TIDMSOHO
RNS Number : 0153G
Triple Point Social Housing REIT
13 March 2020
THIS ANNOUNCEMENT HAS BEEN DETERMINED TO CONTAIN INSIDE
INFORMATION FOR THE PURPOSES OF THE MARKET ABUSE REGULATION (EU)
NO. 596/2014.
13 March 2020
Triple Point Social Housing REIT plc
(the "Company" or, together with its subsidiaries, the
"Group")
RESULTS FOR THE YEARED 31 DECEMBER 2019
The Board of Triple Point Social Housing REIT plc (ticker: SOHO)
is pleased to announce its audited results for the year ended 31
December 2019.
31 December 2019 31 December 2018
--------------------------------- ----------------- -----------------
IFRS NAV per share 105.37p 103.65p
E arnings per share (basic
and diluted) 6.75p 8.37p
- IFRS basis 3.39p 2.27p
- EPRA basis
Total annual ised rental income GBP25.4m (1) GBP17.4m (1)
V alu e of the portfolio
- IFRS basis GBP471.6m GBP323.5m
- Portfolio valuation basis GBP503.8m GBP343.7m
Weighted average unexpired 25.7 yrs 27.2 yrs
lease term
Dividend paid or declared per
Ordinary S hare 5.095p 5.00p
Dividend paid per C Share - 1.29p
Financial highlights
-- IFRS net asset value per share of 105.37 pence as at 31
December 2019 (2018: 103.65 pence), an increase of 1.66 % .
-- Portfolio independently valued as at 31 December 201 9 at GBP
471.6 million on an IFRS basis (2018: GBP323.5 million) ,
reflecting a valuation uplift of 7.45 % against total invested
funds of GBP439 million (2) . The properties have been valued on an
individual basis.
-- The Group's properties were valued at GBP503.8 million on a
portfolio valuation basis (2018: GBP 343.7 million ) , reflecting a
portfolio premium of 6.82% or a GBP 32.2 million uplift against the
IFRS valuation. A portfolio valuation basis assumes the portfolio
of properties is held in a single company holding structure, is
sold to a third party on arms-length terms, and attracts lower
purchaser's costs of 2.30 %.
-- The portfolio's total annualised rental income was GBP25.4
million (1) as at 31 December 2019 (2018: GBP 17.4 million ) .
-- Operating profit for the year ended 31 December 2019 was
GBP26.9 million (2017: GBP 21. 5 million ) .
-- Ongoing Charges Ratio of 1.63% as at 31 December 2018 (2018: 1.58%) .
-- Extended existing debt facility by GBP60 million. As at 12
March 2020, GBP 29 .4 million of debt was uncommitted.
Operational highlights
-- Acquired 116 properties (843 units) during the year for a
total investment cost of GBP 130.5 million ( including costs )
bringing the total investment portfolio to 388 properties.
-- Committed approximately GBP29.8 million to forward fund the
development of nine newly built or fully-renovated bespoke
Supported Housing schemes, bringing total forward funding
agreements entered into by the Group to 22 of which 11 had reached
practical completion by the year end and 11 were on-going.
-- IFRS blended net initial yield of 5.27% based on the value of
the portfolio on an IFRS basis as at 31 December 2019 , against the
portfolio's blended net initial yield on purchase of 5.91 % .
-- Further diversif ied the portfolio:
o 11 regions
o 149 local authorities
o 300 leases
o 16 Approved Providers
o 88 care providers
-- A s at 31 December 2019 , the weighted average unexpired
lease term (" WAULT ") was 25.7 years .
-- 100% of the Group's portfolio was fully let or pre-let and
income producing during the year (1) .
-- 100% of contracted rental income was either CPI or RPI linked.
Post Balance Sheet Activity
-- The Company declared a dividend of 1.285 pence per ordinary
share in respect of the period from 1 October to 31 December 2019.
This dividend will be paid on or around 27 March 20 20 to
shareholders on the register at 13 March 20 20 .
-- The dividend payable on 27 March 2020 brings the total
dividend per Ordinary Share paid by the Company to 5.0 95 pence per
s hare in respect of the financial year to 31 December 201 9 in
line with the Company's stated target. The Company is targe ting an
increase in the aggregate dividend , underpinned by the anticipated
growth in income . The 2020 dividend target will be determined in
line with February 2020 Consumer
Price Index once this data is made available (3) .
-- The Company acquired a further seven properties (91 units)
for an aggregate purchase price of approximately GBP19.3 million
(including costs).
Notes:
1 Excluding ongoing forward funded schemes that are under an agreement for lease
2 Including acquisition costs
3 These are targets only and not a profit forecast and there can
be no assurance that they will be met
Christopher Phillips, Chairman of Triple Point Social Housing
REIT plc, commented:
" We look forward to 2020 with optimism. This follows another
successful year in 2019 which has set us up well for the next 12
months. During 2019, we deployed the proceeds of two fund-raises
into more high-quality properties. We extended our debt facility
based on continuing demand from local Commissioners and are
approaching the optimal target level of gearing. We met our
dividend target and are making progress towards fully covering the
dividend. Rent continues to be paid and on time. In 2020 we will
continue to focus on property quality and due diligence, and our
principal challenge will be to help the sector meet growing
regulatory requests and increase the Company's share price to
reflect our continuing operational success. However, building on
our success this year and in previous years, we believe we are well
equipped to meet these challenges and more as we move forward into
2020. "
FOR FURTHER INFORMATION ON THE COMPANY, PLEASE CONTACT:
Triple Point Investment Management Tel: 020 7201 8976
LLP
(Delegated Investment Manager)
James Cranmer
Ben Beaton
Max Shenkman
Justin Hubble
Akur Capital (Financial Adviser) Tel: 020 7493 3631
Tom Frost
Anthony Richardson
Siobhan Sergeant
The Company's LEI is 213800BERVBS2HFTBC58.
Further information on the Company can be found on its website
at www.triplepointreit.com .
NOTES:
The Company invests in primarily newly developed social housing
assets in the UK, with a particular focus on supported housing. The
assets within the portfolio are subject to inflation-adjusted,
long-term (typically from 20 years to 30 years), Fully Repairing
and Insuring (" FRI ") leases with Approved Providers (being
Housing Associations, Local Authorities or other regulated
organisations in receipt of direct payment from local government).
The portfolio comprises investments into properties which are
already subject to an FRI lease with an Approved Provider, as well
as forward funding of pre-let developments but does not include any
direct development or speculative development.
There is increasing political pressure and social need to
increase housing supply across the UK which is creating
opportunities for private sector investors to help deliver this
housing . The Group's ability to provide forward funding for new
developments not only enables the Company to secure fit for
purpose, modern assets for its portfolio but also addresses the
chronic undersupply of suitable supported housing properties in the
UK at sustainable rents as well as delivering returns to
investors.
Triple Point Investment Management LLP (part of the Triple Point
Group) is responsible for management of the Group's portfolio (with
such functions having been delegated to it by Langham Hall Fund
Management LLP, the Company's alternative investment fund
manager).
The Company was admitted to trading on the Specialist Fund
Segment of the Main Market of the London Stock Exchange on 8 August
2017 and was admitted to the premium segment of the Official List
of the Financial Conduct Authority and migrated to trading on the
premium segment of the Main Market on 27 March 2018. The Company
operates as a UK Real Estate Investment Trust (" REIT ") and is a
constituent of the FTSE EPRA/NAREIT index.
CHAIRMAN'S STATEMENT
Introduction
I am pleased to write to you with the results of our second full
financial year. This year we have delivered another strong set of
results - both financially and in terms of social impact.
Our IFRS NAV per share rose by 1.66% to 105.37 pence, reflecting
our secure income and portfolio strength. As expected, our existing
portfolio has performed solidly, and we have continued to deploy
funds into high-quality properties leased to Approved Providers
which continue to strengthen as a result of ongoing regulatory
engagement.
Over the last 12 months, we successfully deployed the proceeds
of both our October 2018 equity raise and our December 2018
revolving credit facility. In October 2019, we extended the
revolving credit facility by another GBP60 million to meet the
strong demand for new Specialised Supported Housing properties.
From each and every acquisition in this evolving market, we learn
and improve our due diligence process, ensuring that, now and in
the future, we always invest in the best properties we can. We now
have 388 properties in 149 different local authorities in England,
Scotland and Wales which are leased (or pre-let) to 16 different
counterparties, ensuring strong diversification.
As always, in 2019 we made sure that the impact of our
investments was more than simply financial. We launched the Company
because we saw an opportunity to do well by doing good. We realised
that Specialised Supported Housing was a sector which could be
transformed by the careful investment of private capital into
high-quality, adapted, community-based homes around the UK. In
doing so, we could achieve a steady, long-term income stream for
our investors through rental income. But, as importantly, we could
also provide housing that simultaneously improves the health of the
people who live in it and saves the Government money compared to
housing people with long-term health needs in institutional
settings like care homes and hospitals. Research suggests that
someone in our housing saves the Government about GBP200 per week
when compared to care home accommodation. This figure increases to
about GBP2,000 a week compared to having someone with long-term
health needs in hospital (1) . For these reasons, the call for new
Specialised Supported Housing by Commissioners across the country
continued throughout 2019. In fact, at the last review in 2015, the
shortfall of supported housing was expected to be 46,771 units by
2024/2025 (2) . We hope our investments continue to address this
shortfall and benefit society into 2020 and beyond.
In previous reports we have discussed the evolution of
regulation in the Supported Housing market. The impact of this
regulatory engagement has remained an important part of the market
throughout 2019 - and is likely to remain so in 2020 and beyond as
historical issues are resolved. We discuss all this in detail in
the Investment Manager's Report, but it is worth saying now that,
despite some short-term delays caused by regulatory engagement, we
strongly welcome greater regulation of a sector that is rapidly
evolving and maturing. For all the improvements already made by
Registered Providers (3) , we remain committed to taking into
account the views of all relevant stakeholders to evolve the model
and ensure that the risks that the Regulator of Social Housing set
out in its April 2019 report (4) and its non-compliant ratings for
individual Registered Providers are mitigated (5) . This is
discussed in more detail in the Investment Manager's Report. This
will ensure the sector is sustainable and provides long-term
solutions to local government, care providers and individuals with
specific care needs. We believe that private capital continues to
play an important role, recognised by the Regulator, in addressing
the chronic undersupply and in delivering high-quality new housing
(6) .
Throughout 2019 we continued to build on the quality of our
portfolio. In April, for example, we acquired our first site in
Scotland, West Bowling Green, a flagship forward funding
development in the centre of Edinburgh which will be leased to
Inclusion Housing and which is being developed in conjunction with
Edinburgh City Council. In September we acquired Park View
Apartments , a self-contained 18-unit purpose built property in
Wolverhampton, that is leased to Bespoke Supported Tenancies.
Finally, in December we acquired Delph Crescent which is leased to
Care Housing Association and that was developed in full
collaboration with Bradford Metropolitan District Council.
Investing in high-quality housing helps provide the best health
outcomes for residents and the long-term sustainability of the
properties for the benefit of Approved Providers, care providers,
local authorities and our investors. We will continue to evolve our
due diligence criteria in 2020 to ensure we always buy the best
properties that we possibly can. When acquisition opportunities are
presented, our Investment Manager's deep sector knowledge and
well-established due diligence process allows them to conduct an
initial appraisal, at which point schemes are often rejected. To
date, we have rejected in excess of GBP 500 million of potential
deals as a result of property or counterparty quality.
Forward Funding
As part of our aim to buy the highest quality housing possible
and deliver the greatest social and financial impact, this year saw
us commit a significant level of capital to forward fund the
development of new properties amounting to GBP29.8 million on nine
projects. As at 31 December 2019, we have committed GBP56.2 million
to 22 forward funded projects, with 11 projects now having
completed and the remaining 11 expected to complete in 2020.
The ability to forward fund remains a key differentiator from
our competition and ensures that we are deploying funds into the
highest quality new-build projects available. Forward funding
allows the Group to enjoy valuation uplifts on new-build
properties, benefit from the high occupancy such custom-built
properties achieve, provide higher quality accommodation for
residents, as well as bring new housing stock to market to the
benefit of wider society. As ever, we need to balance how much
forward funding we have at any one time since these projects do not
generate income during construction. However, given the significant
benefits for residents and other stakeholders, we forward fund,
wherever possible, new development projects.
Deployment
During the twelve months of 2019 we bought 116 new properties,
which provide accommodation for 843 residents, for a total
investment cost of GBP13 0.5 million (7) . All our properties are
based in communities and have specialist adaptations for the needs
of residents agreed by the care provider, Commissioner and Approved
Provider. Beyond these completed properties, as at 31 December 2019
we had outstanding commitments of GBP24.3 million relating to four
properties on which we had exchanged, and 11 forward funded
properties on which had yet to complete construction. With our
second investment into Scotland in October 2019, our
diversification continues to grow. Following our investments in
2019, our overall portfolio has grown to 388 properties as at 31
December 2019 (31 December 2018: 272). These properties provide
accommodation for 2,728 residents (31 December 2018: 1,893).
During 2019, we began working with 26 new care providers and 40
new local authorities. Overall, we now have leases in place with 16
Approved Providers - the same number as at the end of 2018 - and
own properties into which 88 care providers operate (31 December
2018: 62) and located in 149 different local authorities (31
December 2018: 109). At the end of 2019, our portfolio's weighted
average unexpired lease term (including put/call options and
reversionary leases) was 25.7 years, compared to 27.2 years in the
previous period. This reflects the greater diversification of our
portfolio from the properties initially acquired on IPO and a
maturing of the market.
Deployment in 2019 was slower than 2018. This was the result of
the Group being further through its deployment cycle and greater
regulatory engagement causing Registered Providers to focus on
consolidation rather than growth. Regulatory engagement is
discussed in detail in the Investment Manager's Report below, and
while it has slowed down the deployment of new Specialised
Supported Housing it has improved governance, financial strength
and operations which will benefit Approved Providers and the wider
sector in the long-term.
Share Price
The Company's share price came under pressure following the
publication of a report from the Regulator in April 2019 about
lease-based providers of Specialised Supported Housing. This had
the effect of reducing the Company's market capitalisation. As well
as acknowledging the benefits of private capital investing in this
sector, the report set out a number of risks for Registered
Providers.
It is true that a minority of Registered Providers operating in
this growing sector have been deemed non-compliant by the
Regulator. However, the fundamentals remain strong and it is
important to remember that the majority of Registered Providers
continue to perform well. In addition, there is persistent demand
for this type of housing, which provides better outcomes for
residents while saving the Government money. We continue to engage
with shareholders and other stakeholders to explain the strength of
the model generally and our operational performance
specifically.
Share Buybacks
During 2019, the Company bought back 450,000 Ordinary Shares at
a share price of between 83 and 83.3 pence per share. These shares
are now held in treasury. The Board decided to undertake share
buybacks because the Company's share price was trading at a
significant discount to net asset value following the publication
in April of the Regulator's report as mentioned above. The Board
took the view that share buybacks should be considered alongside
the acquisition of new properties, since share buybacks for
investment purposes are particularly attractive when the discount
to net asset value is wide, providing net asset value accretion for
ongoing shareholders.
The Company will continue to seek shareholder approval at its
annual general meeting, as a matter of course, to undertake share
buybacks at a discount to net asset value for up to 10% of the
Company's issued share capital. The Directors will consider share
buybacks if they believe them to be in the interests of
shareholders as a whole, taking into account the impact on
secondary market liquidity, the Company's ongoing charges ratio,
the terms of the Group's debt facilities, and general market
conditions including the availability of income-generating
investment opportunities.
Equity and Debt Raising
During 2019 we completed deployment of both the GBP108.2 million
of equity raised in October 2018 and the GBP70 million of debt
raised in December 2018. In October 2019, we extended that debt
facility by GBP60 million. As at 12 March 2020, GBP 29.4 million of
debt was uncommitted and available to be deployed to meet the
demand for more Specialised Supported Housing and help us achieve
full dividend cover towards the end of 2020. On a Group
consolidated basis, the current LTV is 31.1%.
Financial Results
As at 31 December 2019, our portfolio was independently valued
at GBP471.6 million on an IFRS basis. This reflects a valuation
uplift of GBP32.7 million, or 7.45%, over our total investment cost
(i.e. including transaction costs). The valuation reflects a
blended valuation net initial yield of 5.27%, which is better than
the portfolio's blended average net initial yield at purchase of
5.91%. This equates to a yield compression of 64 basis points,
reflecting our ability to buy good properties at off-market
prices.
As at 31 December 2019, our portfolio was valued at GBP503.8
million on a portfolio valuation basis (i.e. assuming a single sale
of the property-holding SPVs to a third-party on an arm's length
basis with purchaser's costs of 2.30%). The portfolio valuation
reflects a portfolio premium of GBP32.2 million against the IFRS
valuation.
IFRS earnings per share in the year was 6.75 pence and EPRA
earnings per share was 3.39 pence. The audited IFRS NAV per share
and the EPRA NAV per share were both 105.37 pence, an increase
since 31 December 2018 of 1.66%.
Dividends
The Company has paid three interim dividends of 1.27 pence per
share each for the year to 31 December 2019. On 5 March 2020 we
declared a further interim dividend of 1.285 pence per share for
the period 1 October to 31 December 2019, payable on or around 27
March 2020 to shareholders on the register on 13 March 2020,
bringing the total dividends paid or declared in respect of the
year to 31 December 2019 to 5.095 pence per share. This met our
dividend target for the whole year, representing an increase of
1.9% over 2018's aggregate dividend, in line with inflation and
reflecting the CPI-based rent reviews typically contained in the
leases over our properties.
The Company is targeting an increase in the aggregate dividend,
underpinned by the anticipated growth in income. The 2020 dividend
target will be determined in line with February 2020 Consumer Price
Index once this data is made available. It remains a priority of
ours to achieve a fully covered dividend. As at 31 December 2019,
EPRA earnings covered 66.6% of dividends. Full dividend cover by
EPRA earnings is expected in Q3 2020 once debt funds are fully
deployed. The delay in full dividend cover has resulted from the
slower than expected deployment of funds as Approved Providers have
focused on improving governance and operations, as required by the
Regulator, rather than growing their portfolios. However, on an
annualised basis, if all completed properties were
income-generating for the full period, the dividend cover would be
76%; if income on all exchanged and forward funded properties were
included, dividend cover would be 90%.
Outlook
We look forward to 2020 with optimism. This follows another
successful year in 2019 which has set us up well for the next 12
months. During 2019, we deployed the proceeds of two fund-raises
into more high-quality properties. We extended our debt facility
based on continuing demand from local Commissioners and are
approaching the optimal target level of gearing. We met our
dividend target and are making progress towards fully covering the
dividend. Rent continues to be paid and on time. In 2020 we will
continue to focus on property quality and due diligence, and our
principal challenge will be to help the sector meet growing
regulatory requests and increase the Company's share price to
reflect our continuing operational success. However, building on
our success this year and in previous years, we believe we are well
equipped to meet these challenges and more as we move forward into
2020.
Our success owes much to the strength of the Investment
Manager's network and due diligence processes. Through its hard
work, we have been able to continue buying best-in-class properties
around the country at attractive and sustainable yields.
I would like to take this opportunity to thank shareholders for
your continued support, and our Investment Manager and my fellow
Board members for their support and commitment throughout the
year.
Chris Phillips
Chairman
12 March 20 20
Notes:
1 Mencap, Funding supported housing for all (2018)
2 National Housing Federation, Supported housing: Understanding need and supply (2015)
3 See Investment Manager's report below.
4 Regulator of Social Housing, Lease-based providers of specialised supported housing (2019)
5 Regulator of Social Housing, Regulatory Notice: Bespoke Supportive Tenancies Limited (2019)
Regulator of Social Housing, Regulatory Notice: Encircle Housing
Limited (2019)
Regulator of Social Housing, Current regulatory judgement:
Inclusion Housing Community Interest Company (2019)
Regulator of Social Housing, Current regulatory judgement:
Westmoreland Supported Housing Limited (2019)
6 Regulator of Social Housing, Lease-based providers of
specialised supported housing (2019), para. 2.6.
7 Including acquisition costs
STRATEGY AND BUSINESS MODEL
The Board is responsible for the Group's Investment Objective
and Investment Policy and has overall responsibility for ensuring
the Group's activities are in line with such overall strategy. The
Group's Investment Policy and Investment Objective are published
below.
Investment Objective
The Group's investment objective is to provide shareholders with
stable, long-term, inflation-linked income from a portfolio of
social housing assets in the United Kingdom with a focus on
Supported Housing assets. The portfolio comprises investments in
operating assets and the forward funding of pre-let development
assets, the Company seeks to optimise the mix of these assets to
enable it to pay a covered dividend increasing in line with
inflation and so generate an attractive risk-adjusted total
return.
Investment Policy
To achieve its investment objective, the Group invests in a
diversified portfolio of freehold or long leasehold social housing
assets in the UK. Supported Housing assets account for at least 80%
of the Group's gross asset value. The Group acquires portfolios of
social housing assets and single social housing assets, either
directly or via SPVs. Each asset is subject to a lease or occupancy
agreement with an Approved Provider for terms primarily ranging
from 20 years to 30 years, with the rent payable thereunder subject
to adjustment in line with inflation (generally CPI). Title to the
assets remains with the Group under the terms of the relevant
lease. The Group is not responsible for any management or
maintenance obligations under the terms of the lease or occupancy
agreement, all of which are serviced by the Approved Provider
lessee. The Group is not responsible for the provision of care to
residents of Supported Housing assets.
The social housing assets are sourced in the market by the
Investment Manager.
The Group intends to hold its portfolio over the long-term,
taking advantage of long-term upward-only inflation-linked leases.
The Group will not be actively seeking to dispose of any of its
assets, although it may sell investments should an opportunity
arise that would enhance the value of the Group as a whole.
The Group may forward fund the development of new social housing
assets when the Investment Manager believes that to do so would
enhance returns for shareholders and/or secure an asset for the
Group's portfolio at an attractive yield. Forward funding will only
be provided in circumstances in which:
(a) there is an agreement to lease the relevant property upon
completion in place with an Approved Provider;
(b) planning permission has been granted in respect of the site; and
(c) the Group receives a return on its investment (at least
equivalent to the projected income return for the completed asset)
during the construction phase and before the start of the
lease.
For the avoidance of doubt, the Group will not acquire land for
speculative development of social housing assets.
In addition, the Group may engage third party contractors to
renovate or customise existing social housing assets as
necessary.
Gearing
The Group uses gearing to enhance equity returns. The Directors
will employ a level of borrowing that they consider prudent 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 Company's portfolio and the Group.
The Directors intend that the Group will target a level of
aggregate borrowings over the medium-term equal to approximately
40% of the Group's gross asset value. The aggregate borrowings will
always be subject to an absolute maximum, calculated at the time of
drawdown, of 50% of the Group's gross asset value.
Debt will typically be secured at the asset level, whether over
a particular property or a holding entity for a particular property
(or series of properties), without recourse to the Company and
having consideration for key metrics including lender diversity,
cost of debt, debt type and maturity profiles.
Use of Derivatives
The Group may use derivatives for efficient portfolio
management. In particular, the Group may engage in full or partial
interest rate hedging or otherwise seek to mitigate the risk of
interest rate increases on borrowings incurred in accordance with
the Investment Policy as part of the Group's portfolio management.
The Group will not enter into derivative transactions for
speculative purposes.
Investment Restrictions
The following investment restrictions apply:
-- the Group will only invest in social housing assets located in the United Kingdom;
-- the Group will only invest in social housing assets where the
counterparty to the lease or occupancy agreement is an Approved
Provider. Notwithstanding that, the Group may acquire a portfolio
consisting predominantly of social housing assets where a small
minority of such assets are leased to third parties who are not
Approved Providers. The acquisition of such a portfolio will remain
within the Investment Policy provided that at least 90% (by value)
of the assets are leased to Approved Providers and, in aggregate,
all such assets within the Group's total portfolio represent less
than 5% of the Group's gross asset value at the time of
acquisition;
-- at least 80% of the Group's gross asset value will be
invested in Supported Housing assets;
-- the unexpired term of any lease or occupancy agreement
entered into (or in the case of an acquisition of a portfolio of
assets, the average unexpired term of such leases or occupancy
agreements) shall not be less than 15 years, unless the Investment
Manager reasonably expects the term of such shorter lease or
occupancy agreement (or in the case of an acquisition of a
portfolio of assets, the average term of such leases or occupancy
agreements) to be extended to at least 15 years;
-- the maximum exposure to any one asset (which, for the
avoidance of doubt, will include houses and/or apartment blocks
located on a contiguous basis) will not exceed 20% of the Group's
gross asset value;
-- the maximum exposure to any one Approved Provider will not
exceed 30% of the Group's gross asset value, other than in
exceptional circumstances for a period not to exceed three
months;
-- the Group may forward fund social housing units in
circumstances where there is an agreement to lease in place and
where the Group receives a coupon (or equivalent reduction in the
purchase price) on its investment (generally slightly above or
equal to the projected income return for the completed asset)
during the construction phase and before entry into the lease.
Forward funding equity commitments will be restricted to an
aggregate value of not more than 20% of the Group's net asset
value, calculated at the time of entering into any new forward
funding arrangement;
-- the Group will not invest in other alternative investment
funds or closed-ended investment companies (which, for the
avoidance of doubt, does not prohibit the acquisition of SPVs which
own individual, or portfolios of, social housing assets);
-- the Group will not set itself up as an Approved Provider; and
-- the Group will not engage in short selling.
The investment limits detailed above apply at the time of the
acquisition of the relevant asset in the portfolio. The Group will
not be required to dispose of any investment or to rebalance its
portfolio as a result of a change in the respective valuations of
its assets or a merger of Approved Providers.
Investment Strategy
The Group specialises in investing in UK social housing, with a
focus on Supported Housing. The strategy is underpinned by strong
local authority demand for more social housing, which is reflected
in the focus on acquiring recently developed and refurbished
properties across the United Kingdom. The assets within the
portfolio have typically been developed for pre-identified
residents and in response to demand specified by local authorities
or NHS commissioners. On acquisition, the properties are subject to
inflation-adjusted, long-term (typically from 20 years to 30
years), fully repairing and insuring leases with specialist
Approved Providers in receipt of direct payment from local
government (usually Registered Providers regulated by the Regulator
of Social Housing). The portfolio comprises investments made into
properties already subject to a fully repairing and insuring lease
as well as forward funding of pre-let developments. The portfolio
will not include any direct development or speculative development
investments.
Business Model
The Group owns and manages social housing properties that are
leased to experienced housing managers (typically Registered
Providers, which are often referred to as housing associations)
through long-term, inflation-linked, fully repairing and insuring
leases. The vast majority of the portfolio and future deal pipeline
is made up of Supported Housing homes which are residential
properties that have been adapted or built such that care and
support can easily be provided to vulnerable residents who may have
mental health issues, learning difficulties or physical
disabilities. We are focused on acquiring specially or recently
developed properties in order to help local authorities meet
increasing demand for suitable accommodation for vulnerable
residents (the drivers of this demand are discussed in the
Investment Manager's report). Local authorities are responsible for
housing these residents and for the provision of all care and
support services that are required.
The Supported Housing properties owned by the Group are leased
to Approved Providers which are usually not-for-profit
organisations focused on developing, tenanting and maintaining
housing assets in the public (and private) sectors. Approved
Providers are approved and regulated by the Government through the
Regulator of Social Housing (or in rare instances, where the Group
contracts with care providers, the Care Quality Commission). All
the Group's leases with Approved Providers are linked to inflation,
have a duration of 20 years or longer, and are fully repairing and
insuring - meaning that the obligations for management, repair and
maintenance of the property are passed to the Approved Provider.
The Approved Provider is also responsible for tenanting the
properties. Typically, the Government funds both the rent of the
individuals housed in Supported Housing and the maintenance costs
associated with managing the property. In addition, because of the
vulnerable nature of the residents, the rent and maintenance costs
are paid directly from the local authority to the Approved
Provider. The rent received from the local authority by the
Approved Provider is then paid to the Group via the lease. Ultimate
funding for the rent and maintenance comes from the Department for
Work and Pensions in the form of housing benefit.
The majority of residents housed in Supported Housing properties
require support and/or care. This is typically provided by a
separate care provider regulated by the Care Quality Commission.
The agreement for the provision of care for the residents is
between the local authority and the care provider. The care
provider is paid directly by the local authority. Usually the Group
has no direct financial or legal relationship with the care
provider and the Group never has any responsibility for the
provision of care to the residents in properties the Group owns.
The care provider will often be responsible for nominating
residents into the properties and, as a result, will normally
provide some voids cover to the Approved Provider should they not
be able to fill the asset (i.e. if occupancy is not 100% it is
often the care provider rather than the Approved Provider that will
cover the cost). The Group receives full rent regardless of
underlying occupancy, but monitors occupancy levels and the payment
of voids cover by care providers, to ensure that Approved Providers
are appropriately protected.
Many assets that the Investment Manager sources for the Group
have been recently developed and are either specifically designed
new build properties or renovated existing houses or apartment
blocks that have been adapted for Supported Housing. The benefit of
buying recently-developed stock is that it has been planned in
response to local authority demand and is designed to meet the
specific requirements of the intended residents. In addition, it
enables the Group to work with a select stable of high-quality
developers on pipelines of deals rather than being reliant on
acquiring portfolios of already-built assets on the open market.
This has two advantages: firstly, it enables the Group to source
the majority of its deals off-market through trusted developer
partners and, secondly, it ensures the Group has greater certainty
over its pipeline with visibility over the long-term deal flow of
the developers it works with and knows it will not have to compete
with other funders.
As well as acquiring recently-developed properties, the Group
can provide forward funding to developers of new Supported Housing
properties. Being able to provide forward funding gives the Group a
competitive advantage over other acquirers of Supported Housing
assets as it enables the Group to offer developers a single funding
partner for both construction and the acquisition of the completed
property. This is often more appealing to developers than having to
work with two separate funders during the build of a new property
as it reduces practical and relationship complexity. As well as
strengthening developer relationships, forward funding enables the
Group to have a greater portion of new build properties in its
portfolio which typically attract higher valuations, are modern and
have been custom-built to meet the needs of the residents they
house, helping to achieve higher occupancy levels. The Group
benefits from the Investment Manager's long track record of
successfully forward funding a range of property and infrastructure
assets. The Group will only provide forward funding when the
property has been pre-let to an Approved Provider and other
protections, such as fixed-priced build contracts and deferred
developer profits, have been put in place to mitigate construction
risk.
Since the Company's IPO, the Group has set out to build a
diversified portfolio that contains assets leased to a variety of
Approved Providers, in a range of different counties, and serviced
by a number of care providers. This has been possible due to the
Investment Manager's 14-year track record of asset-backed
investments, its active investment in the Supported Housing sector
since 2014, and the strong relationships it has enjoyed with local
authorities for over a decade. These relationships have enabled the
Group, in a relatively short space of time, to work with numerous
Approved Providers, care providers and local authorities to help
deliver new Supported Housing assets that provide homes to some of
the most vulnerable members of society.
KEY PERFORMANCE INDICATORS
In order to track the Group's progress the following key
performance indicators are monitored:
KPI AND DEFINITION RELEVANCE TO STRATEGY PERFORMANCE EXPLANATION
1. Dividend
--------------------------- ---------------------------- --------------------------- ----------------------------
Dividends paid to The dividend reflects the Total dividends of 5.095 The Company has declared a
shareholders and declared Company's ability to pence per share were paid dividend of 1.285 p ence
during the period. deliver a low risk but or declared in respect of per Ordinary share in
growing the period 1 respect of the period
income stream from the January 2019 to 31 1 October 2019 to 31
portfolio. December 2019. December 2019, which will
be paid on 27 March 2020.
(2018: 5.00p) Total dividends paid
and declared for the period
are in line with the
Company's target.
---------------------------- --------------------------- ----------------------------
2. IFRS NAV per share
--------------------------- ---------------------------- --------------------------- ----------------------------
The value of our assets The IFRS NAV reflects our 105.37 pence at 31 The IFRS NAV per share at
(based on an independent ability to grow the December 2019 IPO was 98.0 pence.
valuation) less the book portfolio and to add value
value of our liabilities, to it throughout (2018: 103.65 pence ) This is an increase of
attributable to the life cycle of our 7.52% since IPO driven by
shareholders. assets. growth in the underlying
asset value of the
investment properties.
---------------------------- --------------------------- ----------------------------
3. Loan to GAV
A proportion of our The Company uses gearing to 31 .1 % Loan to GAV at 31 As at 31 December 2019:
investment portfolio is enhance equity returns. December 2019. GBP68.5 million private
funded by borrowings. Our placement of loan notes
medium to long term (2018: 15.5%) with MetLife; and
target Loan to GAV is 40% a GBP130 million secured
with a hard cap of 50%. revolving credit facility
with Lloyds/NatWest of
which GBP101 million
was drawn at 31 December
2019.
4. Earnings per S hare
--------------------------- ---------------------------- --------------------------- ----------------------------
The post-tax earnings The EPS reflects our 6.75 pence per share EPS decreased by 19.35%
generated that are ability to generate for the year ended 31 during the year owing to
attributable to earnings from our portfolio December 2019, based on the weighted average number
shareholders. including valuation earnings including the of shares in
increases. fair value gain on the financial year being
properties, higher than the previous
calculated on the weighted financial year.
average number of shares
in issue during the year. The outlook remains
positive and we continue to
(2018: 8.37 pence) invest to generate an
attractive total return.
---------------------------- --------------------------- ----------------------------
5 . Weighted A verage U nexpired L ease T erm (WAULT)
--------------------------------------------------------- --------------------------- ----------------------------
The average unexpired The WAULT is a key measure 25.7 years at 31 December As at 31 December 2019, the
lease term of the of the quality of our 2019 (includes put and portfolio's WAULT stood at
investment portfolio, portfolio. Long lease terms call options). 25.7 years and remains well
weighted by annual passing underpin the ahead of
rents. security of our income (2018: 27.2 years) the Group's minimum term of
Our target is a WAULT of stream. 15 years.
at least 15 years.
---------------------------- --------------------------- ----------------------------
6 . Adjusted Portfolio E arnings P er S hare
--------------------------------------------------------- --------------------------- ----------------------------
The post-tax earnings The Adjusted EPS reflects 15.92 pence per share for The adjusted EPS shows the
adjusted for the market the application of using the value per share on a long
portfolio valuation the portfolio premium value year ended 31 December term basis under the
including portfolio and reflects 2019, special assumption
premium the potential increase in as shown in the of a hypothetical sale of
. value the Group could Financial Statements. the underlying property
realise if assets are sold investment portfolio in one
on a portfolio (2018: 12.91 pence) single transaction
basis.
---------------------------- --------------------------- ----------------------------
7. Portfolio NAV
---------------------------------------------------------- ---------------------------- ----------------------------
The IFRS NAV adjusted for The Portfolio NAV measure The Portfolio NAV of The Portfolio NAV per share
the market portfolio is to highlight the fair GBP401.9 million equates to shows a good market growth
valuation including value of net assets on an a Portfolio NAV of 114.53 p in the underlying asset
portfolio premium. ongoing, long-term ence per Ordinary value of the
basis and reflects the Share, as shown in the investment properties.
potential increase in value Financial Statements.
the Group could realise
under the special (2018: Portfolio NAV
assumption of a GBP384.3 million equated to
hypothetical sale of the 109.40 p ence per ordinary
underlying property share)
investment portfolio in one
single
transaction.
---------------------------- ---------------------------- ----------------------------
8. Exposure to Largest Approved Provider
----------------------------------------------------------------------------------------------------------------------
The percentage of the The exposure to the largest 20.6% Our target is lower than
Group's gross assets that Approved Provider must be 25%. We are substantially
are leased to the single monitored to ensure that we (2018: 15.8%) below our maximum exposure
largest Approved are not target with
Provider. overly exposed to one our largest Approved
Approved Provider in the Provider, Inclusion
event of a default Housing.
scenario.
---------------------------- ---------------------------- ----------------------------
9. Total Return
----------------------------------------------------------------------------------------------------------------------
IFRS NAV plus total The total return measure IFRS NAV 105.37 pence at 31 The IFRS NAV per share at
dividends paid during the highlights the gross return December 2019. 31 December 2019 was 105.37
year. to investors including Total dividends paid during pence. Adding back
dividends paid the year ended 31 December dividends paid during
since the prior year. 2019 were 5.06 pence the year of 5.06 pence per
Ordinary Share to the IFRS
Total return was 6.5% for NAV at 31 December 2019
the year to 31 December results in an
2019. increase of 6.5%.
(2018: 7.5%)
---------------------------- ---------------------------- ----------------------------
EPRA PERFORMANCE MEASURES
The table below shows additional performance measures,
calculated in accordance with the Best Practices Recommendations of
the European Public Real Estate Association (EPRA). We provide
these measures to aid comparison with other European real estate
businesses.
Full reconciliations of EPRA Earning and NAV are included in
Notes 3 6 and 3 7 of the consolidated financial statements
respectively. A full reconciliation of the other EPRA performance
measures are included in the Unaudited Performance Measures section
of the Annual Report .
KPI AND DEFINITION PURPOSE PERFORMANCE
1. EPRA Earnings per S hare
EPRA Earnings per share excludes A measure of a Group's underlying 3.39 pence per share for the year to
gains from fair value adjustment on operating results and an indication 31 December 2019
investment property that of the extent to which
are included in the IFRS calculation current dividend payments are (2018: 2.27 pence)
for Earnings per share. supported by earnings.
3.39 pence per share for the year
ended 31 December 2019. The Group is
currently in ramp up
phase and undertaking forward funding
developments resulting in a lag in
the Company's ability
to fully cover dividends. Our
priority remains to achieve a fully
covered dividend from operations.
We expect this to be achieved by Q3
2020.
======================================
2. EPRA NAV per S hare
-------------------------------------- -------------------------------------- --------------------------------------
EPRA NAV makes certain adjustments to Provides stakeholders with the most GBP369.7 m/105.37 pence per share as
IFRS NAV to exclude items not relevant information on the fair at 31 December 2019
expected to crystalise value of the assets and
in a long-term investment property liabilities within a true real estate GBP364.2 m/103.65 pence per share as
business model. As at 31 December investment company with a long-term at 31 December 2018
2019 both the EPRA NAV investment strategy.
and the IFRS NAV are equivalent.
-------------------------------------- -------------------------------------- --------------------------------------
3 . EPRA N NN AV per S hare
-------------------------------------- -------------------------------------- --------------------------------------
EPRA NAV adjusted to include the fair Makes an adjustment to EPRA NAV to GBP364.7m/103.93 pence per share as
values of: provide stakeholders with the most at 31 December 2019
1. financial instruments; relevant information
2. debt; and on the fair value of the assets and GBP364 .0 m/103.60 pence per share as
3. deferred taxes. liabilities within a true real estate at 31 December 2018
investment company.
-------------------------------------- -------------------------------------- --------------------------------------
4 . EPRA Net Initial Yield (NIY)
Annualised rental income based on the A comparable measure for portfolio 5.29% at 31 December 2019
cash rents passing at the balance valuations. This measure should make
sheet date, less non-recoverable it easier for investors 5.13% at 31 December 2018
property operating expenses, divided to judge for themselves how the
by the market value of the property, valuation of a portfolio compares
increased with (estimated) with others.
purchasers' costs.
======================================
5 . EPRA 'Topped-Up' NIY
This measure incorporates an The topped-up net initial yield is 5.29% at 31 December 2019
adjustment to the EPRA NIY in respect useful in that it allows investors to
of the expiration of rent-free see the yield based 5.21% at 31 December 2018
periods (or other unexpired lease on the full rent that is contracted
incentives s uch as discounted rent at 31 December 2019.
periods and step rents).
======================================
6 . EPRA Vacancy Rate
Estimated Market Rental Value (ERV) A "pure" percentage measure of 0.00% as at 31 December 2019
of vacant space divided by ERV of the investment property space that is
w hole portfolio. vacant, based on ERV. 0.00% as at 31 December 2018
======================================
7. EPRA Cost Ratio
====================================== ====================================== ======================================
Administrative & operating costs A key measure to enable meaningful 28.35% as at 31 December 2019
(including & excluding costs of measurement of the changes in a
direct vacancy) divided by Group's operating costs. 39.02% as at 31 December 2018
gross rental income.
====================================== ====================================== ======================================
INVESTMENT MANAGER'S REPORT
Review of the Group's Portfolio
Looking back over the Group's second full financial year, there
is much to be happy about. The Group's portfolio is performing
well. During the year, the Group bought 116 new properties - many
of them off-market - providing accommodation for 843 new residents.
The Group's portfolio now comprises 388 properties with
accommodation for 2,728 residents. It is diversified across 16
Approved Providers, 88 Care Providers and 149 local authorities.
The Group's WAULT remains high at 25.7 years. To date all of the
Group's rent has been received in full. The Group's portfolio was
independently valued at GBP471.6 million, an uplift of 7.45%
against total funds invested of GBP439 million.
In achieving all this, the Group spent the proceeds of the
equity and debt raises secured at the end of 2018, before
successfully securing a GBP60 million extension to the same debt
facility based on the strength of the sector's fundamentals and our
investment processes. Indeed, our due diligence evolves with every
transaction, and many deals are rejected despite falling within our
strict investment criteria. As you would expect, on each and every
transaction we analyse a wide and growing range of matters such as
legal title, property condition, Commissioner support, rent
support, and our counterparties' covenant strength. Central to our
due diligence is the physical quality of our properties.
High-quality properties mean safer housing, better outcomes for
residents, greater demand from local Commissioners and lower
maintenance costs for Registered Providers.
Ensuring that our investments have a positive social impact has
always been fundamental to our processes. However, we have recently
formalised the assessment of impact into our due diligence
documentation. This will allow us to measure and track impact as
well as we can, ensuring our investments always benefit society as
much as our shareholders. All future transactions will be formally
assessed against impact measures in both our upfront due diligence
questionnaire and our detailed due diligence tracker. Our
investment Committee will only allow investments to proceed to
completion if they demonstrate a clear social impact, primarily
through delivering more housing, saving the Government money, and
improving health outcomes for residents.
As part of our aim to make the Company one of the UK's leading
social impact REITs, we are commissioning a market-leading provider
of commercial due diligence in healthcare to conduct the largest
exercise in gathering primary data that the Specialised Supported
Housing sector has yet seen. The report will gather as much data as
is currently available on the size of the market, current demand,
future demand, the cost implications of this type of housing, and
the health outcomes it provides. This data will be gathered through
Freedom of Information requests, telephone interviews with
Commissioners and local authorities, reviews of Housing Strategy
papers, and analysis of portfolios from Registered Providers and/or
care providers operating in the sector. In collecting all this
data, the report should provide the most comprehensive and
up-to-date picture yet of the size, demand, and costs and benefits
of Specialised Supported Housing. We hope to have the report
completed in mid- 2020 and look forward to sharing it with all
stakeholders.
The publication of the Regulator's risk report in April 2019
focused on the risks that Registered Providers should consider when
operating the long-lease model. However, improvements continue to
be made by Registered Providers and operating performance remains
strong, as reflected in the positive momentum of the Company's
share price towards the end of 2019. Indeed, the reasons why the
Group was launched in the first place are still readily apparent on
the ground. Across the country there is still enormous demand -
from Commissioners, care providers and Approved Providers - for
this housing because it saves the Government money at the same time
as improving the lives of people living in it. It is exactly these
societal benefits which underpin the Group's rental income for its
investors. Without the Group's investment, its residents could
still be living in inappropriate settings to the detriment of
themselves, their families and the taxpayer.
Market Review
The rapid growth of the Supported Housing sector that
characterised 2016, 2017 and early 2018 has now matured into a
period of steadier growth and greater regulatory scrutiny during
2019. The sector, which traditionally had little regulatory
involvement, has been the subject of increasing engagement with the
Regulator of Social Housing. This engagement resulted in a series
of regulatory notices and judgements. In February, at the end of a
routine In-Depth Assessment, the Regulator published a Regulatory
Judgement on Inclusion Housing C.I.C., deeming it non-compliant in
terms of financial viability (V3) and governance (G3) (1) .
Inclusion's non-compliant judgement focused on the general risks of
leasing rather than owning properties.
Encircle Housing and Bespoke Supportive Tenancies Limited both
received non-compliant ratings in April and May respectively (2) .
Neither was given a formal rating because they had fewer than 1,000
units under management at the time the Regulator conducted its
investigations. Their judgements focused on specific issues
relating to risk management and indeed on 12 August 2019 a further
short notice was published about Bespoke Supportive Tenancies
concerning shortcomings in its compliance checks at certain
properties.
Finally, on 30 September 2019 the Regulator downgraded
Westmoreland Supported Housing's original governance rating from G3
to G4 (with its viability remaining at V3) (3) . This followed a
winding up petition submitted - but then withdrawn - by one of
Westmoreland's landlords over disputed rent. The Regulator deemed
that Westmoreland had a governance shortcoming as it had allowed
this to happen. Westmoreland has now had three new board members
appointed by the Regulator to improve its governance. All payments
under the Group's leases with Westmoreland continue to be paid on
time.
As at 31 December 2019, the Group had 90 properties leased to
Inclusion ( 20.6 % of the Group's G AV as at 31 December 2019), two
properties leased to Encircle (0. 6 % of G AV), 41 leased to
Bespoke Supportive Tenancies ( 6.1 % of G AV), and 15 leased to
Westmoreland ( 3.2 % of G AV). As at 31 December 2019, a ll rents
to the Group continue d to be paid in full.
Beyond these specific regulatory judgements, the Regulator's
April 2019 addendum to its 2018 Sector Risk Profile focused on the
risks of providers of Specialised Supported Housing which
predominantly lease, rather than own, properties owned by public or
private funds. The report acknowledged the importance of private
investment into this sector but focused on the risks that should be
borne in mind by both Registered Providers and investors into the
sector. After discussing these risks, the report stated that the
Regulator intends to work with Registered Providers to help them
mitigate these risks. This work presumably has had some success
because the 2019 Sector Risk Profile suggests that, despite
continuing concerns, these concerns relate to only some Registered
Providers. Importantly, when these regulatory judgements and
notices relate to properties owned by the Group they have not
affected the valuation of the Group's investments. The independent
account's valuer, JLL, have demonstrated strong evidence that,
regardless of the regulatory activities, the appetite from
investors for these assets remained unaffected and that similar
assets leased to the affected Registered Providers continued to
trade in the market without any discount. In the light of this JLL
concluded not to risk-adjust the respective yields in relation to
these assets in order to reflect lower market values.
In response to this regulatory engagement, Registered Providers
in this sector have been working to improve their governance, their
operations, and their financial positions. The 14 Registered
Providers we lease properties to have appointed 46 board members
since the start of 2018. These board members have backgrounds in
housing, care, finance and law. Operationally, Registered Providers
are recruiting more staff and are signing up to better software
packages to improve reporting. Financially, Registered Providers
are, as expected, using growing surpluses to diversify from leasing
properties into buying freehold properties, giving them asset bases
and more income. Over the last two financial years, the average net
asset value of our 14 Registered Providers increased by 34%.
In our view, these are the right responses to the risks properly
identified by the Regulator. As we said in our article in Social
Housing magazine in November 2019, we are working with Registered
Providers to ensure the standards of the Regulator are met. Even
though we are not regulated by the Regulator, as a long-term
stakeholder in this sector we are committed to ensuring the sector
works as well as it can for the long-term. We regularly meet our
Approved Providers to discuss financial reporting and governance
and help them to address specific property-related issues. We
continue to expand our property management team with a focus on
property inspections as well relationships with Registered
Providers and care providers.
In parallel, we continue to meet senior members of Government to
explain the nature and benefits of our investment model,
discussions which we hope will soon be informed by the
data-gathering report referred to above. We are also discussing
what adjustments we can make to the model that will uphold
financial and governance standards while attracting further private
investment. Already we have been rolling out a new force majeure
clause that allows tenants to re-negotiate rents in the event of a
change in Government rent policy. Likewise, we have been giving
tenants call options allowing them to extend the length of their
leases.
For all the Regulator's concerns about the performance of some
Registered Providers in this sector, they have recognised the
benefits of private investment (4) . The fundamentals of this
sector remain as compelling as ever. The House of Commons Library's
paper The Future of Supported Housing states that most supported
housing is "exceptionally good value for money, providing
significant cost savings for the wider public sector, while
maximising quality of life for tenants" (5) . In the same way,
Mencap's analysis has found that each person in Specialised
Supported Housing saves the Government about GBP200 per week
compared to being in a care home and about GBP2,000 per week
compared to being in a hospital (6) . Multiplying these costs
savings across the 2,728 units in the Group's portfolio (as at 31
December 2019) gives some indication of the scale of the
cost-savings the Group alone delivers.
Given these benefits, there is a strong case to use private
investment to fill the shortfall of Supported Housing that is
expected to be 46,771 units by 2024/25 (7) . Beyond the wider
housing crisis in the UK, demand for Specialised Supported Housing
specifically has grown for a number of reasons. As well as the
general population growing, the proportion of people living to
working age with health needs has increased as medical advances
have extended lifespans (8) . In addition, the Government continues
its policy - enshrined in the Care Act 2014 and the Transforming
Care Programme of 2015 - of moving people from institutional
settings into community-based settings (9) . It is perhaps no
surprise that we regularly hear from Commissioners in all parts of
the UK calling for more Specialised Supported Housing. As recently
as February 2020, the CQC released a report stating that "too many
people with a learning disability and autistic people are in
hospital because of a lack of local, intensive community services"
(10) . Our portfolio continues to diversify across the UK to meet
this demand - with two investments into Scotland in 2019, for
example. With demand for this type of housing as strong as ever,
pricing in the market remains competitive.
Politically, the strong Conservative majority won on 13 December
2019 is likely to lead to a period of stable Government after three
years of uncertainty and gridlock. The Government's parliamentary
majority will enable it to deal with Brexit transition negotiations
as quickly and efficiently as possible to take the issue off the
front pages. In any case, housing and social care - which are UK
based - are relatively insulated from the impact of Brexit.
Indeed, as well as giving the Government the ability to resolve
Brexit sooner, the Conservative majority will enable Government to
address other policy areas including social care and housing. The
Conservative manifesto promised another GBP74 million for care
packages over three years, which will benefit the care providers on
the Group's schemes. Likewise, the Government is targeting building
another million new homes over the course of the parliament. A
White Paper on social housing due to be published in 2020 is
expected to empower tenants and support the continued supply of
social homes (11) . Overall, the Group is well protected from the
impact of Brexit and should benefit from the new Government's
domestic policies.
Financial Review
As at 31 December 2019, the annualised rental income of the
Group was GBP25.4 million (excluding forward funding transactions)
(as at 31 December 2018, GBP17.4 million). The Group is a UK REIT
for tax purposes and is exempt from corporation tax on its property
rental business.
A fair value gain of GBP11.8 million was recognised during the
year on the revaluation of the Group's properties.
Slower than expected deployment, resulting from the engagement
of Registered Providers with the Regulator, has delayed when the
Group will achieve full dividend cover. Our priority remains to
achieve a fully covered dividend from operations, which we expect
to be achieved in this financial year. Earnings per share and EPRA
earnings per share are calculated on the weighted average number of
shares in issue during the period.
The audited IFRS NAV per share was 105.37 pence, a continual
increase from 103.65 pence as at 31 December 2018 as a result of
profits generated from rental income and an uplift in fair value
gain on investment property less dividends paid. The Group's EPRA
NAV per share is the same as the IFRS NAV at 105.37 pence. The IFRS
NAV adjusted for the portfolio valuation (including portfolio
premium) was GBP401.9 million, which equates to a Portfolio NAV of
114.53 pence per share.
The ongoing charges ratio is calculated as a percentage of the
average net asset value for the period under review. The ongoing
charges ratio for the year was 1.63% compared to 1.58% in the year
to 31 December 2018. This is due to the Investment Management fees
for the year increasing in line with deployment as fees are not
taken on cash.
At the year end, the portfolio was independently valued at
GBP471.6 million on an IFRS basis, reflecting a valuation uplift of
7.45% against the portfolio's aggregate purchase price (including
transaction costs). The valuation reflects a portfolio yield of
5.27%, against the portfolio's blended net initial yield of 5.91%
at the point of acquisition. This equates to a yield compression of
64 basis points, reflecting the quality of the Group's property
selection and off-market acquisition process.
The Group's properties were valued at GBP503.8 million on a
portfolio valuation basis, reflecting a portfolio premium of 6.82%
or a GBP32.2 million uplift against the IFRS valuation. The
portfolio valuation assumes a single sale of the property holding
SPVs to a third-party on an arm's length basis with purchaser's
costs of 2.30%.
Debt Financing
In October 2019, the Group secured a GBP60 million extension to
its existing GBP70 million Revolving Credit Facility ("RCF")
previously provided exclusively by Lloyds Bank plc. As part of the
extension, National Westminster Bank plc provided debt alongside
Lloyds Bank plc on identical terms. The Group now has the ability
to draw a total of up to GBP130 million under the RCF. The
extension of the RCF widens the Group's lender pool while providing
the Group with additional committed capital at an attractive
margin, to help finance the acquisition of supported housing assets
from its pipeline.
The RCF and its subsequent extension followed the long-dated,
fixed-rate, interest-only private placement of loan notes signed
with MetLife in July 2018 for GBP68.5 million which was fully
deployed in 2018. During the year, the Group drew down GBP100.6
million of the RCF, equating to 77% of the debt available under the
facility. The Group is planning to undertake further draws in the
first half year of 2020 and aims to be fully drawn in Q3 2020.
Both the MetLife facility and the RCF have been secured and
drawn at an initial loan-to-value ("LTV") of 40% against defined
pool of assets which is in line with the Company's investment
policy of a long-term level of aggregate borrowings equal to 40% of
the Group's gross asset value. As at 31 December 2019, the LTV for
MetLife was 37.8% and 40% for the RCF. On a Group consolidated
basis the current LTV is 31.1%.
The MetLife facility is split into two tranches, Tranche--A in
an amount of GBP41.5 million has a term of 10 years from
utilisation expiring in 30 June 2028 and Tranche--B in an amount of
GBP27 million has a term of 15 years from utilisation will expire
in 30 June 2033. The RCF has an initial four-year term expiring on
20 December 2022 and, subject to lender approval, may be extended
by a further two years to 20 December 2024.
The MetLife facility requires the Group to maintain an asset
cover ratio of x2.25 and an interest cover ratio of x1.75. The RCF
requires the Group to maintain on drawn funds a LTV ratio of lower
than 50% and an interest cover ratio in excess of x2.75. At all
times the Group has complied with debt covenants on both
facilities. As at 31 December 2019, the RCF remained unhedged. The
Board regularly reviews potential hedging arrangements which can be
put in place at any time during the duration of the facility.
The Group will continue to monitor capital requirements to
ensure we take advantage of developments in the market and achieve
dividend cover.
Strategic Alignment and Property Selection
In 2019, the Group has continued to execute its investment
strategy, delivering inflation-protected income underpinned by a
careful selection of secure, long-let and index-linked properties.
During the year, the Group bought 116 properties, which included
nine new forward funding transactions, for a total investment cost
of GBP13 0.5 million (including transaction costs).
31 December 31 December Change in
2019 2018 2019
# of Properties 388 272 +116
# of Leases 300 189 +111
# of Units 2,728 1,893 +835
# of APs 16 16 -
# of FFAs 22 13 +9
WAULT 25.7 27.2 -1.5
In addition, as at 31 December 2019 the Group had outstanding
commitments of GBP24.3 million (including transaction costs),
comprising GBP6.6 million for contracts exchanged on four
properties at the period end and GBP17.6 million for outstanding
forward funding commitments.
Committed Capital Total Funds GBP/million
------------------------------ ------------------------
Total Invested since IPO 439
Exchanges 6.6
Forward Funding Commitments 17.6
Total Invested and Committed
Capital 463.2
Property Portfolio and Asset Management
As at 31 December 2019, the property portfolio comprised 388
properties with 2,728 units and showed a broad geographic
diversification across the UK. The four largest concentrated areas
by market value were the North West (21.8%), West Midlands (15.9%),
East Midlands (14.2%) and London (11.3%). The IFRS value of the
property portfolio at 31 December 2019 was GBP471.6 million.
During 2019, the Group continued its forward funding programme
which forms an integral part of the Group's investment strategy,
creating significant value-add to the property portfolio. Through
forward funding, the Group enjoys valuation uplifts on new-build
properties and benefits from the high occupancy such custom-built
properties achieve driven by strong Commissioner demand. As at 31
December 2019, the Group had entered into a total of 22 forward
funding projects with 11 schemes having reached practical
completion and 11 schemes still under construction. Our asset
management team aims to visit every property in the Group's
portfolio each year, inspecting the quality of each asset and
meeting the Care Provider to ensure properties are maintained in
accordance with health and safety and the FRI leases; ultimately
safeguarding tenant welfare. Our dedicated Relationship Manager is
further strengthening our relations with Approved Providers and
Care Providers. The Group's portfolio is actively asset managed
with opportunities to improve environmental efficiencies factoring
heavily in addition to other asset management initiatives.
Rental Income
As at 31 December 2019, the property portfolio was fully let
(with all properties either let or pre-let on financial close),
comprising 300 fully repairing and insuring leases which excludes
the agreement for leases in relation to current forward funding
transactions. The total annualised rental income of GBP25.4 million
is the aggregate rental income of the standing investments. All
rents continued to be paid in full and on time. In this reporting
period, there were 178 leases which benefited from an annual rental
uplift linked to CPI/RPI, equating to a total rental value increase
of approximately GBP0.2 million more than the initially contracted
rent. The annual rent uplifts typically happen every April or on
the anniversary of the lease start date.
The Group has not expanded its tenant base of 16 Approved
Providers in the period, yet it remains well diversified across the
sector with some of the most specialist UK housing associations.
Our three largest Approved Providers by rental income were
Inclusion (21. 7 %), 28A Supported Living (13.1%) and Falcon
(13.1%).
Our three largest Approved Providers by units were Inclusion
Housing (616), Falcon Housing Association (357) and Hilldale
Housing Association (328).
As at 31 December 2019, the property portfolio had a WAULT of
25.7 years (well in excess of the Group's minimum term of at least
15 years), with 92.0% of the portfolio's rental income showing an
unexpired lease term of between 21-30 years. Compared with 30 June
2019, the WAULT has reduced by 1.5 years as most additions in the
last six months have had a lease term of c.25 years (compared to
some of our first investments which had lease terms of up to 60
years). The WAULT includes the initial lease term upon completion
as well as any reversionary leases and put/call options available
to the Group at expiry.
Rents under the leases are indexed against either CPI (94.2%) or
RPI (5.8%), which provides investors with the security that the
rental income will increase in line with inflation. Some leases
have an index "premium" under which the standard rental increase is
based upon CPI or RPI plus a further percentage point, reflecting
top-ups by local authorities. These account for 6.1% of the Group's
leases. For the purposes of the portfolio valuation, Jones Lang
LaSalle assumed CPI and RPI to increase at 2.0% per annum and 2.5%
per annum respectively over the term of the relevant leases.
Pipeline and Outlook
Almost every day we hear that Commissioners around the country
are requesting more new Supported Housing schemes. This is to meet
the housing requirements of thousands who remain in inappropriate
institutional and home settings. These calls are borne out in the
statistics, with a shortfall of 46,771 Supported Housing units
expected by 2024/25 (12) . Our pipeline has historically reflected
this demand in full, with nearly GBP400 million in our pipeline in
the middle of 2019. However, given our capital constraints (our
debt is drawn down in tranches), we have reduced our active
pipeline to match the expected cash flow and to reduce possible
abort costs. At the year-end we had an active pipeline of over
GBP100 million. This pipeline remains diversified across the UK
mainland with a range of new and existing counterparties and can
scale up as and when we have further funds to deploy.
In early 2020 the Group invested the first tranche of the GBP60
million extension to the October 2019 revolving debt facility.
Based on the Group's pipeline, we anticipate that the rest of the
extension will be invested by Q3 2020 . The Group will look to
raise further capital as and when necessary (and subject to market
conditions) to meet attractive investment opportunities, including,
wherever possible, forward funding schemes.
Looking ahead in 2020, we expect strong performance. Regulatory
engagement of Registered Providers is likely to continue, but our
view is that, in the long-term, the sector will benefit from this
as it continues to mature. It is already clear that due diligence
processes, financial positions, and governance across the sector
have materially improved, and we will continue to support progress
across all these fronts into 2020 and beyond. In the meantime, we
will continue to help the Group invest in the best properties
available across the UK for the benefit of taxpayers, our investors
and, above all, our residents.
Max Shenkman
Head of Investment
12 March 2020
Notes:
1 Regulator of Social Housing, Current regulatory judgement:
Inclusion Housing Community Interest Company (2019)
2 Regulator of Social Housing, Regulatory Notice: Encircle Housing Limited (2019)
Regulator of Social Housing, Regulatory Notice: Bespoke
Supportive Tenancies Limited (2019)
3 Regulator of Social Housing, Current regulatory judgement:
Westmoreland Supported Housing Limited (2019)
4 Regulator of Social Housing, Lease-based providers of
specialised supported housing (2019), para. 2.6.
5 Department for Communities and Local Government &
Department for Work and Pensions, Funding for Supported Living
(2016)
6 Mencap, Funding supported housing for all (2018)
7 National Housing Federation, Supported housing: Understanding need and supply (2015)
8 Department for Communities and Local Government &
Department for Work and Pensions, Supported accommodation review:
The scale, scope and cost of the supported housing sector
(2016)
9 Local Government Association, Adass, NHS (2015) Building the right support
10 Care Quality Commission, Monitoring the Mental Health Act in 2018/19, p.6
11 Sarah Williams, Conservatives gain majority, promising to
deliver "the housing people need" (2019)
12 National Housing Federation, Supported housing: Understanding need and supply (2015)
PORTFOLIO SUMMARY
% of funds invested
Region Properties (1)
--------------- ----------- --------------------
North West 89 22.0
West Midlands 58 15.4
East Midlands 53 14.1
London 26 11.8
South East 49 10.3
North East 43 10.3
Yorkshire 28 7.1
South West 25 5.1
East 13 2.7
Wales 2 0.6
Scotland 2 0.6
Total 388 100.0
--------------- ----------- --------------------
Notes:
1 Funds invested include total funds committed to forward
funding developments, including amounts not yet deployed, excluding
purchase costs
CORPORATE SOCIAL RESPONSIBILITY
Acting in a sustainable and responsible manner is fundamental
both to our ambition to be the leading UK Supported Housing
investor and to the achievement of our long-term financial
objectives. In this section we have outlined the key areas in which
we consider the impact of our operations with the aim of having a
positive societal impact.
Our properties provide multiple benefits to local communities.
They provide residents with safe and secure accommodation, tailored
to meet their individual care needs. They provide Approved Provider
lessees with a way of growing sustainably, allowing them to expand
the number of individual lives they support and improve and they
provide employment for local carers, housing managers and builders.
While development and refurbishment can cause some minor short-term
disruption to an area, these activities help create employment and,
at the same time, help alleviate the UK's housing crisis.
Our business model seeks to ensure not only that our properties
are suitable for individuals with complex living needs, but that
our portfolio continues to meet residents' evolving needs in the
future. With ethical objectives in mind, we strive to provide value
for investors and the wider community at the same time.
Environment
Offering residents resource-efficient and adapted living areas
is critical to ensure our investments are fit-for-purpose and
sustain their value over the long-term. As a landlord, we consider
the opportunities we have to help reduce running costs for our
lessees and occupiers, increase resident well-being and contribute
to the prosperity of a location through supporting new building
design and development. Ignoring these issues when considering
property management and investments would risk the erosion of
income and value as well as missing opportunities to enhance
investment returns.
Policy presents new challenges and opportunities for the real
estate industry and the social housing market, with potentially
profound implications for both owners and occupiers. A good
investment strategy must incorporate environmental and social
issues alongside traditional economic considerations. Impact
assessment is central to our investment process and is demonstrated
through the environmental, social and governance assessments in our
due diligence. For example, we require every property we acquire to
have a minimum energy performance rating of at least a D on an
Energy Performance Certificate ("EPC") and have set a target of at
least a C rating, notwithstanding the legal requirement for any
privately rented properties to have a minimum energy performance
rating of E on an EPC.
When acquiring assets, we look closely at their environmental
impact, and encourage a sustainable approach for new development as
well as the maintenance and upgrading of existing properties.
Through our rigorous due diligence process, the high standards we
expect from developers and significant investment in the Supported
Housing sector, we have been able to provide capital and expertise
that has enabled parties in the industry to professionalise. this
increased professionalisation in the industry will lead to further
high-quality housing being made available, alleviate the issue of
low supply and enable us and the Approved Providers to support
vulnerable residents further.
Climate Change
The Board is cognisant of the impact of the Group's operations
on emissions. Through construction, long-term use and eventual
demolition, the built-up environment accounts for over a third of
global energy consumption. In supporting the construction of new
build properties, we hope to encourage best practice, in turn
helping to reduce the industry's impact on emissions and the
consumption of depleting resources.
The Board has considered the requirements to disclose the annual
quantity of emissions in tonnes of carbon dioxide equivalent for
activities for which the Group is responsible and believes that the
Group has no reportable emissions for the year ended 31 December
2019, and therefore has not included the information or
methodologies for the calculation of emissions, for the following
reasons:
-- emissions from the Group's properties were the lessees'
responsibility rather than the Group's;
-- emissions produced from either the registered office of the
Company or from the offices of other service providers are deemed
to fall under the responsibility of other parties; and
-- the Group has not leased or owned any vehicles which fall
inside the scope of the GHG Protocol Corporate Standard.
Business Relationships
As well as the critical day-to-day portfolio management, the
Group has a set of corporate providers that ensure the smooth
running of the Group's activities. The Group's key service
providers are listed in the Annual Report , and the Management
Engagement Committee annually review the effectiveness and
performance of these service providers, taking into account any
feedback received. The Group also benefits from the commitment and
flexibility of its corporate lenders for its debt facilities and
works with a selection of high-quality trusted developer partners
to source the majority of its deals off market and to who forward
funding is provided. Each of these relationships is critical to the
long-term success of the business. Therefore, the Group and the
Investment Manager maintain high standards of business conduct by
acting in a collaborative and responsible manner with all its
business partners that protects the reputation of the Group as a
whole.
Employees
The Group has no employees and accordingly no requirement to
separately report on this area.
The Investment Manager is an equal opportunities employer who
respects and seeks to empower each individual and the diverse
cultures, perspectives, skills and experiences within its
workforce. The Investment Manager places great importance on
company culture and the wellbeing of its employees and considers
various initiatives and events to ensure a positive working
environment.
Health and Safety
The Group is committed to fostering the highest standards in
health and safety. Before the Group acquires a property, we ensure
it includes all installations necessary to minimise the risk to the
vulnerable people who will live in it. Day-to-day responsibility
for health and safety in our properties is then shared by the
Approved Providers and Care Providers who manage the housing and
provide care. Nonetheless, our Investment Manager still requests
confirmation from Approved Providers that all properties remain
compliant and visit properties to verify this. Every quarter the
Board is provided with updates on the health and safety of our
residents.
Diversity
We are an externally managed business and do not have any
employees or office space. As such the Group does not operate a
diversity policy with regards to any administrative, management and
supervisory functions.
Human Rights
The Group is not within the scope of the Modern Slavery Act 2015
because it has not exceeded the turnover threshold and is therefore
not obliged to make a slavery and human trafficking statement.
The Board are satisfied that, to the best of their knowledge,
the Company's principal advisers comply with the provisions of the
UK Modern Slavery Act 2015.
Our business is solely in the UK and therefore we consider there
is a low risk of human rights abuses.
SECTION 172(1) STATEMENT
The following disclosure describes how the directors have had
regard to the matters set out in section 172(1)(a) to (f) when
performing their duty under s172 and forms the directors' statement
required under section 414CZA of the Act.
Stakeholder Engagement
This section describes how the Board engages with its key
stakeholders, and how it considers their interests when making its
decisions. Further, it demonstrates how the Board takes into
consideration the long-term impact of its decisions, and its desire
to maintain a reputation for high standards of business
conduct.
Stakeholder Why is it important How have the What were the What was the
to engage? Investment key topics feedback obtained
Manager/Directors of engagement? and the outcome
engaged? of the engagement?
Shareholders Investment The way in 1 Financial 1 Refer to
from our shareholders which we engage and operational shareholder
plays an important with our shareholders performance. engagement
role in the is set out in or Corporate
delivery of in our Corporate 2 The Company's Governance
high-quality Governance share price. Report.
new housing Report.
into the Supported 3 The regulatory 2 Refer to
Housing market. environment the Chairman's
of the Supported Statement.
Through the Housing sector.
investment 3 The Board
of private 4 Environmental, and Investment
capital into social and Manager take
an under-funded governance into account
sector, we considerations. shareholder
can achieve concerns when
a positive speaking to
social impact Regulator and
whilst ensuring agreed to keep
our shareholders shareholders
receive a long-term updated of
inflation-linked any developments.
return. We understand
the importance
of, and are
committed to,
working with
Registered
Providers to
address the
concerns of
the Regulator.
Refer to the
Market Review
in the Investment
Manager's Report.
4 The Investment
Manager has
further embedded
environmental,
social and
governance
considerations
into its investment
process. Refer
to Investment
Manager's Report.
----------------------- ----------------------- ---------------------- -----------------------
Investment The Investment The Board maintains In addition As a result
Manager Manager is regular and to all matters of the engagement
responsible open dialogue related to between the
for executing with the Investment the execution Board and the
the Investment Manager at of the Company's Investment
Objective within Board meetings Investment Manager the
the Investment and has regular Objective, Group has been
Policy of the contact on the Board engaged able to execute
Company. operational with the Investment its investment
and investment Manager on strategy and
matters outside the structure has considered
of meetings. of the Group, what adjustments
developments can be made
in the market to the Group's
and updates model that
from the Regulator. will uphold
financial and
governance
standards while
attracting
further private
investment
long term.
Additionally,
the Investment
Manager produces
reports to
the Board every
quarter on
various governance
and operational
matters at
the Board's
request. Capital
allocation
is also considered
with regard
to the views
of the Board.
----------------------- ----------------------- ---------------------- -----------------------
Approved Our relationship The Investment The Investment Refer to the
Providers with Approved Manager maintains Manager discussed Investment
Providers is strong relationships a number of Manager's Report.
integral to with Approved topics with In part, as
ensuring rent Providers, Approved Providers a result of
received from having meetings including ensuring the engagement,
the Local Authority every six months that properties Approved Providers
is paid to and are in are managed saw new Board
the Group and regular dialogue in accordance appointments,
that properties on a variety with their improvement
are managed of matters. leases; financial to NAV and
appropriately Quarterly key reporting and rising occupancy
to safeguard performance governance; levels.
tenants. indicator reporting and specific
is also provided. property-related
All of the issues such
Group's leases as occupancy,
with Approved health and
Providers are safety issues,
fully repairing rent levels,
and insuring management
- meaning that accounts and
Approved Providers governance.
are responsible
for management,
repair and
maintenance,
in addition
to tenanting
the properties.
----------------------- ----------------------- ---------------------- -----------------------
Care Providers Our residents The Investment The Investment The Investment
receive care Manager engages Manager engages Manager rejected
from Care Providers. with Care Providers with Care Providers deals where
It is important as part of on: the specific Care Providers
to ensure that its due diligence care and support did not meet
our vulnerable process and requirements the high-quality
residents receive regularly meets of residents standards expected
the best possible and engages including health or where Care
care. In addition, with Care Provider and safety Providers were
the Care Providers representatives compliance unable to demonstrate
share the cost when inspecting (refer to Investment the financial
of voids with the Group's Manager's Report); strength to
Approved Providers portfolio and property management meet its obligations
so we engage looking at by Approved under a Service
with Care Providers occupancy figures Providers; Level Agreement.
to ensure our every quarter. financial and
Approved Providers operational Following engagement,
are able to capacity for scope of works
pay our rent new schemes; were agreed
in the event occupancy levels; with Care Providers
of empty units. and financial to produce
performance. high quality,
Therefore, fit for purpose
Care Providers properties
play an essential that meet the
role in the specific care
occupancy levels needs of residents.
of our properties
and strong To maintain
engagement the Group's
with the Group reputation
ensures the for high standards
best possible of business
care for our conduct, Care
residents. Providers were
changed where
the standard
of care expected
by the Group
were not met
or where engagement
identified
Care Providers
in financial
difficulties.
----------------------- ----------------------- ---------------------- -----------------------
Residents We remain focused The Investment We provide Resident issues
on providing Manager monitors oversight of raised as a
homes to our resident welfare resident welfare result of engagement
residents which through engagement by ensuring through Care
offer them with Approved properties Providers were
greater independence Providers. are safe and addressed.
than institutional The Investment secure before
accommodation, Manager receives residents move Compliance
as well as quarterly reports in by: monitoring issues have
meeting their from Approved compliance been remedied
specialist Providers to with health and any necessary
care needs. ensure compliance and safety works have
with health standards; been undertaken.
and safety ensuring residents
standards. are looked The Group's
Any concerns after by competent investment
are raised counterparties; decisions are
to the Board. and requesting informed by
updates on the long-term
We do not generally any health needs of our
engage with and safety residents.
residents directly issues every
since they quarter.
are vulnerable.
Instead, day-to-day
engagement
is done by
Care Providers
and, to a lesser
extent, Approved
Providers.
----------------------- ----------------------- ---------------------- -----------------------
The Regulator The Regulator The Investment Discussions The Investment
of Social regulates Registered Manager is focused on Manager is
Housing Providers of in regular understanding working with
social housing contact with the risks that Registered
to ensure providers the Regulator the Regulator Providers to
are financially through telephone set out in ensure the
viable and calls and regular its April 2019 standards of
properly governed. meetings. report and the Regulator
It is important to discuss are met. Refer
to ensure that how standards to the Investment
the Regulator of Registered Manager's Report
does not object Providers can for more detail.
to the way be improved.
the Group invests
and the way
Approved Providers
operate.
----------------------- ----------------------- ---------------------- -----------------------
Lenders The Group's The Investment The Group engaged The Group is
investments Manager engages on the following fully compliant
in social housing with the existing topics: financial with its debt
assets are lenders mainly and information covenants.
partly funded via the reporting covenant reporting; The Investment
by debt. Prudent of financial active asset Manager's pro-active
debt financing and information management engagement
is critical covenants under activities with the Group's
to achieve the existing undertaken lenders is
the target loan agreements by the Group welcome by
return promised on a quarterly e.g. altering its lenders
to shareholders basis. leases and/or and to date
and to meet any other portfolio no concerns
full dividend In addition, performance in relation
cover once there are regular enhancing activity to the performance
equity proceeds ad-hoc engagements that requires of its loans
have been fully in relation lenders' consent. have been raised
deployed. to general by the lenders.
topics relating There was also
Further, engagement to the social frequent liaison The Board continues
with debt funders housing sector with lenders' to monitor
is also a significant as well as rates desks compliance
signal to the specific topics in order to with debt covenants
sector that arising from monitor the and keeps liquidity
they are aligned the financial movement of under constant
with shareholders' and operational the 3M Libor review to make
interests e.g. performance forward curve certain the
long-term support of the Group's as part of Group will
of the sector activities the Group's always have
social housing. and any other monitoring sufficient
general matters of interest headroom in
affecting the rates for the its debt facilities.
relationship unhedged Revolving
between the Credit Facility.
Group and the
lenders.
----------------------- ----------------------- ---------------------- -----------------------
Principal Decisions
Principal decisions have been defined has those that have a
material impact to the Group and its key stakeholders. In taking
these decisions, the directors considered their duties under
section 172 of the Act.
Extension of Debt Facility
During the year the Group secured a GBP60 million extension to
its existing GBP70 million revolving credit facility. In
considering whether to approve the transaction the Board had regard
to the interests of the Group's shareholders, lenders and the
community.
The Board believed that the extension of the debt facility was
in the best interest of shareholders as it would provide additional
capital and would allow the Group to continue to execute its
pipeline and achieve a fully covered dividend. The Group was able
to secure the extension of the debt facility on identical terms to
its existing facility. Further, the Group maintained an active
dialogue for the lender to appraise the Group's business model and
its portfolio. As described in the Corporate Social Responsibility
section the Board also considered that further funds available to
be deployed into the supported housing sector would benefit the
wider community.
Further details of the Group's debt financing are detailed in
the Investment Manager's Report.
Share Buybacks
The Board agreed to undertake buybacks in the year, acquiring
200,000 Ordinary Shares at a price of 83 pence and 250,000 Ordinary
Shares at a price of 83.3 pence per Ordinary Share for
treasury.
The Board considered the views of shareholders and believed that
share buybacks for investment purposes were particularly attractive
when the discount to NAV at which the Company's shares trade is
wide given the NAV accretion which it provides to ongoing
shareholders. The Board continued to consider share buybacks for
investment purposes alongside the acquisition of new Supported
Housing properties when establishing how best to deploy capital
taking account of the pipeline at the time. Further details of the
share buybacks during the year is in the Chairman's Statement.
RISK MANAGEMENT
The Board recognises that effective risk management is key to
the Group's success and that a proactive approach is critical to
ensuring the sustainable growth and resilience of the Group.
We operate in a low-risk environment, focusing on a single
sub-sector of the UK real estate market to deliver an attractive,
growing and secure income for shareholders. We have a specific
Investment Policy which we adhere to and for which the Board has
overall responsibility. As our risk appetite is low, we do not
undertake speculative development. Furthermore, we have experienced
lessees in our properties and we possess a portfolio of
high-quality assets with a robust WAULT to them.
As an externally managed investment company, we outsource key
services to the Investment Manager and other service providers and
rely on their systems and controls. The Board undertakes a formal
risk review, with the assistance of the audit committee, twice a
year to assess and challenge the effectiveness of our risk
management and internal control systems. The Board regularly review
the control reports of the key service providers and the external
auditors note any deficiencies in internal controls and processes
have been identified during the course of the audit.
The AIFM, in conjunction with the Investment Manager, has
responsibility for identifying potential risks at an early stage,
escalating risks or changes to risk and relevant considerations and
implementing appropriate mitigations which are recorded in the
Group's risk register. Where relevant the financial model is stress
tested to assess the potential impact of recorded risks against the
likelihood of occurrence and graded suitably. The principal risks
that have been subject to this methodology are noted in the Risk
Heat Matrix below. The Board regularly reviews the risk register to
ensure gradings and mitigating actions remain appropriate.
As part of this risk management evaluation the Board has
identified and undertaken a robust assessment of the Group's
emerging risks by assessing upcoming or potential changes in the
market or regulatory environment. The Board considers the
likelihood of the emerging risk materialising and its potential
impact on the Group. Emerging risks are regularly monitored, and to
the extent possible or practicable, mitigating actions are
implemented.
Our risk management process is designed to identify, evaluate
and mitigate (rather than eliminate) the significant and emerging
risks we face and continues to evolve to reflect changes in the
business and operating environment. The process can therefore only
provide reasonable, and not absolute, assurance. It does however
ensure a defined approach to decision making that decreases
uncertainty surrounding anticipated outcomes, balanced against the
objective of creating value for shareholders.
The Board has not identified or been advised of any failings or
weaknesses in our risk management and internal control systems.
Principal risks and uncertainties
The table below sets out what we believe to be the principal
risks and uncertainties facing the Group. The table does not cover
all of the risks that the Group may face. Additional risks and
uncertainties not presently known to management or deemed to be
less material at the date of this report may also have an adverse
effect on the Group .
Risk Category Risk Risk Impact Risk Mitigation Impact Likelihood Change in
Description year
Financial Expensive or Without sufficient When raising Moderate Low Stable
lack of debt debt funding at debt finance
finance may sustainable rates, the Investment
limit our we will be unable to Manager adopts
ability to pursue suitable a flexible
grow and investments in line approach
achieve a with our Investment involving
fully covered Policy. This would speaking
dividend significantly impair to multiple
our ability funders
to pay dividends to offering
shareholders at the various rates,
targeted rate. structures and
tenors. Doing
this allows the
Investment
Manager to
maintain
maximum
competitive
tension between
funders. After
proceeding with
a funder
the Investment
Manager agrees
heads of terms
early in the
process to
ensure a
streamlined,
transparent
fund-raising
process. The
Board also
keeps liquidity
under constant
review and
we will always
aim to have
headroom in our
debt facilities
ensuring that
we have a level
of
protection in
the event of
adverse
fund-raising
conditions.
-------------- --------------------- ---------------- -------------- ------------- --------------
Financial Floating rate The Group's The Group Moderate Moderate Stable
debt exposes Revolving Credit considers cash
the business Facility is flow forecasts
to underlying currently non-hedged and ensures
interest rate and therefore sufficient cash
movements interest is payable balances are
based on a margin held within
over 3M Libor. Any the Group to
adverse movements in meet future
the 3M Libor forward needs. Prudent
curve could liquidity risk
significantly impair management
our profitability implies
and ability to pay maintaining
dividends. sufficient
cash and
marketable
securities, the
availability of
financing
through
appropriate and
adequate
credit lines,
and the ability
of customers to
settle
obligations
within normal
terms of
credit.
The Group
ensures,
through
forecasting of
capital
requirements,
that adequate
cash is
available
to fund the
Group's
operating
activities. The
Group's 10-year
and 15-year
MetLife
tranches
have a fixed
rate coupon and
the Board
regularly
reviews
potential
hedging
arrangements
which
can be put in
place at any
time during the
duration of the
Revolving
Credit
Facility.
-------------- --------------------- ---------------- -------------- ------------- --------------
Financial Unable to The borrowings the The Investment High Low Stable
operate Group currently has Manager
within debt and which the Group monitors loan
covenants uses in the future to value and
may contain interest
loan to value and covenants
interest covenants ratios on an
ratios. If property ongoing
valuations and basis. In the
rental income unlikely event
decrease, that an event
such covenants could of default
be breached, and the occurs under
impact of such an these covenants
event could include: the Group
an increase has a
in borrowing costs; sufficient
a requirement for remedy period
additional cash to cure the
collateral; payment covenant breach
of a fee to the by either
lender; a sale of an injecting cash
asset or assets or a collateral
forfeit of any asset or equity
to a lender. funded assets
This may result in in order to
the Group selling restore
assets to repay covenant
drawn loan amounts compliance.
resulting in a
decrease
on Group's Net Asset
Value.
-------------- --------------------- ---------------- -------------- ------------- --------------
Property Default of The default of one Under the terms Low to Low Stable
one or more or more of our of our Moderate
Approved lessees could impact Investment
Provider the revenue gained Policy and
lessees from relevant restrictions,
assets. no more than
If the lessee cannot 30% (although
remedy the default the
or no support is Group has a
offered to the target of 25%)
lessee by the of the Group's
Regulator gross asset
of Social Housing, value may be
we may have to exposed to one
terminate or lessee,
negotiate the lease, meaning the
meaning a sustained risk of
reduction significant
in revenues while a rent loss is
replacement is low. The
found. lessees are
predominantly
regulated
by the
Regulator of
Social Housing,
meaning that,
if a lessee was
to suffer
financial
difficulty,
it is likely
that the
Regulator of
Social Housing
would assist in
making
alternative
arrangements
to ensure
continuity for
residents who
are vulnerable
members of the
community.
-------------- --------------------- ---------------- -------------- ------------- --------------
Property Forward Our forward funded Before entering Low to Low to Stable
funding developments are into any Moderate moderate
properties likely to involve a forward funding
involves a higher degree of arrangements,
higher degree risk than is the Investment
of risk than associated Manager
that with standing undertakes
associated investments. This substantial
with could include due diligence
completed general construction on developers
investments risks, delays in the and their main
development subcontractors,
or the development ensuring they
not being completed, have a strong
cost overruns or track
developer/contractor record. We
default. If enter into
any of the risks contracts on a
associated with our fixed price
forward funded basis and then,
developments during the
materialised, this development
could work,
reduce the value of we defer
these assets and our development
portfolio. profit until
work has been
completed and
audited by a
chartered
surveyor.
Further, less
than 10% of our
portfolio is
forward-funded
at present and
we are limited
by
our Investment
Policy which
restricts us to
forward funding
a maximum of
20% of the
Group's
net asset value
at any one
time.
Ultimately,
with these
mitigating
factors in
place, the
flexibility
to forward fund
allows us to
acquire assets
and
opportunities
which will
provide prime
revenues
in future
years.
-------------- --------------------- ---------------- -------------- ------------- --------------
Regulatory Risk of an Should an Approved As part of the Low Moderate to Stable
Approved Provider with which Group's High
Provider the Group has one or acquisition
receiving a more leases in place process, the
non-compliant receive a Investment
financial non-compliant rating Manager
viability or by the Regulator, in conducts a
governance particular in thorough due
rating relation to diligence
by the viability, depending process on all
Regulator on Registered
the further actions Providers with
of the Regulator, it which the
is possible that Company enters
there may be a into lease
negative impact on agreements
the market value of that takes
the relevant account of
properties which are their financial
the subject of such strength and
lease(s). Depending governance
on the exposure of procedures.
the Group to such
Approved Provider, The Investment
this in turn may Manager has
have a material established
adverse relationships
effect on Group's with the
Net Asset Value Approved
until such time as Providers with
the matter is whom
resolved through an it works. The
improvement Approved
in the relevant Providers keep
Approved Provider's the Investment
rating or a change Manager
in Approved informed of
Provider. developments
surrounding
the regulatory
notices.
The Group has
leases in place
with four
Approved
Providers that
have been
deemed
non-compliant
by the
Regulator.
These assets
did not suffer
from an
impairment in
value as part
of the Q4
valuation by
the Group's
independent
Valuer.
More detail on
this risk can
be found below.
-------------- --------------------- ---------------- -------------- ------------- --------------
Regulatory Risk of Future governments As demand for High Low to Stable
changes to may take a different social housing Moderate
the social approach to the remains high
housing social housing relative to
regulatory regulatory regime, supply, the
regime resulting in changes Board and the
to the law and other Investment
regulation or Manager is
practices of the confident there
Government with will continue
regard to be a viable
to social housing. market within
which to
operate,
notwithstanding
any future
change of
Government.
Even if
Government
funding was to
reduce, the
nature of the
rental
agreements the
Group has in
place means
that the Group
will enjoy
continued
lessee
rent commitment
for the term of
the agreed
leases.
-------------- --------------------- ---------------- -------------- ------------- --------------
Regulatory Risk of not If the Group fails The Group High Low Stable
being to remain in intends to
qualified as compliance with the continue to
REIT REIT conditions, the operate as a
members of the Group REIT and work
will be subject to within its
UK corporation tax investment
on some or all of objective
their property and policy. The
rental income and Group will
chargeable retain legal
gains on the sale of and regulatory
properties which advisers and
would reduce the consult with
funds available to them on a
distribute to regular basis
investors. to ensure it
understands and
complies with
the
requirements.
In addition,
the
Board oversees
adherence to
the REIT
regime,
maintaining
close dialogue
with the
Investment
Manager to
ensure we
remain
compliant with
legislation.
-------------- --------------------- ---------------- -------------- ------------- --------------
Corporate Reliance on We continue to rely Unless there is High Low Stable
the on the Investment a default,
Investment Manager's services either party
Manager and its reputation may terminate
in the social the Investment
housing market. As a Management
result, our Agreement
performance will, to by giving not
a large extent, less than 12
depend on the months' written
Investment notice. The
Manager's abilities Board regularly
in the property reviews and
market. Termination monitors
of the Investment the Investment
Management Agreement Manager's
would severely performance. In
affect our ability addition, the
to effectively Board meets
manage our regularly with
operations and may the Manager
have a negative to ensure that
impact on the share we maintain a
price of the positive
Company. working
relationship.
-------------- --------------------- ---------------- -------------- ------------- --------------
Financial Property Property valuations All of the Moderate Moderate Stable
valuations are inherently Group's
may be subjective and property assets
subject to uncertain. Market are
change over conditions, which independently
time may valued
impact the quarterly by
creditworthiness of Jones Lang
lessees, may LaSalle,
adversely affect a specialist
valuations. The property
portfolio is valuation firm,
valued on a Market who are
Value basis, which provided with
takes into account regular updates
the expected rental on portfolio
income to be activity
received under the by the
leases in future. Investment
This valuation Manager. The
methodology provides Investment
a significantly Manager meets
higher with the
valuation than the external
Vacant Possession valuers to
value of a property. discuss
In the event of an the basis of
unremedied default their
of an Approved valuations and
Provider lessee, the their quality
value of the assets control
in the portfolio may processes.
be negatively Default risk of
affected. lessees
Any changes could is mitigated in
affect the Group's accordance with
net asset value and the lessee
the share price of default
the Group. principal risk
explanation
provided above.
In order to
protect against
loss in value,
the Investment
Manager's
property
management team
seeks to visit
each property
in the
portfolio once
a year, and
works closely
with lease
counterparties
to ensure, to
the extent
reasonably
possible, their
financial
strength and
governance
procedures
remain robust
through the
duration of the
relevant lease.
-------------- --------------------- ---------------- -------------- ------------- --------------
Emerging Risks
The United Kingdom's Withdrawal from the European Union
The Board has continued to monitor the potential risks
associated with Brexit. As discussions continue to develop with the
UK's trading relationship with the EU, it still remains unclear as
to the extent or precise nature of the impact of Brexit on the
Company and its stakeholder base. Nevertheless, the strong
Conservative majority achieved in December 2019 is likely to lead
to a period of greater political stability, and with care, housing
and social care, being UK based, the Group remains relatively
insulated from the impact of Brexit.
The Board will continue to monitor the developing relationship
between the UK and the EU and the wider potential impact of Brexit
on the Group and its stakeholder base.
GOING CONCERN AND VIABILITY
Going Concern
The Strategic Report and financial statements have set out the
current financial position of the Group and parent Company. The
Board has regularly reviewed the position of the Company and its
ability to continue as a going concern in Board meetings throughout
the year. The Group has targeted high-quality properties in line
with yield expectations and will continue to analyse investment
opportunities to ensure that they are the right fit for the
Group.
The Group has invested GBP439 million up to 31 December 2019,
and GBP19.3 million since the year end. The cash balance of the
Group at year end was GBP67.7 million, of which GBP30.4 million was
readily available for use. This is the cash balance at 31 December
2019 less any funds that are committed for future deployment,
retentions, or working capital requirements. As stated in the
Strategic Report, the Investment Manager has identified a visible
pipeline of over GBP100 million of attractive investment
opportunities for acquisition over the next 12 months. The Board
has evaluated the financial position of the Group and plans to
raise both debt and equity capital, as necessary, in order to fund
the Group's investments for the next 12 months. Income generated
from the Group's portfolio of assets is expected to substantially
facilitate the payment of dividends to shareholders at the targeted
rate. Based on this, the Board believes that the Group is in a
position to manage its financial risks for the foreseeable
future.
The Board believes that there are currently no material
uncertainties in relation to the Group's and Company's ability to
continue for a period of at least 12 months from the date of the
approval of the Group and parent Company's financial statements
and, therefore, has adopted the going concern basis in the
preparation of the financial statements.
Viability Statement
In accordance with Principle 21 of the AIC Code, the Board has
assessed the prospects of the Group over a period longer than 12
months required by the relevant "Going Concern" provisions. The
Board has considered the nature of the Group's assets and
liabilities, and associated cash flows, and has determined that
five years, up to 31 December 2024, is the maximum timescale over
which the performance of the Group can be forecast with a material
degree of accuracy and therefore is the appropriate period over
which to consider the viability.
In determining this timescale the Board has considered the
following:
-- That the business model of the Group assumes the future
growth in its investment portfolio through the acquisition of
Supported Housing assets which are intended to be held for the
duration of the viability period
-- The length of the service level agreements between Approved
Providers and Care Providers is typically five years
-- The future growth of its investment portfolio of properties
is achieved through long-term, inflation linked, fully repairing
and insuring leases
-- The Group's property portfolio has a WAULT of 25.7 years to
expiry, representing a secure income stream for the period under
consideration
-- The Group's floating rate Revolving Credit Facility has an
initial term of four years (of which three remain) which may be
extended by a further two years.
In assessing the Company's viability, the Board has carried out
a robust assessment of the emerging risks and principal risks
facing the Group, including those that would threaten its business
model, future performance, solvency, liquidity and dividend cover
for a five year period.
The Directors' assessment has been made with reference to the
principal risks and uncertainties and emerging risks summarised
above and how they could impact the prospects of the Group and
Company both individually and in aggregate.
The business model was subject to a sensitivity analysis, which
involved flexing a number of key assumptions underlying the
forecasts. The sensitivities performed were designed to provide the
Directors with an understanding of the Group's performance in the
event of severe but plausible downturn scenario, taking full
account of mitigating actions that could be taken to avoid or
reduce the impact or occurrence of the underlying risks outlined
below:
1 Approved Providers defaulting under a lease having a negative
impact on rental income and valuations:
-- the viability model has been stressed by a 10% reduction in
rental income. The 10% reduction in rent was chosen to represent
either a mid-sized Approved Provider becoming insolvent or a major
sectoral change that may affect the ability of an Approved Provider
to pay full rents. It is assumed that the loss in income has an
impact on the valuation of the portfolio, 90% remains at full
valuation and 10% at vacant possession value. Under the 12 month
going concern model rents are reduced by 25% to represent a
scenario whereby an Approved Provider, to which the Group had it
reached its maximum target exposure, became insolvent. This assumes
there could be a 12 month delay in finding a replacement tenant;
whereas the viability model assumes a new tenant will be found and
10% reflects the average loss in rental income over the five year
model.
2 Deterioration in economic outlook which could impact the
fundamentals of the social housing sector, including a negative
impact on valuations and rental uplifts:
-- the business model has been stressed to exclude all rental
uplifts which has an impact on the valuation of the portfolio and
the ability to pay covered dividends.
-- the business model has been stressed with an adverse impact
on the yield which has an impact on covenant testing.
3 Lack of availability of debt financing or other capital:
-- I n the normal course of business, financing is arranged in
advance of expected requirements and the business model assumes
that the Directors have reasonable confidence that the secured debt
facilities will be fully drawn during 2020 to bring leverage up to
the target of 40%. No further financing is assumed in the business
model after 2020.
The outcome in the downturn scenario on the Group's covenant
testing is that there are no breaches and the Group can maintain a
covenant headroom on existing facilities.
In the downturn scenario mitigating actions to reduce variable
costs would be required to enable the Group to meet its future
liabilities.
The remaining principal risks and uncertainties, whilst having
an impact on the Group's business, are not considered by the
Directors to have a reasonable likelihood of impacting the Group's
viability over the five year period.
Based on the results of this analysis, the Directors have a
reasonable expectation that the Group and Company will be able to
continue in operation and meet its liabilities as they fall due for
the next five years.
BOARD APPROVAL OF THE STRATEGIC REPORT
The Strategic Report was approved by the Board and signed on its
behalf by:
Chris Phillips
Chairman
12 March 20 20
GROUP FINANCIAL STATEMENTS
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Note GBP'000 GBP'000
------------------------------------- ----- ------------- -------------
Income
Rental income 5 21,112 11,490
Total income 21,112 11,490
Expenses
Directors' remuneration 6 (307) (265)
General and administrative expenses 9 (1,809) (1,909)
Management fees 8 (3,869) (2,309)
Total expenses (5,985) (4,483)
Gain from fair value adjustment
on investment property 14 11,809 14,497
Operating profit 26,936 21,504
Finance income 11 229 183
Finance costs 12 (3,448) (1,790)
Profit for the year before tax 23,717 19,897
------------- -------------
Taxation 13 - -
Profit and total comprehensive
income
for the year 23,717 19,897
============= =============
IFRS Earnings per share - basic
and diluted 36 6.75p 8.37p
EPRA Earnings per share - basic
and diluted 36 3.39p 2.27p
The accompanying notes form an integral part of these Group
Financial Statements.
GROUP STATEMENT OF FINANCIAL POSITION
As at 31 December 2019
31 December 31 December
2019 2018
Note GBP'000 GBP'000
-------------------------------- ----- ------------ ------------
Assets
Non-current assets
Investment properties 14 472,349 324,069
Total non-current
assets 472,349 324,069
Current assets
Trade and other receivables 15 4,287 3,392
Cash, cash equivalents
and restricted cash 16 67,711 114,624
------------ ------------
Total current assets 71,998 118,016
Total assets 544,347 442,085
============ ============
Liabilities
Current liabilities
Trade and other payables 17 8,145 8,998
------------ ------------
Total current liabilities 8,145 8,998
Non-current liabilities
Other payables 18 1,514 1,565
Bank and other Borrowings 19 164,955 67,361
------------ ------------
Total non-current liabilities 166,469 68,926
Total liabilities 174,614 77,924
============ ============
Total net assets 369,733 364,161
============ ============
Equity
Share capital 22 3,514 3,514
Share premium reserve 23 151,157 151,157
Treasury shares
reserve 24 (378) -
Capital reduction
reserve 25 166,154 183,921
Retained earnings 26 49,286 25,569
------------ ------------
Total Equity 369,733 364,161
============ ============
IFRS Net asset value per share
- basic and diluted 37 105.37p 103.65p
EPRA Net asset value per share
- basic and diluted 37 105.37p 103.65p
The Group Financial Statements were approved and authorised for
issue by the Board on 12 March 2020 and signed on its behalf
by:
Chris Phillips
Chairman
12 March 2020
The accompanying notes form an integral part of these Group
Financial Statements.
GROUP STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2019
Share Treasury Capital
Share premium shares reduction Retained Total
capital reserve reserve reserve earnings equity
Year ended
31 December 2019 Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ----- --------- --------- ---------- ----------- ---------- ---------
Balance at 1 January
2019 3,514 151,157 - 183,921 25,569 364,161
Total comprehensive
income for the year - - - - 23,717 23,717
Transactions with
owners
Own shares repurchased 24 - - (378) - - (378)
Dividends paid 27 - - - (17,767) - (17,767)
Balance at 31 December
2019 3,514 151,157 (378) 166,154 49,286 369,733
========= ========= ========== =========== ========== =========
Share Treasury Capital
Share premium shares reduction Retained Total
capital reserve reserve reserve earnings equity
Year ended
31 December 2018 Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ----- --------- --------- ---------- ----------- ---------- ---------
Balance at 1 January
2018 2,000 - - 194,000 5,672 201,672
Total comprehensive
income for the year - - - - 19,897 19,897
Transactions with
owners
Ordinary Shares
issued in the year 22,
at a premium 23 1,514 153,320 - - - 154,834
Share issue costs
capitalised 23 - (2,163) - - - (2,163)
Dividends paid 27 - - - (10,079) - (10,079)
Balance at 31 December
2018 3,514 151,157 - 183,921 25,569 364,161
========= ========= ========== =========== ========== =========
The accompanying notes form an integral part of these Group
Financial Statements.
GROUP STATEMENT OF CASH FLOWS
For the year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Note GBP'000 GBP'000
------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
Profit before income tax 23,717 19,897
Adjustments for:
Gain from fair value adjustment
on investment property (11,809) (14,497)
Finance income (229) (183)
Finance costs 3,448 1,790
Operating results before working
capital changes 15,127 7,007
Increase in trade and other receivables (11) (2,074)
Increase in trade and other payables 1,188 473
------------- -------------
Net cash flow generated from operating
activities 16,304 5,406
------------- -------------
Cash flows from investing activities
Purchase of investment properties (137,724) (163,995)
Prepaid acquisition costs (paid)/refunded (884) 6,655
Restricted cash - (paid) (8,375) (12,809)
Restricted cash - released 11,348 9,419
Interest received 163 150
Net cash flow used in investing
activities (135,472) (160,580)
------------- -------------
Cash flows from financing activities
Proceeds from issue of Ordinary
Shares at a premium - 108,150
Ordinary Share issue costs capitalised - (2,150)
Proceeds from issue of C Shares
at a premium 20 - 47,500
C Share issue costs capitalised 20 - (950)
Own shares repurchased 24 (378) -
Interest paid (2,898) (1,563)
Bank borrowings drawn 19 100,592 68,500
Restricted bank borrowings 19 10,460 (10,460)
Loan arrangement fees paid 19 (3,455) (1,186)
Dividends paid 27 (17,767) (10,079)
------------- -------------
Net cash flow generated from financing
activities 86,554 197,762
------------- -------------
Net (decrease)/increase in Cash,
cash equivalents and restricted
cash (32,614) 42,588
Cash and cash equivalents at the
beginning of the year 97,346 54,758
Cash and cash equivalents at the
end of the year 16 64,732 97,346
============= =============
The accompanying notes form an integral part of these Group
Financial Statements.
NOTES TO THE GROUP FINANCIAL STATEMENTS
For the ended 31 December 2019
1. CORPORATE INFORMATION
Triple Point Social Housing REIT PLC (the "Company") is a Real
Estate Investment Trust ("REIT") incorporated in England and Wales
under the Companies Act 2006 as a public company limited by shares
on 12 June 2017 . The address of the registered office is 1 King
William Street, United Kingdom, EC4N 7AF. The Company is registered
as an investment company under section 833 of the Companies Act
2006 and is domiciled in the United Kingdom.
The principal activity of the Company is to act as the ultimate
parent company of Triple Point Social Housing REIT PLC and its
subsidiaries (the "Group") and to provide shareholders with an
attractive level of income, together with the potential for capital
growth from investing in a portfolio of social homes.
2. BASIS OF PREPARATION
The financial information contained in this announcement has
been prepared on the basis of the accounting policies set out in
the statutory accounts for the year ended 31 December 2019. Whilst
the financial information included in this announcement has been
computed in accordance with International Financial Reporting
Standards (IFRS), as adopted by the European Union, this
announcement does not itself contain sufficient information to
comply with IFRS. The financial information does not constitute the
Company's statutory accounts for the years ended 31 December 2019
or 2018, but is derived from those accounts. Those accounts give a
true and fair view of the assets, liabilities, financial position
and profit and loss of the Company and the undertakings included in
the consolidation taken as a whole. Statutory accounts for 2018
have been delivered to the Registrar of Companies and those for
2019 will be delivered following the Company's Annual General
Meeting. The auditor's reports on both the 2019 and 2018 accounts
were unqualified; did not draw attention to any matters by way of
emphasis; and did not contain statements under s498(2) or (3) of
the Companies Act 2006.
The principal accounting policies adopted in the preparation of
this preliminary financial information are set out below. The
policies have been consistently applied to both years, with the
exception of the adoption of IFRS 16 in the year to 31 December
2019:
-- IFRS 16 Leases
IFRS 16 replaced IAS 17 Leases and introduced a single lessee
accounting model and requires a lessee to recognise assets and
liabilities for all leases with a term of more than 12 months,
unless the underlying asset is of low value. A lessee is required
to recognise a right-of-use asset representing its right to use the
underlying leased asset and a lease liability representing its
obligation to make lease payments.
Previously, the Group was required to classify all leases as
either operating or finance leases.
The Group adopted IFRS 16 using the modified retrospective
approach with recognition of any transitional adjustments being
made on the date of application (1 January 2019), without
restatement of comparative figures. The Group elected to apply the
practical expedient to not reassess whether a contract is, or
contains a lease at the date of initial application. Contracts
entered into before the transition date that were not identified as
leases under IAS 17 and IFRIC 4 were not reassessed. The definition
of a lease under IFRS 16 was applied only to contracts entered into
or changed on or after 1 January 2019.
The Directors have given due consideration to the impact on the
financial statements of IFRS 16 and have concluded that the
adoption of the standard did not have a material impact on the
financial statements in the period of initial application. This is
because where the Group is a lessee i.e. leasehold properties, the
Group already recognises these as finance leases on the statement
of financial position. Further, no changes have been identified in
respect of the leases where the Group also acts as a lessor.
The following are new standards, interpretations and amendments,
which are not yet effective, and have not been early adopted in
this financial information, that will or may have an effect on the
Group's future financial statements:
-- Definition of a Business (Amendments to IFRS 3) (effective 1 January 2020);
-- Amendments to IAS 1 Presentation of Financial Statements (effective 1 January 2020);
-- Amendments to references to the Conceptual Framework in IFRS
Standards (effective 1 January 2020*); and
-- Definitions of material amendments to IAS 1 and IAS 8 (effective 1 January 2020).
*standard not yet endorsed
The Directors are currently assessing the impact of these
amendments and have given due consideration to the impact on the
financial statements of the amendments to IFRS 3. Under the
amendments of IFRS 3, to be considered a business, an acquired set
of activities and assets must include, at a minimum, an input and a
substantive process that together significantly contribute to the
ability to create outputs. An optional concentration test that
permits a simplified assessment of whether an acquired set of
activities and assets is a business has been added.
At present they do not anticipate that the adoption of the
amendment and interpretation will have a material impact on the
financial statements in the period of initial application. This is
because the amendment narrows the definition of a business,
however, subsidiaries acquired by the Group to date have all been
treated as the acquisition of a group of assets rather than a
business as there was not an integrated set of activities acquired
in addition to the property. The Group does not intend to purchase
any subsidiaries which incorporate anything other than an
investment property.
2.
2.1. Going concern
The Group benefits from a secure income stream from long leases
which are not overly reliant on any one tenant and present a
well-diversified risk. The directors have reviewed the Group's
forecast which show the expected annualised rental income exceeds
the expected operating costs of the Group. This is explained
further within the Going Concern and Viability section included in
the Strategic Report.
As a result, the directors believe that the Group is well placed
to manage its financing and other business risks and that the Group
will remain viable, continuing to operate and meets its liabilities
as they fall due.
The directors believe that there are currently no material
uncertainties in relation to the Group's ability to continue in
operation for the period of at least 12 months from the date of
approval of the Group's Financial Statements. The Board is,
therefore, of the opinion that the going concern basis adopted in
the preparation of the financial statements is appropriate.
2.2 Currency
The Group financial information is presented in Sterling which
is also the Company's functional currency.
3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
In the application of the Group's accounting policies, which are
described in note 4, the directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The
estimates and associated assumptions that have a significant risk
of causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial year are outlined
below:
Estimates:
3.1. Investment properties (note 14)
The Group uses the valuation carried out by its independent
valuers as the fair value of its property portfolio. The valuation
is based upon assumptions including future rental income and the
appropriate discount rate. The valuers also make reference to
market evidence of transaction prices for similar properties.
Further information is provided in note 14.
The Group's properties have been independently valued by Jones
Lang LaSalle Limited ("JLL" or the "Valuer") in accordance with the
definitions published by the Royal Institute of Chartered
Surveyors' ("RICS") Valuation - Professional Standards, July 2018,
Global and UK Editions (commonly known as the "Red Book"). JLL is
one of the most recognised professional firms within social housing
valuation and has sufficient current local and national knowledge
of both social housing generally and specialist supported housing
("SSH") and has the skills and understanding to undertake the
valuations competently.
With respect to the Group's Financial Statements, investment
properties are valued at their fair value at each Statement of
Financial Position date in accordance with IFRS 13 which recognises
a variety of fair value inputs depending upon the nature of the
investment. Specifically:
Level 1 - Unadjusted, quoted prices for identical assets and
liabilities in active (typically quoted) markets;
Level 2 - Quoted prices for similar assets and liabilities in
active markets; and
Level 3 - External inputs are "unobservable". Value is the
Director's best estimate, based on advice from relevant
knowledgeable experts, use of recognised valuation techniques and a
determination of which assumptions should be applied in valuing
such assets and with particular focus on the specific attributes of
the investments themselves.
Given the bespoke nature of each of the Group's investments, all
of the Group's investment properties are included in Level 3.
Judgements:
3.2. Asset acquisitions
The Group acquires subsidiaries that own investment properties.
At the time of acquisition, the Group considers whether each
acquisition represents the acquisition of a business or the
acquisition of an asset. The directors consider the substance of
the assets and activities of the acquired entity in determining
whether the acquisition represents the acquisition of a business.
The Group accounts for an acquisition as a business combination
where an integrated set of activities is acquired in addition to
the property.
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 deferred tax arises.
All corporate acquisitions during the period have been treated
as asset purchases rather than business combinations because no
integrated set of activities were acquired.
3.3. The Group as lessor (note 28)
The Group has determined based on an evaluation of the terms and
conditions of the arrangements that it retains all the significant
risks and rewards of ownership of its properties and so accounts
for the leases as operating leases. This evaluation involves
judgement and the key factors considered include comparing the
duration of the lease terms compared to the economic life of the
underlying property asset, or in the case of sub-leased properties,
the remaining life of the right-of-use asset arising from the
headlease, the minimum lease payments discounted using an average
cost of borrowing rate compared to the fair value of the asset at
acquisition.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of
the financial statements are set out below.
4.1 Basis of consolidation
The financial statements comprise the financial information of
the Group as at the year-end date.
Subsidiaries are all 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 to
direct the activities of the entity. All intra-Group transactions,
balances, income and expenses are eliminated on consolidation. The
financial information of the subsidiaries are included in the
financial statements from the date that control commences until the
date that control ceases.
If an equity interest in a subsidiary is transferred but a
controlling interest continues to be held after the transfer then
the change in ownership interest is accounted for as an equity
transaction.
Accounting policies of the subsidiaries are consistent with the
policies adopted by the Company.
4.2 Investment property
Investment property, which is property held to earn rentals
and/or for capital appreciation, is initially measured at cost,
being the fair value of the consideration given, including
expenditure that is directly attributable to the acquisition of the
investment property. The Group recognises asset acquisitions on
completion. After initial recognition, investment property is
stated at its fair value at the Statement of Financial Position
date. Gains and losses arising from changes in the fair value of
investment property are included in profit or loss for the period
in which they arise in the Statement of Comprehensive Income.
Subsequent expenditure is capitalised only when it is probable that
future economic benefits are associated with the expenditure.
An investment property is derecognised upon disposal or when the
investment property is permanently withdrawn from use and no future
economic benefits are expected to be obtained from the disposal.
Any gain or loss arising on de-recognition of the property
(calculated as the difference between the net disposal proceeds and
the carrying amount of the asset) is recorded in profit or loss in
the period in which the property is derecognised.
Investment properties under construction are financed by the
Group where the Group enters into contracts for the development of
a pre-let property under a forward funding agreement. The Group
does not expose itself to any speculative development risk as the
proposed property is pre-let to a tenant under an agreement for
lease and the Group enters into a fixed price development agreement
with the Developer. Investment properties under construction are
initially recognised in line with stage payments made to the
developer. The properties are revalued at fair value at each
reporting date in the form of a work-in-progress value. The
work-in-progress value of investment properties under construction
is estimated as fair value of the completed asset less any costs
still payable in order to complete, which includes the Developer's
margin.
During the period between initial investment and the lease
commencement date (practical completion of the works) a coupon
interest due on the funds paid in the range of 6-6.75% per annum is
payable by the Developer. The accrued coupon interest is considered
as a discount on the fixed contract price. It does not result in
any cash flows during the development, but reduces the outstanding
balance payable to the developer on practical completion. When
practical completion is reached, the completed investment property
is transferred to operational assets at the fair value on the date
of completion.
Significant accounting judgements, estimates and assumptions
made for the valuation of investment properties are discussed in
note 3.
4.3 Leases
Lessor
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
The Group has determined that it retains all the significant
risks and rewards of ownership of the properties it has acquired to
date and accounts for the contracts as operating leases as
discussed in note 3.
Properties leased out under operating leases are included in
investment property in the Statement of Financial Position. Rental
income from operating leases is recognised on a straight-line basis
over the term of the relevant leases.
Lessee
As a lessee the Group recognises a right-of-use asset within
investment properties and a lease liability for all leases, which
is included within other payables (note 18). The lease liabilities
are measured at the present value of the remaining lease payments,
discounted using an appropriate discount rate. The discount rate
applied by the Group is the incremental borrowing rate at which a
similar borrowing could be obtained from an independent creditor
under comparable terms and conditions. Subsequent to initial
measurement lease liabilities increase as a result of interest
charged at a constant rate on the balance outstanding and are
reduced for lease payments made.
As leasehold properties meet the definition of investment
property, the right-of-use assets are presented within investment
property (note 14), and after initial recognition are subsequently
measured at fair value.
Sub-leases
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership of the underlying property asset to the lessee.
Sub-leases of leasehold properties are classified with reference to
the right-of-use asset arising from the head lease. All other
leases are classified as operating leases.
4.
4.4 Rent and other receivables
Rent and other receivables are amounts due in the ordinary
course of business. If collection is expected in one year or less,
they are classified as current assets.
Rent receivables are initially recognised at fair value plus
transaction costs and are subsequently carried at amortised cost,
less provision for impairment.
Impairment provisions for current and non-current rent
receivables are recognised based on the simplified approach within
IFRS 9 using a provision matrix in the determination of the
lifetime expected credit losses. During this process the
probability of the non-payment of the trade receivables is
assessed. This probability is then multiplied by the amount of the
expected loss arising from default to determine the lifetime
expected credit loss for the trade receivables. For rent
receivables, which are reported net, such provisions are recorded
in a separate provision account with the loss being recognised in
the consolidated statement of comprehensive income. On confirmation
that the rent receivable will not be collectable, the gross
carrying value of the asset is written off against the associated
provision.
Impairment provisions for all other receivables are recognised
based on a forward looking expected credit loss model using the
general approach. The methodology used to determine the amount of
the provision is based on whether there has been a significant
increase in credit risk since initial recognition of the financial
asset. For those where the credit risk has not increased
significantly since initial recognition of the financial asset,
twelve month expected credit losses along with gross interest
income are recognised. For those for which credit risk has
increased significantly, lifetime expected credit losses along with
the gross interest income are recognised. For those that are
determined to be credit impaired, lifetime expected credit losses
along with interest income on a net basis are recognised.
4.5 Cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash include cash in hand,
cash held by lawyers and liquidity funds with a term of no more
than three months that are readily convertible to a known amount of
cash, and which are subject to an insignificant risk of changes in
value.
Cash held by lawyers is money held in escrow for expenses
expected to be incurred in relation to investment properties
pending completion. These funds are available immediately on
demand.
Restricted Cash represents cash held in relation to retentions
for repairs, maintenance and improvement works by the vendors that
is committed on the acquisition of the properties; and restricted
bank borrowings.
4.6 Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle that
obligation and a reliable estimate can be made of the amount of the
obligation.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the
Statement of Financial Position date, taking into account the risks
and uncertainties surrounding the obligation.
4.7 Trade and other payables
Trade and other payables are classified as current liabilities
if payment is due within one year or less from the end of the
current accounting period. If not, they are presented as
non-current liabilities. Trade and other payables are recognised
initially at their fair value and subsequently measured at
amortised cost using the effective interest method until
settled.
4.8 Bank and other borrowings
Bank borrowings and the Group's loan notes are initially
recognised at fair value net of any transaction costs directly
attributable to the issue of the instrument. Such interest-bearing
liabilities are subsequently measured at amortised cost using the
effective interest rate method, which ensure that any interest
expense over the period to repayment is at a constant rate on the
balance of the liability carried in the Group Statement of
Financial Position. For the purposes of each financial liability,
interest expense includes initial transaction costs and any premium
payable on redemption, as well as any interest or coupon payment
while the liability is outstanding.
4.9 C shares financial liability
C shares were convertible non-voting preference shares issued
during the prior year and met the definition of a financial
liability. C shares were recognised on issue at fair value less
directly attributable transaction costs. After initial recognition,
C shares were subsequently measured at amortised cost using the
effective interest rate method. Amortisation is credited to or
charged to finance income or finance costs in the Consolidated
Statement of Comprehensive Income. Transaction costs are deducted
from proceeds at the time of issue. C shares converted into
Ordinary shares on the conversion date on the basis of their
respective NAV per share at the calculation date.
4.10 Taxation
Taxation on the element of the profit or loss for the period
that is not exempt under UK REIT regulations would be comprised of
current and deferred tax. Tax is recognised in the Statement of
Comprehensive Income except to the extent that it relates to items
recognised as direct movement in equity, in which case it is
recognised as a direct movement in equity. Current tax is the
expected tax payable on any non REIT taxable income for the period,
using tax rates enacted or substantively enacted at the Statement
of Financial Position date, and any adjustment to tax payable in
respect of previous periods.
4.11 Dividends payable to shareholders
Dividends to the Company's shareholders are recognised as a
liability in the Group's Financial Statements in the period in
which the dividends are approved. In the UK, interim dividends are
recognised when paid .
4.12 Rental income
Rental income from investment property is recognised on a
straight-line basis over the term of ongoing leases and is shown
gross of any UK income tax. A rental adjustment is recognised from
the rent review date in relation to unsettled rent reviews, where
the directors are reasonably certain that the rental uplift will be
agreed.
Tenant lease incentives are recognised as a reduction of rental
revenue on a straight-line basis over the term of the lease. These
are recognised within trade and other receivables on the Statement
of Financial Position.
When the Group enters into a forward funded transaction, the
future tenant signs an agreement for lease. No rental income is
recognised under the agreement for lease, but once the practical
completion has taken place the formal lease is signed at which
point rental income commences to be recognised in the Statement of
Comprehensive Income.
4.13 Finance income and finance costs
Finance income is recognised as interest accrues on cash
balances held by the Group. Finance costs consist of interest and
other costs that the Group incurs in connection with bank and other
borrowings. These costs are expensed in the period in which they
occur. Borrowing costs that are separately identifiable and
directly attributable to the acquisition or construction of forward
funded assets that take a substantial period of time to complete
are capitalised as part of the development cost in investment
property (note 14).
4.14 Expenses
All expenses are recognised in the Statement of Comprehensive
Income on an accruals basis.
4.15 Investment management fees
Investment advisory fees are recognised in the Statement of
Comprehensive Income on an accruals basis.
4.16 Share issue costs
The costs of issuing or reacquiring equity instruments (other
than in a business combination) are accounted for as a deduction
from equity.
4.17 Treasury shares
Consideration paid or received for the purchase or sale of
treasury shares is recognised directly in equity. The cost of
treasury shares held is presented as a separate reserve ("the
treasury share reserve"). Any excess of the consideration received
on the sale of treasury shares over the weighted average cost of
the shares sold is credited to retained earnings.
5. RENTAL INCOME
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Rental income - freehold assets 19,205 10,016
Rental income - leasehold assets 1,907 1,474
21,112 11,490
============ ============
The lease agreements between the Group and the Registered
Providers are fully repairing and insuring leases. The Registered
Providers are responsible for the settlement of all present and
future rates, taxes, costs and other impositions payable in respect
of the property. As a result, no direct property expenses were
incurred.
All rental income arose within United Kingdom.
6. DIRECTORS' REMUNERATION
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Directors' fees 275 234
Employer's National Insurance
Contributions 32 31
307 265
============ ============
The Directors are remunerated for their services at such rate as
the directors shall from time to time determine. The Chairman
receives a director's fee of GBP75,000 per annum (2018: GBP75,000),
and the other directors of the Board receive a fee of GBP50,000 per
annum (2018: GBP50,000). The Directors are also entitled to an
additional fee of GBP7,500 (2018: GBP7,500) in connection with the
production of every prospectus by the Company (including the
initial Issue). The additional fees are treated as a cost of issue
not included as an expense through the Statement of Comprehensive
Income.
A summary of the directors' emoluments, including the
disclosures required by the Companies Act 2006, is set out in the
Directors' Remuneration Report within the Corporate Governance
Report. None of the directors received any advances or credits from
any group entity during the year.
7. PARTICULARS OF EMPLOYEES
The Group had no employees during the year other than the
directors (2018: none).
8. MANAGEMENT FEES
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Management fees 3,869 2,309
3,869 2,309
============ ============
On 20 July 2017 Triple Point Investment Management LLP was
appointed as the delegated investment manager of the Company by
entering into the property management services and delegated
portfolio management agreement. Under this agreement the delegated
investment manager will advise the Company and provide certain
management services in respect of the property portfolio. A Deed of
Variation was signed on 23 August 2018. This defined cash balances
in the Net Asset Value calculation in respect of the management fee
as "positive uncommitted cash balances after deducting any
borrowings".
The management fee is an annual management fee which is
calculated quarterly in arrears based upon a percentage of the last
published Net Asset Value of the Group (not taking into account
uncommitted cash balances after deducting borrowings as described
above) as at 31 March, 30 June, 30 September and 31 December in
each year on the following basis with effect from Admission:
(a) on that part of the Net Asset Value up to and including
GBP250 million, an amount equal to 1% of such part of the Net Asset
Value;
(b) on that part of the Net Asset Value over GBP250 million and
up to and including GBP500 million, an amount equal to 0.9% of such
part of the Net Asset Value;
(c) on that part of the Net Asset Value over GBP500 million and
up to and including GBP1 billion, an amount equal to 0.8% of such
part of the Net Asset Value;
(d) on that part of the Net Asset Value over GBP1 billion, an
amount equal to 0.7% of such part of the Net Asset Value.
Management fees of GBP3,869,000 (2018: GBP2,309,000) were
chargeable by TPIM during the year. At the year-end GBP986,000
(2018: GBP811,000) was due to TPIM.
9. GENERAL AND ADMINISTRATIVE EXPENSES
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Legal and professional fees 735 839
Audit fees 167 226
Administration fees 353 335
Other administrative expenses 554 509
1,809 1,909
============ ============
On 1 October 2018 Hanway Advisory Ltd, who are associated with
Triple Point Investment Management LLP the delegated investment
manager, were appointed to provide Administration and Company
Secretarial Services to the Group. During the year Company
Secretarial Services of GBP336,000 (2018: GBP31,200) were
chargeable by Hanway Advisory Ltd.
The audit fees in the table above are inclusive of VAT, and
therefore differ to the fees in note 10 which are reported net of
VAT.
10. AUDIT FEES
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Group audit fees - current year 124 118
Group audit fees - prior year - 60
Subsidiary audit fees 15 10
139 188
============ ============
Non audit fees paid to BDO LLP included GBP45,000 (2018:
GBP73,000) in relation to quarterly eNAV and the half year interim
reviews, and GBP7,500 for its role as reporting accountant of the
Company in relation to new share issues in 2018 (2018: GBP113,000).
The fees relating to the share issuance were treated as share issue
costs and offset against share premium arising on the issue of
these shares.
The audit fee for the following subsidiaries has been borne by
the Company:
-- TP REIT Super Holdco Limited * Norland Estates Limited
-- TP REIT Holdco 1 Limited
* TP REIT Propco 2 Limited
-- TP REIT Holdco 2 Limited
* TP REIT Propco 3 Limited
-- TP REIT Holdco 3 Limited
* TP REIT Propco 4 Limited
-- TP REIT Holdco 4 Limited
11. FINANCE INCOME
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Other interest income 50 33
Interest on liquidity funds 179 150
229 183
============ ============
12. FINANCE COSTS
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Interest payable on bank borrowings 2,992 949
Borrowing costs capitalised (note (60) -
14)
Amortisation of loan arrangement
fees 457 47
C share amortisation expense - 134
C share interest expense - 613
Head lease interest expense 50 33
Bank charges 9 14
3,448 1,790
------------ ------------
Total finance cost for financial
liabilities not at fair value
through profit or loss 3,439 1,762
============ ============
13. TAXATION
As a UK REIT, the Group is exempt from corporation tax on the
profits and gains from its property investment business, provided
it meets certain conditions as set out in the UK REIT regulations.
For the current period, the Group did not have any non-qualifying
profits and accordingly there is no tax charge in the period. If
there were any non-qualifying profits and gains, these would be
subject to corporation tax.
It is assumed that the Group will continue to be a group UK REIT
for the foreseeable future, such that deferred tax has not been
recognised on temporary differences relating to the property rental
business.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Current tax
Corporation tax charge for the - -
year
Total current income tax charge - -
in the profit or loss
============ ============
The tax charge for the period is less than the standard rate of
corporation tax in the UK of 19% (2018:19%). The differences are
explained below.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Profit before tax 23,717 19,897
------------ ------------
Tax at UK corporation tax standard
rate of 19% 4,506 3,780
Change in value of investment
properties (2,244) (2,754)
Exempt REIT income (2,673) (1,340)
Amounts not deductible for tax
purposes 34 145
Unutilised residual current period
tax losses 377 169
- -
============ ============
UK REIT exempt income includes property rental income that is
exempt from UK Corporation Tax in accordance with Part 12 of CTA
2010.
14. INVESTMENT PROPERTY
Operational Properties
assets under development Total
GBP'000 GBP'000 GBP'000
------------ ------------------- ---------
As at 1 January 2019 316,117 7,952 324,069
Acquisitions and additions 114,835 21,428 136,263
Fair value adjustment 11,134 675 11,809
Changes to head lease
right-of-use assets 148 - 148
Borrowing costs capitalised
(note 12) - 60 60
------------ ------------------- ---------
Transfer of completed
properties 12,166 (12,166) -
------------ ------------------- ---------
As at 31 December
2019 454,400 17,949 472,349
------------ ------------------- ---------
As at 1 January 2018 138,512 - 138,512
Acquisitions and additions 154,127 16 ,708 170,835
Fair value adjustment 14,569 (72) 14,497
Changes to head lease
right-of-use assets 225 - 225
Borrowing costs capitalised
(note 12) - - -
------------ ------------------- ---------
Transfer of completed
properties 8,684 (8,684) -
------------ ------------------- ---------
As at 31 December
2018 316,117 7,952 324,069
------------ ------------------- ---------
Reconciliation to independent 31 December 31 December
valuation: 2019 2018
GBP'000 GBP'000
Investment property valuation 471,635 323,469
Fair value adjustment - headlease
ground rent 1,453 1,305
Fair value adjustment - lease
incentive debtor (739) (705)
------------ ------------
472,349 324,069
------------ ------------
Properties under development represent contracts for the
development of a pre-let property under a forward
funding agreement. Where the development period is expected to
be a substantial period, the borrowing costs that can be directly
attributed to getting the asset ready for use are capitalised as
part of the investment property value.
The carrying value of leasehold properties at 31 December 2019
was GBP35.3 million (2018: GBP26.5 million).
In accordance with "IAS 40: Investment Property", the Group's
investment properties have been independently valued at fair value
by Jones Lang LaSalle Limited ("JLL"), an accredited external
valuer with recognised and relevant
professional qualifications. The independent valuers provide
their fair value of the Group's investment property portfolio every
three months.
JLL were appointed as external valuers by the Board on 11
December 2017. JLL has provided valuations services to the Group.
The proportion of the total fees payable by the Company to JLL's
total fee income is minimal. Additionally, JLL has a rotation
policy in place whereby the signatories on the valuations rotate
after 7 years.
% Key Statistic
The metrics below are in relation to the total investment
property portfolio held as at 31 December 2019.
31 December 31 December
Portfolio metrics 2019 2018
Capital Deployed (GBP'000)
* 424,266 293,857
Number of Properties 388 272
Number of Tenancies*** 300 189
Number of Registered Providers*** 16 16
Number of Local Authorities*** 149 109
Number of Care Providers*** 88 62
Valuation NIY** 5.27% 5.25%
*calculated excluding acquisition costs
**calculated using IAS 40 valuations (excluding forward funding
acquisitions)
*** calculated excluding forward funding acquisitions
31 December 2019 31 December 2018
% of funds % of funds
Region *Cost GBP'000 invested *Cost GBP'000 invested
--------------- -------------- ----------- -------------- -----------
North West 93,451 22.0 73,757 25.1
West Midlands 65,189 15.4 41,327 14.1
East Midlands 59,929 14.1 47,412 16.1
London 49,906 11.8 25,921 8.9
South East 43,697 10.3 33,819 11.5
North East 43,691 10.3 39,432 13.4
Yorkshire 30,245 7.1 16,869 5.7
South West 21,547 5.1 11,549 3.9
East 11,514 2.7 2,889 1.0
South Wales 2,660 0.6 883 0.3
Scotland 2,437 0.6 - -
Total 424,266 100 293,858 100.0
--------------- -------------- ----------- -------------- -----------
*excluding acquisition costs
Fair value hierarchy
Quoted
prices
in active Significant Significant
markets observable unobservable
(Level inputs inputs
Date of valuation Total 1) (Level 2) (Level 3)
GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ------------------- -------- ----------- ------------ --------------
Assets measured
at fair value: 31 December
Investment properties 2019 472,349 - - 472,349
------------------------ ------------------- -------- ----------- ------------ --------------
31 December
Investment properties 2018 324,069 - - 324,069
------------------------ ------------------- -------- ----------- ------------ --------------
There have been no transfers between Level 1 and Level 2 during
the year, nor have there been any transfers between Level 2 and
Level 3 during the year.
The valuations have been prepared in accordance with the RICS
Valuation - Professional Standards (incorporating the International
Valuation Standards) by JLL, one of the leading professional firms
engaged in the social housing sector.
As noted previously, all of the Group's investment properties
are reported as Level 3 in accordance with IFRS 13 where external
inputs are "unobservable" and value is the Directors' best
estimate, based upon advice from relevant knowledgeable
experts.
In this instance, the determination of the fair value of
investment property requires an examination of the specific merits
of each property that are in turn considered pertinent to the
valuation.
These include i) the regulated social housing sector and demand
for the facilities offered by each Specialised Supported Housing
("SSH") property owned by the Group; ii) the particular structure
of the Group's transactions where vendors, at their own expense,
meet the majority of the refurbishment costs of each property and
certain purchase costs; iii) detailed financial analysis with
discount rates supporting the carrying value of each property; iv)
underlying rents for each property being subject to independent
benchmarking and adjustment where the Group considers them too high
(resulting in a price reduction for the purchase or withdrawal from
the transaction); and v) a full repairing and insuring lease with
annual indexation based on CPI or CPI+1% and effectively 25 years
outstanding, in most cases with a Housing Association itself
regulated by the Homes and Communities Agency.
The valuer treats the fair value for forward funded assets as
work-in-progress value whereby the Group forward funds a
development by committing a total sum, the Gross Development Value
("GDV") over the development period in order to receive the
completed development at practical completion. The work-in-progress
value of the asset increases during the construction period
accordingly as payments are made by the Group which leads, in turn,
to a pro-rata increase in the valuation in each quarter valuation
assuming there are no material events affecting the GDV adversely.
Interest accrued during construction as well as an estimation of
future interest accrual prior to lease commencement will be
deducted from the balancing payment which is the final payment to
be drawn by the developer prior to the Group receiving the
completed building.
Descriptions and definitions relating to valuation techniques
and key unobservable inputs made in determining fair values are as
follows:
Valuation techniques: Discounted cash flows
The discounted cash flows model considers the present value of
net cash flows to be generated from the property, taking into
account the expected rental growth rate and lease incentive costs
such as rent-free periods. The expected net cash flows are then
discounted using risk-adjusted discount rates.
There are three main unobservable inputs that determine the fair
value of the Group's investment property:
1. The rate of inflation as measured by CPI; it should be noted
that all leases benefit from either CPI or RPI indexation;
2. The discount rate applied to the rental flows; and
3. Underlying passing rents.
Key factors in determining the discount rates to assess the
level of uncertainty applied include: the performance of the
regulated social housing sector and demand for each specialist
supported housing property owned by the Group; costs of acquisition
and refurbishment of each property; the anticipated future
underlying cash flows for each property; benchmarking of each
underlying rent for each property (passing rent); and the fact that
all of the Group's properties have the benefit of full repairing
and insuring leases entered into by a Housing Association.
All of the properties within the Group's portfolio benefit from
leases with annual indexation based upon CPI or RPI. The fair value
measurement is based on the above items highest and best use, which
does not differ from their actual use.
Sensitivities of measurement of significant unobservable
inputs
As set out within the significant accounting estimates and
judgements in Note 3, the Group's property portfolio valuation is
open to judgements and is inherently subjective by nature.
As a result, the following sensitivity analysis has been
prepared:
Average discount rate and range:
The average discount rate used in the Group's property portfolio
valuation is 6.60% (2018: 6.66%).
The range of discount rates used in the Group's property
portfolio valuation is from 6.3% to 7.1% (2018: 6.4% to 7.2%).
-0.5% change +0.5% change +0.25% change -0.25% change
in in in in
Discount Discount
Rate Rate CPI CPI
GBP'000 GBP'000 GBP'000 GBP'000
Changes in the IFRS fair
value of investment properties
as at 31 December 2019 28,803 (26,203) 14,911 (14,257)
Changes as at 31 December
2018 20,362 (18,307) 10,447 (9,973)
15. TRADE AND OTHER RECEIVABLES
31 December 31 December
2019 2018
GBP'000 GBP'000
Prepayments 1,528 1,755
Other receivables 1,282 766
Rent receivable 1,477 871
4,287 3,392
============ ============
Included in Prepayments are prepaid acquisition costs which
include the cost of acquiring assets not completed at the year
end.
The directors consider that the carrying value of trade and
other receivables approximate their fair value. All amounts are due
to be received within one year from the reporting date.
The Group applies the IFRS 9 simplified approach for rent
receivables to measure expected credit losses using a lifetime
expected credit loss provision for rent receivables. To measure
expected credit losses on a collective basis, rent receivables are
grouped based on similar credit risk and ageing.
The expected loss rates are based on the Group's historical
credit losses experienced since incorporation in 2017. The
historical loss rates are then adjusted for the current and
forward-looking information on macroeconomic factors affecting the
Group's tenants. Both the expected credit loss provision and the
incurred loss provision in the current and prior period are
immaterial. The Group does not hold any collateral as security.
The Group applies the general approach to providing for expected
credit losses under IFRS 9 for other receivables. Both the expected
credit loss and the incurred loss provision in the current and
prior year are immaterial.
16. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
31 December 31 December
2019 2018
GBP'000 GBP'000
Cash held by lawyers 771 14,352
Liquidity funds 50,000 75,000
Restricted cash 2,979 17,278
Cash at bank 13,961 7,994
------------ ------------
67,711 114,624
============ ============
Liquidity funds refer to money placed in money market funds.
These are highly liquid funds with accessibility within 24 hours
and subject to insignificant risk of changes in value. Interest at
market rate between 0.59% and 0.75% per annum is earned on these
deposits.
Cash held by lawyers is money held in escrow for expenses
expected to be incurred in relation to investment properties
pending completion. These funds are available immediately on
demand.
Restricted cash represents retention money in relation to
repair, maintenance and improvement works by the vendors to bring
the properties up to satisfactory standards for the Group and the
tenants. The cash is committed on the acquisition of the
properties. The restricted cash is either held with the solicitors
or ring fenced by the Group. In the prior year restricted cash
included GBP10.5million of amounts held in a charged account as
outlined further in note 19.
31 December 31 December
2019 2018
GBP'000 GBP'000
Total Cash, cash equivalents and
restricted cash 67,711 114,624
Restricted cash (2,979) (17,278)
------------ ------------
Cash reported on Statement of Cash
Flows 64,732 97,346
============ ============
17. TRADE AND OTHER PAYABLES
Current liabilities
31 December 31 December
2019 2018
GBP'000 GBP'000
Other creditors 5,521 6,818
Accruals 1,913 1,471
Trade payables 672 589
Deferred consideration - 84
Head lease ground rent (note 28) 39 36
8,145 8,998
============ ============
The Other Creditors balance consists of retentions due on
completion of outstanding works. The directors consider that the
carrying value of trade and other payables approximate their fair
value. All amounts are due for payment within one year from the
reporting date.
18. OTHER PAYABLES
Non-current liabilities
31 December 31 December
2019 2018
GBP'000 GBP'000
Head lease ground rent (note 28) 1,414 1,270
Deferred consideration - 195
Rent deposit 100 100
1,514 1,565
============ ============
19. BANK AND OTHER BORROWINGS
31 December 31 December
2019 2018
GBP'000 GBP'000
Bank and other borrowings drawn at
year end 169,092 68,500
------------ ------------
Less: loan issue costs incurred (4,594) (1,186)
Add: loan issue costs amortised 457 47
------------ ------------
Unamortised costs at end of the year (4,137) (1,139)
------------ ------------
Balance at year end 164,955 67,361
============ ============
At 31 December 2019 there were undrawn bank borrowings of
GBP29.4 million (2018: GBP70 million).
On 20 July 2018, the Group entered into a long dated, fixed
rate, interest only financing arrangement in the form of a private
placement of loan notes in an amount of GBP68.5 million with
MetLife and affiliated funds. The Loan Notes are secured against a
portfolio of specialist supported living assets throughout the UK,
worth approximately GBP181 million. As at 31 December 2018 GBP58
million was utilised; the remaining amount of GBP10.5 million was
in a charged account until it was released on 12 February 2019. The
Loan Notes represent a loan-to-value of 40% of the value of the
secured pool of assets and are split into two tranches: Tranche-A,
is an amount of GBP41.5 million, has a term of 10 years from
utilisation and is priced at an all-in coupon of 2.924% pa; and
Tranche-B, is an amount of GBP27 million, has a term of 15 years
from utilisation and is priced at an all-in coupon of 3.215% pa. On
a blended basis, the weighted average term is 12 years carrying a
weighted average fixed rate coupon of 3.039% pa.
On 21 December 2018 the Group signed a secured GBP70 million
Revolving Credit Facility with Lloyds Bank. The floating rate
Revolving Credit Facility has an initial term of four years
expiring on 20 December 2022. This may be extended by a further two
years to 20 December 2024 if requested but is at the sole
discretion of Lloyds Bank. The interest rate for amounts drawn is
1.85% per annum over three month LIBOR. For undrawn loan amounts
the Company pays a commitment fee in the amount of 40% of the
margin. As at 31 December 2019, GBP62.3 million had been drawn
under the revolving credit facility and, when fully drawn, the
revolving credit facility will represent a loan-to-value of 40%
secured against a defined portfolio of the Group's specialist
supported housing assets.
On 29 October 2019 the Group secured a GBP60 million extension
to the existing Revolving Credit Facility. As part of the
extension, National Westminster Bank plc will provide debt
alongside Lloyds Bank plc and on identical terms. The Group now has
the ability to draw a total of up to GBP130 million under the RCF.
The initial four-year term of the RCF remains unchanged and expires
on 20 December 2022 and, subject to lender approval, may be
extended by a further two years to 20 December 2024. The interest
rate in respect of drawn amounts under the RCF is 1.85 per cent per
annum over 3-month LIBOR. When fully drawn, the RCF will represent
a loan-to-value of 40% secured against a defined portfolio of the
Group's specialist supported housing assets located throughout the
UK and held in a wholly-owned Group subsidiary.
All financing arrangements are on a non-recourse basis to the
Group.
The Group has met all compliance with its financial covenants on
the above loans throughout the year.
Undrawn committed bank facilities - maturity profile
3 to
1 to 2 5 > 5
31 December 2019 Total < 1 year years years years
--------------------- -------- --------- -------- -------- --------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 December 2019 29,408 - - 29,408 -
-------- --------- -------- -------- --------
At 31 December 2018 70,000 - - 70,000 -
-------- --------- -------- -------- --------
20. C SHARES
On 23 March 2018 the Company announced the issue of 47,500,000 C
shares, issued at 100 pence per share. The C shares were
convertible preference shares. The shares were listed on the London
Stock Exchange and dealing commenced on 27 March 2018.
On 29 June 2018 90% of the C share funds had been invested or
committed and the C shares converted into Ordinary Shares on 30
August 2018 (conversion date). The conversion was on the basis of
their respective NAV per share as at 29 June 2018 (calculation
date), adjusted for dividends payable to both share classes and the
fair value gain on assets acquired on which the Company had
exchanged contracts but not completed until 13 July 2018. On 30
August 2018, 46,352,210 Ordinary Shares were issued on conversion
of the C shares.
21. NOTES SUPPORTING STATEMENT OF CASH FLOWS
Reconciliation of liabilities to cash flows from financing
activities:
Bank borrowings C Shares Head lease Total
GBP'000 GBP'000 GBP'000 GBP'000
(note 19) (note 20) (note 17,18)
At 1 January 2019 67,361 - 1,306 68,667
Cashflows:
Bank borrowings drawn 100,592 - - 100,592
Repayment of principal
on head lease liabilities - - (39) (39)
Loan arrangement fees
paid (3,455) - - (3,455)
Non-cash flows:
-Amortisation of loan
arrangement fees 457 - - 457
-Head lease additions - - 138 138
-Accrued interest
on head lease liabilities - - 48 48
---------------- ---------- ------------- --------
At 31 December 2019 164,955 - 1,453 166,408
================ ========== ============= ========
Bank borrowings C Shares Head lease Total
GBP'000 GBP'000 GBP'000 GBP'000
(note 19) (note 20) (note 17,18)
At 1 January 2018 - - 1,080 1,080
Cashflows 67,314 46,550 (35) 113,829
Non-cash flows:
-Amortisation of loan
arrangement fees 47 - - 47
-Amortisation of C
Share liability - 134 - 134
-Conversion into ordinary
shares - (46,684) - (46,684)
-Head lease additions - - 225 225
-Accrued interest
on head lease liabilities - - 36 36
---------------- ---------- ------------- ---------
At 31 December 2018 67,361 - 1,306 68,667
================ ========== ============= =========
22. SHARE CAPITAL
Issued and Issued and
fully paid fully paid
Number GBP'000
At 1 January 2019 and 31 December
2019 351,352,210 3,514
============ ============
Issued and Issued and
fully paid fully paid
Number GBP'000
At 1 January 2018 200,000,000 2,000
Issued on conversion of C shares
on 30 August 2018 46,352,210 464
Issued on public offer on 22
October 2018 105,000,000 1,050
------------ ------------
At 31 December 2018 and 31 December
2019 351,352,210 3,514
============ ============
The Company achieved admission to the specialist fund segment of
the main market of the London Stock Exchange on 8 August 2017,
raising GBP200 million. As a result of the IPO, at 8 August 2017,
200,000,000 shares at one pence each were issued and fully paid.
The Company was admitted to the premium segment of the Official
List of the Financial Conduct Authority and migrated to trading on
the premium segment of the Main Market on 27 March 2018.
On 30 August 2018 the Company converted 47,500,000 C shares in
accordance with the terms for the C shares as set out in the
Company's Articles of Association. For every one C share held,
0.975836 new Ordinary share was issued. This resulted in a further
46,352,210 Ordinary shares being issued and fully paid.
Following a third public offer on 22 October 2018, a further
105,000,000 Ordinary Shares of one pence each were issued and fully
paid.
Rights, preferences and restrictions on shares: All Ordinary
Shares carry equal rights, and no privileges are attached to any
shares in the Company. All the shares are freely transferable,
except as otherwise provided by law. The holders of Ordinary Shares
are entitled to receive dividends as declared from time to time and
are entitled to one vote per share at meetings of the Company. All
shares rank equally with regard to the Company's residual
assets.
The table above includes 450,000 treasury shares (note 24).
Treasury shares do not hold any voting rights.
23. SHARE PREMIUM RESERVE
The share premium relates to amounts subscribed for share
capital in excess of nominal value.
31 December 31 December
2019 2018
GBP'000 GBP'000
Balance at beginning of year 151,157 -
Share premium arising on the conversion
of C Shares into Ordinary Shares - 46,220
Share premium arising on Ordinary
Shares issue - 107,100
Share issue costs capitalised - (2,163)
Balance at end of year 151,157 151,157
============ ============
24. TREASURY SHARES RESERVE
31 December 31 December
2019 2018
GBP'000 GBP'000
Balance at beginning of year - -
Own shares repurchased (378) -
Balance at end of year (378) -
============ ============
The treasury shares reserve relates to the value of shares
purchased by the Company in excess of nominal value. During the
year ended 31 December 2019, the Company purchased 450,000 of its
own 1p Ordinary Shares at a total gross cost of GBP377,706
(GBP374,668 cost of shares and GBP3,038 associated costs). As at 31
December 2019, 450,000 1p Ordinary Shares are held by the company
(31 December 2018 - nil).
25. CAPITAL REDUCTION RESERVE
31 December 31 December
2019 2018
GBP'000 GBP'000
Balance at beginning of year 183,921 194,000
Dividends paid (17,767) (10,079)
Balance at end of year 166,154 183,921
============ ============
The capital reduction reserve relates to the distributable
reserve established on cancellation of the share premium
reserve.
26. RETAINED EARNINGS
31 December 31 December
2019 2018
GBP'000 GBP'000
Balance at beginning of year 25,569 5,672
Total comprehensive income for the
year 23,717 19,897
Balance at end of year 49,286 25,569
============ ============
27. DIVIDS
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
1p for the period 12 June to 31 December
2017 paid on 29 March 2018 - 2,000
1.25p for the 3 months to 31 March
2018 paid on 29 June 2018 - 2,500
1.25p for the 3 months to 30 June
2018 paid on 28 September 2018 - 2,500
1.25p for the 3 months to 30 September
2018 paid on 31 October 2018 - 3,079
1.25p for the 3 months to 31 December
2018 paid on 29 March 2019 4,392 -
1.27p for the 3 months to 31 March
2019 paid on 28 June 2019 4,463 -
1.27p for the 3 months to 30 June
2019 paid on 27 September 2019 4,456 -
1.27p for the 3 months to 30 September
2019 paid on 20 December 2019 4,456 -
17,767 10,079
============= =============
On 5 March 2020, the Company declared an interim dividend of
1.285 pence per Ordinary Share for the period 1 October 2019 to 31
December 2019. The total dividend of GBP4.51 million will be paid
on 27 March 2020 to Ordinary shareholders on the register on 13
March 2020.
The Company intends to pay dividends to shareholders on a
quarterly basis and in accordance with the REIT regime.
Dividends are not payable in respect of its Treasury shares
held.
28. LEASES
A. Leases as lessee
The Group leases a number of properties that were previously
held as finance leases. In the current year these have been
reclassified to right-of-use assets under IFRS 16.
The future minimum lease payments under non-cancellable finance
lease were payable by the Group as follows:
< 1 year 2-5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000
Minimum lease payments 40 158 7,123 7,321
Interest (1) (11) (5,856) (5,868)
--------- ---------- ---------- --------
Present value at 31
December 2019 39 147 1,267 1,453
========= ========== ========== ========
< 1 year 2-5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000
Minimum lease payments 36 142 6,801 6,979
Interest (1) (10) (5,663) (5,674)
--------- ---------- ---------- --------
Present value at 31
December 2018 35 132 1,138 1,305
========= ========== ========== ========
31 December 31 December
2019 2018
GBP'000 GBP'000
Current liabilities (note 17 ) 39 35
Non-current liabilities (note 18) 1,414 1,270
Balance at end of year 1,453 1,305
============ ============
The above is in respect of properties held by the Group under
leasehold. There are 20 properties (2018: 19) held under leasehold
with lease ranges from 125 years to 999 years.
B. Leases as lessor
The Group leases out its investment properties (see note 14
).
The future minimum lease payments under non-cancellable
operating leases receivable by the Group are as follows:
< 1 year 2-5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000
31 December 2019 25,460 101,841 530,954 658,255
========= ========== ========== ========
< 1 year 2-5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000
31 December 2018 18,290 74,449 415,211 507,950
========= ========== ========== ========
Leases are direct-let agreements with Registered Providers for a
term of at least 15 years and usually between 20 to 25 years with
rent linked to CPI or RPI. All leases are full repairing and
insuring (FRI) leases, the tenants are therefore obliged to repair,
maintain and renew the properties back to the original
conditions.
The lease payments were calculated using Weighted Average
Unexpired Lease Term ("WAULT"). WAULT is the average unexpired
lease term across the property investment portfolio, weighted by
the contracted rental income. The WAULT includes all parts of the
lease term, including additional leases which are triggered by
landlords' put options, but not those triggered by Tenants' call
options unless the options were mutual.
The following table gives details of the percentage of annual
rental income per Registered Provider with more than a 10%
share:
31 December 2019 31 December 2018
% of total annual % of total annual
Registered Provider rent rent
Inclusion Housing CIC 21 20
Falcon Housing Association
CIC 13 16
Parasol Homes (previously 28A
Supported Living) 13 11
My Space 11 14
Hilldale 11 10
Other disclosures about leases are provided in notes 5, 12, 14,
17, 21 and 33.
29. CONTROLLING PARTIES
As at 31 December 2019 there is no ultimate controlling party of
the Company.
30. SEGMENTAL INFORMATION
IFRS 8 Operating Segments requires operating segments to be
identified on the basis of internal financial reports about
components of the Group that are regularly reviewed by the Chief
Operating Decision Maker (which in the Group's case is delegated to
the Delegated Investment Adviser TPIM).
The internal financial reports received by TPIM contain
financial information at a Group level as a whole and there are no
reconciling items between the results contained in these reports
and the amounts reported in the financial statements.
The Group's property portfolio comprised 388 (2018: 272) Social
Housing properties as at 31 December 2019 in England, Wales and
Scotland. The directors consider that these properties represent a
coherent and diversified portfolio with similar economic
characteristics and, as a result, these individual properties have
been aggregated into a single operating segment. In the view of the
directors there is accordingly one reportable segment under the
provisions of IFRS 8. All of the Group's properties are engaged in
a single segment business with all revenue, assets and liabilities
arising in the UK, therefore, no geographical segmental analysis is
required by IFRS 8.
31. RELATED PARTY DISCLOSURE
Directors
Directors are remunerated for their services at such rate as the
directors shall from time to time determine. The Chairman receives
a director's fee of GBP75,000 per annum (2018: GBP75,000), and the
other directors of the Board receive a fee of GBP50,000 per annum
(2018: GBP50,000). The directors are also entitled to an additional
fee of GBP7,500 in connection with the production of every
prospectus by the Company (including the Issue).
Dividends of the following amounts were paid to the directors
during the year:
Chris Phillips: GBP2,776 (2018: GBP2,375)
Peter Coward: GBP3,823 (2018: GBP3,563)
Paul Oliver: GBP3,945 (2018: GBP2,924)
No shares were held by Ian Reeves or Tracey Fletcher-Ray as at
31 December 2019 (31 December 2018: nil).
Acquisition
Following shareholder approval, the Group completed the purchase
of the entire issued share capital of TP Social Housing Investments
Limited, a special purpose company holding a portfolio of social
housing assets wholly owned by Pantechnicon Capital for a total
commitment of GBP22.3 million on 13 July 2018. Ben Beaton, James
Cranmer and Claire Ainsworth are all directors of Pantechnicon
Capital Limited and they are also all partners of TPIM, the
delegated
investment adviser.
The Board reviewed the transaction and concluded it was
conducted on an arm's length basis.
32. CONSOLIDATED ENTITIES
The Group consists of a parent Company, Triple Point Social
Housing REIT plc, incorporated in the UK and a number of
subsidiaries held directly by the Company, which operate and are
incorporated in the UK and Guernsey. The principal place of
business of each subsidiary is the same as their place of
incorporation.
The Group owns 100% of the equity shares of all subsidiaries
listed below and has the power to appoint and remove the majority
of the Board of those subsidiaries. The relevant activities of the
below subsidiaries are determined by the Board based on simple
majority votes. Therefore, the directors of the Company concluded
that the Company has control over all these entities and all these
entities have been consolidated within the financial statements.
The principal activity of all the subsidiaries relates to property
investment.
The subsidiaries listed below were held as at 31 December
2019:
Country Ownership
Name of Entity Registered Office of Incorporation %
TP REIT Super HoldCo 1 King William Street, London,
Limited* EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Hold Co 1 Limited EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Hold Co 2 Limited EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Hold Co 3 Limited EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Hold Co 4 Limited EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Prop Co 2 Limited EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Prop Co 3 Limited EC4N 7AF UK 100%
1 King William Street, London,
TP REIT Prop Co 4 Limited EC4N 7AF UK 100%
1 King William Street, London,
Norland Estates Limited EC4N 7AF UK 100%
Burleigh Manor, Peel Road,
Douglas, Isle of Man IM1 Isle of
SIPP Holding Limited* 5EP Man 100%
1 King William Street, London,
FPI Co 152 Limited* EC4N 7AF UK 100%
1 King William Street, London,
FPI Co 188 Limited* EC4N 7AF UK 100%
1 Le Truchot St Peter Port,
PSCI Holdings Limited* GY1 1WD Guernsey 100%
1 Le Truchot St Peter Port,
SL Heywood Limited GY1 1WD Guernsey 100%
1 Le Truchot St Peter Port,
SL Bury Limited GY1 1WD Guernsey 100%
1 King William Street, London,
FPI Co 244 Limited EC4N 7AF UK 100%
Rosewood (Albert Rd) 1 King William Street, London,
Limited EC4N 7AF UK 100%
1 King William Street, London,
SL2 Cottingham Limited EC4N 7AF UK 100%
1 King William Street, London,
Delph Crescent Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (95) Limited EC4N 7AF UK 100%
Woodville Developments 1 King William Street, London,
Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (75) Limited EC4N 7AF UK 100%
1 King William Street, London,
Dolan Trading Limited EC4N 7AF UK 100%
1 King William Street, London,
84 A Oakly Road Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (99) Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (91) Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (84) Limited EC4N 7AF UK 100%
1 King William Street, London,
Allerton SPV12 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI Co 353 Limited EC4N 7AF UK 100%
1 King William Street, London,
73 Marsden Road Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (54) Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI Co 342 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI Co 366 Limited EC4N 7AF UK 100%
* indicates entity is a direct subsidiary of
Triple Point Social Housing REIT PLC
The subsidiaries listed below were acquired in the year to 31
December 2019:
Name of Entity Registered Office Country Ownership
of Incorporation %
1 King William Street, London,
MSL (46) Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (84) Limited EC4N 7AF UK 100%
Global Capital Darwin 1 King William Street, London,
Avenue SPV Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (49) Limited EC4N 7AF UK 100%
Rosewood (Albert Rd) 1 King William Street, London,
Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (33) Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 242 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 250 Limited EC4N 7AF UK 100%
1 King William Street, London,
73 Marsden Road Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 217 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 349 Limited EC4N 7AF UK 100%
1 King William Street, London,
Allerton SPV12 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 353 Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (54) Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 342 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 366 Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (95) Limited EC4N 7AF UK 100%
1 King William Street, London,
SL2 Cottingham Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (91) Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (99) Limited EC4N 7AF UK 100%
1 King William Street, London,
84A Oakly Road EC4N 7AF UK 100%
1 King William Street, London,
Dolan Trading Ltd EC4N 7AF UK 100%
1 King William Street, London,
MSL (75) Limited EC4N 7AF UK 100%
1 King William Street, London,
Delph Crescent Limited EC4N 7AF UK 100%
Woodville Developments 1 King William Street, London,
Limited EC4N 7AF UK 100%
The subsidiaries listed below have been struck off since 31 December
2019:
1 King William Street, London,
FPI CO 353 Limited EC4N 7AF UK 100%
1 King William Street, London,
Allerton SPV12 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 366 Limited EC4N 7AF UK 100%
1 King William Street, London,
FPI CO 342 Limited EC4N 7AF UK 100%
1 King William Street, London,
MSL (54) Limited EC4N 7AF UK 100%
1 King William Street, London,
73 Marsden Road Limited EC4N 7AF UK 100%
1 Le Truchot St Peter Port,
SL Heywood Limited GY1 1WD Guernsey 100%
1 Le Truchot St Peter Port,
SL Bury Limited GY1 1WD Guernsey 100%
33. FINANCIAL RISK MANAGEMENT
The Group is exposed to market risk, interest rate risk, credit
risk and liquidity risk in the current and future periods. The
Board oversees the management of these risks. The Board's policies
for managing each of these risks are summarised below.
33.1 Market risk
The Group's activities will expose it primarily to the market
risks associated with changes in property values.
Risk relating to investment in property
Investment in property is subject to varying degrees of risk.
Some factors that affect the value of the investment in property
include:
-- changes in the general economic climate;
-- competition for available properties;
-- obsolescence; and
-- Government regulations, including planning, environmental and tax laws.
Variations in the above factors can affect the valuation of
assets held by the Group and as a result can influence the
financial performance of the Group.
33.2. Interest rate risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The GBP130 million Revolving Credit Facility with Lloyds Bank
has been secured on a floating rate basis whereby the Group pays a
margin of 1.85% per annum above 3 month LIBOR for drawn loan
amounts throughout the loan term. The director's decision was not
to put hedging arrangements in place from the date of signing as
under the terms of the Revolving Credit Facility the Group has full
flexibility, and at its sole discretion, to put hedging
arrangements in place at any time during the loan term. Throughout
the loan term the Group will closely monitor changes in interest
rates and, if necessary, implement hedging at a later stage. The
liquidity table in 33.4 below outlines the bank borrowings and
interest payable on bank borrowings with a floating interest rate.
An increase in interest rates of 1% per annum would decrease the
profit before tax, and the net asset value, by GBP355,500 at 31
December 2019. The Board believes that a movement of 1% in the
current economic climate is reasonably possible.
The fixed rate loan notes with MetLife do not have exposure to
interest rate risk.
Exposure to interest rate risk on the liquidity funds is
immaterial to the Group.
33.3. 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 risks
from both its leasing activities and financing activities,
including deposits with banks and other institutions as detailed in
notes 16 and 19.
Credit risk related to financial instruments and cash
deposits
One of the principal credit risks facing the Group arises with
the funds it holds with banks and other institutions. The Board
believes that the credit risk on short-term deposits and current
account cash balances is limited because the counterparties are
banks and institutions with high credit ratings.
Credit risk related to leasing activities
In respect of property investments, in the event of a default by
a tenant, the Group will suffer a rental shortfall and additional
costs concerning re-letting the property to another Social Housing
Registered Provider. Credit risk is primarily managed by testing
the strength of covenant of a tenant prior to acquisition and on an
ongoing basis. The Investment Manager also monitors the rent
collection in order to anticipate and minimise the impact of
defaults by occupational tenants. Outstanding rent receivables are
regularly monitored. The maximum exposure to credit risk at the
reporting date is the carrying value of each class of financial
asset.
The Group has 79 leases with 2 Registered Providers that have
received a non-compliant rating for governance and viability from
the Regulator, and 43 leases with 2 Registered Providers that have
been deemed non-compliant but have not been rated. We continue to
conduct ongoing due diligence on all Registered Providers and all
rents payable under these leases have been paid. The Group's valuer
has confirmed that there is no impact on the value of the Group's
assets as a result of the non-compliant rating. We continue to
monitor and maintain a dialogue with the Registered Providers as
they work with advisers and the Regulator to implement a financial
and governance improvement action plan in order to address the
Regulator's concerns and obtain a compliant rating. The Board
believes that the credit risk associated with the non-compliant
rating is limited and all rents are received by the Registered
Provider from local and central government.
33.4. Liquidity risk
The Group manages its liquidity and funding risks by considering
cash flow forecasts and ensuring sufficient cash balances are held
within the Group to meet future needs. Prudent liquidity risk
management implies maintaining sufficient cash and marketable
securities, the availability of financing through appropriate and
adequate credit lines, and the ability of customers to settle
obligations within normal terms of credit. The Group ensures,
through forecasting of capital requirements, that adequate cash is
available to fund the Group's operating activities.
The following table details the Group's liquidity analysis:
3-12 1-5 > 5
31 December 2019 < 3 months months Years years
------------------------------- -------- ----------- -------- -------- --------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Headleases (note
28) 7,321 10 30 158 7,123
Trade and other payables 8,106 6,003 2,103 - -
Bank and other borrowings
(note 19):
* Fixed interest rate 68,500 - - - 68,500
* Variable interest rate 100,592 - - 100,592 -
Interest payable
on bank and other
borrowings:
* Fixed interest rate 22,033 520 1,561 8,326 11,626
* Variable interest rate 10,725 720 2,019 7,986 -
217,277 7,253 5,713 117,062 87,249
======== =========== ======== ======== ========
3-12 1-5 > 5
31 December 2018 < 3 months months Years years
---------------------------- -------- ----------- -------- -------- --------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Headleases (note
28) 6,979 9 27 142 6,801
Trade and other payables 8,878 7,808 1,040 30 -
Bank and other borrowings
(note 19):
* Fixed interest rate 68,500 - - - 68,500
Interest payable
on bank and other
borrowings:
* Fixed interest rate 24,114 520 1,561 8,326 13,707
108,471 8,337 2,628 8,498 89,008
======== =========== ======== ======== ========
33.5. Financial instruments
The Group's principal financial assets and liabilities, which
are all held at amortised cost, are those that arise directly from
its operation: trade and other receivables, trade and other
payables, headleases, borrowings and cash held at bank.
Set out below is a comparison by class of the carrying amounts
and fair value of the Group's financial instruments that are
included in the financial statements:
Book value Fair value Book value Fair value
31 December 31 December 31 December 31 December
2019 2019 2018 2018
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets:
Trade and other
receivables 2,759 2,759 1,637 1,637
Cash held at bank 67,711 67,711 114,624 114,624
------------- ------------- ------------- -------------
Financial liabilities:
Trade and other
payables 8,106 8,106 8,878 8,878
Borrowings 164,955 173,035 67,361 67,508
------------- ------------- ------------- -------------
34. POST BALANCE SHEET EVENTS
Property acquisitions
Since 31 December 2019, the Group has acquired portfolios of 7
supported Social Housing properties deploying GBP19.3 million
(including acquisition costs).
35. CAPITAL COMMITMENTS
The Group had capital commitments of GBP24.3 million (2018:
GBP21 million) in relation to the cost to complete its forward
funded pre-let development assets and on properties exchanged but
not completed at 31 December 2019.
36. EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated by dividing
profit for the period attributable to ordinary equity holders of
the Company by the weighted average number of Ordinary Shares in
issue during the period. As there are no dilutive instruments
outstanding, both basic and diluted earnings per share are the
same.
The calculation of basic and diluted earnings per share is based
on the following:
Year ended Year ended
31 December 31 December
2019 2018
Calculation of Basic Earnings per
share
Net profit attributable to Ordinary
Shareholders (GBP'000) 23,717 19,897
Weighted average number of Ordinary
Shares (excluding treasury shares) 351,124,401 237,610,066
IFRS Earnings per share - basic and
diluted 6.75p 8.37p
------------ ------------
Calculation of EPRA Earnings per
share
Net profit attributable to Ordinary
Shareholders (GBP'000) 23,717 19,897
Changes in value of fair value of
investment property (GBP'000) (11,809) (14,497)
EPRA earnings (GBP'000) 11,908 5,400
Non cash adjustments to include:
Interest capitalised on forward funded
developments (60) -
Amortisation of loan arrangement
fees 457 47
------------ ------------
Adjusted earnings (GBP'000) 12,305 5,447
------------ ------------
Weighted average number of Ordinary
Shares (excluding treasury shares) 351,124,401 237,610,066
------------ ------------
EPRA earnings per share - basic and
diluted 3.39p 2.27p
Adjusted earnings per share - basic
and diluted 3.50p 2.29p
------------ ------------
Adjusted earnings is a performance measure used by the Board to
assess the Group's dividend payments. The metric adjusts EPRA
earnings for interest paid to service debt that was capitalised,
and the amortisation of loan arrangement fees. The Board sees these
adjustments as a reflection of actual cashflows which are
supportive of dividend payments. The Board compares the Adjusted
earnings to the available distributable reserves when considering
the level of dividend to pay. These adjustments have historically
been insignificant.
37. NET ASSET VALUE PER SHARE
Basic Net Asset Value ("NAV") per share is calculated by
dividing net assets in the Group Statement of Financial Position
attributable to Ordinary Shareholders of the parent by the number
of Ordinary Shares outstanding at the end of the period. Although
there are no dilutive instruments outstanding, both basic and
diluted NAV per share are disclosed below.
Net asset values have been calculated as follows:
31 December 31 December
2019 2018
GBP'000 GBP'000
Net assets at the end of the year 369,733 364,161
Shares in issue at end of the
year (excluding treasury shares) 350,902,210 351,352,210
Dilutive shares in issue - -
IFRS NAV per share - basic and
dilutive 105.37p 103.65p
------------ ------------
EPRA NAV per share 105.37p 103.65p
============ ============
38. CAPITAL MANAGEMENT
The Group's objectives when managing capital are to safeguard
the Group's ability to continue as a going concern in order to
provide returns for shareholders and to maintain an optimal capital
structure to minimise the cost of capital.
The Group considers proceeds from share issuance, bank and other
borrowings and retained earnings as capital.
Until the Group is fully invested and pending re-investment or
distribution of cash receipts, the Group will invest in cash
equivalents, near cash instruments and money market
instruments.
The level of borrowing will be on a prudent basis for the asset
class and will seek to achieve a low cost of funds, whilst
maintaining the flexibility in the underlying security requirements
and the structure of both the investment property portfolio and the
Group.
The directors currently intend that the Group should target a
level of aggregate borrowings over the medium term equal to
approximately 40% of the Group's Gross Asset Value. The aggregate
borrowings will always be subject to an absolute maximum,
calculated at the time of drawdown, of 50% of the Gross Asset
Value.
The fixed rate facility with MetLife requires an asset cover
ratio of x2.25 and an interest cover ratio of x1.75. At 31 December
2019, the Group was fully compliant with both covenants with an
asset cover ratio of x2.64 (2018: x2.57) and an interest cover
ratio of x4.78 (2018: x3.95).
The RCF requires the Group to maintain a loan-to-value of less
than 50%, and an interest cover ratio in excess of x2.75. At 31
December 2019, the Group was fully compliant with both covenants
with a loan-to-value ratio of 40% and an interest cover ratio of
x5.42.
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 FLFFTVAIFLII
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