(2,583,559) |
(138,593) |
The estimated fair values of receivables are the discounted
amount of the estimated future cash flows expected to be received
and approximate their carrying amounts.
The trade receivables above relate to rental income receivable
from tenants of the investment properties. When a new lease is
agreed with a tenant the Investment manager performs various money
laundering checks and makes a financial assessment to determine the
tenant’s ability to fulfil its obligations under the lease
agreement for the foreseeable future. The majority of tenants are
invoiced for rental income quarterly in advance and are issued with
invoices at least 21 days before the relevant quarter starts.
Invoices become due on the first day of the quarter and are
considered past due if payment is not received by this date. Other
receivables are considered past due when the given terms of credit
expire.
Amounts are considered impaired when it becomes unlikely that
the full value of a receivable will be recovered. Movement in the
balance considered to be impaired has been included in other direct
property costs in the Consolidated Statement of Comprehensive
Income. As at 31 December 2019, trade
receivables of £2,583,559 (2019: £138,593) were considered impaired
and provided for.
If the provision for bad debts increased by £1 million then the
Company’s earnings and net asset value would decrease by £1
million. If the provision for bad debts decreased by £1 million
then the Company’s earnings and net asset value would increase by
£1 million.
The ageing of these
receivables is as follows: |
|
|
2020
£ |
2019
£ |
0 to 3 months |
(252,550) |
(118,416) |
3 to 6 months |
(705,740) |
(1,427) |
Over 6 months |
(1,625,269) |
(18,750) |
Closing balance |
(2,583,559) |
(138,593) |
As of 31
December 2020, trade receivables of £6,019,917 (2019: £2,599,862)
were less than 3 months past due but considered not impaired. |
11 CASH AND CASH EQUIVALENTS
|
2020 |
2019 |
|
£ |
£ |
Cash held at bank |
8,461,451 |
3,081,770 |
Cash held on deposit
with RBS |
921,920 |
3,393,849 |
|
9,383,371 |
6,475,619 |
Cash held at banks earns interest at floating rates based on daily
bank deposit rates. Deposits are made for varying periods of
between one day and three months, depending on the immediate cash
requirements of the Group, and earn interest at the applicable
short-term deposit rates. |
12 TRADE AND OTHER PAYABLES
|
2020 |
2019 |
|
£ |
£ |
Trade and other
payables |
3,302,081 |
2,796,799 |
VAT payable |
1,684,195 |
381,068 |
Deferred rental
income |
7,372,985 |
5,733,327 |
Rental deposits due to
tenants |
736,793 |
320,878 |
|
13,096,054 |
9,232,072 |
Trade payables are non-interest bearing and are normally settled on
30-day terms. |
13 BANK BORROWINGS
|
2020 |
2019 |
|
£ |
£ |
Loan facility and
drawn down outstanding balance |
110,000,000 |
130,000,000 |
Opening carrying
value |
127,316,886 |
129,249,402 |
Borrowings during the
year |
27,000,000 |
1,000,000 |
Repayment of RCF |
(45,000,000) |
(3,000,000) |
Arrangements costs of
additional facility |
— |
(99,997) |
Amortisation of
arrangement costs |
225,937 |
167,481 |
Closing carrying
value |
109,542,823 |
127,316,886 |
On 28 April 2016 the Company
entered into an agreement to extend £145 million of its existing
£155 million debt facility with RBS. The debt facility consisted of
a £110 million seven year term loan facility and a £35 million five
year RCF which was extended by two years in May 2018 with the margin on the RCF now at LIBOR
plus 1.45%. Interest is payable on the Term Loan at 3 month LIBOR
plus 1.375% which equates to a fixed rate of 2.725% on the Term
Loan.
In June 2019, the Company also
entered into a new arrangement with the Royal Bank of Scotland
International Limited (RBSI) to extend its Revolving Credit
Facility (RCF) by £20 million. This facility has a margin of 1.60%
above LIBOR. As at 31 December 2020
none of the RCF was drawn (2019: £20 million).
Under the terms of the loan facility there are certain events
which would entitle RBS to terminate the loan facility and demand
repayment of all sums due. Included in these events of default is
the financial undertaking relating to the LTV percentage. The loan
agreement notes that the LTV percentage is calculated as the loan
amount less the amount of any sterling cash deposited within the
security of RBS divided by the gross secured property value, and
that this percentage should not exceed 60% for the period to and
including 27 April 2021 and should
not exceed 55% after 27 April 2021 to
maturity.
|
2020
£ |
2019
£ |
Loan amount |
110,000,000 |
128,000,000 |
Cash |
(9,383,371) |
(6,475,619) |
|
100,616,629 |
121,524,381 |
Investment property
valuation |
437,695,000 |
493,175,000 |
LTV percentage |
23.0% |
24.6% |
Other loan covenants that the Group is obliged to meet include
the following:
• that the net rental income is not less
than 150% of the finance costs for any three month period;
• that the largest single asset accounts
for less than 15% of the Gross Secured Asset Value;
• that the largest ten assets accounts
for less than 75% of the Gross Secured Asset Value;
• that sector weightings are restricted
to 55%, 45% and 55% for the Office, Retail and Industrial sectors
respectively;
• that the largest tenant accounts for
less than 20% of the Group’s annual net rental income;
• that the five largest tenants account
for less than 50% of the Group’s annual net rental income;
• that the ten largest tenants account
for less than 75% of the Group’s annual net rental income.
During the year, the Group complied with its obligations and
loan covenants under its loan agreement.
The loan facility is secured by fixed and floating charges over
the assets of the Company and its wholly owned subsidiaries,
Standard Life Investments Property Holdings Limited and Standard
Life Investments (SLIPIT) Limited Partnership.
14 INTEREST RATE SWAP
As part of the refinancing of loans (see note 13), on
28 April 2016 the Group completed an
interest rate swap of a notional amount of £110,000,000 with RBS.
The interest rate swap effective date is 28
April 2016 and has a maturity date of 27 April 2023. Under the swap the Company has
agreed to receive a floating interest rate linked to 3 month LIBOR
and pay a fixed interest rate of 1.35%.
The Group has adopted the "interest rate benchmark reform"
amendments in the current financial year. These allow the Group to
continue hedge accounting for its benchmark interest rate exposure
during the period of uncertainty arising from interest rate
benchmark reforms. The Group will continue to apply these
amendments until the uncertainty arising from interest rate
benchmark reform is no longer present with respect to the timing
and amount of the interest rate benchmark cash flows.
None of the Group's current LIBOR-linked contracts include
fallback provisions for a cessation of the referenced benchmark
interest rate. The Group will look to implement fallback language
for different instruments and IBORs when appropriate.
The Group has only one hedge instruments as noted above, for
which the Group has applied the "interest rate benchmark reform"
amendments.
|
2020
£ |
2019
£ |
Opening fair value of interest rate
swaps at 1 January |
(2,220,616) |
(803,963) |
Valuation (loss)/gain on interest
rate swaps |
(1,514,638) |
(1,416,653) |
Closing fair value of interest rate
swaps at 31 December |
(3,735,254) |
(2,220,616) |
The split of the swap liability is listed below.
|
2020
£ |
2019
£ |
Current liabilities |
(1,472,387) |
(644,465) |
Non-current liabilities |
(2,262,867) |
(1,576,151) |
Interest rate swap with a start date
of 28 April 2016 maturing on 27 April 2023 |
(3,735,254) |
(2,220,616) |
Please see the Annual Report for further EPRA disclosures.
15 OBLIGATIONS UNDER
FINANCE LEASES
|
Minimum lease |
|
Present value of minimum lease |
|
payments |
Interest |
payments |
2020 |
2020 |
2020 |
£ |
£ |
£ |
Less than one
year |
26,068 |
(24,552) |
1,516 |
Between two and five
years |
104,271 |
(97,784) |
6,487 |
More than five
years |
2,632,853 |
(1,738,211) |
894,642 |
Total |
2,763,192 |
(1,860,547) |
902,645 |
|
Minimum lease |
|
Present value of minimum lease |
|
payments |
Interest |
payments |
2019 |
2019 |
2019 |
£ |
£ |
£ |
Less than one
year |
26,068 |
(24,592) |
1,476 |
Between two and five
years |
104,271 |
(97,956) |
6,316 |
More than five
years |
2,658,921 |
(1,762,591) |
896,329 |
Total |
2,789,260 |
(1,885,139) |
904,121 |
The above table shows the present value of future lease payments
in relation to the ground lease payable at Hagley Road,
Birmingham as required under IFRS
16. A corresponding asset has been recognised and is part of
Investment properties as shown in note 7.
16 LEASE ANALYSIS
The Group has granted leases on its property portfolio. This
property portfolio as at 31 December
2020 had an average lease expiry of six years and two
months. Leases include clauses to enable periodic upward revision
of the rental charge according to prevailing market conditions.
Some leases contain options to break before the end of the lease
term.
Future minimum rentals receivable under non-cancellable
operating leases as at 31 December are as follows:
|
2020
£ |
2019
£ |
Within one year |
26,247,932 |
25,806,303 |
After one year, but not more than
five years |
98,059,956 |
79,140,128 |
More than five
years |
77,593,168 |
94,344,918 |
Total |
201,901,056 |
199,291,349 |
The largest single tenant at the year end accounts for 5.6%
(2019: 4.5%) of the current annual passing rent.
17
SHARE CAPITAL
Under the Company’s Articles of Incorporation the Company may
issue an unlimited number of ordinary shares of 1 pence each, subject to issuance limits set at
the AGM each year. As at 31 December
2020 there were 404,316,422 ordinary shares of shares rank
equally for dividends and distributions and carry one vote each.
There are no restrictions concerning the transfer of ordinary
shares in the Company, no special rights with regard to control
attached to the ordinary shares, no agreements between holders of
ordinary shares regarding their transfer known to the Company and
no agreement which the Company is party to that affects its
control following a takeover bid.
In February 2020 the Company
issued a further 1 million shares raising £952,800 after costs.
Allotted, called up and fully paid:
|
2020
£ |
2019
£ |
Opening balance |
227,431,057 |
227,431,057 |
Shares issued |
960,000 |
- |
Issue costs associated
with new ordinary shares |
(7,200) |
- |
Closing balance |
228,383,857 |
227,431,057 |
Treasury Shares
In November 2020, the Company
undertook a share buyback programme at various levels of discount
to the prevailing NAV. As at 31 December
2020 2,548,997 shares had been bought back at a cost of
£1,450,787 after costs and are included in the Treasury share
reserve.
|
2020
£ |
2019
£ |
Opening balance |
- |
- |
Bought back during the year |
1,450,787 |
- |
Closing balance |
1,450,787 |
- |
The number of shares in issue as at 31 December 2020/2019 is as
follows:
|
2020
Number of shares |
2019
Number of shares |
Opening balance |
405,865,419 |
405,865,419 |
Issued during the year |
1,000,000 |
- |
Bought back during the year and put
into Treasury |
(2,548,997) |
- |
Closing balance |
404,316,422 |
405,865,419 |
18 RESERVES
The detailed movement of the below reserves for the years to
31 December 2020 and 31 December 2019 can be found in the Consolidated
Statement of Changes in Equity.
Retained earnings
This is a distributable reserve and represents the cumulative
revenue earnings of the Group less dividends paid to the Company’s
shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed
investment properties and unrealised valuation gains and losses on
investment properties and cash flow hedges since the Company’s
launch.
Other distributable reserves
This reserve represents the share premium raised on launch of
the Company which was subsequently converted to a distributable
reserve by special resolution dated 4
December 2003.
19 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing
profit for the year net of tax attributable to ordinary equity
holders by the weighted average number of ordinary shares
outstanding during the year. As there are no dilutive instruments
outstanding, basic and diluted earnings per share are
identical.
The earnings per share for the year is set out in the table
below. In addition one of the key metrics the Board considers is
dividend cover.
This is calculated by dividing the net revenue earnings in the
year (surplus for the year net of tax excluding all capital items
and the swaps breakage costs) divided by the dividends payable in
relation to the financial year. For 2020 this equated to a figure
of 108% (2019: 100%).
The following reflects the income and share data used in the
basic and diluted earnings per share computations:
|
2020
£ |
2019
£ |
Surplus for the year
net of tax |
(15,782,067) |
16,144,131 |
|
2020
£ |
2019
£ |
Weighted average
number of ordinary shares outstanding during the year |
406,650,268 |
405,865,419 |
Earnings per ordinary
share (p) |
(3.88) |
3.98 |
Profit for the year
excluding capital items |
16,664,294 |
19,330,662 |
EPRA earnings per
share (p) |
4.10 |
4.76 |
20 DIVIDENDS AND PROPERTY
INCOME DISTRIBUTION GROSS OF INCOME TAX
Non Property Income
Distributions |
|
2020 £ |
2019 £ |
0.561p per ordinary
share paid in March 2020 relating to the quarter ending 31 December
2019 (2019: 0.125p) |
|
2,284,011 |
507,333 |
0.238p per ordinary
share paid in May 2020 relating to the quarter ending 31 March 2020
(2019: nil) |
|
968,340 |
1,923,802 |
|
|
|
|
Property Income
Distributions |
|
|
|
0.629p per ordinary
share paid in March 2020 relating to the quarter ending 31 December
2019 (2019: 1.065p) |
|
2,557,687 |
4,322,467 |
0.952p per ordinary
share paid in May 2020 relating to the quarter ending 31 March 2020
(2019: 1.19p) |
|
3,873,359 |
4,829,798 |
0.714p per ordinary
share paid in August 2020 relating to the quarter ending 30 June
2020 (2019: 1.19p) |
|
2,905,019 |
4,829,798 |
0.714p per ordinary
share paid in November 2020 relating to the quarter ending 30
September 2020 (2019: 0.716p) |
|
2,905,019 |
2,905,996 |
|
|
15,493,435 |
19,319,194 |
On 26 Feb 2021 a dividend in
respect of the quarter to 31 December
2020 of 0.714 pence per share
was paid wholly as a property income dividend.
21
RECONCILIATION OF CONSOLIDATED
NAV TO PUBLISHED NAV
The NAV attributable to ordinary shares is published quarterly
and is based on the most recent valuation of the investment
properties.
|
2020 |
2019 |
Number of ordinary
shares at the reporting date |
404,316,422 |
405,865,419 |
|
2020
£ |
2019
£ |
Total equity per
audited consolidated financial statements |
331,506,437 |
364,794,564 |
NAV per share (p) |
82.0 |
89.9 |
22 RELATED PARTY
DISCLOSURES
Directors’ remuneration
The Directors of the Company are deemed as key management
personnel and received fees for their services. Further details are
provided in the Directors’ Total fees for the year were £236,953
(2019: £227,276) none of which remained payable at the year end
(2019: nil).
Aberdeen Standard Fund Managers Limited, as the Manager of the
Group from 10 December 2018,
(previously Standard Life Investments (Corporate Funds) Limited),
received fees for their services as investment managers. Further
details are provided in note 4.
|
2020 |
2019 |
Robert Peto |
30,077 |
44,000 |
Sally-Ann Farnon |
- |
17,850 |
Huw Evans |
36,000 |
35,000 |
Mike
Balfour
James Clifton-Brown |
40,000
39,638 |
37,000
35,000 |
Jill May |
36,000 |
28,135 |
Sarah
Slater
Employers national insurance contributions |
36,000
18,737 |
3,455
16,276 |
|
236,452 |
216,716 |
Directors
expenses |
501 |
10,560 |
|
236,953 |
227,276 |
23 SEGMENTAL
INFORMATION
The Board has considered the requirements of IFRS 8 ‘operating
segments’. The Board is of the view that the Group is engaged in a
single segment of business, being property investment and in one
geographical area, the United
Kingdom.
24 EVENTS
AFTER THE BALANCE SHEET DATE
On 8 January 2021, the Company
completed the sale of Interfleet House, Derby for £4.30m.
On 26 Feb 2021 a dividend in
respect of the quarter to 31 December
2020 of 0.714 pence per share
was paid wholly as a property income dividend.
On 19 March 2021, the Company
completed the sale of Valley Road, Bradford for £2.65m.
On 26 March 2021 the Company
completed the sale of Persimmon House, Dartford for £3.1m.
Up to 23 April 2021 the Company
bought back a further 7.4m shares for
£4.5m.
On 20 April 2021 a fifth interim
dividend of 0.381p per share was declared payable on 18 May 2021.
This Annual Financial Report
announcement is not the Company's statutory accounts for the year
ended 31 December 2020. The statutory
accounts for the year ended 31 December
2020 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in
May 2021 and will be available by
download from the Company's webpage
(www.slipit.co.uk).
Please note that past performance is
not necessarily a guide to the future and that the value of
investments and the income from them may fall as well as rise.
Investors may not get back the amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services
(Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
For further information:-
Jason Baggaley – Real Estate Fund
Manager, Aberdeen Standard Investments
Tel: 07801039463 or jason.baggaley@aberdeenstandard.com
Oli Lord – Deputy Fund Manager,
Aberdeen Standard Investments
Tel: 07557938803 or oli.lord@aberdeenstandard.com
Graeme McDonald - Senior Fund
Control Manager, Aberdeen Standard Investments
Tel: 07717543309 or graeme.mcdonald@aberdeenstandard.com