TIDMRGL
RNS Number : 2879J
Regional REIT Limited
09 April 2020
9 April 2020
Regional REIT Limited
("Regional REIT", the "Group" or the "Company")
Regional REIT (LSE: RGL), the regional real estate investment
specialist focused on building a diverse portfolio of income
producing regional UK core and core plus office and industrial
property assets, today announces its full year results for the year
ending 31 December 2019.
Financial highlights:
Income focused - Continued reliable strong performance in 2019
from a highly diversified and defensive portfolio coupled with
intensive asset management
-- EPRA Total return of 43% since IPO in November 2015; representing 9% annualised returns for shareholders*
-- Rental and property income remained stable GBP75.6m (2018: GBP74.0m)
-- EPRA adjusted EPS of 7.8p (2018: 7.5p); EPRA adjusted EPS,
including realised disposal proceeds 8.2p (2018:13.7p)
-- EPRA NAV per share 112.7p (2018: 115.5p)
-- Group cost of debt decreased to 3.5% (2018: 3.8%)
-- Net LTV maintained below target of c.40% at 38.9% (2018: 38.3%)
-- Weighted average debt duration increased to 7.3 years (2018: 6.4 years)
-- Total dividend increased c.2.5% to 8.25p (2018: 8.05p)
-- Adjusted EPRA EPS dividend cover of 95% (2018: 93%)
Operational highlights:
Deliberately diversified portfolio by location and tenant -
regions remained strong
-- Another year of good progress; positive growth and portfolio diversification achieved
-- Successful oversubscribed equity raise supported strong
performance in transactional activity with GBP87.1m (before costs)
invested in new acquisitions and GBP24.3m (net of costs) received
from three strategic disposals
-- Increasingly diversified portfolio of 160 properties (2018:
150), 1,251 units (2018: 1,192) and 904 tenants (2018: 874)
-- Core and core plus regional office and industrial property
assets represented 93.6% of portfolio by value (with 79.9% in
offices and 13.7% in industrial sites)
-- Lease renewals for office and industrial assets achieved a 9.8% increase in rental roll YoY
-- EPRA Occupancy rates remained robust due to active and
intensive asset management at 89.4% (2018: 89.4%)
Post period end
-- Continued positive momentum, disposing of two non-core assets
totalling GBP8.6m(before costs) whilst actively managing the
portfolio with three further quality lettings
-- 24 March 2020, the Company announced as a result of current
market volatility caused by the global spread of COVID-19, it was
no longer considering an equity fundraise
-- 31 March 2020, the Company confirmed its dividend for Q4 2019
of 2.55pps would be paid to shareholders on 9 April 2020. In light
of recent events, and until we have greater clarity on the economic
outlook, future dividend distributions remain under review,
however, the quality and diversity of the Company's tenant base
means that it remains in a strong position to deliver one of the
sector's best income returns to shareholders.
-- Since the period end GBP30.7m of available borrowing headroom
has been drawn down ensuring ample liquidity with a cash balance
post dividend of GBP58.1m
-- As at 6 April 2020, the Company had collected 81.6% of the
rent due, in comparison to 83.1% at the same date in 2019. Another
4.8% of tenants have switched to monthly payments and have either
paid or have agreed to pay. Furthermore, we expect another 2.3% of
tenants to settle within 7 days, which in aggregate amounts to
88.7% of rents to be collected. We wholly expect to collect in
excess of 90% of rent in due course.
*Equivalent to a 10% internal rate of return
Stephen Inglis, CEO of London and Scottish Property Investment
Management, the Asset Manager, commented:
"We are extremely pleased with the good progress achieved to
further diversify and strengthen our income and asset mix
throughout 2019 and into Q1 2020. A key component of this total
return to Shareholders continues to be one of the sector's leading
dividend paying REIT's, as we increased the dividend again by a
further c.2.5%.
The year also marked a considerable milestone in our ongoing
ambition to grow the Company, by a highly successful oversubscribed
capital raise of GBP62.5m. Swift deployment of these proceeds
helped to contribute to the continued growth in our investment
properties under management to GBP787.9m, up 9.7% from GBP718.4m in
2018.
Whilst markets are currently experiencing considerable levels of
volatility due to the COVID-19, we continue to believe that our
highly diversified income led approach to shareholder returns will
continue to offer investors the best defensive, risk adjusted
income value in the sector. We have a very strong tenant base with
c.51% of rents being secured against tenants regarded under the
Government's definition as 'essential services' and other
Government departments, and with a further c.12% of income secured
from large international companies.
We have a hugely experienced senior management team which has
delivered great results for shareholders through a number of
recessions and downturns over the past 30 years, including most
recently the 2008 recession. In the wake of the global financial
crisis, we were able to deliver increased income, across a
predominantly multi-let office and industrial portfolio, throughout
the 2008-2012 period. This experience working with tenants in
challenging times will be invaluable in the aftermath of the
current COVID-19 crisis.
Our market fundamentals to date remain robust, however, we will
inevitably be impacted by COVID-19 and though we are committed to
paying a regular quarterly dividend to our shareholders this will
be subject to market conditions, the Company's performance, its
financial position and business outlook.
Our unique, vertically integrated, asset management platform
continues to deliver considerable value for our shareholders and I
believe our encouraging income collection rate for the current
quarter is testament to this. Our platform, with so many property
managers and asset managers on the ground supported by our accounts
team and research enables a joined up, effective and understanding
approach to supporting tenants and achieving the best outcome in
this uncertain time.
It is these unique aspects to the Company's proposition that we
believe have helped deliver such strong Shareholder returns in
2019, outperforming the FTSE NAREIT Index and providing 43.0% EPRA
NAV total return to Shareholders since IPO and will continue to
deliver for shareholders over the longer term ."
-S -
A meeting for analysts will be held via a conference call
facility at 9.30am (London time, BST) on Thursday, 9 April 2020 .
If you would like the conference call details please contact Henry
Wilson on +44 (0) 207 466 5111 or henryw@buchanan.uk.com .
The presentation slides for the meeting will shortly be
available to download from the Investors section of the Group's
website at www.regionalreit.com .
Enquiries:
Regional REIT Limited
Toscafund Asset Management Tel: +44 (0) 20 7845
6100
Investment Manager to the Group
Adam Dickinson, Investor Relations, Regional
REIT Limited
London & Scottish Property Investment Management Tel: +44 (0) 141 248
4155
Asset Manager to the Group
Stephen Inglis
Buchanan Communications Tel: +44 (0) 20 7466
5000
Financial PR regional@buchanan.uk.com
Charles Ryland / Victoria Hayns / Henry
Wilson
About Regional REIT
Regional REIT Limited ("Regional REIT" or the "Company") and its
subsidiaries (the "Group") is a United Kingdom ("UK") based real
estate investment trust that launched in November 2015. It is
managed by London & Scottish Property Investment Management
Limited, the Asset Manager, and Toscafund Asset Management LLP, the
Investment Manager.
Regional REIT's commercial property portfolio is comprised
wholly of income producing UK assets and comprises, predominantly,
offices and industrial units located in the regional centres
outside of the M25 motorway. The portfolio is highly diversified,
with 160 properties, 1,251 units and 904 tenants as at 31 December
2019, with a valuation of GBP787.9m.
Regional REIT pursues its investment objective by investing in,
actively managing and disposing of regional core and core plus
property assets. It aims to deliver an attractive total return to
its Shareholders, targeting greater than 10% per annum, with a
strong focus on income supported by additional capital growth
prospects.
The purpose of the Company is to deliver long-term returns for
Shareholders with income generated from investment in UK commercial
property outside of the M25 motorway.
For more information, please visit the Group's website at
www.regionalreit.com .
Cautionary Statement
This document has been prepared solely to provide additional
information to Shareholders to assess the Group's performance in
relation to its operations and growth potential. The document
should not be relied upon by any other party or for any other
reason. Any forward looking statements made in this document are
done so by the Directors in good faith based on the information
available to them up to the time of their approval of this
document. However, such statements should be treated with caution
due to the inherent uncertainties, including both economic and
business risk factors, underlying any such forward-looking
information.
ESMA Legal Entity Identifier ("LEI"): (549300D8G4NKLRIKBX73)
Chairman's Statement
"This was another good year for Regional REIT, marking four
years since our IPO and representing a step change in the growth of
the Group with the successful oversubscribed equity capital raise
in July 2019. In addition, we continued to deliver to our
Shareholders a sector-leading dividend that we increased again by a
further c. 2.5%.
In line with our strategic objectives, our unique, integrated,
proactive asset management platform continued to manage our
regionally diverse portfolio on a granular level. This ensured that
we delivered the bespoke and high-quality environments our tenants
expect, resulting in robust occupancy, increased tenant renewals,
increased rent roll, and increased WAULT to expiry.
Whilst the economic and geopolitical backdrop remained
uncertain, we responded to both market opportunities and challenges
and continued to focus on activities that create value for our
Shareholders and deliver a regular source of robust income." Kevin
McGrath , Chairman
As I write my Chairman's Statement, and before I comment on the
Company's progress and growth during 2019, the world's focus is on
COVID-19 and its impact on business and day to day life. I want to
assure our Shareholders that the Board is monitoring the impact of
the COVID-19 virus on the Group. Further details are given
below.
I am pleased to report that the Group had another very active
year and continued to achieve positive growth, with investment
properties under management increasing significantly by 9.7% to
GBP787.9m. The EPRA company adjusted diluted earnings per share was
7.8 pence per share ("pps") (2018: 7.5pps). IFRS earnings were
6.6pps (2018: 18.1pps) with the recycling of the 2018 disposal
funds into assets which are currently undergoing our intensive
asset management initiatives. The total dividend for the year of
8.25pps, is an increase of c. 2.5% on the 8.05pps dividend for
2018. We continued to work closely with our tenants via our
distinctive offering of integrated asset, property and finance
teams, ensuring we have supportive tenants, which added value to
both rental income and capital appreciation.
Our priorities were to maintain occupancy levels, continue to
provide vibrant spaces in which our tenants can thrive, and
increase our diversification by tenant profile and geography,
whilst seizing considerable ongoing anticipated opportunities from
the challenging commercial property market. EPRA occupancy rates
remained robust at 89.4% (2018: 89.4%), rent roll increased to
GBP64.3m (2018: GBP59.7m), and WAULT to expiry increased to 5.5
years (2018: 5.4 years). These are encouraging achievements.
During the year, the Group acquired properties with an aggregate
value of GBP87.1m, before costs, which was in part funded by the
successfully oversubscribed GBP62.5m equity capital raise
undertaken in July 2019. This funding enabled us to make
opportunistic off-market aggregate property acquisitions of
GBP63.9m (before costs), which further diversified the portfolio
not only by property, but also by tenant. In addition, we continued
our portfolio enhancement programme, with disposals amounting to
GBP24.3m (net of costs), and our rolling capital expenditure
programme amounted to GBP8.0m.
Furthermore, our debt profile continues to be rationalised with
the settlement of the GBP39.9m 6.5% Zero Dividend Preference Shares
("ZDPs") issued by the Company's indirect subsidiary, Regional REIT
ZDP Plc, which matured on 9 January 2019, coupled with the GBP121m
refinancing in June 2019. These successful initiatives resulted in
a reduction in the Group's WACD, including hedging costs, to c.3.5%
at 31 December 2019 (31 December 2018: 3.8%), and a weighted
average debt duration of 7.3 years (31 December 2018: 6.4
years).
The Group's overall net borrowings were 38.9% of gross
investment properties as at 31 December 2019 (31 December 2018:
38.3%) and below the Company's target ratio of approximately
40%.
The combination of all of this positive momentum, together with
our diverse portfolio and experienced management team, has ensured
that the Group remains well positioned for the next stage of its
development and to continue to effectively execute our proven
business model.
Market Environment
Following muted investment at the beginning of 2019, the UK
regions outside of London attracted GBP4.9 billion of investment
during the final quarter of 2019 - equal to the five-year quarterly
average. This brought investment in the second half of 2019 to
GBP10.2 billion, 34% higher than the first half of 2019. Annual
investment in the regional markets reached GBP17.9 billion in
2019.
Overseas investment in the UK property markets accounted for
almost half (48%) of total investment in 2019 according to data
from CoStar(1) . Furthermore, CoStar estimate that total overseas
investment for 2019 reached GBP21.3 billion, 6% higher than the
10-year average.
(1) CoStar, Investment Volumes, Q4 2019
Regional offices have outperformed in comparison to central
London offices, delivering superior total returns of 8.6% in 2019
in comparison to central London office returns of 5.8% - a trend
that has been witnessed over the past four years.
Dividends
The dividend is the major component of total Shareholder
returns. Over the period under review, the Company declared total
dividends of 8.25pps for the year, comprising three quarterly
dividends of 1.90pps each, and a fourth quarterly dividend of
2.55pps, an increase of c.2.5% on the previous year's total
dividend. This represented a yield of 7.3% at a share price of
113.2p at the close of 31 December 2019. Since inception, the
Company has distributed dividends amounting to 30.25pps.
Performance
The EPRA Total Accounting Return performance since listing on 6
November 2015 amounted to 43.0%, and an annualised EPRA Total
Accounting Return of 9.0%.
The Company's Total Shareholder Return of 32.5% for 2019
outperformed the FTSE EPRA NAREIT UK Index Total Return of 30.6%.
Since inception, the Total Shareholder Return was 52.2% vs 12.5%
for the FTSE EPRA NAREIT UK Index.
In accordance with the management arrangements, the Asset
Manager and Investment Manager are each entitled to a 50% share of
a performance fee of 15% of the Total EPRA Accounting Return in
excess of an annual hurdle rate of 8%. A performance fee did not
crystallise for the period from 1 January 2019 to 31 December
2019.
Management Agreements
The management agreements between the Company, the Asset Manager
and the Investment Manager, entered into when the Company listed,
had a five-year term to November 2020. In view of the strong
returns of the Company, the significant increase in its size and
there being less than one year to expiry of the current agreement,
the Board sought to secure the services of the Managers. In doing
so, the Management Engagement and Remuneration Committee conducted
a review to ensure that the terms of these agreements remained
appropriate. The Management Engagement and Remuneration Committee
sought advice from Peel Hunt LLP, the Company's Financial Adviser
and Broker, and Macfarlanes LLP, the Company's Legal Adviser.
Following this review, which included comparisons of Shareholder
returns against those of its peer group and consideration of the
interests of the Company and the respective Managers, the Company
and the Managers each agreed to waive their right to issue a
termination notice on or before 3 November 2020 and the management
agreement will now continue in force until 3 November 2023.
Shareholder and Stakeholder Engagement
Ultimately, the experience of our tenants and other stakeholders
will influence our performance. Our aim is to continue to offer
great workspaces and environments to businesses throughout their
lifecycle, from a start-up in a small flexible unit to a landmark
corporate headquarters. Direct engagement with our tenants is an
important part of our asset management initiatives, to help us
understand their needs and identify opportunities and challenges.
We encourage our tenants to work openly and collaboratively with us
to enable us to continually improve our workspaces and deliver
mutual benefit. Likewise, we encourage this with our stakeholders
to ensure we can continually improve our operations.
The Company has continued to develop its relations with
investors. The Company's website can be found at
www.regionalreit.com .
Annual General Meeting
The Company's 2020 Annual General Meeting ("AGM") was due to be
held on Thursday, 21 May 2020. In accordance with the Company's
Articles of Incorporation (the "Articles") and given the COVID-19
situation, in particular the compulsory measures (the Stay at Home
Measures) published by the Government on 23 March 2020 prohibiting
public gatherings of more than two people, the Board has made the
decision to postpone the Company's 2020 AGM. Notice of a revised
time and date for the 2020 AGM will be published on our website (
www.regionalreit.com ) and, where appropriate, by RNS announcement
as soon as practicable. In due course, a notice of AGM will be
circulated in accordance with the requirements of the Company's
Articles.
The Company is cognisant of its environmental impact and at the
2020 AGM will be seeking approval to implement electronic
communications. Further details regarding this will be set out in
the Company's Notice of AGM, which will be circulated in due
course. I encourage all Shareholders to consider this proposal. We
will also be removing paper proxies at the 2020 AGM from our voting
process in favour of a quicker and more secure method of voting
online via our registrar's website. You can, however, request a
paper proxy if you wish from our registrars at the appropriate
time.
Subsequent Events and COVID-19
The wellbeing of our tenants and other stakeholders in the
Company are of utmost importance to the Board and we continue to
manage the Company, cognisant of their needs in this current
environment.
On 20 February 2020, the Company announced a potential equity
fundraise to take advantage of its growing near-term pipeline of
accretive growth. As a result of the current market uncertainty
caused by the global spread of COVID-19, the Company took the
decision to withdraw the potential equity fundraise.
On 31 March 2020, and in view of the COVID -19 disruption to UK
economic activity the Company announced a trading update. The
rental collections were slightly reduced as at 30 March 2020, with
68.2% of invoiced rental income collected in comparison with 69.6%
at the same date in 2019. In addition, GBP30.7m of available
borrowing headroom from the Santander UK and Royal Bank of Scotland
facilities had been drawn.
The Board will continue to closely monitor the developing
situation and its effect on the Group, although the Board is
re-assured by the Company's balance sheet, the breadth of tenants
and geographical spread of assets, which will ensure it is well
positioned to mitigate any prolonged periods of uncertainty.
Outlook
Subject to the above, the outlook for the Group is positive and
the Board is encouraged by the Asset Manager's ability to secure
attractive assets in regional locations which will support the
Company's long-term return prospects. For the remainder of 2020,
the Group is confident of maintaining the momentum of the asset
management initiatives, which should continue to deliver income for
our Shareholders.
We remain mindful of the backdrop of economic uncertainty,
market cycles and tenant requirements in a structurally evolving
property market, which will inevitably be impacted by COVID-19.
However, our confidence for the long term is underpinned by the
Group's focus on asset management initiatives that increase the
number, quality and quantum of income streams, coupled with an
ever-broadening Shareholder base and strengthened balance
sheet.
Kevin McGrath
Chairman
8 April 2020
Asset and Investment Managers' Report
"We are pleased to have performed again for our Shareholders,
delivering strong dividends and capital growth in 2019. A key
component of this total return to Shareholders remains our
sector-leading dividend income distributed on a quarterly basis. It
is notable therefore that, as planned, distribution to Shareholders
increased for the fourth consecutive year and has done so every
year since IPO, to 8.25 pence per share.
The year also marked a considerable milestone in our ongoing
ambition to grow the Company, marked by a highly successful
oversubscribed capital raise of GBP62.5m. Swift deployment of these
proceeds into our significant investment pipeline helped to
contribute to the continued growth in our investment properties
under management to GBP787.9m, up 9.7% from GBP718.4m in 2018. In
turn, our enlarged portfolio of properties supported a further
increase in both the volume of our gross rent roll to GBP64.3m and
the diversity of our tenant base to 904 tenants.
Whilst markets are currently experiencing considerable levels of
volatility due to COVID-19; we continue to believe that our
income-led, defensive and risk-adverse approach to Shareholder
returns will continue to offer investors the best risk-adjusted
income return in the sector. Our market fundamentals remain robust
and we continue to micro manage the portfolio utilising our unique,
sector-leading asset and property management teams to assist
tenants where possible, on health matters, good practice and also
to access all of the assistance available from the Government, Bank
of England and other banks and local authorities with an absolute
focus on everyone's health and safety and on maintaining our
income.
It is simply too early to tell what impact COVID-19 will have on
the business, but we continue to monitor the situation extremely
closely and are speaking regularly to our banks who remain hugely
supportive and our occupiers. It is worth noting that we are lowly
leveraged, have substantial headroom on bank covenants and that we
have a hugely diverse portfolio, in terms of number of quality
tenants, number of properties, geographic spread of the assets and
no large exposure to any individual tenant, any individual property
and very little exposure to retail and leisure. We also have a very
broad spectrum of tenants operating across a wide range of sectors.
We believe that this is important as it is likely that some sectors
will be more detrimentally affected than others going forward.
Only a few weeks ago we announced that we were contemplating an
equity raise, given the strength and value identified in our
investment pipeline. It will come as no surprise that we are no
longer considering an equity raise at this time and indeed we will
be making no new acquisitions in the immediate future, focussing
instead on conserving existing cash and maintaining our rental
income for ongoing expenses and dividend distributions, in
accordance with the HMRC REIT regime.
The Company's continuing focus on income have delivered strong
Shareholder returns in 2019, outperforming the FTSE NAREIT Index
and providing 43.0% EPRA NAV returns to Shareholders since IPO ."
Stephen Inglis, CEO of London & Scottish Property Investment
Management, the Asset Manager of Regional REIT Limited.
Highlights from 2019
-- Successfully oversubscribed GBP62.5m equity capital raise was undertaken in July 2019.
-- Disposals during 2019 totalled GBP24.3m (net of costs)
achieving an average uplift against December 2018 valuation of
10.3%, reflecting an average net initial yield of 6.8%.
-- Acquisitions in 2019 totalled GBP87.1m (before costs) for 13
properties, reflecting an average net initial yield of 8.6%.
-- Lease renewals for office and industrial assets during 2019
achieved an uplift in gross rental roll of 9.8%.
-- Completed 71 new lettings in 2019, totalling 356,446 sq. ft.;
when fully occupied, these will provide a gross rental income of
c.GBP3.8m.
-- The like-for-like value of the Group's core office and
industrial segment (93.6% by value) also increased in 2019 by 1.4%,
after adjusting for capital expenditure and disposals during the
period.
-- Improved WAULT (to first break) by 2.2%, to 3.5 years and
improved WAULT (to expiry) by 1.9% to 5.5 years.
-- Average rent by let sq. ft. increased by 8.3% from GBP9.40
per sq. ft. in December 2018 to GBP10.17 per sq. ft. in December
2019.
-- Capital value per sq. ft. increased by 9.1% from GBP96.64 per
sq. ft. in December 2018 to GBP105.42 per sq. ft..
Going forward, we believe that our diverse tenant base as well
as the broad regional spread of our assets means that we are well
positioned to weather not only current political uncertainty but
also the wider economic uncertainty that will no doubt result from
the emergence and spread of COVID-19. As always, the Asset Manager
will continue to identify value in the market with a focus on
income.
Investment Activity in the UK Commercial Property Market
Investment in the UK commercial property market reached GBP49.5
billion in 2019, according to research from Lambert Smith Hampton
("LSH")(2) (,) 13% below the five-year average. Although overall
investment in 2019 was lower than 2018, it was 5.2% higher than
2016 levels, a year that was similarly dominated by political
uncertainty. Investment in the final quarter of 2019 was slightly
higher than Q3 2019 volumes, bringing investment in H2 2019 to
GBP29.5 billion, indicating an increase of 47% when compared to H1
2019, which helped boost overall investment figures for 2019. 2019
proved to be another strong year for investment in portfolio deals,
with investment totalling GBP13.0 billion. Investment in portfolios
was particularly strong in the final quarter of 2019, reaching
GBP4.7 billion, 35% higher than the five-year quarterly
average.
Following muted investment at the beginning on 2019, the UK
regions outside of London attracted GBP4.9 billion in investment
during the final quarter of 2019 - equal to the five-year quarterly
average. This brought investment in the second half of 2019 to
GBP10.2 billion, 34% higher than the first half of 2019. Annual
investment in the regional markets reached GBP17.9 billion in 2019.
LSH research notes that there were significant contrasts between
regions during 2019, with the East of England performing strongly
through the year.
Overseas investment in the UK property markets accounted for
almost half (48%) of total investment in 2019 according to data
from CoStar(3) . Overseas investors continued to take advantage of
favourable exchange rates, with investment in the final quarter of
2019 reaching GBP7.2 billion, 24% higher than the five-year
average. Figures from LSH indicate that North America, Far East and
Europe were all net investors in the final quarter of 2019. CoStar
estimate that total overseas investment for 2019 reached GBP21.3
billion, 6% higher than the 10-year average.
(2) Lambert Smith Hampton UKIT Q4 2019
(3) CoStar, Investment Volumes, Q4 2019
Research from CBRE indicates that regional offices have
outperformed in comparison to central London offices, delivering
superior total returns of 8.6% in 2019 in comparison to central
London office returns of 5.8%, a trend that has been witnessed over
the past four years. Outperformance reflected better capital
returns and income returns. Rental growth in regional offices
markets continued with growth of 1.2% in 2019.
Overseas investment in the UK property markets accounted for
almost half (48%) of total investment in 2019 according to data
from CoStar(4) . Despite ongoing political uncertainty, overseas
investors continued to take advantage of favourable exchange rates,
with investment in the final quarter of 2019 reaching GBP7.2
billion, 24% higher than the five-year average. Figures from LSH
indicate that North America, Far East and Europe were all net
investors in the final quarter of 2019. CoStar estimate that total
overseas investment for 2019 reached GBP21.3 billion, 6% higher
than the 10-year average.
(4) CoStar, Investment Volumes, Q4 2019
Occupational Demand in the UK Regional Office Market
Avison Young estimates that take-up of office space across nine
regional office markets(5) reached 8.8 million sq. ft. in 2019;
although this is below the level of take-up recorded in 2018, it is
3.9% above the 10-year average. Take-up during 2019 was marginally
higher (+0.7%) than 2016, a year that was similarly dominated by
political uncertainty. According to Savills, occupational demand
was driven by the technology, media & telecoms sector, which
accounted for the highest proportion of take-up at 27%. Following
the technology, media & telecoms sector, the serviced office
sector and the insurance & financial services sector accounted
for the second and third largest proportion of take-up in the
regional cities, accounting for 12% and 10% respectively. Whilst
demand from Central Government fell in 2019 in comparison to 2018,
Avison Young expect a number of deals to take place in 2020 as part
of the next phase of the hub programme.
(5) Nine regional office markets mentioned by Avison Young
include: Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds,
Liverpool, Manchester & Newcastle
According to Savills, demand for regional office stock led to a
decline in availability across nine regional UK markets(6) , with
total availability falling by 8% in 2019 to 10.5 million sq. ft.,
28% below the 10-year average. This marks the tenth consecutive
year that supply of office stock has declined. Cushman &
Wakefield research indicates that vacancy rates across the UK's
regions fell to 7% in the final quarter of 2019, a decrease from 8%
the 12 months previous(7) .
(6) Nine regional office markets mentioned by Savills includes:
Aberdeen, Birmingham, Bristol, Cambridge, Cardiff, Edinburgh,
Glasgow, Leeds & Manchester
(7) Cushman & Wakefield Big Eight Office Report Q4 2019.
Eight regional office markets mentioned by Cushman & Wakefield
include: Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds,
Manchester & Newcastle
Furthermore, it is estimated that approximately 5.9 million sq.
ft. of office space is currently under construction in the Big Nine
regional markets, with Manchester, Glasgow and Birmingham
accounting for 26%, 19% and 17%, respectively. 56% of office
buildings currently under construction are already pre-let.
Rental Growth in the UK Regional Office Market
A lack of availability in the Big Nine regional markets put an
upward pressure on headline rents as well as a downward pressure on
rent incentives, which led to an increase of 2.9% in city centre
net effective rents in 2019, according to Avison Young.
Additionally, research by Avison Young estimates that headline
rents for out of town offices increased by 3.0% from Q4 2018 to Q4
2019.
The CBRE Monthly Index shows that rental value growth for the
rest of UK office markets in the 12 months ending December 2019 was
1.2%.
Regional REIT's Office Assets
EPRA occupancy of the Group's regional offices rose to 88.4% (31
December 2018: 88.2%). A like-for-like comparison of the Group's
regional offices' EPRA occupancy, 31 December 2019 versus 31
December 2018, shows that occupancy decreased to 86.8% (31 December
2018: 88.5%). This reduction in occupancy can largely be attributed
to two properties becoming vacant: Brennan House, Farnborough
(29,707 sq. ft.) and Niceday House, Meridian Park, Andover (34,262
sq. ft.). Further details on these are below.
-- Brennan House, Farnborough - We were ahead of business plan
when we took the opportunity to do a contract-led letting to Fluor
Limited. Unfortunately, Fluor exercised a valid break notice as
their contract was not extended. Brennan House presents well and we
are exploring the opportunity to carry out works to upgrade the
building. Activity levels remain good in the Farnborough market
with 2019 take up slightly ahead of the five-year average. Take-up
varies across a wide range of size from lettings of 5,500 to 46,000
sq. ft.. We have had a number of positive viewings recently and
remain hopeful of securing a letting at the property in the near
future.
-- Niceday House, Andover - As expected, the tenant vacated at
expiry. Following this, a dilapidations settlement has been agreed
and an outline residential consent has been obtained for change of
use.
WAULT to first break was 3.0 years (31 December 2018: 3.0
years); like-for-like WAULT to first break increased to 3.1 years
(31 December 2018: 3.0 years).
Occupier Demand in the UK Industrial Market
Take-up in the final quarter of 2019 reached 6.8 million sq.
ft., pushing annual take-up during 2019 to 34.5 million sq. ft.;
although this is 18% below the record high reported in 2018, demand
remained above the 10-year average(8) . CBRE(9) research shows that
60% of take-up was within the East Midlands and South East as the
M1 corridor remains the most attractive location for occupiers.
Following this, West Midlands, Yorkshire and North East accounted
for 17% and 12% of take-up in 2019, respectively.
(8) Cushman & Wakefield, Industrial Snapshot, Q4 2019
(9) CBRE, Market Summary, Q4 2019
BNP Paribas Real Estate research highlights occupier demand was
diverse in 2019 with no one sector dominating take-up(10) .
According to Colliers International, occupier demand was driven by
occupier's requirements to future-proof their supply chain
operations. Occupier demand within the industrial market continues
to benefit from growth in online shopping, as online retailing
currently accounts for 19.0% of total retail sales in the UK,
according to the ONS(11) . BNP Paribas Real Estate research shows
that Retailers were the most active in terms of take-up throughout
2019, accounting for 37% of annual take-up (including online
sales).
(10) BNP Paribas Real Estate, Industrial & Logistics Review,
Q4 2019
(11) ONS, Retail Sales, Great Britain, January 2020
In terms of development, 8.6 million sq. ft. of speculative
development was delivered in 2019. However, availability levels
remained relatively steady as a result of robust net absorption.
Looking forward, there is currently only 6.6 million sq. ft. of
speculative development expected to complete in 2020.
Industrial Rental Growth Continues
Research by BNP Paribas Real Estate illustrates that, although
demand for standard industrial space led to rental growth in 2019,
there were signs that rental growth cooled following several years
of strong growth. Data from the CBRE Monthly Index shows rental
growth of 3.1% in the 12 months to the end of December 2019,
indicating that rental growth slowed in 2019 from 4.2% for the 12
months to the end of December 2018.
Regional REIT's Industrial Assets
EPRA occupancy of the Group's industrial sites increased to
95.5% (31 December 2018: 94.5%). A like-for-like comparison of the
Group's industrial offices' EPRA occupancy, 31 December 2019 versus
31 December 2018, shows that occupancy increased to 95.4% (31
December 2018: 94.2%). WAULT to first break was 5.8 years (31
December 2018: 5.4 years); like-for-like WAULT to first break
decreased marginally to 5.8 years (31 December 2018: 5.9
years).
Property Portfolio
As at 31 December 2019, the Group's property portfolio was
valued at GBP787.9m (31 December 2018: GBP718.4m), with rent roll
of GBP64.3m (31 December 2018: GBP59.7m), and an EPRA occupancy of
89.4% (31 December 2018: 89.4%).
On a like-for-like basis, 31 December 2019 versus 31 December
2018, EPRA occupancy was 88.1% (31 December 2018: 89.6%).
There were 160 properties (31 December 2018: 150) in the
portfolio, with 1,251 units (31 December 2018: 1,192) and 904
tenants (31 December 2018: 874). If the portfolio was fully
occupied at Cushman & Wakefield's view of market rents, the
rental income would be GBP77.2m per annum as at 31 December 2019
(31 December 2018: GBP70.0m).
As at 31 December 2019, the net initial yield on the portfolio
was 6.2% (31 December 2018: 6.5%), the equivalent yield was 8.3%
(31 December 2018: 8.2%), and the reversionary yield was 9.1% (31
December 2018: 8.8%)
Property Portfolio by Sector
Sector Properties Valuation % by sq. Occupancy WAULT Gross Average ERV Capital Yield %
valuation ft (EPRA) to rental rent rate
first income
break
(GBPm) (mil) (%) (yrs) (GBPm) (GBPpsf) (GBPm) (GBPpsf) Net Equivalent Reversionary
initial
Office 116 629.7 79.9 4.7 88.4 3.0 51.2 13.15 62.9 135.34 6.1 8.3 9.3
Industrial 18 107.7 13.7 2.2 95.5 5.8 8.0 4.17 9.0 48.85 5.3 7.4 7.6
Retail 23 39.2 5.0 0.5 90.9 4.6 4.3 10.53 4.3 84.19 9.0 9.2 9.7
Other 3 11.4 1.4 0.2 90.6 6.9 0.8 8.17 1.0 74.99 7.5 8.0 8.1
Total 160 787.9 100.0 7.5 89.4 3.5 64.3 10.17 77.2 105.42 6.2 8.3 9.1
Property Portfolio by Region
Region Properties Valuation % by Sq. Occupancy WAULT Gross Average ERV Capital Yield %
valuation ft. (EPRA) to rental rent rate
first income
break
(GBPm) (mil) (%) (yrs) (GBPm) (GBPpsf) (GBPm) (GBPpsf) Net Equivalent Reversionary
initial
Scotland 43 141.8 18.0 1.7 86.2 3.3 12.8 9.73 15.7 81.70 6.7 9.3 10.3
South East 33 233.0 29.6 1.7 87.9 3.4 17.9 12.06 21.2 140.33 5.9 7.5 8.4
North East 20 81.2 10.3 0.9 88.1 2.8 6.8 8.56 8.4 87.29 5.9 9.0 9.6
Midlands 32 140.4 17.8 1.4 93.2 3.5 11.6 9.07 12.7 100.88 6.0 7.8 8.5
North West 16 92.4 11.7 1.0 89.1 4.9 6.7 8.32 9.8 91.21 5.5 8.7 9.4
South West 13 79.3 10.1 0.5 95.8 2.9 6.6 15.57 7.6 165.50 6.8 8.1 8.9
Wales 3 19.9 2.5 0.3 87.6 6.6 1.9 8.73 1.9 74.97 7.5 8.4 8.6
Total 160 787.9 100.0 7.5 89.4 3.5 64.3 10.17 77.2 105.42 6.2 8.3 9.1
============ =========== ========== ========== ====== ========== ====== ======= ========= ======= ========= ======== =========== =============
* Table may not sum due to rounding
Top 15 Investments (market value) as at 31 December 2019
Property Sector Anchor tenants Market % of Lettable EPRA Annualised % of WAULT
value portfolio area Occupancy gross gross to
rent rental first
income break
(years)
(GBPm) (Sq (%) (GBPm)
Ft)
Barclays Execution
Services
Tay House, Ltd, University of
Glasgow Office Glasgow 33.7 4.3 156,853 94.2 2.7 4.2 2.4
Schenker Ltd, A
Share
Juniper & Sons Ltd,
Park, Vanguard Logistics
Basildon Industrial Services Ltd 29.6 3.8 277,760 100.0 2.2 3.5 2.8
Nuvias (UK &
Ireland)
Ltd, Fernox Ltd,
Genesis McCarthy
Business & Stone Retirement
Park, Lifestyles
Woking Office Ltd 26.0 3.3 98,359 82.7 1.5 2.4 4.3
Bank of Scotland
Plc,
The Equitable Life
Buildings 2 Assurance
& 3 HBOS Society, Agria Pet
Campus, Insurance
Aylesbury Office Ltd 24.9 3.2 140,791 95.7 2.3 3.5 3.4
Norfolk Secretary of State
House, for
Smallbrook Communities & Local
Queensway, Government,
Birmingham Office Spark44 Ltd 20.5 2.6 114,982 100.0 1.7 2.6 1.6
Aviva Central
Hampshire Services
Corporate UK Ltd, National
Park, Westminster
Eastleigh Office Bank Plc 20.1 2.6 85,422 99.6 1.5 2.4 3.6
Edvance SAS, The
800 Aztec Secretary
West, of State for
Bristol Office Defence 19.3 2.4 73,292 100.0 1.5 2.4 3.6
One & Two
Newstead
Court,
Annesley Office E.ON UK Plc 16.9 2.1 146,262 100.0 1.4 2.2 3.9
Road 4
Winsford
Industrial
Estate,
Winsford Industrial Jiffy Packaging Ltd 15.7 2.0 246,209 100.0 1.0 1.5 14.8
New College
Manchester
Ltd, Mott MacDonald
Ltd,
Portland Darwin Loan
Street, Solutions
Manchester Office Ltd 15.3 1.9 54,959 97.7 0.8 1.3 2.9
Ceva Logistics Ltd,
Hill
Ashby Park, Rom UK Ltd, Alstom
Ashby De Power
La Zouch Office Ltd 13.9 1.8 91,034 100.0 1.1 1.7 1.4
Columbus
House, TUI Northern Europe
Coventry Office Ltd 13.3 1.7 53,253 100.0 1.4 2.1 4.0
The Scottish
Templeton Ministers,
On The The Scottish Sports
Green, Council,
Glasgow Office Heidi Beers Ltd 11.7 1.5 142,512 97.4 1.3 2.0 4.1
HSS Hire Service
Group
Ltd, Please Hold
(UK)
Oakland Ltd, CVS
House, (Commercial Valuers
Manchester Office & Surveyors) Ltd 11.3 1.4 160,938 89.5 1.1 1.7 3.8
Kingscourt Odeon Cinemas Ltd,
Leisure Jag
Complex, Leisure (Scotland)
Dundee Other Ltd 10.5 1.3 83,780 88.8 0.7 1.1 7.7
* Table may not sum due to rounding
Top 15 Tenants (share of rental income) as at 31 December
2019
Tenant Property Sector WAULT Lettable Annualised % of
to first area gross gross
break (sq rent (GBPm) rental
(yrs) ft) income
Administrative and
Barclays Execution support service
Services Ltd Tay House, Glasgow activities 1.9 78,044 1.6 2.5
Bank of Scotland Buildings 3 HBOS
Plc Campus, Aylesbury Banking 2.2 92,978 1.5 2.3
High Street,
Dumfries
Secretary of State
for Communities & Bennett House,
Local Government Hanley Public sector 2.2 115,753 1.4 2.2
Cromwell House,
Tritton Road,
Lincoln
Norfolk House,
Birmingham
Oakland House,
Manchester
Electricity, gas,
One & Two Newstead steam and air
Court, conditioning
E.ON UK Plc Annesley supply 3.9 146,262 1.4 2.2
Professional,
scientific
TUI Northern Europe Columbus House, and technical
Ltd Coventry activities 4.0 53,253 1.4 2.1
The Scottish Calton House,
Ministers Edinburgh Public Sector 1.5 111,076 1.3 2.1
Quadrant House,
Dundee
Templeton On The
Green, Glasgow
The Courtyard,
Falkirk
Road 4 Winsford
Industrial
Jiffy Packaging Ltd Estate, Winsford Manufacturing 14.8 246,209 1.0 1.5
Electricity, gas,
steam and air
800 Aztec West, conditioning
Edvance SAS Bristol supply 3.4 41,285 0.9 1.4
Professional,
scientific
2 Lochside Avenue, and technical
John Menzies Plc Edinburgh activities 3.6 43,780 0.9 1.4
The Royal Bank of Cyan Building,
Scotland Plc Rotherham Banking 1.5 67,458 0.9 1.3
Professional,
Clearblue Innovation scientific
SPD Development Co Centre, and technical
Ltd Bedford activities 5.8 58,167 0.8 1.3
Hampshire Corporate
Aviva Central Park,
Services Chilworth House, Other service
UK Ltd Eastleigh activities 4.9 42,612 0.8 1.2
Juniper Park, Transportation and
Schenker Ltd Basildon storage 2.8 91,287 0.7 1.1
1-4 Llansamlet
Retail Park, Wholesale and retail
A Share & Sons Ltd Swansea trade 4.4 75,791 0.7 1.1
Juniper Park,
Basildon
The Secretary of 800 Aztec West,
State for Defence Bristol Public sector 4.0 32,007 0.6 1.0
Total 3.8 1,295,962 15.9 24.8
===================================================================== ========== ========== ============= ========
Property Portfolio Sector and Region Splits by Valuation and
Income
By Valuation
As at 31 December 2019, 79.9% (2018: 76.1%) of the portfolio by
market value was offices and 13.7% (2018: 15.5%) was industrial.
The balance was made up of retail, 5.0% (2018: 7.1%) and other,
1.4% (2018: 1.4%). By UK region, as at 31 December 2019, Scotland
represented 18.0% (2018: 18.0%) of the portfolio and England 79.5%
(2018: 79.3%); the balance of 2.5% (2018: 2.7%) was in Wales. In
England, the largest regions were the South East, the Midlands and
the North West.
By Income
As at 31 December 2019, 79.7% (2018: 77.3%) of the portfolio by
income was offices and 12.4% (2018: 13.2%) was industrial. The
balance was made up of retail, 6.7% (2018: 8.3%), and other, 1.2%
(2018: 1.2%). By UK region, as at 31 December 2019, Scotland
represented 19.9% (2018: 20.1%) of the portfolio and England 77.2%
(2018: 77.2%); the balance of 2.9% was in Wales (2018: 2.7%). In
England, the largest regions were the South East, the Midlands and
the North East.
Lease Expiry Profile
The WAULT on the portfolio is 5.5 years (2018: 5.4 years); WAULT
to first break is 3.5 years (2018: 3.4 years). As at 31 December
2019, 5.5% (2018: 10.1%) of income was from leases, which will
expire within 1 year, 14.2% (2018: 4.4%) between 1 and 2 years,
33.0% (2018: 34.0%) between 2 and 5 years and 47.4% (2018: 51.6%)
after 5 years.
Tenants by Standard Industrial Classification as at 31 December
2019
As at 31 December 2019, 13.0% of income was from tenants in the
professional, scientific and technical activities sector (2018:
11.5%), 12.0% from the administrative and support service
activities sector (2018: 10.4%), 9.1% from the information and
communication sector (2018: 8.8%), 9.1% from the wholesale and
retail trade (2018: 10.1%) and 8.7% from the manufacturing sector
(2018: 7.4%). The remaining exposure is broadly spread.
No tenant represents more than 3% of the Group's rent roll as at
31 December 2019, the largest being 2.5% (2018: 2.7%).
Top 15 Properties by Sector: Office
Tay House, Glasgow Market value (GBPm) 33.7
Sector Office
Annualised gross rent
(GBPm) 2.7
Lettable area (Sq.
Ft.) 156,853
Anchor tenants Barclays Execution
Services Ltd, University
of Glasgow
EPRA Occupancy (%) 94.2
WAULT (years) (to first 6.4 (2.4)
break)
-- Secure Income - The leases with Barclays were re-geared in
December 2015, securing income until October 2021 at the
earliest.
-- Break Option Removed - Removal of the University of Glasgow's
break option in September 2019, securing income until September
2024.
-- Tenant Expansion - New 10-year lease agreed with the
University of Glasgow for an additional 9,791 sq. ft. in the
building, with option to break in September 2024. This lease
provides an additional gross rental income of c. GBP181,000 pa.
-- Future Asset Management Initiatives - Let of the balance of
space on the first floor. Explore refurbishment options should
Barclays Execution Services Ltd exercise November 2021 break
option. This presents an opportunity for comprehensive
repositioning of asset in a market with limited supply of
high-quality large floor plates in an improving location.
Genesis Business Park,
Woking Market value (GBPm) 26.0
Sector Office
Annualised gross rent
(GBPm) 1.5
Lettable area (Sq.
Ft.) 98,359
Anchor tenants Nuvias (UK & Ireland)
Ltd, Fernox Ltd, McCarthy
& Stone Retirement
Lifestyles Ltd
EPRA Occupancy (%) 82.7
WAULT (years) (to first 7.3 (4.3)
break)
-------------------------------------------------- ---------------------------
-- Established Business Park - Genesis is the premier
out-of-town office park in the town, situated approximately one
mile from Woking town centre.
-- New Letting New 10-year lease agreed with Gallagher Benefit
Services Management Company Limited for 4,594 sq. ft. (Suite 1C)
subject to a break option after five years at a gross rent of c.
GBP106,000 pa (GBP23.00 per sq. ft.).
-- Asset Management Initiatives - Let balance of space.
Buildings 2 & 3 HBOS
Campus, Aylesbury Market value (GBPm) 24.9
Sector Office
Annualised gross rent
(GBPm) 2.3
Lettable area (Sq.
Ft.) 140,791
Anchor tenants Bank of Scotland Plc,
The Equitable Life
Assurance Society,
Agria Pet Insurance
Ltd
EPRA Occupancy (%) 95.7
WAULT (years) (to first 4.2 (3.4)
break)
------------------------------------------------ ----------------------
-- High-Quality Asset - Comprehensive refurbishment programme of
Building 2 now completed with gross capital expenditure of c.
GBP3.3m. The property is now the best accommodation in the
town.
-- Continued Letting Activity - Additional lettings on the
ground floor of Building 2 to Product Compliance Specialists
Limited on a 10-year lease commencing in April 2019, subject to a
break option at the seventh anniversary. The lease provides a gross
rental income of c. GBP87,000pa (c. GBP24.00 per sq.ft).
-- Future Asset Management Initiatives - Let balance of
remaining space (5,550 sq. ft.) in Building 2. Additionally,
advanced discussions are currently ongoing with the Bank of
Scotland Plc to assess their intentions for renewal of their lease
of Building 3 in November 2021. Opportunity exists to undertake
similar successful refurbishment programme completed on Building
2.
Norfolk House,
Smallbrook Queensway,
Birmingham Market value (GBPm) 20.5
Sector Office
Annualised gross rent (GBPm) 1.7
Lettable area (Sq. Ft.) 114,982
Anchor tenants Secretary of State
for Communities & Local
Government, Spark44
Ltd
EPRA Occupancy (%) 100.0
WAULT (years) (to first 4.0 (1.6)
break)
------------------------------------------------------- -------------------------
-- High-Quality Asset - City centre building split over six
floors with 12 retail units on the ground floor level.
-- Business Plan - Engage with tenants to re-gear the leases,
remove break options and improve rental value. Let remaining retail
unit.
-- Future Asset Management Initiatives - Explore improving
aesthetics and profile of exterior of building by way of potential
cladding options/retail frontage improvements.
Hampshire Corporate
Park, Eastleigh Market value (GBPm) 20.1
Sector Office
Annualised gross rent (GBPm) 1.5
Lettable area (Sq. Ft.) 85,422
Anchor tenants Aviva Central Services
UK Ltd, National Westminster
Bank Plc
EPRA Occupancy (%) 99.6
WAULT (years) (to first 7.5 (3.6)
break)
---------------------------------------------------- ------------------------------
-- Successful Refurbishment - Interior and exterior
refurbishment of Hampshire House. By advance programme and
marketing, the void period was limited to only five months whilst
the works were ongoing.
-- Securing Income Streams - New 10-year lease agreed for
43,612. sq. ft. at Chilworth House, Hampshire Corporate Park,
Eastleigh, at a rent of GBP775,000 per annum which is 15.7% ahead
of the previous rent.
800 Aztec West,
Bristol Market value (GBPm) 19.3
Sector Office
Annualised gross rent (GBPm) 1.5
Lettable area (Sq. Ft.) 73,292
Anchor tenants Edvance SAS, The Secretary
of State for Defence
EPRA Occupancy 100.0
WAULT (years) (to first 8.8 (3.6)
break)
------------------------------------------------ ---------------------------
-- Successful Refurbishment - Major "back to shell"
refurbishment of the whole building completed in August 2018 into
active Bristol market with limited city centre supply .
-- Further Lettings - The final floor comprising 9,736 sq. ft.
has been let to Edvance SAS for a nine-year lease from August 2019
at a gross rental income of c. GBP224,000 pa.
-- Full Let - Property now fully let and producing a gross rental income of GBP2.3m.
One & Two Newstead
Court, Annesley Market value (GBPm) 16.9
Sector Office
Annualised gross rent (GBPm) 1.4
Lettable area (Sq. Ft.) 146,262
Anchor tenants E.ON UK Plc
EPRA Occupancy 100.0
WAULT (years) (to first 5.6 (3.9)
break)
--------------------------------------------------- ------------
-- High-Quality Assets - Two modern office pavilions in an established business park.
-- Break Option Removed - Removal of EON's break option in May
2020 for Two Newstead Court, securing income until April 2025.
Portland Street,
Manchester Market value (GBPm) 15.3
Sector Office
Annualised gross rent (GBPm) 0.8
Lettable area (Sq. Ft.) 54,959
Anchor tenants New College Manchester
Ltd, Mott MacDonald
Ltd, Darwin Loan Solutions
Ltd
EPRA Occupancy (%) 97.7
WAULT (years) (to first 5.3 (2.9)
break)
------------------------------------------------- ----------------------------
-- Tenant Retention - Secured three lease re-gears with existing
tenants during 2019 which will provide a revised combined gross
rental income of c. GBP262,000 per annum, an uplift of 43.4% from
previous gross rental income.
-- Strong Investment Market - Strong investor demand remains for
offices in the Manchester city centre.
-- Asset Management Initiatives - Various initiative ongoing
with existing tenants regarding lease extensions. Explore
opportunity to undertake improvements to elements of the reception
area.
Ashby Park, Ashby
De La Zouch Market value (GBPm) 13.9
Sector Office
Annualised gross rent (GBPm) 1.1
Lettable area (Sq. Ft.) 91,034
Anchor tenants Ceva Logistics Ltd,
Hill Rom UK Ltd, Alstom
Power Ltd
EPRA Occupancy (%) 100.0
WAULT (years) (to first 2.7 (1.4)
break)
-------------------------------------------------- -------------------------
-- Fully Let - Dilapidations on the inherited vacated space
agreed. Jigsaw agreed new lease over revised area with Dunwoody
Airline Services taking the remaining void.
-- Asset Management Initiatives - Re-gear lease with Ceva
Logistics to secure longer income and complete lease surrender of
Power House with Alstom Power Ltd and back-to-back re-letting to
Brush Electrical Machines Ltd on a new 10-year lease.
Columbus House,
Coventry Market value (GBPm) 13.3
Sector Office
Annualised gross rent (GBPm) 1.4
Lettable area (Sq. Ft.) 53,253
Anchor tenants TUI Northern Europe
Ltd
EPRA Occupancy (%) 100.0
WAULT (years) (to first 4.0 (4.0)
break)
------------------------------------------------ --------------------
-- Income Profile - Let to TUI until 2024 on a geared lease with
fixed annual uplifts. TUI has sublet the entire space to First
Utility that provides an underpinning to the rent.
-- Asset Management Initiatives - Potential to agree lease
surrender with TUI, with benefits of existing sublets to First
Utility who have recently been acquired by Shell Petroleum Company
Limited.
Templeton On
The Green, Glasgow Market value (GBPm) 11.7
Sector Office
Annualised gross rent (GBPm) 1.3
Lettable area (Sq. Ft.) 142,512
Anchor tenants The Scottish Ministers,
The Scottish Sports
Council, Heidi Beers
Ltd
EPRA Occupancy (%) 97.4
WAULT (years) (to first 7.5 (4.1)
break)
---------------------------------------------------- ------------------------
-- Diversified Income - Multi-let to 39 tenants across 47 leases.
-- Further Lettings - Six new lettings took place during 2019 to
five tenants across 13,547 sq. ft., providing a combined gross
rental income of c. GBP130,000 per annum and representing a notable
uplift of c. 19% from December 2018 ERVs.
-- Reducing Vacancy - EPRA Occupancy has increased by 5.4% in
the 12 months to 31 December 2019, reaching 97.4%.
Oakland House,
Manchester Market value (GBPm) 11.3
Sector Office
Annualised gross rent (GBPm) 1.1
Lettable area (Sq. Ft.) 160,938
Anchor tenants HSS Hire Service Group
Ltd, Please Hold (UK)
Ltd, CVS (Commercial
Valuers & Surveyors)
Ltd
EPRA Occupancy (%) 89.5
WAULT (years) (to first 5.1 (3.8)
break)
----------------------------------------------- -----------------------
-- Adding Value - Front of house works undertaken to improve
immediate presentation and installation of high-level external
illuminated signage to "landmark" the building.
-- New Lettings - New lease agreed with Please Hold (UK) Limited
for 5,450 sq. ft. on the fifth floor for a 10-year term at a gross
rental value of GBP12.50 per sq. ft., with a break option in
2024.
-- Asset Management Initiatives - Refurbishment of ground floor
to create smaller suites in response to changing occupational
demand as well as proposed creation of hub style facility to
provide welfare facilities (including showers and improved
reception).
Top 15 Properties by Sector: Industrial
Juniper Park, Basildon Market value (GBPm) 29.6
Sector Industrial
Annualised gross rent
(GBPm) 2.2
Lettable area (Sq. Ft.) 277,760
Anchor tenants Schenker Ltd, A Share
& Sons Ltd, Vanguard
Logistics Services
Ltd
EPRA Occupancy (%) 100.0
WAULT (years) (to first 4.4 (2.8)
break)
-------------------------------------------------- ----------------------
-- Diversified Income - Multi-let to 11 tenants across 15 leases.
-- New Letting - New lease agreed with DG International Group
Limited for c. 30,100 sq. ft. for a five-year term at a gross
rental income of c. GBP240,800 per annum, representing a notable
uplift of 30% from the previous tenancy. The unit was re-let within
11 weeks of the previous lease coming to an end.
-- Major Renewal Secured - Unit 2 of the 16-unit site has
successfully been renewed to Vanguard Logistics Services Limited
for a five-year period with Vanguard having the option to extend
beyond this. A stepped rent has been agreed on the 61,079 sq. ft.
unit, increasing to GBP370,000 per annum representing an uplift of
15.4% to the previous annual rent of GBP320,665, and 5.4% ahead of
ERV.
-- Tenant Expansion - Agreement for lease signed with Schenker
Limited to take a lease of the whole ground floor offices (c.
13,000 sq. ft.) at Juniper Place on a five-year term at a gross
rent of c. GBP182,000 per annum (c. GBP14.00 per sq. ft. and 4.9%
above ERV).
Road 4 Winsford
Industrial Estate,
Winsford Market value (GBPm) 15.7
Sector Industrial
Annualised gross rent (GBPm) 1.0
Lettable area (Sq. Ft.) 246,209
Anchor tenants Jiffy Packaging Ltd
EPRA Occupancy (%) 100.0
WAULT (years) (to first 14.8 (14.8)
break)
---------------------------------------------------- --------------------
-- Long-Term Lease - Let to Jiffy Packaging Limited until 2034.
-- Business Plan - Tenant company acquired by Airpack Group and
lease guarantee assigned to new parent company. Discussions
continue with tenant regarding a potential re-gear.
Top 15 Properties by Sector: Other
Kingscourt Leisure
Complex, Dundee Market value (GBPm) 10.5
Sector Other
Annualised gross rent (GBPm) 0.7
Lettable area (Sq. Ft.) 83,780
Anchor tenants Odeon Cinemas Ltd,
Jag Leisure (Scotland)
Ltd
EPRA Occupancy (%) 88.8
WAULT (years) (to first 8.0 (7.7)
break)
--------------------------------------------------- ------------------------
-- Adding Value - Works undertaken to transform 10 screen
multiplex Odeon cinema to 'Odeon Deluxe' brand. Successfully
negotiated re-gear of the lease to provide a further 10-year term
subject to us contributing to the cost of the upgrade.
-- Asset Management Initiatives - Let balance of refurbished space
Financial Review
Net Asset Value
In the year ended 31 December 2019, the EPRA NAV of the Group
increased by GBP55.8m to GBP486.3m (IFRS: GBP483.7m) from GBP430.5m
(IFRS: GBP429.5m) as at 31 December 2018, equating to a decrease in
the diluted EPRA NAV of 2.8pps to 112.7pps from 115.5pps. This is
after the payment of dividends in the period amounting to
8.2pps.
The EPRA NAV increase of some GBP55.8m since 31 December 2018 is
predominately sourced from the issuance of new equity and offset by
the revaluation of investment properties held at 31 December
2019.
On 23 July 2019, the Company issued 58,685,447 Ordinary Shares
at a price of 106.5pps pursuant to a capital raise of gross
proceeds of GBP62.5m. The funds were deployed in three tranches,
excluding transaction costs: on 21 August 2019, a portfolio of six
offices were acquired for GBP25.9m; on 18 October 2019, four
multi-let offices were acquired for GBP27.7m; and finally, on 31
December 2019, a company office headquarters was acquired for
GBP10.3m.
The investment property portfolio valuation as at 31 December
2019 totalled GBP787.9m, (31 December 2018: GBP718.4m). The
increase of GBP69.5m since the December 2018 year end is largely a
reflection of the aforementioned GBP62.5m equity capital raise
funds being deployed, GBP1.7m realised property disposals, offset
by GBP3.5m of investment property revaluations, and gross capital
expenditure amounting to GBP8.0m. Overall, on a like-for-like
basis, the portfolio was broadly unchanged with a 0.1%
decrease.
The below table sets out the acquisitions, disposals and capital
expenditure for the respective periods:
Year ended Year ended
31 December 31 December
2019 2018
(GBPm) (GBPm)
Acquisitions
Net (after costs) 89.9 76.3
Gross (before costs) 87.1 73.3
Disposals
Net (after costs) 24.3 149.3
Gross (before costs) 24.9 152.5
Capital Expenditure
Net (after dilapidations) 5.8 7.0
Gross (before dilapidations) 8.0 9.8
The diluted EPRA NAV per share decreased to 112.7pps (31
December 2018: 115.5pps). The EPRA NAV is reconciled in the table
below:
Year ended
2019
Pence per
GBPm share
Opening EPRA NAV (31 December 2018) 430.5 115.5
Capital raise dilution 60.5 (1.7)
Opening EPRA NAV (incl. net capital
raise) 491.0 113.8
Net rental and property income 55.0 12.7
Administration and other expenses (10.9) (2.5)
Gain on the disposal of investment
properties 1.7 0.4
Change in the fair value of investment
properties (3.5) (0.8)
Change in value of right of use (0.2) (0.0)
-------- ----------
EPRA NAV after operating profit 533.0 123.5
Net finance expense (13.7) (3.2)
Impairment of goodwill (0.6) (0.1)
Taxation 0.4 0.1
EPRA NAV before dividends paid 519.1 120.3
Dividends paid (32.8) (7.6)
Closing EPRA NAV (31 December 2019) 486.3 112.7
======== ==========
Table may not sum due to rounding
As at 31 December 2018, there were 372,821,136 shares in issue. On 23 July 2019, the Company
issued 58,685,447 shares which qualified for the Q2 2019 dividend of 1.90 pence per share and
increased the total number of shares in issue to 431,506,583.
Income Statement
Operating profit before gains and losses on property assets and
other investments for the year ended 31 December 2019 amounted to
GBP44.1m (31 December 2018: GBP36.8m). Profit after finance items
and before taxation was GBP26.3m (31 December 2018: GBP67.9m). This
reduction is predominately the result of three factors: firstly, a
reduction in the gains on the disposal of investment properties,
with 2018 including a number of opportunistic disposals; secondly,
the reduction in the change in fair value of investment properties,
with 2018 values being driven by asset management initiatives; and
finally, the combination of the two prior factors resulted in a
reduction of the performance fee incurred. 2019 included a full
rent roll for properties held as at 31 December 2018, plus the
partial rent roll for properties acquired and disposed of during
the period.
Rental and property income amounted to GBP64.4m, excluding
recoverable service charge income and other similar items (31
December 2018: GBP62.1m). The increase was primarily the result of
the enlarged investment property portfolio held in 2019.
Currently more than 85% of the rental income is collected within
28 days of the due date and bad debts in the period were GBP0.5m
(31 December 2018: GBP0.4m).
Non-recoverable property costs, excluding recoverable service
charge income and other similar costs, amounted to GBP9.4m (31
December 2018: GBP7.7m), and the rent roll increased to GBP64.3m
(31 December 2018: GBP59.7m).
Realised gain on disposal of investment properties amounted to
GBP1.7m (31 December 2018: GBP23.1m). These gains were primarily
driven by asset management initiatives. The change in the fair
value of investment properties amounted to a loss of GBP3.5m (31
December 2018: gain of GBP23.9m). Gross capital expenditure
amounted to GBP8.0m. The change in value of right of use asset
amounted to a charge of GBP0.2m; additional information is set out
in note 2.4 below.
Finance expenses amount to GBP13.9m (31 December 2018:
GBP16.0m). The decrease is largely as a result of the repayment of
the 30m zero dividend preference shares ("ZDPs") on 9 January
2019.
The EPRA cost ratio, including direct vacancy costs, was 31.6%
(31 December 2018: 40.1%), adjusting for ground rent. The decrease
in the cost ratio is ostensibly a reflection of the decrease in
realised gains from the disposal of investment properties in the
period, coupled with the reduction in the fair value of the
investment properties, resulting in a nil performance fee (31
December 2018: GBP7.0m). The EPRA cost ratio, including direct
vacancy costs and excluding the performance fee, was 31.6% (31
December 2018: 28.6%).
The ongoing charges for the period ending 31 December 2019 were
4.5% (31 December 2018: 4.4%).
The EPRA Total Return from 6 November 2015 to 31 December 2019
was 43.0% (31 December 2018: 37.5%), an annualised rate of 9.0% pa
(31 December 2018: 10.6% pa).
Dividend
In relation to the period from 1 January 2019 to 31 December
2019, the Company declared dividends totalling 8.25pps (2018:
8.05pps). Since the end of the period, the Company has declared a
dividend for the fourth quarter of 2019 of 2.55pps.
Announcement Pence per
Period covered date Ex-date Payment date share
1 Jan 2019 to 31
Mar 2019 23 May 2019 6 Jun 2019 12 July 2019 1.90
1 Apr 2019 to 30
Jun 2019 29 Aug 2019 5 Sep 2019 15 Oct 2019 1.90
1 Jul 2019 to 30
Sep 2019 14 Nov 2019 21 Nov 2019 19 Dec 2019 1.90
1 Oct 2019 to 31
Dec 2019 27 Feb 2020 5 Mar 2020 9 April 2020 2.55
1 Jan 2018 to 31
Mar 2018 17 May 2018 24 May 2018 13 Jul 2018 1.85
1 Apr 2018 to 30
Jun 2018 31 Aug 2018 13 Sep 2018 15 Oct 2018 1.85
1 Jul 2018 to 30 22 Nov
Sep 2018 15 Nov 2018 2018 21 Dec 2018 1.85
1 Oct 2018 to 31
Dec 2018 21 Feb 2019 28 Feb 2019 11 Apr 2019 2.50
Debt Financing and Gearing
Borrowings comprise third-party bank debt which is secured over
properties owned by the Group and repayable over the next four to
ten years, with a weighted average maturity of 7.3 years (31
December 2018: 6.4 years).
The Group's borrowing facilities are with the Royal Bank of
Scotland, Scottish Widows Limited & Aviva Investors Real Estate
Finance, Scottish Widows Limited and Santander UK. Total bank
borrowing facilities at 31 December 2019 amounted to GBP294.0m (31
December 2018: GBP290.5m) (before unamortised debt issuance costs),
with GBP27.9m available to be drawn. In addition to the bank
borrowings, the Group has a GBP50m 4.5% retail eligible bond which
is due for repayment in August 2024. In aggregate, the total debt
available at 31 December 2019 amounted to GBP371.9m (31 December
2018: GBP380.4m).
During the period, the Company fully repaid the GBP39.9m ZDP
shares on 9 January 2019. In addition, a new GBP66.0m 10-year
facility was agreed with Santander, refinancing the existing
GBP44.0m facility; a new GBP55.0m five-year facility was agreed
with the Royal Bank of Scotland, which refinanced both the existing
GBP26.5m facility with the Royal Bank of Scotland and the GBP19.0m
facility with HSBC. The new Royal Bank of Scotland and Santander UK
facilities had not been fully drawn as at 31 December 2019.
At 31 December 2019, the Group's cash and cash equivalent
balances amounted to GBP37.3m (31 December 2018: GBP104.8m), after
the repayment of the GBP39.9m ZDP shares and the acquisition of
Norfolk House for GBP20.0m before costs.
The Group's net LTV ratio stands at 38.9% (31 December 2018:
38.3%) before unamortised costs. The Board continues to target a
net LTV ratio of 40%, with a maximum limit of 50%.
Debt Profile and LTV Ratios as at 31 December 2019
Lender Original Outstanding Maturity Gross Annual interest
facility debt* date loan rate
to value**
GBP'000 GBP'000 % %
Royal Bank over 3 months
of Scotland 55,000 48,584 Jun-2024 39.8 2.15 GBP LIBOR
Scottish Widows
Ltd. & Aviva
Investors Real
Estate Finance 165,000 165,000 Dec-2027 45.1 3.28 Fixed
Scottish Widows
Ltd. 36,000 36,000 Dec-2028 38.9 3.37 Fixed
over 3 months
Santander UK 65,870 44,416 Jun-2029 26.4 2.20 GBP LIBOR
========== ============
321,870 294,000
Retail eligible
bond 50,000 50,000 Aug-2024 N/A 4.50 Fixed
========== ============
371,870 344,000
* Before unamortised debt issue costs
** Based on Cushman and Wakefield property valuations
Table may not sum due to rounding
The Managers continue to monitor the borrowing requirements of
the Group. As at 31 December 2019, the Group had substantial
headroom against its borrowing covenants.
The net gearing ratio (net debt to Ordinary Shareholders' equity
(diluted)) of the Group was 63.4% as at 31 December 2019 (31
December 2018: 64.1%).
Interest cover, including amortised costs, stands at 3.6 times
(31 December 2018: 2.3 times) including the ZDP shares, and 3.6
times excluding the ZDP shares (31 December 2018: 2.7 times). The
interest cover, including amortised costs, increase was a result of
the reduction of borrowings following the repayment of the ZDP
shares on 9 January 2019.
Hedging
The Group applies an interest hedging strategy that is aligned
to the property management strategy and aims to mitigate interest
rate volatility on at least 90% of the debt exposure.
31 December 31 December
2019 2018
% %
Borrowings interest rate hedged
(incl. ZDP) 108.1 102.0
Thereof:
Fixed 73.0 76.5
Swap 17.6 12.8
Cap 17.6 12.8
WACD(1) 3.5 3.8
WACD - Excluding the ZDPs(2) 3.5 3.5
Table may not sum due to rounding
(1) WACD - Weighted Average Effective Interest Rate including
the cost of hedging
(2) Zero Dividend Preference Shares, which were assumed
on 24 March 2017 and fully repaid on 9 January 2019
The over hedged position has arisen due to the entire Royal Bank
of Scotland and Santander UK facilities, including any undrawn
balances, being hedged by interest rate cap derivatives which have
no ongoing cost to the Group.
Tax
The Group entered the UK REIT regime on 7 November 2015 and all
of the Group's UK property rental operations became exempt from UK
corporation tax from that date. The exemption remains subject to
the Group's continuing compliance with the UK REIT rules.
On 9 January 2018, the Company registered for VAT purposes in
England.
At 31 December 2019, the Group recognised a tax credit of
GBP0.3m, which comprised tax provisions for the year offset by
releases of tax previously provided for in prior years which are
now concluded and not payable.
Subsequent Events and COVID-19
The wellbeing of our tenants and other stakeholders in the
Company are of utmost importance to the Board and we continue to
manage the Company, cognisant of their needs in this current
environment.
On 20 February 2020, the Company announced a potential equity
fundraise to take advantage of its growing near-term pipeline of
accretive growth. As a result of the current market uncertainty
caused by the global spread of COVID-19, the Company took the
decision to withdraw the potential equity fundraise.
On 31 March 2020, and in view of the COVID-19 disruption to UK
economic activity the Company announced a trading update. The
rental collections were slightly reduced as at 30 March 2020, with
68.2% of invoiced rental income collected in comparison with 69.6%
at the same date in 2019. In addition, GBP30.7m of available
borrowing headroom from the Santander UK and Royal Bank of Scotland
facilities had been drawn.
The Board will continue to closely monitor the developing
situation and its effect on the Group, although the Board is
re-assured by the Company's balance sheet, the breadth of tenants
and geographical spread of assets, which will ensure it is well
positioned to mitigate any prolonged periods of uncertainty.
Principal Risks and Uncertainties
Principal Risks and Uncertainties
The Board acknowledges that it faces a number of risks which
could impact the achievement of its strategy, and that effective
risk management is essential to the Group. A robust assessment is
undertaken of the principal risks facing the Group, including those
that would threaten its business model and future performance,
solvency or liquidity.
Although the Board believes that it has a robust framework of
internal controls in place, this can provide only reasonable, and
not absolute, assurance against material financial misstatement or
loss and is designed to manage, not eliminate risk.
The Group has established a risk management process to monitor
and mitigate identifiable risks where possible, rather than
eliminating them. The Audit Committee reviews the risk management
matrix on a six-monthly basis. The below list sets out the current
identifiable principal risks in no particular order which the Board
is monitoring but does not purport to be an exhaustive list of all
the risks faced by the Group.
The Board is aware that material emerging risks will arise
which, to date, are not deemed material nor warrant significant
resources to monitor. As and when such risks are identified, the
Group will put in place controls to monitor and mitigate .
Principal Risk Summary Movement trend in the period
1. Inappropriate investment strategy ó
2. Valuation ó
3. COVID-19 ö
4. Economic and political ó
5. Funding ó
6. Tenant ó
7. Financial and tax changes ó
8. Operational ö
9. Accounting, legal and regulatory ó
10. Environmental and efficiency standards ö
Strategic
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ó
An
inappropriate * An annual review of the investment strategy. * The property portfolio remains balanced across a
investment range of geographical areas and large number of
strategy investment properties.
could result * A defined and rigorous investment appraisal process.
in lower
income
and capital * Acquire portfolios which offer Shareholders
returns to diversification of investment risk by investing in a
Shareholders. range of geographical areas and number of properties
.
* Supply and demand market information is reviewed
continuously to assist in acquisitions and disposals
.
---------------------------------------------------------------- -----------------------------------------------------------
* Only acquiring office and industrial properties in * The Group continues to purchase properties in the UK
the UK and outside of the M25 motorway. However, the outside the M25 motorway.
Group may invest in property portfolios in which up
to 50% of the properties (by market value) are
situated within the M25 motorway.
---------------------------------------------------------------- -----------------------------------------------------------
* No single property, in the ordinary course of * Tay House (31 December 2018: Tay House) remains the
business, is expected to exceed 10% of the Group's highest valued property, which equates to 4.3% (31
aggregate Investment Properties. However, the Board December 2018: 4.6%) of the Group's investment
may, in exceptional circumstances, consider a properties.
property having a value of up to 20% of the Group's
investment property value at the time of investment.
---------------------------------------------------------------- -----------------------------------------------------------
* No more than 20% of the Group's investment property * The Group's largest single tenant exposure is 2.5%
value shall be exposed to any single tenant or group (31 December 2018: 2.7%) of gross rental income,
undertaking of that tenant. being Barclays Bank PLC (31 December 2018: Barclays
Bank PLC).
---------------------------------------------------------------- -----------------------------------------------------------
* Speculative development (i.e., properties under * No speculative construction was undertaken in the
construction, but excluding any refurbishment works, year.
which have not been pre-let) is prohibited.
---------------------------------------------------------------- -----------------------------------------------------------
* The value of the assets is protected by an active * The Asset Manager continues to actively manage the
asset management programme, which is regularly investment properties in accordance with market
reviewed against the business plan for each property. conditions and the individual asset programme.
---------------------------------------------------------------- -----------------------------------------------------------
Valuation
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ó
The valuation
of * External valuers, Cushman & Wakefield provide * Cushman & Wakefield provide the valuation for the
the Group's independent valuations for all properties and in entire portfolio.
portfolio accordance with the RICS Red Book.
affects its
profitability
and net * The Audit Committee has the opportunity to discuss
assets. with the external valuers the basis of their
valuations.
* The Asset Manager's experience and extensive property
market knowledge and are able to challenge the
external valuers findings.
* The Company's Auditor to engage an independent third
party to evaluate Cushman & Wakefield valuation.
------------------------------------------------------------ --------------------------------------------------------
COVID-19
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ö
The economic
disruption * The retention of the Asset and Investment Manager, * This was a completely new and unforeseen risk.
resulting will be pivotal in the near-term in maintaining the However, the Group continues to scrutinise all
from rental income, given their experience and corporate current risk mitigation approaches employed and to
COVID-19 memory. The Company and the Managers each agreed to work closely with all parties through this disruptive
virus waive their right to issue a termination notice on or period.
could impact before 3 November 2020 and the management agreement
rental will now continue in force until 3 November 2023
incomes, the
ability
to access * The Asset Manager stands ready, should it be required
funding ,
at to support tenants in accessing UK Government
competitive financial assistance
rates,
maintain
a progressive * The Asset Manager, where appropriate, has put in
dividend place social distancing measures as advised by the
policy, and government
adhere
to the HMRC
REIT * The available borrowing facility headroom has been
regime drawn down from Santander UK and Royal Bank of
requirements, Scotland
especially if
associated
restrictions * The Company is no longer considering a potential
are equity fundraise and any associated property
in place for acquisitions
greater
than one
year. * Close relationships with lenders ensuring early
dialogue around covenants
* Dividend distributions remain under review
----------------------------------------------------------------- -----------------------------------------------------------------
Economic and political
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ó
Significant
political * The Group operates with a sole focus on the UK * There remains a risk that property valuations and the
events regions, with no foreign currency exchange exposure. occupancy market may be impacted by the ongoing
could It remains well positioned with a deliberately negotiations during the Brexit transition period.
impact the diverse standard industry classification of tenants
health generating in excess of 900 (31 December 2018: 800)
of the UK income streams which are located in areas of expected
economy, economic growth.
resulting
in
borrowing * The Board receives advice on macro-economic risks
constraints from the Investment Manager and other Advisers and
, acts accordingly.
change in
demand
by tenants
for
suitable
properties,
the quality
of
the
tenants,
and
ultimately
the
portfolio
value.
------------------------------------------------------------ ------------------------------------------------------------
Funding
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ó
The Group may
not be able * Borrowings are currently provided by a range of * Weighted average debt term increased to 7.3 years
to institutions with targeted staggered maturities. from 6.4 years in 2018.
secure
further
debt on * Strong relationships with key long-term lenders. * Weighted average cost of capital, including hedgi
acceptable ng
terms, which costs was 3.5% (31 December 2018: 3.8%).
may impinge * Funding options are constantly reviewed with an
upon emphasis on reducing the weighted average cost of
investment capital and lengthening the weighted average debt to * LTV increased to 38.9% from 38.3% at 31 December
opportunities maturity. 2018.
and the
ability
to grow the * Continual monitoring of LTV.
Group.
----------------------------------------------------------- --------------------------------------------------------
Bank
reference * Policy of hedging at least 90% of variable interest * Continued adherence to the hedging policy.
interest rate borrowings.
rates
may be set to
rise * Borrowings are currently provided by a range of
accompanying institutions with targeted staggered maturities.
higher
inflation.
----------------------------------------------------------- --------------------------------------------------------
Tenant
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD
ó
Type of tenant
and concentration * An active asset management programme with a focus on * This risk remains stable in view of the increasing
of tenant could the Asset Manager working with individual tenants to diversification of properties, tenants and
result in lower assess any occupational issues and to manage any geographies in the portfolio.
income from reduced potential bad debts.
lettings or
defaults. * T he tenant mix and their underlying activity has
* Diversified portfolio of properties let, where continued to increasingly diversify, with the number
possible, to a large number of low risk tenants of tenants amounting to 904 at the year end (31
across a wide range of different standard industrial December 2018: 874).
classifications throughout the UK.
* Potential acquisitions are reviewed for tenant
overlap.
----------------------------------------------------------------- ------------------------------------------------------------------
A high
concentration * The portfolio lease and maturity concentrations are * The WAULT to first break as at 31 December 2019 was
of lease term monitored by the experienced Asset Manager to 3.5 years (31 December 2018: 3.4)
maturity and/or minimise concentration.
break options
could result in * T he largest tenant is 2.5% of the gross rental
a more volatile * There is a focus on securing early renewals and income, being Barclays Bank PLC (31 December 2018:
contracted rent increased lease period. 2.7%).
roll.
* The requirement for suitable tenants and the quality * The Asset Management team remains vigilant to the
of the tenant is managed by the experienced Asset health of current tenants and continues to liaise
Manager which maintains close relationships with with occupiers and agents.
current tenants and with letting agents.
----------------------------------------------------------------- ------------------------------------------------------------------
Financial and Tax Change
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ó
Changes to
the * The Board receives advice on these changes where * Advice is received from a number of corporate
UK REIT and appropriate and will act accordingly. advisers including Grant Thornton UK LLP and the
non-REIT Group adapts to changes as required.
regimes,
tax and
financial
legislation.
------------------------------------------------------- -------------------------------------------------------
Operational
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ö
Business
disruption * T he Asset and Investment Managers each have * Both the Asset and Investment Managers annually
could contingency plans in place to ensure there are no review their Disaster and Business Continuity Plans.
impinge disruptions to the core infrastructure, including
on the cyber security measures, which would impinge on the
normal normal operations of the Group. These plans have bee
operations n
of implemented in adherence to COVID-19 government
the Group. guidelines, with limited disruption to operations.
----------------------------------------------------------- -----------------------------------------------------------
* An annual due diligence exercise is carried out on * Annual due diligence visits were undertaken with the
all principal third-party service providers. Company's principal third party service providers.
* There were no concerns identified from these visits.
----------------------------------------------------------- -----------------------------------------------------------
* As an externally managed investment Company, there i * Both the Asset and Investment Manager are viable
s going concerns.
a continued reliance on the Asset and Investment
Managers.
----------------------------------------------------------- -----------------------------------------------------------
* All acquisitions undergo a rigorous due diligence * The Asset Manager remains vigilant to changes in
process and all multi-let properties undergo an Health and Safety regulations, including, where
annual comprehensive fire risk. required, COVID-19 social distancing measures.
* The impact of physical damage and destruction to * The Asset Manager reviews the adequacy of insurance
investment properties is mitigated by ensuring all cover on an ongoing basis.
are covered by a comprehensive building, loss of ren
t
and service charge plus terrorism insurance with the
exception of a small number of "self-insure"
arrangements covered under leases.
----------------------------------------------------------- -----------------------------------------------------------
Accounting, Legal, and Regulatory
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ó
Changes to
accounting, * Robust processes are in place to ensure adherence to * The Group continues to receive advice from its
legal accounting, legal, regulatory requirements, and corporate advisers and has incorporated changes where
and/or Listing Rules. required.
regulatory
legislation
could * All contracts are reviewed by the Group's legal * The Administrator and Company Secretary continue to
result advisers. attend all Board meetings and advise on Listing Rule
in changes requirements in conjunction with the Corporate Broker
to and Financial Adviser.
current * The Administrator, in its capacity as Group
operating Accountant, and the Company Secretary attend all
processes. Board meetings in order to be aware of all
announcements that need to be made.
* All compliance issues are raised with the Financial
Adviser.
----------------------------------------------------------- ------------------------------------------------------------
Environmental and Energy Efficiency Standards
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT ö
The Group's
cost base * The Board receives regular updates on environmental, * Additional attention is currently being devoted in
could social, governance and potential legislation changes this area to ensure the appropriate approach and
be impacted, (e.g. the Government Green Finance Strategy July indicators are applied.
and 2019) from its advisers.
management
time
diverted, * The Group is currently reviewing its approach to
due to these emerging risks with the assistance of
climate specialist external advisers.
changes and
associated
legislation.
---------------------------------------------------------------- ----------------------------------------------------------
Changes to
the * Property acquisitions undergo a rigorous due * The rigour of the environmental assessments process
environment diligence process, including an environmental continues to be reviewed with the aim of enhancing
could impact assessment. it.
upon the
operations
of the * The Asset Manager monitors the portfolio for any
Group. detrimental environmental impact, by way of frequent
inspections of the properties, and the annual
insurance review process.
---------------------------------------------------------------- ----------------------------------------------------------
An Energy
Performance * The Group continues to review each property to ensure * The Asset Manager is continually reviewing the
Rating of E adherence with Energy Performance Rating feasibility of enhancing Energy Performance Ratings
and below is requirements. to exceed the minimum requirement.
required for
each asset
in * The energy efficiency of investment acquisitions is
order to be fully considered as part of the buying due diligence.
let or sold.
---------------------------------------------------------------- ----------------------------------------------------------
Emerging Risks
In reviewing the principal risks, the Board also considers
emerging risks on a regular basis. The Company has a procedure in
place to identify emerging risks and manages them accordingly. One
key emerging risk that was identified but is now considered an
actual principal risk to the Company is COVID-19, as detailed
above.
Changes to the Principal Risks and Uncertainties
The Board, via the Audit Committee, has agreed the movement
during the period to each of the identified principal risks and
uncertainties following review of these risks, having considered
the characteristics of these and the economic and geo-political
factors. Any impact of these risks
to the Company's future strategy is considered on an ongoing
basis.
Going Concern
The Directors have made an assessment of the Group's ability to
continue as a going concern which included the current
uncertainties created by COVID-19, coupled with the Group's cash
resources, borrowing facilities, rental income, acquisition and
disposals of investment properties, elective and committed capital
expenditure, and dividend distributions.
The Group ended the year under review with GBP37.3m of cash and
cash equivalents, of which GBP34.7m was unrestricted cash. In light
of current uncertainties, the Directors prudently decided to draw
down GBP30.7m of available borrowing headroom from the Santander UK
and Royal Bank of Scotland facilities on 26 March 2020. As at 30
March 2020, the cash and cash equivalents amounted to GBP68.8m, of
which GBP64.4m was unrestricted. As a result of the drawdown, the
borrowing facilities increased from GBP344.0m at the year ended 31
December 2019 to GBP371.9m as at 31 March 2020, with an LTV of c.
39%, based upon the value of Company's investment properties as at
31 December 2019. In respect of the Company's borrowings, the first
of its facilities to mature is for GBP55.0m in June 2024, and is
held with the Royal Bank of Scotland.
As at 30 March 2020, the first quarter 2020 rent collected was
only c.1.4% reduced from the position as at the same date in the
first quarter 2019. As at 31 March 2020, the aggregate rent to be
invoiced for the second and third quarters of 2020 would amount to
some GBP30.4m, and the respective operating costs would amount to
some GBP5.7m.
As part of the going concern assessment, and taking the above
into consideration, the Directors reviewed a number of scenarios
which included extreme downside sensitivities in relation to rental
cash collection, no property acquisitions, no elective capital
expenditure, REIT regime compliance, and no dividends. The 2019
dividend payment of 8.25 pence per share would amount to GBP35.6m
if distributed in 2020, based on the current number of shares in
issue. A range of scenarios up to 12 months with nil cash
collection were considered, and taking into account mitigating
management actions, the company had adequate resources to continue
its operations.
To supplement the scenario planning, constructive discussions
were held with all the Company's lenders around the ability to
waive or change the respective covenants, if required. This was
further underpinned by the, Bank of England's financial services
regulatory and supervisory body, the Prudential Regulation
Authority providing guidance to its regulated members on the 26
March 2020.
Given the substantial amount of unrestricted cash currently held
by the Group, the limited level of committed capital expenditure in
the forthcoming 12 months, and reasonable downside sensitivities
the Directors are satisfied that the Company has adequate resources
to continue in operational existence, for a period of at least 12
months from the date that these Financial Statements were
approved.
Furthermore, the Directors are not aware of any material
uncertainties that may cast significant doubt upon the Group's
ability to continue as a going concern. Accordingly, the Directors
consider that it is appropriate to prepare the Financial Statements
on a going concern basis.
Viability Statement
In accordance with the AIC Code of Corporate Governance, and
taking into consideration COVID- 19, the Directors have assessed
the prospects of the Group and future viability over a three-year
period from the year end, being longer than the 12 months required
by the 'Going Concern' provision. The Board conducted the review
with regard to the Group's long-term strategy, principal risks and
risk appetite, current position, asset performance and future
plans, and determined that three years to 31 December 2022 is the
maximum timescale over which the performance of the Group can be
forecast with any material degree of accuracy, and so is an
appropriate period over which to consider the Group's
viability.
A range of downside sensitivity analyses were stress tested to
form part of the review, with material inputs filtered to consider
differing economic backdrops, and how such challenges would be met.
Achievement of the one-year forecast has a greater level of
certainty and is used to set near-term targets across the Group.
Achievement of the subsequent forecasted years is less certain than
the one-year. The Board's forecast, though provides a longer-term
outlook against which strategic decisions can be made.
Assessment of Review Period
The Board chose to conduct the review for a three-year period
giving consideration to:
-- The Group's WAULT of 3.5 years to first break.
-- The Group's detailed forecast covering a rolling three-year period.
-- The Group's weighted average debt to maturity was 7.3 years as at 31 December 2019.
Assessment of Prospects and Viability
The financial planning process considers the Group's
profitability, capital values, LTV, cashflows, dividend cover,
banking covenants, and other key financial metrics over the
three-year period. The metrics are subject to a sensitivity
analysis, in which a number of the main underlying assumptions are
flexed and tested to consider a range of alternative
macro-environments and portfolio compositions. The review was
updated to consider the impact of COVID-19, however, given the
unpredictable nature of the outbreak, and how rapidly the responses
to the outbreak are changing, the Board is unable to predict the
full extent of the impact.
The downside scenarios considered the impact on the corporate
model, including the loss of all rental income up to a 12 month
period, taking into consideration, no property acquisitions,
elective capital expenditure, or dividends, and compliance with the
REIT regime. Taking into account mitigating management actions, the
Company had adequate resources to continue is operations over the
period of the assessment on the assumption the current economic
turbulence resulting from the impact of COVID-19 will be
ameliorated by the UK Government actions and normalise within one
year.
Subject to this assumption, the results of the sensitivity
analysis and stress testing demonstrated that the Group would have
sufficient liquidity to meet its on-going liabilities and its
currently committed capital expenditure as they fall due over the
period of assessment.
Furthermore, the Board, in conjunction with the Audit Committee,
carried out a robust assessment of the principal risks and
uncertainties facing the Group, including those that would threaten
its business model, strategy, future performance, solvency or
liquidity over the three-year period. The risk review process
provided the Board with assurance that the mitigations and
management systems are operating as intended. The Board believes
that the Group is well positioned to manage its principal risks and
uncertainties successfully, taking into account the current
COVID-19 risk, and the economic and political environment.
The Board's expectation is further underpinned by the regular
briefings provided by each of the Asset and Investment Manager.
These briefings consider market conditions, opportunities, the
ability to raise third-party funds and deploy these promptly, and
changes in the regulatory landscape, and the current political and
economic risks and uncertainties. These risks, and other potential
risks which may arise, continue to be closely monitored by the
Board.
Confirmation of Viability
The Board confirms that it 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 three years, taking
account of the Group's current position, the principal risks as set
out in the Chairman's Statement and the principal risks and
uncertainties report, and on the assumption the current economic
turbulence resulting from the impact of COVID-19 will be
ameliorated by the UK Government actions and normalise within one
year.
The Directors have carefully reviewed areas of potential
financial risk. The Directors have satisfied themselves that the
Group has adequate financial resources to continue in operational
existence for the foreseeable future.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Notes GBP'000 GBP'000
Continuing Operations
Revenue
Rental and property income 5 75,645 74,019
Property costs 6 (20,681) (19,644)
------------- -------------
Net rental and property income 54,964 54,375
Administrative and other expenses 7 (10,904) (17,586)
-------------
Operating profit before gains and
losses on property assets and other
investments 44,060 36,789
Gain on disposal of investment properties 14 1,662 23,127
Change in fair value of investment
properties 14 (3,513) 23,881
Change in fair value of right of
use assets 33 (194) -
------------- -------------
Operating profit 42,015 83,797
Finance income 9 155 268
Finance expenses 10 (13,880) (15,983)
Impairment of goodwill 16 (557) (557)
Net movement in fair value of derivative
financial instruments 26 (1,479) 415
-------------
Profit before tax 26,254 67,940
Taxation 11 257 (567)
------------- -------------
Total comprehensive income for the
year
(attributable to owners of the parent
Company) 26,511 67,373
------------- -------------
Total comprehensive income arises from continuing
operations.
Earnings per share - basic and diluted 12 6.6p 18.1p
The notes below are an integral part of these consolidated
financial statements.
Consolidated Statement of Financial Position
As at 31 December 2019
31 December 31 December
2019 2018
Notes GBP'000 GBP'000
Assets
Non-current assets
Investment properties 14 787,915 718,375
Right of use assets 33 16,351 -
Goodwill 16 558 1,115
Non-current receivables on tenant
loan 17b 1,156 1,396
------------ ------------
805,980 720,886
Current assets
Trade and other receivables 18 32,158 22,163
Cash and cash equivalents 19 37,248 104,823
------------ ------------
69,406 126,986
873,737
Total assets 875,386 847,872
------------ ------------
Liabilities
Current liabilities
Trade and other payables 20 (22,153) (30,663)
Deferred income 21 (13,301) (11,043)
Taxation liabilities 22 (736) (1,763)
Bank and loan borrowings 23 - (400)
Zero dividend preference shares 24 - (39,816)
------------ ------------
(36,190) (83,685)
Non-current liabilities
Bank and loan borrowings 23 (287,856) (285,199)
Retail eligible bonds 25 (49,286) (49,136)
Derivative financial instruments 26 (1,816) (337)
Lease liabilities 33 (16,510) -
------------ ------------
(355,468) (334,672)
Total liabilities (391,658) (418,357)
------------ ------------
Net assets 483,728 429,515
------------ ------------
Equity
Stated capital 27 430,819 370,316
Retained earnings 52,909 59,199
------------ ------------
Total equity attributable to owners of
the parent Company 483,728 429,515
------------ ------------
Net asset value per share - basic
and diluted 28 112.1p 115.2p
The notes below are an integral part of these consolidated
financial statements.
These consolidated group financial statements were approved by
the Board of Directors and authorised for issue on 8 April 2020 and
signed on its behalf by:
Kevin McGrath,
Chairman and Independent Non-Executive Director
8 April 2020
Consolidated Statement of Changes in Equity
For the year ended 31 December 2019
Attributable to owners of the
parent Company
Stated Retained
capital earnings Total
Notes GBP'000 GBP'000 GBP'000
Balance at 1 January
2019 370,316 59,199 429,515
Total comprehensive
income - 26,511 26,511
Issue of share capital 27 62,500 - 62,500
Share issue costs 27 (1,997) - (1,997)
Dividends paid 13 - (32,801) (32,801)
--------------- -------------- ---------------
Balance at 31 December
2019 430,819 52,909 483,728
--------------- -------------- ---------------
Consolidated Statement of Changes in Equity
For the year ended 31 December 2018
Attributable to owners of the
parent company
Notes Stated Retained
capital earnings Total
GBP'000 GBP'000 GBP'000
Balance at 1 January
2018 370,318 22,581 392,899
Total comprehensive
income - 67,373 67,373
Share based payments 29.1 - (930) (930)
Share issue costs 27 (2) - (2)
Dividends paid 13 - (29,825) (29,825)
--------------- -------------- ---------------
Balance at 31 December
2018 370,316 59,199 429,515
--------------- -------------- ---------------
The notes below are an integral part of these consolidated
financial statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Cash flows from operating activities
Profit for the year before taxation 26,254 67,940
- Change in fair value of investment
properties 3,513 (23,881)
- Change in fair value of financial
derivative instruments 1,479 (415)
- Gain on disposal of investment properties (1,662) (23,127)
- Change in fair value of right of use 194 -
assets
Impairment of goodwill 557 557
Finance income (155) (268)
Finance expenses 13,880 15,983
Share based payments - (930)
Increase in trade and other receivables (7,881) (7)
(Decrease)/increase in trade and other
payables (12,416) 5,323
Increase/(decrease) in deferred income 2,259 (2,358)
------------- -------------
Cash generated from operations 26,022 38,817
Financial income - 250
Finance costs (12,165) (12,173)
Payments for the interest portion (583) -
of the lease liability
Taxation paid (839) (1,467)
------------- -------------
Net cash flow generated from operating
activities 12,435 25,427
------------- -------------
Investing activities
Purchase of investment properties (49,917) (48,675)
Sale of investment properties 24,294 149,276
Interest received 163 220
Acquisition of subsidiaries, net
of cash acquired (43,943) (32,629)
------------- -------------
Net cash flow (used in)/ generated
from
investing activities (69,403) 68,192
------------- -------------
Financing activities
Proceeds from the issue of shares 62,500 -
Share issue costs (1,997) (1,190)
Dividends paid (32,534) (29,429)
Zero Dividend Preference Shareholders (39,879) -
repaid
Bank borrowings advanced 22,911 50,959
Bank borrowings repaid (19,398) (101,506)
Bank borrowing costs paid (2,168) (1,345)
Proceeds from Bond issue - 50,000
Bond issue costs paid (7) (925)
Lease repayments (35) -
------------- -------------
Net cash flow used in financing
activities (10,607) (33,436)
------------- -------------
Net (decrease)/ increase in cash and
cash equivalents (67,575) 60,183
Cash and cash equivalents at the start
of the year 104,823 44,640
------------- -------------
Cash and cash equivalents at the end
of the year 37,248 104,823
------------- -------------
The notes below are an integral part of these consolidated
financial statements.
Notes to the Consolidated Financial Statements
For the year ended 31 December 2019
1. Corporate Information
The Group's consolidated financial statements for the year ended
31 December 2019 comprise the results of the Co mpany and its
subsidiaries (together constituting the "Group") and were approved
by the Board and authorised for issue on 8 April 2020.
The Company is a company limited by shares incorporated in
Guernsey under The Companies (Guernsey) Law, 2008, as amended (the
"Law"). The Company's Ordinary Shares are admitted to the Official
List of the Financial Conduct Authority ("FCA") and traded on the
London Stock Exchange ("LSE").
The Company was incorporated on 22 June 2015 and is registered
with the Guernsey Financial Services Commission as a Registered
Closed-Ended Collective Investment Scheme pursuant to The
Protection of Investors (Bailiwick of Guernsey) Law, 1987, as
amended, and the Registered Collective Investment Schemes Rules
2018.
The Company did not begin trading until 6 November 2015 when the
shares were admitted to trading on the LSE.
The nature of the Group's operations and its principal
activities are set out in the Strategic Report which can be found
in the full Annual Report.
The address of the registered office is Mont Crevelt House,
Bulwer Avenue, St. Sampson, Guernsey GY2 4LH.
2. Basis of preparation
In accordance with Section 244 of The Companies (Guernsey) Law
2008, the Group confirms that the financial information for the
year ended 31 December 2019 are derived from the Group's audited
financial statements and that these are not statutory accounts and,
as such, do not contain all information required to be disclosed in
the financial statements prepared in accordance with International
Financial Reporting Standards ("IFRS").
The statutory accounts for the year ended 31 December 2019 have
been audited and approved, but have not yet been filed.
The Group's audited financial statements for the year ended 31
December 2019 received an unqualified audit opinion and the
auditor's report contained no statement under section 263(2) or
263(3) of The Companies (Guernsey) Law 2008.
The financial information contained within this preliminary
statement was approved and authorised for issue by the Board on 8
April 2020.
2.1 Functional and presentation currency
The financial information is presented in Pounds Sterling, which
is also the functional currency, and all values are rounded to the
nearest thousand (GBP'000) pound, except where otherwise
indicated.
2.2 Going concern
The assessments of going concern are prepared in accordance with
the FRC Guidance issued in September 2014.
The Directors have carefully considered areas of potential
financial risk and have reviewed cash flow forecasts, evaluating a
number of scenarios which included extreme downside sensitivities
in relation to rental cash collection, no property acquisitions, no
elective capital expenditure, REIT regime compliance, and no
dividends. A range of scenarios of up to 12 months of nil rental
cash collection were considered, and taking into account mitigating
management actions, the company had adequate resources to continue
is operations. Further effects of the post-year end COVID-19
outbreak are documented in the going concern and viability
statements and within principal and emerging risks above.
No material uncertainties have been detected which would
influence the Group's ability to continue as a going concern for a
period of at least 12 months from the approval of these financial
statements. The Directors have satisfied themselves that the Group
has adequate financial resources to continue in operational
existence for this period.
Accordingly, the Board of Directors continue to adopt the going
concern basis in preparing the financial statements.
2.3 Business combinations
At the time of acquisition, the Group considers whether each
acquisition represents the acquisition of a business or the
acquisition of an asset. For an acquisition of a business where an
integrated set of activities are acquired in addition to the
property, the Group accounts for the acquisition as a business
combination under IFRS 3 Business Combinations ("IFRS 3").
Where such acquisitions are not judged to be the acquisition of
a business, they are not treated as business combinations. Rather,
the cost to acquire the corporate entity is allocated between the
identifiable assets and liabilities of the entity based upon their
relative fair values at the acquisition date. Accordingly, no
goodwill or additional deferred tax arises.
2.4 New standards, amendments and interpretations
New standards, amendments to standards and interpretations which
came into effect for accounting periods starting on or after 1
January 2019 and have had an impact on the financial statements are
as follows:
IFRS 16, 'Leases' , is effective for accounting periods
beginning on or after 1 January 2019. Under IFRS 16, most leased
assets are capitalised as "right of use assets" by recognising the
present value of the lease payments as an asset and a financial
liability representing the obligation to make future lease
payments.
The Group has a number of leases concerning the long-term lease
of land associated with its long leasehold investment properties.
At 31 December 2019, there was GBP 50,054,000 ground rent committed
under these leases (31 December 2018: GBP50,614,000) and the annual
charge for ground rent for the period for the year ended 31
December 2019 was GBP 618,000 (31 December 2018: GBP618,000).
Under IFRS 16, the Group recognises the right of use asset in
the Consolidated Statement of Financial Position and this is valued
at fair value as the underlying asset is an Investment Property.
The change in fair value is recognised in the Consolidated
Statement of Comprehensive Income. In addition, a financial
liability is recognised in the Consolidated Statement of Financial
Position which is valued at the present value of future lease
payments using the Group's incremental borrowing rate. Lease
payments (also known as ground rent) which were previously
recognised within non-recoverable property costs, now upon payment,
reduce the financial liability. The financial liability is
recalculated at each reporting date, lease payments reduce the
financial liability and interest on the financial liability is
recognised in finance costs.
IFRS 16 has been applied from 1 January 2019 and the modified
retrospective approach to measure the right of use asset at the
same value as the financial liability has been taken and
comparatives have not been restated. At 1 January 2019, a right of
use asset and the financial liability of GBP16,545,000 and
GBP16,545,000 respectively were recognised.
The right of use asset and the financial liability were measured
at the present value of the remaining lease payments, discounted
using the Group's incremental borrowing rate as of 1 January 2019.
The incremental borrowing rate used to determine the right of use
asset has been determined with consideration for the rate at which
the Group would pay to borrow for an asset of similar value to the
right of use asset. The Group considers this to be equivalent to
the Group's weighted average cost of debt, being 3.5% and has
applied. This single discount rate has been applied across the
whole portfolio of leases.
At 31 December 2019, the financial liability was adjusted for
the interest as the lease liability is carried at fair value, with
amounts recognised within finance costs for movements on the
finance liability. The right of use asset was calculated at fair
value with the change in fair value charged to the Consolidated
Statement of Comprehensive Income. Under the modified retrospective
approach in IFRS 16, comparative information is not required to be
restated.
The table below illustrates the accounting treatment presented
in the financial statements:
Transactions in the Condensed Year ended Year ended
Consolidated Statement of 31 December 31 December
Comprehensive Income 2019 2018
GBP'000 GBP'000
Ground rent charges included within non-recoverable
property costs - 618
Fair value movement on right of use asset 194 -
Finance charges 583 -
Total 777 618
------------- -------------
Assets and liabilities recognised Year ended Year ended
within the Condensed Consolidated 31 December 31 December
Statement of Financial Position 2019 2018
GBP'000 GBP'000
Right of use assets included with investment 16,351 -
property
Lease liabilities (16,510) -
Total (159) -
------------- -------------
2.5 New standards, amendments and interpretations effective for
future accounting periods
A number of new standards, amendments to standards and
interpretations are effective for periods beginning on or after 1
January 2020 and have not been applied in preparing these financial
statements. These are:
Amendments to IFRS 3 'Business Combinations' (effective where
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after 1 January 2020) -
makes amendments to clarify the definition of a business to help
companies determine whether an acquisition is of a business or a
group of assets. The amendments are expected to result in more
acquisitions being accounted for as asset acquisitions. As detailed
in notes 2.3 and 3.4, careful consideration is given to the
accounting treatment for each acquisition. Most acquisitions made
by the Group are treated as the acquisition of a group of assets,
so the Directors do not expect the amendments to this standard to
have any significant impact on the financial statements.
Amendments to IAS 1 'Presentation of Financial Statements' and
IAS 8 'Accounting Policies, Changes in Accounting Estimates and
Errors' (effective for annual periods beginning on or after 1
January 2020) - make amendments to clarify the definition of
'material'. The amendments make IFRSs more consistent but are not
expected to have a significant impact on the preparation of the
financial statements.
3. Significant accounting judgements, estimates and
assumptions
The preparation of the 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, uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the
carrying amount of the asset or liability affected in future
periods.
3.1. Critical accounting estimates and assumptions
The principal estimates that may be material to the carrying
amount of assets and liabilities are as follows:
3.1.1 Valuation of investment property
The fair value of investment property, which has a carrying
value at the reporting date of GBP 787,915,000 (31 December 2018:
GBP718,375,000), is determined by independent property valuation
experts to be the estimated amount for which a property should
exchange on the date of the valuation in an arm's length
transaction. Properties have been valued on an individual basis.
The valuation experts use recognised valuation techniques applying
the principles of both IAS 40 and IFRS 13.
The value of the properties has been assessed in accordance with
the relevant parts of the current RICS Red Book. In particular, we
have assessed the fair value as referred to in VPS4 item 7 of the
RICS Red Book. Under these provisions, the term "Fair Value" means
the definition adopted by the International Accounting Standards
Board ("IASB") in IFRS 13, namely "The price that would be received
to sell an asset, or paid to transfer a liability in an orderly
transaction between market participants at the measurement date".
Factors reflected include current market conditions, annual
rentals, lease lengths and location. The significant methods and
assumptions used by the valuers in estimating the fair value of
investment property are set out in note 14 .
In relation to Brexit, the ongoing negotiations with regards to
the terms of the UK's exit from the EU has meant that property
market uncertainty has increased. The independent property
valuation experts are comfortable that, despite the property market
uncertainty, there is sufficient transactional market evidence at
the reporting date to support the fair value of investment
property.
3.1.2 Fair valuation of interest rate derivatives
In accordance with IAS 39, the Group values its interest rate
derivatives at fair value. The fair values are estimated by the
respective counterparties with revaluation occurring on a quarterly
basis. The counterparties will use a number of assumptions in
determining the fair values, including estimations over future
interest rates and therefore future cash flows. The fair value
represents the net present value of the difference between the cash
flows produced by the contracted rate and the valuation rate. The
carrying value of the derivatives at the reporting date was
GBP1,816,000 (31 December 2018: GBP337,000). The significant
methods and assumptions used in estimating the fair value of the
interest rate derivatives are set out in note 26.
3.1.3 Leases - the Group as lessee
The Group has a number of leases concerning the long-term lease
of land associated with its long leasehold investment properties.
Under IFRS16, the Group calculates the lease liability at each
reporting date and at the inception of each lease and at 1 January
2019 when the standard was first adopted. The liability is
calculated using present value of future lease payments using the
Group's incremental borrowing rate as discount rate. At 31 December
2019, there were 13 leases with the range of the period left to run
being 15 and 107 years. The Directors have determined that the
discount rate to use in the calculation for each lease at 1 January
2019 and 31 December 2019 is 3.5% being the Group's weighted
average cost of debt.
3.1.4 Dilapidation income
The Group recognises dilapidation income in the Group's
Statement of Comprehensive Income when the right to receive the
income arises. In determining accrued dilapidations, the Group has
considered historic recovery rates, while also factoring in
expected costs associated with recovery.
3.2. Critical judgements in applying the Group's accounting
policies
In the process of applying the Group's accounting policies,
management has made the following judgements, which have the most
significant effect on the amounts recognised in the financial
statements:
3.2.1 Operating lease contracts - the Group as lessor
The Group has acquired investment properties that are subject to
commercial property leases with tenants. The Group has determined,
based on an evaluation of the terms and conditions of the
arrangements, particularly the duration of the lease terms and
minimum lease payments, that it retains all of the significant
risks and rewards of ownership of these properties and so accounts
for the leases as operating leases.
3.2.2 Consolidation of entities in which the Group holds less
than 50%
Management considered that up until 9 November 2018, the Group
had de facto control of View Castle Limited (previously known as
Credential Investment Holdings Limited) and its 27 subsidiaries
(the "View Castle Sub Group") by virtue of the amended and restated
Call Option Agreement dated 3 November 2015. Following a
restructure of the View Castle Sub Group, the majority of
properties held within the View Castle Sub Group were transferred
into two new special purpose vehicles ("SPVs") with two additional
properties to be transferred into these SPVs at a later date. A new
call option was entered into dated 9 November 2018 with View Castle
Limited and five of its subsidiaries (the "View Castle Group"). As
per the previous amended and restated Call Option Agreement, under
this new option the Group may acquire any of the properties held by
the View Castle Group for a fixed nominal consideration. Despite
having no equity holding, the Group is deemed to have control over
the View Castle Group as the Option Agreement means that the Group
is exposed to, and has rights to, variable returns from its
involvement with the View Castle Group, through its power to
control.
3.2.3 Acquisitions of subsidiary companies
During the year, the Group has made two purchases of subsidiary
companies which own investment properties. For each acquisition,
the Directors consider whether the acquisition met the definition
of the acquisition of a business or the acquisition of a group of
assets and liabilities.
A business is defined in IFRS 3 as an integrated set of
activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of
dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants. Furthermore, a
business consists of inputs and processes applied to those inputs
that have the ability to create outputs.
The companies acquired in the year have comprised portfolios of
investment properties and existing leases with multiple tenants
over varying periods, with little in the way of processes acquired.
It has therefore concluded in each case that the acquisitions did
not meet the criteria for the acquisition of a business as outlined
above.
3.2.4 Recognition of income
Service charges and other similar receipts are included in net
rental and property income gross of the related costs as the
Directors consider the Group acts as principal in this respect.
4. Summary of significant accounting policies
The accounting policies adopted in this report are consistent
with those applied in the financial statements for the year ended
31 December 2018 and have been consistently applied for the year
ended 31 December 2019. The significant change arising from
accounting standards effective for the first time, IFRS 16 Leases,
is detailed in note 2.4.
4.1. Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Company and its subsidiaries as at the date of
the Statement of Financial Position.
4.2 Subsidiaries
Subsidiaries are all entities (including structured entities)
over which the Group has control. The Group controls an entity when
the Group is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those
returns through its power over the entity. Subsidiaries are fully
consolidated from the date on which control is transferred to the
Group. They are deconsolidated from the date that control
ceases.
The Group applies the acquisition method to account for business
combinations. The consideration transferred for the acquisition of
a subsidiary is the fair value of the assets transferred, the
liabilities incurred to the former owners of the acquiree and the
equity interests issued by the Group. Identifiable assets and
liabilities acquired, and contingent liabilities assumed, in a
business combination are measured initially at their fair values at
the acquisition date. The Group recognises any non-controlling
interest in the acquiree on an acquisition-by-acquisition basis,
either at fair value or at the non-controlling interest's
proportionate share of the recognised amounts of the acquiree's
identifiable net assets. Acquisition-related costs are expensed as
incurred.
Any contingent consideration to be transferred by the Group is
recognised at fair value at the acquisition date. Subsequent
changes to the fair value of the contingent consideration are
recognised in profit or loss. Contingent consideration that is
classified as equity is not re-measured, and its subsequent
settlement is accounted for within equity.
For acquisitions of subsidiaries not meeting the definition of a
business, the Group allocates the cost between the individual
identifiable assets and liabilities in the Group based on their
relative fair values at the date of acquisition. Such transactions
or events do not give rise to goodwill.
Inter-company transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated in
full. When necessary, amounts reported by subsidiaries have been
adjusted to conform to the Group's accounting policies.
The excess of the consideration transferred, and the amount of
any non-controlling interest in the acquiree over the fair value of
the identifiable net assets acquired, is recognised as
goodwill.
4.2.1. Disposal of subsidiaries
When the Group ceases to have control over an entity, any
retained interest in the entity is re-measured to its fair value at
the date when control is lost, with the change in the carrying
amount recognised in profit or loss. The fair value is the initial
carrying amount for the purposes of subsequently accounting for the
retained interest as an associate, joint venture or financial
asset. In addition, any amounts previously recognised in other
comprehensive income in respect of that entity are accounted for as
if the Group had directly disposed of the related assets or
liabilities. This may mean that amounts previously recognised in
other comprehensive income are reclassified to profit or loss.
4.3. Segmental information
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-maker is the person or group that
allocates resources to and assesses the performance of the
operating segments of an entity. The Group has determined that its
chief operating decision-maker is the Board of Directors.
After a review of the information provided for management
purposes, it was determined that the Group has one operating
segment and therefore segmental information is not disclosed in
these consolidated financial statements.
4.4. Investment property
Investment property comprises freehold or leasehold properties
that are held to earn rentals or for capital appreciation, or both,
rather than for sale in the ordinary course of business or for use
in production or administrative functions.
Investment property is recognised, usually, on legal completion,
when the risks and rewards of ownership have been transferred, and
is measured initially at cost including transaction costs.
Transaction costs include transfer taxes, professional fees for
legal services and other costs incurred in order to bring the
property to the condition necessary for it to be capable of being
utilised in the manner intended. Subsequent to initial recognition,
investment property is stated at fair value. Gains or losses
arising from changes in the fair value are included in the Group's
Consolidated Statement of Comprehensive Income in the period in
which they arise under IAS 40, 'Investment Property'.
Additions to investment property include costs of a capital
nature only. Expenditure is classified as capital when it results
in identifiable future economic benefits, which are expected to
accrue to the Group. All other property expenditure is charged in
the Group's Consolidated Statement of Comprehensive Income as
incurred.
Investment properties cease to be recognised when they have been
disposed of or withdrawn permanently from use and no future
economic benefit is expected. The difference between the net
disposal proceeds and the carrying amount of the asset (being the
fair value at the start of the financial year) would result in
either gains or losses at the retirement or disposal of investment
property. Any gains or losses are recognised in the Group's
Consolidated Statement of Comprehensive Income in the period of
retirement or disposal.
4.5. Goodwill
Goodwill arises on the acquisition of subsidiaries and
represents the excess of the consideration transferred over the
Group's interest in the fair value of the net identifiable assets,
liabilities and contingent liabilities of the acquiree plus the
amount of the non-controlling interest of the acquiree.
For the purpose of impairment testing, goodwill acquired in a
business combination is allocated to each of the subsidiaries, or
groups of subsidiaries, that is expected to benefit from the
synergies of the combination. Each subsidiary or group of
subsidiaries to which the goodwill is allocated represents the
lowest level within the entity at which the goodwill is monitored
for internal management purposes.
Goodwill impairment reviews are undertaken annually, or more
frequently if events or changes in circumstances indicate a
potential impairment. The carrying value of goodwill is compared to
the recoverable amount, which is the higher of the value in use and
the fair value less the costs of disposal. Any impairment is
recognised immediately as an expense and is not subsequently
reversed.
4.6. Derivative financial instruments
Derivative financial instruments, comprising interest rate caps
and swaps for hedging purposes, are initially recognised at fair
value at acquisition and are subsequently measured at fair value,
being the estimated amount that the Group would receive or pay to
sell or transfer the agreement at the period end date, taking into
account current interest rate expectations and the current credit
rating of the lender and its counterparties. The gain or loss at
each fair value remeasurement date is recognised in the Group's
Consolidated Statement of Comprehensive Income.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data is available to measure
fair value, maximising the use of relevant observable inputs and
minimising the use of unobservable inputs significant to the fair
value measurement as a whole.
4.7 Financial assets
The Group classifies its financial assets as at fair value
through profit or loss or at amortised cost, depending on the
purpose for which the asset was acquired. Currently the Group does
not have any financial assets which it has classified at fair value
through profit or loss.
Assets held at amortised cost arise principally from the
provision of goods and services (e.g. trade receivables), but also
incorporate other financial assets where the objective is to hold
these assets in order to collect contractual cash flows which
comprise the payment of principal and interest. They are initially
recognised at fair value plus transaction costs that are directly
attributable to their acquisition or issue and are subsequently
carried at amortised cost being the effective interest rate method,
less provision for impairment.
The Group's financial assets comprise 'trade and other
receivables', 'tenant loan', 'surrender premium' and 'cash and cash
equivalents'.
The tenant loan relates to a loan made to a tenant which is
subject to interest. The amount receivable has been recognised at
amortised cost using the effective interest method.
The lease surrender receivable relates to a lease surrender
payment which has been received in instalments. The amount
receivable has been recognised at amortised cost using the
effective interest method.
4.8. Trade and other receivables
Trade and other receivables are recognised initially at fair
value and subsequently carried at amortised cost less provision for
impairment. Where the time value of money is material, receivables
are carried at amortised cost using the effective interest method.
Impairment provisions are recognised based on the expected credit
loss model detailed within IFRS 9.
The Group recognises a loss allowance for expected credit losses
on trade receivables. The loss allowance is based on lifetime
expected credit losses. The amount of expected credit losses is
updated at each reporting date to reflect changes in credit risk
since initial recognition. The expected credit losses on these
financial assets are estimated based on the Group's historical
credit loss experience, adjusted for factors that are specific to
the debtors, general economic conditions and an assessment of both
the current as well as the forecast direction of conditions at the
reporting date. Impaired balances are reported net, however,
impairment provisions are recorded within a separate provision
account with the loss being recognised within administration costs
within the Consolidated Statement of Comprehensive Income. On
confirmation that the trade receivable will not be collectable, the
gross carrying value of the asset is written off against the
associated provision.
Lease premiums and other lease incentives provided to tenants
are recognised as an asset and amortised over the period from date
of lease commencement to termination date.
4.9. Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held
at banks with original maturities of three months or less. Cash
also includes amounts held in restricted accounts that are
unavailable for everyday use.
4.10. Trade payables
Trade payables are initially recognised at their fair value
being at their invoiced value inclusive of any VAT that may be
applicable. Payables are subsequently measured at amortised cost
using the effective interest method.
4.11. Bank and other borrowings
All bank and other borrowings (comprising bank loans and retail
eligible bonds) are initially recognised at cost net of
attributable transaction costs. Any attributable transaction costs
relating to the issue of the bank borrowings are amortised through
the Group's Statement of Comprehensive Income over the life of the
debt instrument on a straight-line basis. After initial
recognition, all bank and other borrowings are measured at
amortised cost, using the effective interest method.
Bank and other borrowings are derecognised when the obligation
under the liability is discharged or cancelled or expires. When an
existing financial liability is replaced by another from the same
lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or
modification is treated as the derecognition of the original
liability and the recognition of a new liability. The difference in
the respective carrying amounts is recognised in Group's
Consolidated Statement of Comprehensive Income.
4.12 Zero Dividend Preference Shares
Zero Dividend Preference Shares ("ZDP Shares") are recognised as
liabilities in the Group's Consolidated Statement of Financial
Position in accordance with IAS 32 Financial Instruments:
Presentation. After initial recognition, these liabilities are
measured at amortised cost, which represents the value the
liability is recognised at initial recognition, plus the accrued
interest entitlement to the date of these financial statements.
4.13 Dividends payable to Shareholders
Equity dividends are recognised when paid.
4.14 Rental and property income
Rental income arising from operating leases on investment
property is accounted for on a straight-line basis over the lease
terms and is included in gross rental and property income in the
Group's Consolidated Statement of Comprehensive Income. Initial
direct costs incurred in negotiating and arranging an operating
lease are added to the carrying amount of the lease asset and are
recognised as an expense over the lease term on the same basis as
the lease income.
For leases which contain fixed or minimum uplifts, the rental
income arising from such uplifts is recognised on a straight-line
basis over the lease term.
Tenant lease incentives are recognised as a reduction of rental
revenue on a straight-line basis over the term of the lease. The
lease term is the non-cancellable period of the lease together with
any further term for which the tenant has the option to continue
the lease where, at the inception of the lease, the Directors are
reasonably certain that the tenant will exercise that option.
Surrender premiums received from tenants to terminate leases or
surrender premises are recognised in the Group's Statement of
Comprehensive Income when the right to receive them arises.
Dilapidation income is recognised in the Group's Statement of
Comprehensive Income when the right to receive it arises.
When the Group is acting as an agent, the commission, rather
than gross income, is recorded as revenue.
Income arising from expenses recharged to tenants is recognised
in the year in which the compensation becomes receivable. Service
charges and other similar receipts are included in net rental and
property income gross of the related costs as the Directors
consider the Group acts as principal in this respect.
4.15 Property costs
Non recoverable property costs contain service and management
charges related to empty properties. For the year ended 31 December
2018 this figure also included ground rents charges. As from 1
January 2019 a right of use asset and a lease liability are
recognised instead of a ground rent cost. Please refer to notes 2.4
and 4.23.
Service and management charges are recognised in the accounting
period in which the services are rendered.
Recoverable property costs contain service charges and other
similar costs which are recognised in the accounting period in
which the services are rendered.
4.16. Interest income
Interest income is recognised as interest accrued on cash
balances held by the Group. Interest charged to a tenant on any
overdue rental income is also recognised within interest
income.
4.17. Dividend income
Dividend income is recognised when the right to receive payment
is established.
4.18. Finance costs
Interest costs are expensed in the period in which they occur.
Arrangement fees that an entity incurs in connection with bank and
other borrowings are amortised over the term of the loan.
4.19. Taxation
As the Company is managed and controlled in the UK, it is
considered to be tax resident in the UK.
The tax currently payable is based on the taxable profit for the
period. Taxable profit differs from net profit as reported in the
Consolidated Statement of Comprehensive Income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current and deferred tax is
calculated using tax rates that have been enacted or substantively
enacted at the date of the Statement of Financial Position.
The Group elected to be treated as a UK REIT with effect from 7
November 2015. The UK REIT rules exempt the profits of the Group's
UK property rental business from UK Corporation Tax. Gains on UK
properties are also exempt from tax, provided that they are not
held for trading or sold in the three years after completion of
development. The Group is otherwise subject to UK Corporation
Tax.
There are a small number of entities within the Group which fall
outside the REIT rules and are subject to UK taxes on profits and
property gains.
4.20 Deferred tax
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit. The amount of deferred tax
provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using
tax rates that are expected to apply in the period when the
liability is settled or the asset is realised based on tax rates
(and tax laws) enacted or substantively enacted at the date of the
Statement of Financial Position. A deferred tax asset is recognised
only to the extent that it is probable that future profits will be
available for offset.
Deferred tax has been recognised on the unrealised property
valuation gains of properties owned by Group entities which fall
outside of the REIT tax rules.
The current rate of UK Corporation Tax is 19%. Reductions in UK
Corporation Tax have been enacted, reducing the rate to 17% from 1
April 2020, however, it has been confirmed in the recent Budget
Announcement, on 11 March 2020, that the government will legislate
to retain the current 19% rate in April 2020.
4.21. Stated capital
Stated capital represents the consideration received by the
Company for the issue of Ordinary Shares. Ordinary Shares are
classed as equity.
4.22. Share-based payments
The Group has entered into Performance Fee arrangements with the
Asset Manager and Investment Manager which depend on the growth in
the net asset value of the Group exceeding a hurdle rate of return
over a performance period. The fee will be partly settled in cash
and partly in equity and the equity portion is therefore a
share-based payment arrangement. The fair value of the obligation
is measured at each reporting period, and the cost recognised as an
expense. The part of the obligation to be settled in shares is
credited to equity reserves. If circumstances change and the fee is
no longer settled by the issue of shares, then the amounts
previously credited to equity reserves are reversed.
4.23 Leased assets
The Group has a number of leases concerning the long-term lease
of land associated with its long leasehold investment properties.
These leased assets are capitalised as "right of use assets" by
recognising the present value of the lease payments as an asset and
a financial liability representing the obligation to make future
lease payments.
Right of use assets are valued at fair value and the change in
fair value is recognised in the Consolidated Statement of
Comprehensive Income.
The associated financial liability is valued at the present
value of future lease payments using the Group's incremental
borrowing rate. The value of the financial liability is revalued at
each reporting date. Lease payments reduce the financial liability
and interest on the financial liability is recognised in finance
costs.
5. Rental and property income
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Rental income - freehold property 53,404 54,107
Rental income - long leasehold property 10,989 7,968
Recoverable service charge income and other
similar items 11,252 11,944
------------- -------------
Total 75,645 74,019
------------- -------------
6. Property costs
Year ended Year ended
31 December 31 December
2019 2018
GBP000 GBP'000
Operating lease expenses - 618
Other property expenses and irrecoverable
costs 9,429 7,082
Recoverable service charge income and other
similar costs 11,252 11,944
-------------
Total 20,681 19,644
------------- -------------
Property costs represent direct operating expenses which arise
on investment properties that generate rental income. Operating
lease expenses are now accounted for under IFRS16 as detailed in
note 2.4.
7. Administrative and other expenses
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Investment management fees 2,356 2,405
Property management fees 2,280 2,264
Performance fees - 7,046
Asset management fees 2,356 2,405
Directors' remuneration (see note 8) 255 235
Administration fees 746 663
Legal and professional fees 2,107 1,714
Marketing and promotion 96 87
Other administrative costs (including bad
debts) 657 595
Bank charges 51 172
Total 10,904 17,586
------------- -------------
Services provided by the Company's Auditor and its
associates
The Group has obtained the following services from the Company's
Auditor and its associates:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Audit of the consolidated and parent Company
financial statements 85 78
Audit-related services in respect of the
half-year financial statements 26 26
Audit of the subsidiaries for their respective
periods of account 114 171
Fees associated with share issue 80 -
------------- -------------
Total 305 275
------------- -------------
8. Directors' remuneration
Key management comprises the Directors of the Company. A summary
of the Directors' emoluments is set out in the Directors'
Remuneration Report.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Directors' fees 228 216
Employers National Insurance contributions 27 19
--------------- --------------
Total 255 235
--------------- --------------
9. Finance income
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Interest income 155 224
Unwinding of the discount on financial
assets - 44
-------------- --------------
Total 155 268
-------------- --------------
10. Finance expenses
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Interest payable on bank borrowings 9,904 11,267
Accrued capital entitlement on ZDP Shares 60 2,430
Amortisation of loan arrangement fees 912 1,172
Amortisation of ZDP Share acquisition costs 3 147
Bond interest 2,250 906
Bond issue costs amortised 157 61
Bond expenses 11 -
Lease interest 583 -
-------------- --------------
Total 13,880 15,983
-------------- --------------
11. Taxation
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Corporation tax (credit)/charge (359) 1,983
Increase/(decrease) in deferred tax creditor 102 (1,416)
-------------- --------------
Total (257) 567
-------------- --------------
The current tax charge is reduced by the UK REIT tax exemptions.
The tax charge for the year can be reconciled to the profit in the
Statement of Comprehensive Income as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Profit before taxation 26,254 67,940
------------- -------------
UK Corporation Tax rate 19% 19%
Theoretical tax at UK Corporation Tax rate 4,988 12,909
Effects of:
Revaluation of investment property 668 (4,537)
Adjustments to tax charge in respect of
previous periods - 25
Permanent differences (556) 1,592
Profits from the tax-exempt business (5,459) (8,006)
Deferred tax movement 102 (1,416)
------------- -------------
Total (257) 567
------------- -------------
Permanent differences are the differences between an entity's
taxable profits and its results as stated in the financial
statements. These arise because certain types of income and
expenditure are non-taxable or disallowable, or because certain tax
charges or allowances have no corresponding amount in the financial
statements.
The Group elected to be treated as a UK REIT with effect from 7
November 2015. The UK REIT rules exempt the profits of the Group's
UK property rental business from corporation tax. Gains on UK
properties are also exempt from tax, provided they are not held for
trading or sold in the three years after completion of development.
The Group is otherwise subject to UK corporation tax and UK income
tax.
As a REIT, Regional REIT Ltd is required to pay PIDs equal to at
least 90% of the Group's exempted net income. To retain UK REIT
status, there are a number of conditions to be met in respect of
the principal company of the Group, the Group's qualifying activity
and its balance of business. The Group continues to meet these
conditions.
UK corporation tax and UK income tax arise on entities which
form part of the Group consolidated accounts but do not form part
of the REIT group.
Due to the Group's REIT status and its intention to continue
meeting the conditions required to obtain approval in the
foreseeable future, no provision has been made for deferred tax on
any capital gains or losses arising on the revaluation or disposal
of investments held by entities within the REIT group.
No deferred tax asset has been recognised in respect of losses
carried forward due to the unpredictability of future taxable
profits.
12. Earnings per share
Earnings per share amounts are calculated by dividing profits
for the year attributable to ordinary equity holders of the Company
by the weighted average number of Ordinary Shares in issue during
the year.
The calculation of basic and diluted earnings per share is based
on the following:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Calculation of earnings per share
Net profit attributable to Ordinary Shareholders 26,511 67,373
Adjustments to remove:
Changes in value of investment properties 3,513 (23,881)
Changes in fair value of interest rate
derivatives and financial assets 1,479 (459)
Gain on disposal of investment property (1,662) (23,127)
Impairment of goodwill 557 557
Deferred tax charge/ (credit) 102 (1,416)
Income tax charge on disposal profits - 1,416
Close out costs on borrowings and derivatives 487 430
------------- -------------
EPRA net profit attributable to Ordinary
Shareholders 30,987 20,892
Add performance fee - 7,046
------------- -------------
Company specific adjusted earnings figure 30,987 27,938
------------- -------------
Weighted average number of Ordinary Shares 398,867,828 372,821,136
Earnings per share - basic and diluted 6.6p 18.1p
EPRA earnings per share - basic and diluted 7.8p 5.6p
Company specific adjusted earnings per
share - basic and diluted 7.8p 7.5p
13. Dividends
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Dividend of 2.50 (2018: 2.45) pence per
Ordinary Share
for the period 1 October 2018 - 31 December
2018 9,321 9,134
Dividend of 1.90 (2018: 1.85) pence per
Ordinary Share
for the period 1 January 2019 - 31 March
2019 7,084 6,897
Dividend of 1.90 (2018: 1.85) pence per
Ordinary Share
for the period 1 April 2019 - 30 June 2019 8,198 6,897
Dividend of 1.90 (2018: 1.85) pence per
Ordinary Share
for the period 1 July 2019 - 30 September
2019 8,198 6,897
-------------- --------------
32,801 29,825
-------------- --------------
On 21 February 2019, the Company announced a dividend of 2.50
pence per share in respect of the period 1 October 2018 to 31
December 2018. The dividend payment was made on 11 April 2019 to
Shareholders on the register as at 1 March 2019.
On 23 May 2019, the Company announced a dividend of 1.90 pence
per share in respect of the period 1 January 2019 to 31 March 2019.
The dividend payment was made on 12 July 2019 to Shareholders on
the register as at 7 June 2019.
On 29 August 2019, the Company announced a dividend of 1.90
pence per share in respect of the period 1 April 2019 to 30 June
2019. The dividend payment was made on 15 October 2019 to
Shareholders on the register as at 6 September 2019.
On 14 November 2019, the Company announced a dividend of 1.90
pence per share in respect of the period 1 July 2019 to 30
September 2019. The dividend payment was made on 19 December 2019
to Shareholders on the register as at 22 November 2019.
On 27 February 2020, the Company announced a dividend of 2.55
pence per share in respect of the period 1 October 2019 to 31
December 2019. The dividend will be paid on 9 April 2020 to
Shareholders on the register as at 6 March 2020. The financial
statements do not reflect this dividend.
The Board intends to pursue a progressive dividend policy and
continue to pay quarterly dividends. However, in view of ongoing
circumstances, the Company reserves the right to review future
dividend payments.
14. Investment properties
In accordance with International Accounting Standard, IAS 40,
'Investment Property', investment property has been independently
valued at fair value by Cushman & Wakefield Chartered
Surveyors, a accredited independent valuer with recognised and
relevant professional qualifications and with recent experience in
the locations and categories of the investment properties being
valued. The valuations have been prepared in accordance with the
Red Book and incorporate the recommendations of the International
Valuation Standards Committee which are consistent with the
principles set out in IFRS 13.
The valuations are the ultimate responsibility of the Directors.
Accordingly, the critical assumptions used in establishing the
independent valuation are reviewed by the Board.
All corporate acquisitions during the year have been treated as
properties purchased rather than business combinations.
Group Long Leasehold
Freehold Property
Movement in investment properties Property GBP'000 Total
for the year ended 31 December GBP'000 GBP'000
2019
Valuation at 1 January 2019 625,020 93,355 718,375
Property additions - acquisitions 89,920 - 89,920
Property additions - subsequent
expenditure 5,527 238 5,765
Property disposals (24,003) (291) (24,294)
Gain/(loss) on the disposal of
investment properties 1,679 (17) 1,662
Change in fair value during the
year (235) (3,278) (3,513)
----------- --------------- ----------
Valuation at 31 December 2019 697,908 90,007 787,915
----------- --------------- ----------
The net book value of properties disposed of during the year amounted
to GBP22,632,000.
Movement in investment properties
for the year ended 31 December
2018
Valuation at 1 January 2018 636,600 100,730 737,330
Property additions- acquisitions 76,334 - 76,334
Property additions - subsequent
expenditure 6,735 244 6,979
Property disposals (142,505) (6,771) (149,276)
Gain/(loss) on the disposal of
investment properties 23,856 (729) 23,127
Change in fair value during the
period 24,000 (119) 23,881
----------- --------------- ----------
Valuation at 31 December 2018 625,020 93,355 718,375
----------- --------------- ----------
The net book value of properties disposed of during the year amounted
to GBP126,149,000.
The historic cost of the properties is GBP 751,638,000 (31 December 2018: GBP 675,808,000 ).
The following table provides the fair value measurement
hierarchy for investment property:
Significant Significant
Quoted active observable unobservable
prices inputs inputs
Total (level 1) (level 2) (level 3)
Date of valuation: GBP'000 GBP'000 GBP'000 GBP'000
31 December 2019 787,915 - - 787,915
---------- ---------------- ------------ --------------
31 December 2018 718,375 - - 718,375
---------- ---------------- ------------ --------------
The hierarchy levels are defined in note 30 .
It has been determined that the entire investment properties
portfolio should be classified under the level 3 category. The
table below shows the movement in the year on the level 3
category:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Balance at the start of the
year 718,375 737,330
Additions 95,685 83,313
Disposals (24,294) (149,276)
Gain on the disposal of investment
properties 1,662 23,127
Change in fair value during
the year (3,513) 23,881
-------------- --------------
Balance at the end of the year 787,915 718,375
-------------- --------------
The determination of the fair value of the investment properties
held by each consolidated subsidiary requires unobservable inputs,
such as the use of the estimated future cash flows from investment
properties, which take into consideration lettings, tenants'
profiles, future revenue streams, capital values of fixtures and
fittings, plant and machinery, any environmental matters and the
overall repair and condition of the property, and discount rates
applicable to those assets. Future revenue streams comprise
contracted rent (passing rent) and Estimated Rental Value ("ERV")
after the contract period. In calculating ERV, the potential impact
of future lease incentives to be granted to secure new contracts is
taken into consideration. All these estimates are based on local
market conditions existing at the reporting date.
Techniques used for valuing investment properties
The following descriptions and definitions relate to valuation
techniques and key observable inputs made in determining the fair
values: -
Valuation technique: market comparable method
Under the market comparable method (or market approach), a
property fair value is estimated based on comparable transactions
in the market.
Observable input: market rental
The rent at which space could be let in the market conditions
prevailing at the date of valuation range: GBP 6,000 - GBP
3,092,291 per annum (2018: GBP1,500- GBP3,092,226 per annum).
Observable input: rental growth
The estimated average increase in rent is based on both market
estimations and contractual agreements.
Observable input: net initial yield
The initial net income from a property at the date of purchase,
expressed as a percentage of the gross purchase price including the
costs of purchase range: 0.00%- 28.70 % (2018: 0.00%-26.98%).
Unobservable inputs:
The significant unobservable inputs (level 3) are sensitive to
changes in the estimated future cash flows from investment
properties such as increases and decreases in contracted rents,
operating expenses and capital expenses, plus transactional
activity in the real estate market.
As set out within the significant accounting estimates and
judgements, the Group's property portfolio valuation is open to
judgement and is inherently subjective by nature, and actual values
can only be determined in a sales transaction.
15. Investment in subsidiaries
List of subsidiaries which are 100% owned and controlled by the
Group
Country of Ownership
incorporation %
Blythswood House LLP United Kingdom 100%
Regional Commercial MIDCO Limited Jersey 100%
RR Aspect Court Limited Jersey 100%
RR Bristol Ltd Jersey 100%
RR Hounds Gate Limited Jersey 100%
RR Rainbow (Aylesbury) Limited Jersey 100%
RR Rainbow (North) Limited Jersey 100%
RR Rainbow (South) Limited Jersey 100%
RR Range Limited Jersey 100%
RR Sea Dundee Limited United Kingdom 100%
RR Sea Hannover St. Limited United Kingdom 100%
RR Sea Lamont I Ltd Jersey 100%
RR Sea Lamont II Ltd Jersey 100%
RR Sea Lamont III Ltd Jersey 100%
RR Sea St. Helens Limited United Kingdom 100%
RR Sea Stafford Limited United Kingdom 100%
RR Sea Strand Limited United Kingdom 100%
RR Sea TAPP Limited Guernsey 100%
RR Sea TOPP Bletchley Limited Guernsey 100%
RR Sea TOPP I Limited Guernsey 100%
RR Skylar Limited Jersey 100%
RR UK (Central) Limited Jersey 100%
RR UK (Cheshunt) Limited Jersey 100%
RR UK (Port Solent) Limited Jersey 100%
RR UK (South) Limited Jersey 100%
RR Wing Portfolio Limited Jersey 100%
Tay Properties Limited Jersey 100%
TCP Arbos Limited Jersey 100%
TCP Channel Limited Jersey 100%
Tosca Chandlers Ford Limited Jersey 100%
Tosca Churchill Way Limited Jersey 100%
Tosca Garnet Limited Jersey 100%
Tosca Glasgow II Limited United Kingdom 100%
Tosca Midlands Limited Jersey 100%
Tosca North East Limited Jersey 100%
Tosca North West Limited Jersey 100%
Tosca Scotland Limited Jersey 100%
RR Star Limited Jersey 100%
Tosca South West Limited Jersey 100%
Tosca Swansea Limited Jersey 100%
Tosca Thorpe Park Limited Jersey 100%
Tosca UK CP II Limited Jersey 100%
Tosca UK CP Limited Jersey 100%
Tosca Victory House Limited Jersey 100%
Tosca Winsford Limited Jersey 100%
Toscafund Bennett House Limited Jersey 100%
Toscafund Bishopgate Street Limited Jersey 100%
Toscafund Blythswood Limited Jersey 100%
Toscafund Brand Street Limited Jersey 100%
Toscafund Chancellor Court Limited Jersey 100%
Toscafund Crompton Way Limited Jersey 100%
RR Falcon Limited Jersey 100%
Toscafund Glasgow Limited Jersey 100%
Toscafund Harvest Limited Jersey 100%
Toscafund Milburn House Limited Jersey 100%
Toscafund Minton Place Limited Jersey 100%
Toscafund Newstead Court Limited Jersey 100%
Toscafund Portland Street Limited Jersey 100%
Toscafund Sheldon Court Limited Jersey 100%
Toscafund St Georges House Limited Jersey 100%
Toscafund St James Court Limited Jersey 100%
Toscafund Strathclyde BP Limited Jersey 100%
Toscafund Wallington Limited Jersey 100%
Toscafund Welton Road Limited Jersey 100%
Toscafund Westminster House Limited Jersey 100%
All of the above entities have been included in the Group's
consolidated financial statements.
By virtue of an Amended and Restated Call Option Agreement dated
3 November 2015, the Directors consider that the Group has control
of View Castle Limited (previously Credential Investment Holdings
Limited) and its 27 subsidiaries (the "View Castle Group").
Under this option, the Group has the ability to acquire any of
the properties held by the View Castle Group by issuing an option
notice for a nominal consideration of GBP1. The recipient of the
option notice will be obliged to convey its title within one month
after receipt of the option notice.
Despite having no equity holding, the Group controls the View
Castle Group as the option agreement has the effect that the Group
is exposed to, and has rights to, variable returns from its
involvement with the View Castle Group through its power to
control.
The companies which make up the View Castle Group are as
follows:
List of subsidiaries that are controlled by the Group:
Country of Effective
incorporation Ownership
%
Castlestream Limited United Kingdom 100%
Caststop Limited United Kingdom 100%
Credential (Baillieston) Limited United Kingdom 100%
Credential (Greenock) Limited United Kingdom 100%
Credential (Wardpark North) Limited United Kingdom 100%
Credential (Wardpark South) Limited
(in liquidation) United Kingdom 100%
Credential Bath Street Limited (in
liquidation) United Kingdom 100%
Credential Charing Cross Limited (in
liquidation) United Kingdom 100%
Credential Estates Limited United Kingdom 100%
Credential Residential Finance Limited
(in liquidation) United Kingdom 100%
Credential Tay House Limited (in liquidation) United Kingdom 100%
Hamiltonhill Estates Limited (in liquidation) United Kingdom 100%
Lilybank Church Limited (in liquidation) United Kingdom 100%
Lilybank Terrace Limited (in liquidation) United Kingdom 100%
Old Mill Studios Limited (in liquidation) United Kingdom 100%
Old Rutherglen Road Limited United Kingdom 100%
Rocket Unit Trust Jersey 100%
Squeeze Newco (Elmbank) Limited (in
liquidation) United Kingdom 100%
Squeeze Newco 2 Limited United Kingdom 100%
Stock Residential Lettings Limited United Kingdom 100%
The Legal Services Centre Limited United Kingdom 100%
View Castle (Properties) Limited United Kingdom 100%
View Castle (Milton Keynes) Limited United Kingdom 100%
View Castle Limited United Kingdom 100%
All of the above entities have been included in the Group's
consolidated financial statements up to 31 December 2019.
Business Combinations
There have been no new business combinations entered into in the
financial year.
During the year, there were two subsidiary company acquisitions
that took place in order for the Group to acquire the investment
property owned by that company. These acquisitions have not been
treated as a business combination. For further details see note
3.4. The fair value of investment properties acquired through the
purchase of subsidiary companies totalled GBP 45,790,000 . Total
consideration paid was GBP 45,173,000 . The assets and liabilities
of the companies acquired included the investment properties,
mentioned above, net current liabilities totalling GBP 716,000
(principally comprising debtors, cash, creditors and deferred
income) and bank borrowings of GBPnil.
16. Goodwill
31 December 31 December
2019 2018
GBP'000 GBP'000
Group
At start of year 1,115 1,672
Impairment (557) (557)
------------ ------------
At end of year 558 1,115
------------ ------------
Goodwill arises on the acquisition of subsidiaries and
represents the excess of the consideration transferred, the amount
of any non-controlling interest in the acquiree and the
acquisition-date fair value of any previous equity interest in the
acquiree over the fair value of the identifiable net assets
acquired. If the total of consideration transferred,
non-controlling interest recognised and previously held interest
measured at fair value is less than the fair value of the net
assets of the subsidiary acquired in the case of a bargain
purchase, the difference is recognised directly in the Group's
Statement of Comprehensive Income.
Goodwill impairment reviews are undertaken annually or more
frequently if events or changes in circumstances indicate a
potential impairment. The goodwill is compared to the recoverable
amount, which is the higher of value in use and the fair value less
costs of disposal. Any impairment is recognised immediately as an
expense and is not subsequently reversed. The impairment review is
based on group pre-tax cash flow projections of cost savings of the
Group as a whole as a single cash generating unit, using a discount
factor of 6.9% (31 December 2018: 4.8%), which is based on the
borrowing margins currently available. If a reasonable change
occurs in a key assumption, the recoverable amount of goodwill
would still be expected to be equal to the carrying value. The
impairment review was conducted over a five-year period, which is
predominately derived from the borrowings facility terms, and will
result in a nil terminal value.
17. Non-current receivables
17a. Non-current receivables on lease surrender premium
31 December 31 December
2019 2018
GBP'000 GBP'000
At start of year - 206
Movement in year - (250)
Unwinding of discount - 44
------------------- ------------
At end of year - -
------------------- ------------
In May 2014, the tenant of one of the subsidiaries (Blythswood
House) surrendered their lease resulting in a lease surrender
premium to be paid by the tenant in equal instalments over four
years with the final instalment paid in the quarter ending 31 March
2018. The amount due was recognised initially at fair value and
subsequently recorded at amortised cost using the effective
interest method. The unwinding of the discount is included in
finance income.
17b. Non-current receivables on tenant loans
31 December 31 December
2019 2018
GBP'000 GBP'000
At start of year 1,926 1,926
Amounts repaid in the year (578) -
------------ ----------------
At end of year 1,348 1,926
------------ ----------------
Asset due within 1 year 192 530
Asset due after 1 year 1,156 1,396
------ ------
1,348 1,926
------ ------
During 2016, the Group entered into a loan agreement with a
tenant for GBP1,926,000. The loan is subject to interest of 4%
above the base rate of the Bank of Scotland on late payments and is
repayable in instalments over ten years.
18. Trade and other receivables
31 December 31 December
2019 2018
GBP'000 GBP'000
Gross amount receivable from tenants 8,206 7,294
Less provision for impairment (891) (1,115)
------------ ----------------
Net amount receivable from tenants 7,315 6,179
Current receivables - tenant loans (note
17b ) 192 530
Value added tax 1,415 -
Income tax 70 -
Other receivables 6,385 3,256
Prepayments 16,781 12,198
------------ ----------------
32,158 22,163
------------ ----------------
The maximum exposure to credit risk at the reporting date is the
carrying value of the amounts disclosed above. The Group does not
hold any collateral as security.
The aged analysis of trade receivables that are past due but not
impaired was as follows:
31 December 31 December
2019 2018
GBP'000 GBP'000
< 30 days 4,369 3,974
30-60 days 1,055 720
> 60 days 2,782 2,600
------------ ------------
8,206 7,294
Less provision for impairment (891) (1,115)
------------ ------------
7,315 6,179
------------ ------------
The Directors consider the fair value of receivables equals
their carrying amount.
The table above shows the aged analysis of trade receivables
included in the table above which are past due but not impaired.
These relate to tenants for whom there is no recent history of
default.
Provision for impairment of trade receivables movement as
follows:
31 December 31 December
2019 2018
GBP'000 GBP'000
At start of year 1,115 1,033
Provision for impairment in the year 562 928
Receivables written off as uncollectable (537) (452)
Unused provision reversed (249) (394)
------------ ----------------
At end of year 891 1,115
------------ ----------------
Other categories within trade and other receivables do not
include impaired assets.
19. Cash and cash equivalents
31 December 31 December
2019 2018
GBP'000 GBP'000
Group
Cash held at bank 34,731 82,396
Restricted cash held at bank 2,517 22,427
------------ ------------
At end of year 37,248 104,823
------------ ------------
Restricted cash balances of the Group comprise:
-- GBP124,000 (2018: GBP20,259,000) of funds held in blocked
bank accounts which are controlled by one of the Group's lenders
and are released to free cash once certain loan conditions are met.
The restricted funds arose on net proceeds from investment property
disposals and were released after the year end.
-- GBP2,312,000 (2018: GBP900,000) of funds which represent tenants' rental deposits.
-- GBP nil (2018: GBP1,268,000) of funds held in blocked bank
accounts which are controlled by one of the Group's lenders and are
released to free cash once certain conditions are met. The
restricted funds arose on net proceeds held in relation to rental
guarantees given by the seller of properties purchased by the
Group. These funds can only be withheld by the lender and used to
repay outstanding loans in the event of a default.
-- GBP81,000 (2018: GBPnil) is held in other locked accounts.
All restricted cash balances will be available before 31 March
2020.
In addition, GBP 4,225,000 (2018 GBP2,780,000) of cash funds
represent service charge income received from tenants for
settlement of future service charge expenditure. These amounts are
not analysed as restricted balances.
20. Trade and other payables
31 December 31 December
2019 2018
GBP'000 GBP'000
Withholding tax due on dividends paid 1,569 1,302
Trade payables 3,650 2,462
Other payables 8,544 9,905
Value added tax - 939
Accruals of incidental costs for fund
raise and acquisitions - 27
Accruals 8,390 16,028
------------ ----------------
At end of year 22,153 30,663
------------ ----------------
Other payables principally include rent deposits held and
service charge costs.
21. Deferred income
Deferred rental income represents rent received in advance from
tenants.
22. Taxation liabilities
31 December 31 December
2019 2018
GBP'000 GBP'000
Income tax - 1,129
Deferred tax 736 634
------------ ------------
736 1,763
------------ ------------
The movement on deferred tax liability
is shown below:
At start of year 634 2,050
Deferred tax on the valuation of investment
properties 102 (1,416)
---- --------
At end of year 736 634
---- --------
23. Bank and loan borrowings
Bank borrowings are secured by charges over individual
investment properties held by certain asset-holding subsidiaries.
The banks also hold charges over the shares of certain subsidiaries
and any intermediary holding companies of those subsidiaries. Any
associated fees in arranging the bank borrowings unamortised as at
the yearend are offset against amounts drawn on the facilities as
shown in the table below:
31 December 31 December
2019 2018
GBP'000 GBP'000
Bank borrowings drawn at start of year 290,487 339,074
Bank borrowings drawn 22,911 52,919
Bank borrowings repaid (19,398) (101,506)
------------ ------------
Bank borrowings drawn at end of year 294,000 290,487
Less: unamortised costs at start of year (4,888) (4,693)
Less: loan issue costs incurred in the
year (2,168) (1,367)
Add: loan issue costs amortised in the
year 912 1,172
------------ ------------
At end of year 287,856 285,599
------------ ------------
Maturity of bank borrowings
Repayable within 1 year - 400
Repayable between 1 to 2 years - 400
Repayable between 2 to 5 years 48,584 88,687
Repayable after more than 5 years 245,416 201,000
Unamortised loan issue costs (6,144) (4,888)
------------ ------------
287,856 285,599
------------ ------------
As detailed in note 25, the Group has GBP50,000,000 retail
eligible bonds in issue.
The table below lists the Group's borrowings.
Gross
Lender Original Outstanding Maturity loan to Annual interest Amortisation
facility debt* date value** rate
GBP'000 GBP'000 %
2.15% over
Royal Bank of 3mth GBP Mandatory
Scotland 55,000 48,584 Jun -24 39.8% LIBOR prepayment
Scottish Widows
Ltd. & Aviva
Investors Real
Estate Finance 165,000 165,000 Dec-27 45.1% 3.28% Fixed None
Scottish Widows
Ltd 36,000 36,000 Dec-28 38.9% 3.37% Fixed None
2.20% over
3mth GBP Mandatory
Santander UK 65,870 44,416 Jun-29 26.4% LIBOR prepayment
Total bank borrowings 321,870 294,000
Retail eligible
bond 50,000 50,000
----------- --------------
Total 371,870 344,000
----------- --------------
LIBOR = London Interbank Offered Rate (Sterling)
MP = Mandatory prepayment
* Before unamortised debt issue costs
** Based upon Cushman & Wakefield property valuations
The weighted average term to maturity of the Group's debt at the
period end was 7.3 years (31 December 2018: 6.4 years). The
weighted average interest rate payable by the Group on its debt
portfolio, excluding hedging costs, as at the period end was 3.4 %
(31 December 2018: 3.7%).
The Group weighted average interest rate, including the ZDP
Shares, retail eligible bonds and hedging costs at the period end,
amounted to 3.5% per annum (31 December 2018: 3.8% per annum, which
included the ZDP Shares). The ZDP Shares were fully repaid on 9
January 2019.
The Group has been in compliance with all of the financial
covenants relating to the above facilities as applicable throughout
the year covered by these consolidated financial statements. Each
facility has distinct covenants which generally include: historic
interest cover, projected interest cover, LTV cover and debt
service cover. A breach of agreed covenant levels would typically
result in an event of default of the respective facility, giving
the lender the right, but not the obligation, to declare the loan
immediately due and payable. Where a loan is repaid in these
circumstances, early repayment fees will apply, which are generally
based on a percentage of the loan repaid or calculated with
reference to the interest income foregone by the lenders as a
result of the repayment.
As shown in note 26, the Group uses a combination of interest
rate swaps and fixed rate bearing loans to hedge against cash flow
interest rate risks. The Group's exposure to interest rate
volatility is minimal.
24. Zero dividend preference shares
31 December 31 December
2019 2018
GBP'000 GBP'000
At start of year 39,816 37,239
Amortisation of acquisition costs 3 147
Accrued capital entitlement 60 2,430
Repayment (39,879) -
------------ ------------
At end of year - 39,816
------------ ------------
The Group entity, Regional REIT ZDP PLC, had 30,000,000 zero
dividend preference shares ("ZDP shares") in issue, which were
listed on the London Stock Exchange (LSE: RGLZ). The ZDP shares
were issued at 100 pence per share. The ZDP shares had an
entitlement to receive a fixed cash amount on 9 January 2019, being
the maturity date, but did not receive any dividends or income
distributions. Additional capital accrued to the ZDP shares on a
daily basis at a rate equivalent to 6.5% per annum, resulting in a
final capital entitlement of 132.9 pence per share, which was paid
on 9 January 2019.
25. Retail Eligible Bonds
During the prior year, the Company launched GBP50,000,000 4.5%
Retail Eligible Bonds with a maturity date of 6 August 2024. These
unsecured Bonds are listed on the London Stock Exchange ORB
platform.
31 December 31 December
2019 2018
GBP'000 GBP'000
Bond principal at start of year 50,000 -
Bonds issued in the year - 50,000
Unamortised issue costs at start of year (864) -
Issue costs (7) (925)
Amortisation of issue costs 157 61
At end of year 49,286 49,136
------------ ------------
26. Derivative financial instruments
Interest rate caps and swaps are in place to mitigate the
interest rate risk that arises as a result of entering into
variable rate borrowings.
31 December 31 December
2019 2018
GBP'000 GBP'000
Group
Fair value at start of year (337) (752)
Revaluation in the year (1,479) 415
------------ ------------
Fair value at end of year (1,816) (337)
------------ ------------
The calculation of fair value of interest rate caps and swaps is
based on the following calculation: the notional amount multiplied
by the difference between the swap rate and the current market rate
and then multiplied by the number of years remaining on the
contract and discounted.
The table below details the hedging and swap notional amounts
and rates against the details of the Group's loan facilities.
Original Outstanding Maturity Annual Interest Notional
Lender Facility Debt Date rate Amount Rate
GBP'000 GBP'000 % GBP'000 %
Royal Bank
of Scotland 55,000 49,584 Jun-24 2.15% over GBP27,500 1.26%
3 months
GBP LIBOR GBP27,500 1.26%
Scottish
Widows Ltd.
& Aviva Investors
Real Estate
Finance 165,000 165,000 Dec-27 3.28% Fixed n/a n/a
Scottish
Widows Ltd 36,000 36,000 Dec-28 3.37% Fixed n/a n/a
Santander
UK 65,870 44,416 Jun-29 2.20% over GBP33,000 1.80%
3 months
GBP LIBOR GBP33,000 1.80%
----------- --------------
Total 321,870 294,000
----------- --------------
LIBOR = London Interbank Offered Rate (Sterling)
As at 31 December 2019, the swap notional arrangements were GBP
60.50 m (31 December 2018: GBP48.58m).
The Group weighted average effective interest rate was 3.5 % (31
December 2018: 3.5 %) inclusive of hedging costs but excluding the
ZDP shares.
The maximum exposure to credit risk at the reporting date is the
fair value of the derivative liabilities.
It is the Group's target to hedge at least 90% of the total debt
portfolio using interest rate derivatives and fixed-rate
facilities. As at the year end, the total proportion of hedged debt
equated to 109.5% (31 December 2018: 102.6%), as shown below. The
over hedged position has arisen as a result of the full RBS and
Santander facilities (including headroom) being hedged but that the
excess relates to Interest Rate Caps which have no ongoing cost for
the Group.
31 December 31 December
2019 2018
GBP'000 GBP'000
Total bank borrowings 294,000 290,487
------------ ------------
Notional value of interest rate caps and
swaps 121,000 97,158
Value of fixed rate debts 201,000 201,000
------------ ------------
322,000 298,158
------------ ------------
Proportion of hedged debt 109.5% 102.6%
------------ ------------
The Group has not adopted hedge accounting.
27. Stated capital
Stated capital represents the consideration received by the
Company for the issue of Ordinary Shares.
Group 31 December 31 December
2019 2018
Issued and fully GBP'000 GBP'000
paid shares of no
par value
At start of the year 370,316 370,318
Shares issued 23 July 2019 62,500 -
Share issue costs (1,997) (2)
------------ ------------
At end of the year 430,819 370,316
------------ ------------
Number of shares in issue
At start of the year 372,821,136 372,821,136
Shares issued 23 July 2019 58,685,447 -
At end of the year 431,506,583 372,821,136
------------ ------------
28. Net asset value per share (NAV)
Basic NAV per share is calculated by dividing the net assets in
the Statement of Financial Position attributable to ordinary equity
holders of the parent by the number of Ordinary Shares outstanding
at the end of the year.
EPRA NAV is a key performance measure used in the real estate
industry which highlights the fair value of net assets on an
ongoing long-term basis. Assets and liabilities that are not
expected to crystallise in normal circumstances such as the fair
value of derivatives and deferred taxes on property valuation
surpluses are therefore excluded.
Net asset values have been calculated as follows:
Group 31 December 31 December
2019 2018
GBP'000 GBP'000
Net asset value per Consolidated Statement
of Financial Position 483,728 429,515
Adjustment for calculating EPRA net assets:
Derivative financial instruments 1,816 337
Deferred tax liability 736 634
-------------- ------------
EPRA net assets 486,280 430,486
-------------- ------------
Number of Ordinary Shares 372,821,
in issue 431,506,583 136
Net asset value per share - basic and diluted 112.1p 115.2p
EPRA net asset value per share - basic and
diluted 112.7p 115.5p
29. Notes to the Statement of Cash Flows
29.1. Non cash transactions
The Group has accounted for the following non cash
transactions:
-- During the year ended 31 December 2018, the Group reversed
the total of share-based payment adjustments made in previous years
having determined that the Performance Fees would be fully paid by
cash (see note 35).
29.2 Reconciliation of changes in liabilities to cash flows
arising from financing activities
31 December Zero dividend
2019 Bank loans preference Retail Derivative
and borrowings shares Eligible financial Lease
GBP'000 GBP'000 Bonds instruments liabilities Total
GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1
January
2019 285,599 39,816 49,136 337 16,545 391,433
---------------- -------------- ----------- -------------- ---------------- --------------
Changes from
financing
cash flows:
Zero Dividend
Preference
Shareholders
repaid - (39,879) - - - (39,879)
Bank and Bond
borrowings
advanced 22,911 - - - - 22,911
Bank borrowings
repaid (19,398) - - - - (19,398)
Bank and Bond
borrowing
costs paid (2,168) - (7) - - (2,175)
Lease payments - - - - (35) (35)
---------------- -------------- ----------- -------------- ---------------- --------------
Total changes
from
financing cash
flows 1,345 (39,879) (7) - (35) (38,576)
---------------- -------------- ----------- -------------- ---------------- --------------
Amortisation of
issue costs 912 3 157 - - 1,072
Accrued capital
entitlement - 60 - - - 60
Change in fair
value - - - 1,479 - 1,479
---------------- -------------- ----------- -------------- ---------------- --------------
Total other
changes 912 63 157 1,479 - 2,611
---------------- -------------- ----------- -------------- ---------------- --------------
Balance at 31
December
2019 287,856 - 49,286 1,816 16,510 355,468
---------------- -------------- ----------- -------------- ---------------- --------------
Balances are included in the Statement of Financial
Position as follows:
Current - - - - - -
liabilities
Non-current
liabilities 287,856 - 49,286 1,816 16,510 355,468
---------------- -------------- ----------- -------------- ---------------- -----------
Balance at 31
December
2019 287,856 - 49,286 1,816 16,510 355,468
---------------- -------------- ----------- -------------- ---------------- -----------
31 December 2018 Zero dividend
Bank loans preference Retail Derivative
and borrowings shares Eligible financial
GBP'000 GBP'000 Bonds instruments Total
GBP'000 GBP'000 GBP'000
Balance at 1 January
2018 334,381 37,239 - 752 372,372
----------------- -------------- ----------- -------------- -----------
Changes from financing
cash flows:
Bank and Bond
borrowings
advanced 50,959 - 50,000 - 100,959
Bank borrowings repaid (101,506) - - - (101,506)
Bank and Bond
borrowing
costs paid (1,345) - (925) - (2,270)
----------------- -------------- ----------- -------------- -----------
Total changes from
financing
cash flows (51,892) - 49,075 - (2, 817)
----------------- -------------- ----------- -------------- -----------
Arising from
subsidiary
acquisitions 1,960 - - - 1,960
Costs from subsidiary
acquisitions (22) - - - (22)
Amortisation of issue
costs 1,172 147 61 - 1,380
Accrued capital
entitlement - 2,430 - - 2,430
Change in fair value - - - (415) (415)
----------------- -------------- ----------- -------------- -----------
Total other changes 3,110 2,577 61 (415) 5,333
----------------- -------------- ----------- -------------- -----------
Balance at 31 December
2018 285,599 39,816 49,136 337 374,888
----------------- -------------- ----------- -------------- -----------
Balances are included in the Statement of Financial
Position as follows:
Current liabilities 400 39,816 - - 40,216
Non-current
liabilities 285,199 - 49,136 337 334,672
----------------- -------------- ----------- -------------- -----------
Balance at 31 December
2018 285,599 39,816 49,136 337 374,888
----------------- -------------- ----------- -------------- -----------
30. Financial risk management
30.1 Financial instruments
The Group's principal financial assets and liabilities are those
that arise directly from its operations: trade and other
receivables, trade and other payables and cash and cash
equivalents. The Group's other principal financial liabilities are
bank and other loan borrowings, amounts due to ZDP Shareholders and
interest rate derivatives, the main purpose of which is to finance
the acquisition and development of the Group's investment property
portfolio.
Set out below is a comparison by class of the carrying amounts
of the Group's financial instruments that are carried in the
financial statements and their fair value:
Group 31 December 2019 31 December 2018
Carrying Fair Carrying Fair
value value value value
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets - measured
at amortised cost
Trade and other receivables 16,463 16,463 11,891 11,891
Cash and short-term deposits 37,248 37,248 104,823 104,823
Financial liabilities
- measured at amortised
cost
Trade and other payables (20,584) (20,584) (29,361) (29,361)
Bank and loan borrowings (287,856) (294,875) (285,599) (285,599)
ZDP Shares - - (39,816) (39,150)
Retail eligible bonds (49,286) (51,860) (49,136) (50,038)
Financial liabilities
- measured at fair value
through profit or loss
Interest rate derivatives (1,816) (1,816) (337) (337)
Lease liability (16,510 (16,510) - -
The following financial liabilities are recorded in the
Consolidated Statement of Financial Position at amortised cost but
their fair value is different as disclosed above. Their fair values
are determined as follows:
-- The fair value of bank and loan borrowings is determined by
reference to mark to market valuations provided by the lenders.
-- The fair value of Retail Eligible Bonds is determined by their published market value.
The following financial liabilities are recorded in the
Consolidated Statement of Financial Position at fair value which is
determined as follows:
-- The fair value of interest rate derivatives is recorded in
the Consolidated Statement of Financial Position and is determined
by forming an expectation that interest rates will exceed strike
rates and discounting these future cash flows at the prevailing
market rates as at the year end.
-- The fair value of the lease liability is recorded in the
Consolidated Statement of Financial Position calculated as the
present value of future cash flows discounted using the Group's
incremental borrowing rate.
Fair value hierarchy
The following table provides the fair value measurement
hierarchy for financial liabilities measured at fair value through
profit or loss.
Significant Significant
Quoted active observable unobservable
prices inputs inputs
Total (level 1) (level 2) (level 3)
GBP'000 GBP'000 GBP'000 GBP'000
31 December 2019
Interest rate derivatives (1,816) - (1,816) -
Lease liability (16,510) - - (16,510)
---------- ---------------- ------------ --------------
Total (18,326) - (1,816) (16,510)
---------- ---------------- ------------ --------------
31 December 2019
Interest rate derivatives (337) - (337) -
---------- ---------------- ------------ --------------
Total (337) - (337) -
---------- ---------------- ------------ --------------
The different levels are defined as follows.
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.
For assets and liabilities that are recognised in the
consolidated financial statements on a recurring basis, the Group
determines whether transfers have occurred between levels in the
hierarchy by reassessing categorisation at the end of each
reporting period.
There have been no transfers between levels during the year.
30.2 Risk management
The Group is exposed to market risk (including interest rate
risk), credit risk and liquidity risk. The Board of Directors
oversees the management of these risks. The Board of Directors
reviews and agrees policies for managing each of these risks that
are summarised below.
30.3 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 Group's bank balances along with a number
of interest rate swaps entered into to mitigate interest rate
risk.
The Group's interest rate risk arises from long-term borrowings
issued at variable rates, which expose the Group to cash flow
interest rate risk. Borrowings issued at fixed rates expose the
Group to fair value interest rate risk. The Group manages its cash
flow interest rate risk by using floating to fixed interest rate
swaps, interest rate caps and interest rate swaps. Interest rate
swaps have the economic effect of converting borrowings from
floating rates to fixed rates. Interest rate caps limit the
exposure to a known level.
If interest rates were to increase by the following rates, this
would increase the annual interest charge to the Group and thus
reduce profits and net assets as follows:
Interest rate increase Increase to the annual interest
charge
31 December 31 December
2019 2018
GBP'000 GBP'000
0.00% - -
0.25% 81 102
0.50% 155 24
0.75% 184 307
1.00% 212 409
30.4 Credit risk
Credit risk is the risk that a counterparty will not meet its
obligations under a financial instrument or customer contract,
leading to a financial loss. The Group is exposed to credit risk
from both its leasing activities and financing activities,
including deposits with banks and financial institutions. Credit
risk is mitigated by tenants being required to pay rentals in
advance under their lease obligations. The credit quality of the
tenant is assessed based on an extensive credit rating scorecard at
the time of entering into a lease agreement.
Outstanding trade receivables are regularly monitored. The
maximum exposure to credit risk at the reporting date is the
carrying value of each class of financial asset.
30.5 Credit risk related to trade receivables
Trade receivables, primarily tenant rentals, are presented in
the Group's Statement of Financial Position net of provisions for
impairment. Credit risk is primarily managed by requiring tenants
to pay rentals in advance and performing tests around strength of
covenant prior to acquisition. Any trade receivables past due as at
the year end were received shortly after the year end.
30.6 Credit risk related to financial instruments and cash
deposits
One of the principal credit risks of the Group arises with the
banks and financial institutions. The Board of Directors believes
that the credit risk on short-term deposits and current account
cash balances is limited because the counterparties are banks, who
are committed lenders to the Group, with high credit ratings
assigned by international credit-rating agencies.
The list of bankers for the Group, with their latest Fitch
credit ratings, was as follows:
Bankers Fitch Ratings
Barclays A Stable
Royal Bank of Scotland A Stable
Santander UK A+ Stable
Aviva A+ Stable
Scottish Widows* A+ Stable
* rating relates to parent entity - Lloyds Banking Group plc
30.7 Liquidity risk
Liquidity risk arises from the Group's management of working
capital and, going forward, the finance charges and principal
repayments on its borrowings. It is the risk that the Group will
encounter difficulty in meeting its financial obligations as they
fall due, as the majority of the Group's assets are investment
properties and are therefore not readily realisable. The Group's
objective is to ensure that it has sufficient available funds for
its operations and to fund its capital expenditure. This is
achieved by continuous monitoring of forecast and actual cash flows
by management.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments:
Group at 31 December Within Between Between After
2019 1 year 1 to 2 years 2 to 5 5 years Total
GBP'000 GBP'000 years GBP'000 GBP'000
GBP'000
Trade and other payables (20,584) - - - (20,584)
Bank borrowings (9,579) (9,579) (76,588) (273,944) (369,690)
Interest rate derivatives (487) (483) (1,111) - (2,081)
Retail eligible bonds (2,250) (2,250) (56,750) - (61,250)
Lease liability (618) (618) (1,854) (50,964) (54,054)
--------- -------------- -------------- ---------- ----------
(33,518) (12,930) (136,303) (324,908) (507,659)
--------- -------------- -------------- ---------- ----------
Group at 31 December Within Between Between After
2018 1 year 1 to 2 years 2 to 5 years 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Trade and other payables (29,361) - - - (29,361)
Bank borrowings (8,926) (8,959) (113,026) (228,717) (359,628)
Interest rate derivatives (264) (244) (418) - (926)
ZDP Shares (39,879) - - - (39,879)
Retail eligible bonds (2,250) (2,250) (6,750) (52,250) (63,500)
--------- -------------- -------------- ---------- ----------
(80,680) (11,453) (120,194) (280,967) (493,294)
--------- -------------- -------------- ---------- ----------
The maturity dates of all bank borrowings are disclosed in note
23.
The maturity date of the retail eligible bonds is disclosed in
note 25.
The range of maturity dates of the lease liability payments is
between 10 and 107 years.
31. Capital management
The primary objective of the Group's capital management is to
ensure that it remains a going concern and continues to qualify for
UK REIT status.
The Group's capital is represented by reserves and bank
borrowings. The Board, with the assistance of the Investment and
Asset Managers, monitors and reviews the Group's capital so as to
promote the long-term success of the business, facilitate
expansion, deliver a quarterly dividend distribution and to
maintain sustainable returns for Shareholders.
The Group's policy on borrowings is as follows: the level of
borrowing will be on a prudent basis for the asset class, and will
seek to achieve a low cost of funds, while maintaining flexibility
in the underlying security requirements and the structure of both
the portfolio and of Regional REIT.
Based on current market conditions, the Board will target Group
net borrowings of 40% of Investment Property Values at any time.
However, the Board may modify the Group's borrowing policy
(including the level of gearing) from time to time in light of
then-current economic conditions, relative costs of debt and equity
capital, fair value of the Company's assets, growth and acquisition
opportunities or other factors the Board deems appropriate. The
Group's net borrowings may not exceed 50% of the Investment
Property Values at any time without the prior approval of Ordinary
Shareholders in a General Meeting.
The optimal debt financing structure for the Group will have
consideration for key metrics including: fixed or floating interest
rate charged, debt type, maturity profile, substitution rights,
covenant and security requirements, lender type, diversity and the
lender's knowledge and relationship with the property sector.
32. Operating leases
The future minimum lease payments receivable under
non-cancellable operating leases in respect of the Group's property
portfolio are as follows:
31 December 31 December
2019 2018
Group GBP'000 GBP'000
Receivable within 1 year 50,038 44,684
Receivable between 1 - 2 years 41,696 36,157
Receivable between 2 - 5 years 61,181 57,599
Receivable after 5 years 36,202 40,483
------------ ------------
189,117 178,923
------------ ------------
The Group has in excess of 910 operating leases. The number of
years remaining on these operating leases varies between 1 and 80
years. The amounts disclosed above represent total rental income
receivable up to the next lease break point on each lease. If a
tenant wishes to end a lease prior to the break point, a surrender
premium will be charged to cover the shortfall in rental income
received.
33. Leases
As from 1 January 2019, the Group has adopted IFRS16 accounting
treatment as described in note 2.4.
31 December 31 December
2019 2018
Right of use asset GBP'000 GBP'000
At start of year - -
Value recognised at 1 January 2019 16,545 -
Fair value movement (194) -
16,351 -
------------ ------------
31 December 31 December
2019 2018
Lease liability GBP'000 GBP'000
At start of year - -
Value recognised at 1 January 2019 16,545 -
Lease payments (618) -
Interest charges 583
16,510 -
------------ ------------
The Group's lease commitments which are now represented by the
right of use asset and lease liability are spread across 13
separate leases with the two largest leases at Basingstoke and
Witham making up 42 % of the balance. Total commitments on leases
in respect of land and buildings are as follows:
31 December 31 December
2019 2018
Group GBP'000 GBP'000
Payable within 1 year 618 618
Payable between 1 - 2 years 618 618
Payable between 2 - 5 years 1,854 1,854
Payable after 5 years 50,964 51,337
------------ ------------
54,054 54,427
------------ ------------
34. Segmental information
After a review of the information provided for management
purposes during the current year, it was determined that the Group
has one operating segment and therefore segmental information is
not disclosed in these consolidated financial statements.
35. Transactions with related parties
Transactions with the Directors
Directors' remuneration is disclosed within the Remuneration
Report and note 8 to the financial statements. Directors'
beneficial interests in the Ordinary Shares of the Company are
disclosed within the Directors' Report. During the year, the
following dividends were received by the Directors (and their
spouses or minor children) on the holdings:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Kevin McGrath 21 24
William Eason 17 16
Daniel Taylor 42 28
Stephen Inglis 103 60
Frances Daley 3 2
Timothy Bee 13 12
-------------- --------------
Total 199 142
-------------- --------------
Transactions with the Asset Manager, London & Scottish
Property Investment Management Limited and the Property Manager,
London & Scottish Property Asset Management Limited
Stephen Inglis is a non-executive Director of Regional REIT
Limited, as well as being the Chief Executive Officer of London
& Scottish Property Investment Management Limited ("LSPIM") and
a director of London & Scottish Property Asset Management
Limited. The former company has been contracted to act as the Asset
Manager of the Group and the latter as the Property Manager.
In consideration for the provision of services provided, the
Asset Manager is entitled in each financial year (or part thereof)
to 50% of an annual management fee on a scaled rate of 1.1% of the
EPRA net asset value, reducing to 0.9% on net assets over
GBP500,000,000. The fee shall be payable in cash quarterly in
arrears.
In respect of each portfolio property, the Asset Manager has
procured and shall, with the Company in future, procure that London
& Scottish Property Asset Management Limited is appointed as
the Property Manager. A property management fee of 4% per annum is
charged by the Property Manager on a quarterly basis: 31 March, 30
June, 30 September, and 31 December, based upon the gross rental
yield. Gross rental yield means the rents due under the property's
lease for the peaceful enjoyment of the property, including any
value paid in respect of rental renunciations but excluding any
sums paid in connection with service charges or insurance
costs.
The Asset Manager is also entitled to a Performance Fee. Details
of the Performance Fee are given below.
The following tables show the fees charged in the year and the
amount outstanding at the end of the year:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Asset management fees charged* 2,356 2,405
Property management fees charged* 2,280 2,264
Performance fees charged - 3,523
-------------- --------------
Total 4,636 8,192
-------------- --------------
31 December 31 December
2019 2018
GBP'000 GBP'000
Total fees outstanding 1,275 5,263
------------ ------------
* Including irrecoverable VAT charged where appropriate
Transactions with the Investment Manager, Toscafund Asset
Management LLP
Tim Bee, Chief Legal Counsel of Toscafund Asset Management LLP
was appointed as non-executive director on 7 July 2017. Toscafund
Asset Management LLP has been contracted as the Investment Manager
of the Group.
In consideration for the provision of services provided, the
Investment Manager is entitled in each financial year (or part
thereof) to 50% of an annual management fee on a scaled rate of
1.1% of the EPRA net asset value, reducing to 0.9% on net assets
over GBP500,000,000. The fee is payable in cash quarterly in
arrears.
The Investment Manager is also entitled to a Performance Fee.
Details of the Performance Fee are given below.
The following tables show the fees charged in the year and the
amount outstanding at the end of the year:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Investment management fees charged 2,356 2,405
Performance fees charged - 3,523
Total 2,356 5,928
-------------- --------------
31 December 31 December
2019 2018
GBP'000 GBP'000
Total fees outstanding 591 5,044
-------------- --------------
Performance Fee
The Asset Manager and the Investment Manager are each entitled
to 50% of a Performance Fee. The fee is calculated at a rate of 15%
of the Total Shareholder Return in excess of the hurdle rate of 8%
per annum for the relevant performance period. Total Shareholder
Return for any financial year consists of the sum of any increase
or decrease in EPRA NAV per Ordinary Share and the total dividends
per Ordinary Share declared in the financial year. A Performance
Fee is only payable in respect of a performance period where the
EPRA NAV per Ordinary Share exceeds the High-water mark which is
equal to the greater of the highest year-end EPRA NAV Ordinary
Share in any previous performance period or the Placing price (100p
per Ordinary Share). The Performance Fee was calculated initially
on 31 December 2018 and is calculated annually thereafter. Full
details of the Managers' Performance Fee are given on pages 183-85
of the IPO Prospectus.
The Performance Fee for the first Performance Period, 6 November
2015 to 31 December 2018, was paid 50% in cash and 50% in Ordinary
Shares which are subject to a one-year lock-up.
The Performance Fees for subsequent years are payable 34% in
cash and 66% in Ordinary Shares, again at the prevailing price per
share, with 50% of the shares locked-in for one year and 50% of the
shares locked-in for two years.
Based on the EPRA NAV of the Group as at 31 December 2019, the
Performance Fee liability for the year ending 31 December 2019 was
estimated at GBPnil (for the period from commencement of trading to
31 December 2018: GBP8,905,000). This fee has been accrued in the
consolidated financial statements.
36. Capital commitments
At 31 December 2019, the Group had committed capital expenditure
on its investment property portfolio of GBP2,500,000 relating to a
property in Dundee. These costs were paid in February 2020.
37. Subsequent events
The wellbeing of our tenants and other stakeholders in the
Company are of utmost importance to the Board and we continue to
manage the Company, cognisant of their needs in this current
environment.
On 20 February 2020, the Company announced a potential equity
fundraise to take advantage of its growing near-term pipeline of
accretive growth. As a result of the current market uncertainty
caused by the global spread of COVID-19, the Company took the
decision to withdraw the potential equity fundraise.
On 31 March 2020, and in view of the COVID-19 disruption to UK
economic activity the Company announced a trading update. The
rental collections were slightly reduced as at 30 March 2020, with
68.2% of invoiced rental income collected in comparison with 69.6%
at the same date in 2019. In addition, GBP30.7m of available
borrowing headroom from the Santander UK and Royal Bank of Scotland
facilities had been drawn.
The Board will continue to closely monitor the developing
situation and its effect on the Group, although the Board is
re-assured by the Company's balance sheet, the breadth of tenants
and geographical spread of assets, which will ensure it is well
positioned to mitigate any prolonged periods of uncertainty.
Regional REIT Limited;
ISIN: GG00BYV2ZQ34
SEDOL: BYV2ZQ3
Legal Entity Identifier: 549300D8G4NKLRIKBX73
Company Website
www.regionalreit.com
Forthcoming Events
Q1 2020 Trading Update 21 May 2020
2020 Annual General Meeting TBC
2020 Interim Results Announcement 17 September 2020
Q3 2020 Trading Update 12 November 2020
Note: all future dates are provisional and subject to
change.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR IPMLTMTIMBTM
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