Source - RNS
RNS Number : 2496J
Secure Income REIT PLC
08 September 2016
 

8 September 2016

Secure Income REIT Plc

(the "Company" or the "Group")

 

Interim results for the six months ended 30 June 2016

 

Secure Income REIT Plc (AIM: SIR), the specialist long term income UK REIT, today announces its interim results for the six months ended 30 June 2016.

 

Highlights

 

•   Near doubling of adjusted EPRA EPS to 5.4p, up from 2.9p in the six months to 31 December 2015 and (0.3)p in the six months to 30 June 2015: significant impact of degearing and lower financing costs following 2015 refinancing

 

•    6.2% increase in EPRA NAV to 300.2 pence per share as at 30 June 2016

 

•    Further reduction in net loan to value ratio to 59.5%, down from 61% at 31 December 2015 and 80% at listing in June 2014

 

•    Portfolio valuation up 2.1% since 31 December 2015 to £1.38 billion; net initial yield 5.3% and equivalent yield 6.3%

 

•    Weighted average unexpired lease term of 23.1 years with no breaks, one of the longest in the sector

 

•   Passing rent of £78.5 million as at 30 June 2016 with annual fixed or RPI uplifts, secured entirely against major global multi-billion pound quoted businesses

 

•   First distribution paid to shareholders in August 2016: 2.9375 pence per share as first quarterly payment, annualising at 11.75 pence per share and equating to a 3.9% yield on 30 June 2016 EPRA NAV

 

•   The Company has also announced today its agreement to acquire a £192.6 million investment portfolio of 55 Travelodge hotels and a proposed placing of new ordinary shares to raise c. £140 million at a placing price (equivalent to the pro forma EPRA NAV, adjusted for the impact of the transaction) of 298.6 pence per share.  The acquisition is conditional on the placing and should it complete, the Board estimates a 14% increase in the dividend yield to 4.5% on the placing price

 

 

30 June 2016

31 December 2015

Change since

31 December 2015

EPRA net asset value

£541.5m

£510.1m

6.2%

EPRA net asset value per share

300.2p

282.8p

6.2%

 

 

 

 

Net asset value

£534.5m

£504.4m

6.0%

 

 

 

 

Adjusted EPRA earnings per share

5.4p

2.6p

n/a

 

 

Martin Moore, Independent Non-Executive Chairman of the Company, commented: "I am delighted to report a very positive first half for the Group.  Our EPRA NAV per share has continued to rise, up 6.2% over the six months to 30 June 2016 to just over 300p, and we are pleased to have made our maiden quarterly dividend payment in August.  We are very excited to have secured an opportunity to expand our business with the £193 million Travelodge transaction which, if supported by shareholders, will raise our dividend yield, lengthen our lease duration even further, degear the business and diversify our covenant profile."

 

ENQUIRIES:

 

Prestbury Investments LLP                                                           Tel: 020 7647 7647

Nick Leslau 

Mike Brown

Sandy Gumm

 

FTI Consulting                                                                               Tel: 020 3727 1000

Richard Sunderland

Claire Turvey

 

Stifel Nicolaus Europe (Nominated Adviser and Broker)                  Tel: 020 7710 7600

David Arch

Tom Yeadon

Mark Young

 

Notes to Editors

 

About Secure Income REIT

Secure Income REIT Plc is a UK REIT specialising in generating long term, inflation protected, secure income from real estate investments.  Its investment strategy is designed to satisfy investors' growing requirements for high quality, secure, inflation protected income flows.  The Group owns a freehold portfolio of 26 well established real estate assets including some of the UK's top visitor attractions and theme parks: namely Alton Towers theme park and hotel, Thorpe Park and Warwick Castle, as well as 20 private hospitals in the UK.

 

Forward looking statements

This document includes forward looking statements which are subject to risks and uncertainties.  You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements.  Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after the date of this document.

 

 

 

Chairman's Statement

 

 

Dear shareholder,

Following the £282 million secondary placing in March, representing 61.4% of the issued share capital, I am delighted to welcome our new shareholders onto the register and to report a very positive first half of 2016 for the Group.

 

Our highly resilient and growing long term income streams have so far proven a haven of stability at a time of volatility in the listed real estate sector; our shares have consistently held above the placing price despite the sector falling on average more than 20% immediately after the 23 June referendum result.

 

Our EPRA NAV per share has continued to rise, up 6.2% over the six months to 30 June 2016 to just over 300p, and we are pleased to have made our maiden quarterly dividend payment in August.  We can be confident that our dividends will rise for a very long time due to our industry leading weighted average unexpired lease term of over 23 years, with two thirds of our income increasing by 2.8% per annum and the remaining third increasing annually by RPI.  All of our tenants have continued to prosper, with Ramsay, Merlin and Orpea trading at or close to all-time share price highs with market capitalisations ranging from £4.1 billion to £9.3 billion.

 

Results and financial position

The 6.2% increase in the Group's EPRA NAV since 31 December 2015 arose as follows:

 

 

£m

Pence per share

EPRA NAV at 1 January 2016

510.1

282.8

Investment property revaluation*

19.7

10.9

Rental income net of finance costs and recurring administrative expenses*

12.5

7.0

Costs of secondary placing

(2.1)

(1.2)

Investment feasibility costs

(1.4)

(0.8)

Currency translation movements

2.7

1.5

EPRA NAV at 30 June 2016

541.5

300.2

*  including a £6.6 million (3.7 pence per share) adjustment to strip out the impact of spreading fixed rental uplifts over the term of the lease required by accounting standards - adjustment reduces rental income and increases revaluation movement in equal amounts.

 

In the six months to 30 June 2016, the portfolio valuation rose by 2.1% to £1.38 billion, showing a net initial yield of 5.3% and an equivalent yield of 6.3%.

 

Adjusted EPRA EPS for the six months to 30 June 2016 was 5.4 pence per share compared to a loss of 0.3 pence per share for the six months to 30 June 2015 as follows:

 

 

Six months to

30 June 2016

Pence per share

Six months to

30 June 2015

Pence per share

Rental income net of property outgoings:

 

 

  Portfolio owned at 30 June 2016

21.3

20.8

  Sold properties

-

4.8

Net finance costs

(13.6)

(23.6)

Administrative expenses and corporate costs

(2.3)

(2.2)

Tax

-

(0.1)

Adjusted EPRA EPS

5.4

(0.3)

 

58% of our rent roll is guaranteed by Ramsay Health Care Limited, listed on the Australian Stock Exchange with a market capitalisation of £9.3 billion* and one of the five largest healthcare groups in the world.  A further 39% of rents are guaranteed by Merlin Entertainments Plc, a FTSE 100 constituent with a market capitalisation of £5.0 billion*, the largest operator of visitor attractions in Europe and the second largest in the world.  The remainder of our rent roll is guaranteed by Orpea SA, a European leader in dependency care, listed on Euronext Paris with a market capitalisation of £4.1 billion*.  In addition, as we grow the Group we will diversify our income streams by acquiring assets which meet our investment criteria and deliver enhanced returns to shareholders in line with our strategy, such as the £193 million Travelodge hotel acquisition announced today.

 

 

 

* as at 7 September 2016

 

 

 

Chairman's Statement continued

 

 

Outlook

Since we last reported to shareholders in March the short term outlook for the UK may have changed significantly, but we anticipate that little of this shift in environment will adversely affect our business and much could prove supportive.

 

The referendum result led to the Bank of England slashing its economic growth forecast by the biggest margin on record (from 2.3% to 0.8% for 2017), recommencing QE and cutting interest rates.  Much has been written about the impact on the commercial property market and particularly the redemptions from open ended funds.  Our view is simply that buying pressure over the last two years had driven down the yields offered on most traditional commercial property to a level that seemed expensive when compared to historic trends, and that at some point a correction seemed likely.  This has now been triggered by the outcome of the referendum but the extent of this correction is likely to be limited by the relatively small number of forced sellers as well as the valuation level of, and income returns available from, the alternative homes for investment in equities and bonds.  Property crashes may be much talked about but are relatively scarce: over the last 50 years, they have only ever followed speculative development or bank lending booms, neither of which have been a feature of recent years.

 

We have always been keen to make a clear distinction between mainstream commercial property and the composition of our portfolio, which is entirely let to strong covenants on long leases with guaranteed uplifts in less cyclical alternative property sectors.  Whereas the rental levels of traditional property assets tend to follow economic growth, both upwards and downwards, our cash flows are much more predictable and resilient.  This is a critical feature as the search for yield has become more acute, with 20 year gilt yields halving from 2.5% to 1.2% and 10 year gilt yields plummeting from 2.0% to 0.7% over the last year.  Very low bond yields provide a highly supportive backdrop for investments producing predictable income returns, as illustrated by the c. 20% rise in the value of infrastructure funds over the last year.

 

As the summer market lull followed the referendum outcome, property transactional evidence is relatively thin on the ground.  However, we have certainly seen no evidence of a weakening in prices in our sector of the market and we sense that sentiment may well be firming given that investments with similar income characteristics outside the property market have risen in value in recent months.  As a consequence we are very excited to have secured an opportunity to expand our business with the Travelodge transaction which, if supported by shareholders, will raise our dividend yield, lengthen our lease duration even further, degear the business and diversify our covenant profile.

 

Martin Moore

Chairman

8 September 2016

 

 

 

 

Investment Adviser's Report

 

 

Prestbury Investments LLP is the investment adviser to Secure Income REIT Plc and is pleased to report on the operations of the Group for the six months ended 30 June 2016.

 

The portfolio

The portfolio comprises 26 properties with secure, long term income and contractual uplifts offering inflation protection.  The rent is derived from tenants whose businesses offer global spread and have demonstrated their strong defensive qualities in performing very well over many years, including the recession of 2008 - 2009.  The Group's properties form an integral part of those businesses.

 

Healthcare assets (62% of portfolio value)

The healthcare assets comprise 20 freehold private hospitals: a portfolio of 19 located throughout England let to a subsidiary of Ramsay Health Care Limited, the listed Australian healthcare company, and one in central London let to a subsidiary of Groupe Sinoué, a French company specialising in mental health, with passing rent as follows:

 

 

30 June

2016

£m

31 December 2015

£m

Acute hospitals - guaranteed by Ramsay Health Care Limited

45.6

44.4

London psychiatric hospital - guaranteed by Orpea SA

2.0

1.9

 

47.6

46.3

 

The leases on the acute hospitals are all guaranteed by Ramsay Health Care Limited, one of the top five private hospital operators in the world and a constituent of the ASX 50 index of Australia's largest listed companies, with a market capitalisation at 7 September 2016 of £9.3 billion.

 

The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2016 of 20.9 years without break.  The rent increases by a fixed 2.75% per annum throughout the lease term in May each year.  In addition, every five years commencing in May 2017, the Group has the option to revise the rent to the higher of the then passing rent increased by 2.75% per annum calculated on a compounded basis (the "indexed rent") and the open market rental value, with a special assumption at the first open market review in May 2017 that the rental level is the higher of the indexed rent or the amount calculated by the formula 0.885 x 0.65 x "EBITDARH", where EBITDARH is calculated as earnings from each individual property before interest, tax, depreciation, amortisation, rent and head office costs.  In subsequent five yearly reviews the rent is set to indexed rent or open market rent at the Group's option.

 

The lease on the London psychiatric hospital is guaranteed by Orpea SA, a leading European operator of nursing homes, post-acute care and psychiatric care, listed on Euronext Paris with a market capitalisation at 7 September 2016 of
£4.1 billion.  Orpea owns 45% of Groupe Sinoué, the parent company of the tenant.  The hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2016 of 28.1 years without break, and the rent increases by a fixed 3.0% per annum throughout the lease term in May each year.

 

Leisure assets (38% of portfolio value)

The leisure assets are located in England and Germany and comprise four well known visitor attractions and two hotels, including two of the UK's top three theme parks.  The English assets are Alton Towers theme park and the Alton Towers hotel, Thorpe Park theme park and Warwick Castle, while the German assets are Heide Park theme park (the largest in Northern Germany) and the Heide Park hotel, both located in Soltau, Saxony.  Passing rent on the portfolio was as follows:

 

 

30 June

2016

£m

31 December 2015

£m

English assets

25.4

25.1

German assets (at 30 June 2016 exchange rate)

5.5

5.5

 

30.9

30.6

 

There are upwards only uncapped RPI-linked rent reviews every June throughout the term (based on RPI in the twelve months to April each year) for the English leisure portfolio, which in 2016 resulted in an increase of 1.3%.  The German properties are subject to fixed annual increases of 3.34% every July throughout the term, as a result of which the German rents increased from £5.5 million to £5.7 million on 29 July 2016 (translated at the 30 June 2016 rate).

 

 

 

Investment Adviser's Report continued

 

 

The portfolio (continued)

Leisure assets (continued)

The properties are all let to substantial operating subsidiaries of Merlin Entertainments Plc, the guarantor of the leases.  Merlin is a FTSE 100 company with a market capitalisation at 7 September 2016 of £5.0 billion.  Measured by the number of visitors, it is Europe's largest and the world's second largest operator of leisure attractions.  The average unexpired lease term of the leisure assets is 26.0 years and the tenants have two successive rights to renew these leases for 35 years at the end of each term.  The leases are on full repairing and insuring terms. 

 

Portfolio valuation yields at 30 June 2016

 

 

 

 

 

England

Germany

Total

30 June 2016

Total

31 December 2015

Healthcare:

 

 

 

 

 

 

 

 

Net initial yield

 

 

 

 

5.2%

n/a

5.2%

5.2%

Equivalent yield

 

 

 

 

6.2%

n/a

6.2%

6.4%

Reversionary yield

 

 

 

 

5.4%

n/a

5.4%

5.4%

 

 

 

 

 

 

 

 

 

Leisure:

 

 

 

 

 

 

 

 

Net initial yield

 

 

 

 

5.4%

6.1%

5.5%

5.5%

Equivalent yield

 

 

 

 

6.3%

7.7%

6.5%

6.6%

Reversionary yield

 

 

 

 

5.5%

6.5%

5.6%

5.6%

 

 

 

 

 

 

 

 

 

Total portfolio:

 

 

 

 

 

 

 

 

Net initial yield

 

 

 

 

5.3%

6.1%

5.3%

5.3%

Equivalent yield

 

 

 

 

6.2%

7.7%

6.3%

6.4%

Reversionary yield

 

 

 

 

5.4%

6.5%

5.5%

5.5%

 

 

 

 

 

 

 

 

 

Weighted average unexpired lease term

 

22.9 years

26.1 years

23.1 years

23.5 years

 

The healthcare valuation yields include the effect of the fixed rental uplifts that took effect in May 2016 and the English leisure valuation yields include the effect of the 1.3% RPI-linked rental uplifts that took effect in June 2016.  The German leisure valuation yield of 6.1% reflects the passing rent at 30 June 2016, and so has since increased to 6.3% following the July 2016 fixed rental uplifts.

 

Portfolio valuation

 

 

Healthcare

 

Leisure

 

Total

 

30 June

2016

£m

31 December

2015

£m

 

30 June

2016

£m

31 December

2015

£m

 

30 June

2016

£m

31 December

2015

£m

Percentage change in the period

England

849.7

834.4

 

443.2

441.6

 

1,292.9

1,276.0

1.3%

Germany at constant Euro exchange rate

-

-

 

76.0

73.5

 

76.0

73.5

3.3%

Movement in Euro exchange rate

-

-

 

9.6

n/a

 

9.6

n/a

13.0%

 

849.7

834.4

 

528.8

515.1

 

1,378.5

1,349.5

2.1%

 

The portfolio valuation uplift in the period comprised:

 

£m

Percentage change in the period

Healthcare assets

15.3

1.8%

English leisure assets

1.6

0.4%

German leisure assets at constant Euro exchange rate

2.5

3.3%

Movement in Euro exchange rate

9.6

13.0%

 

29.0

2.1%

 

 

 

 

Investment Adviser's Report continued

 

 

The portfolio (continued)

Portfolio valuation (continued)

The favourable currency translation movements of £9.6 million have arisen on the German properties in the period to 30 June 2016, reflecting the strength of the Euro against Sterling: the 31 December 2015 exchange rate was €1:£0.7350 and at 30 June 2016 was €1:£0.82775.  This gain is offset by equivalent movements in the value of the Euro-denominated debt secured on those properties (and other Euro-denominated assets and liabilities) to leave a net currency translation gain of £2.7 million on the Group's German investments.

 

In addition to these movements, a rent smoothing adjustment arises on investment property revaluations from the Group's accounting policy, as required by International Financial Reporting Standards, to spread the impact of fixed rental uplifts evenly over the term of the relevant lease.  The adjustments relate to those rents on the healthcare assets which increase by 2.75% (58% of the Group's rent roll) and 3.0% (3% of the Group's rent roll) every May, and those rents on the German leisure assets which increase by 3.34% every July (7% of the Group's rent roll).

 

The impact of this accounting treatment is to reflect a receivable, which is included in the book value of investment property, for the amount of rent included in the income statement ahead of actual cash receipts.  This receivable increases over the first half of each lease term then unwinds, reducing to zero over the second half of each lease term.  The impact over time for each of the rental income flows subject to smoothing is as follows:

 

 

 

Maximum

 

Receivable

receivable

Midway

at 30 June

at midway

point

2016

point

in lease

£m

£m

term

Healthcare - acute hospitals

132.9  

159.5  

May 2022

Healthcare - London psychiatric hospital

6.6  

20.6 

Nov 2025

German leisure*

26.7  

38.8 

Jan 2025

Total

166.2  

218.9

 

* at the period end Euro conversion rate of €1:£0.82775

 

In order that the rent smoothing receivable does not, in combination with the book value of the investment properties, overstate the value of the property portfolio, any movement in the receivable is offset against property revaluation movements.  As a result, this adjustment affects only the income statement presentation, increasing rental income and reducing property revaluation gains, and does not change the Group's net assets.

 

The annual impact of this adjustment is known with certainty unless there are acquisitions, disposals or lease variations.  The additional revenue and reduced valuation movement that is expected to be recognised on the existing portfolio during the current year and the next three financial years is as follows:

 

 

Healthcare

German leisure*

Total

 

£m

£m

£m

2016

10.6 

2.1 

12.7 

2017

9.3 

1.9 

11.2 

2018

7.9 

1.8 

9.7 

2019

6.6 

1.6 

8.2 

* at the year to date average Euro conversion rate of €1:£0.77881

 

 

 

 

Investment Adviser's Report continued

 

 

Financial review

EPRA NAV per share

The principal financial outcome that the Board seeks to achieve is attractive growth in total shareholder returns.  Progress towards this objective is specifically measured through growth in EPRA NAV plus distributions paid.  EPRA NAV is a measure of the fair value of a property company on a long term basis, ignoring the impact of hedging valuations and any deferred tax.

 

EPRA NAV per share at 30 June 2016 was 300.2 pence per share, a 6.2% increase since 31 December 2015.  Distributions commenced after the balance sheet date.

 

£m

Pence per share

EPRA NAV at 1 January 2016

510.1

282.8

Investment property revaluation*

19.7

10.9

Rental income less finance and recurring administrative costs*

12.5

7.0

Costs of secondary placing

(2.1)

(1.2)

Investment feasibility costs

(1.4)

(0.8)

Currency translation movements

2.7

1.5

EPRA NAV at 30 June 2015

541.5

300.2

*  including a £6.6 million (3.7 pence per share) adjustment to strip out the impact of spreading fixed rental uplifts over the term of the lease required by accounting standards - adjustment reduces rental income and increases revaluation movement in equal amounts.

 

Adjusted EPRA earnings per share

In order to monitor the Group's recurring profitability and its ability to make distributions, the Board uses the Group's adjusted EPRA earnings per share ("EPRA EPS") as a key performance indicator.  EPRA EPS excludes investment property revaluations, fair value movements and early termination costs on interest rate derivatives, and the relevant deferred tax to give a measure of underlying earnings from core operating activities.  Adjusted EPRA EPS further excludes:

 

·      the effect of smoothing the fixed rental income, as the EPRA adjustments already exclude the rent smoothing impact on revaluations but not the impact on rental income, and in order not to distort dividend cover calculations; and

·      certain non-recurring costs, as the Board believes this enables a more consistent comparison of underlying recurring earnings.

 

The non-recurring costs charged in the period and excluded in the adjusted EPRA EPS calculation relate to:

 

•     the £2.1 million cost to the Group of the secondary placing of 61.4% of the Company's existing share capital in March 2016, to broaden the Company's investor base, to create additional liquidity in share trading and to provide improved flexibility for financing future transactions; and

•     £1.4 million of costs incurred in exploring the feasibility of the proposed Travelodge acquisition, principally legal fees and other due diligence costs.  The costs have been expensed in the period as the decision to acquire the portfolio had not been made at the balance sheet date.  Should the acquisition complete, these costs are expected to remain as an expense in the income statement.

 

Adjusted EPRA EPS is therefore calculated as follows:

 

Six months to

30 June 2016

Six months to

30 June 2015

 

£m

Pence per share

£m

Pence per share

Rental income net of property outgoings

45.0

25.0

52.9

29.3

Net finance costs

(24.5)

(13.6)

(42.4)

(23.6)

Administrative expenses and corporate costs

(7.7)

(4.3)

(4.0)

(2.2)

Tax

-

-

(0.3)

(0.1)

EPRA EPS

12.8

7.1

6.2

3.4

Rent smoothing

(6.6)

(3.7)

(6.8)

(3.7)

Costs of secondary placing

2.1

1.2

-

-

Investment feasibility costs

1.4

0.8

-

-

Adjusted EPRA EPS

9.7

5.4

(0.6)

(0.3)

 

 

 

 

Investment Adviser's Report continued

 

 

Financial review (continued)

Income statement

The rental income profile and the credit strengths of the businesses paying the rent are disclosed in the Portfolio section of this report, along with details of the investment property revaluations.

 

The Group's administrative expenses are analysed below:

 

 

Six months to

30 June 2016

Six months to

30 June 2015

 

£m

Pence per share

£m

Pence per share

Investment Adviser's fee

3.6

2.0

3.3

1.8

Other administrative expenses

0.3

0.1

0.4

0.2

Corporate costs

0.3

0.2

0.3

0.2

Recurring costs

4.2

2.3

4.0

2.2

Costs of secondary placing

2.1

1.2

-

-

Investment feasibility costs

1.4

0.8

-

-

Total administrative expenses

7.7

4.3

4.0

2.2

 

The majority of the Group's overheads are borne by the Investment Adviser and are compensated for by way of advisory fees payable to the Investment Adviser under an agreement by which it is entitled to receive cash fees calculated on a sliding scale relative to the Group's EPRA NAV.  Fees are payable at 1.25% per annum on EPRA NAV up to £500 million, plus 1.0% on EPRA NAV from £500 million to £1,000 million and 0.75% thereafter.  Until 10 July 2016, the cash required to satisfy this advisory fee was subsidised by the pre-listing shareholders of the Company up to a maximum of £1.3 million per quarter and £1.5 million in the extended period to 10 July 2016.  During the period, cash of £2.8 million was received from those shareholders towards the £3.6 million of fees payable.

 

Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:

 

·     the cost of the board of seven Directors, four of whom received fees totalling £0.1 million in the period.  The other three Directors are partners in the Investment Adviser and receive no remuneration from the Company; and

·      other costs of being listed, including listing fees, nominated advisers' fees and registrars' fees, which totalled £0.2 million in the period.

 

Irrecoverable VAT, which is included as appropriate in each of the line items above, arises on the proportion of expenses relating to the healthcare portfolio, as VAT is not chargeable or recoverable on the healthcare assets.  The VAT disallowed averaged 61% across the Group in the period.

 

The average interest rate paid across the Group's three secured debt facilities during the period was 5.2% per annum, significantly down from 6.8% per annum in the period to 2 October 2015 when the last of the new facilities arranged in the second half of 2015 was drawn.  All facilities are fixed rate loans, so this rate is expected to apply to these facilities in future years until the first debt maturity in October 2022.

 

Tax

The Group operates under the UK REIT regime, so its UK and German rental operations are exempt from UK corporation tax, subject to the Group's continuing compliance with the UK REIT rules.  The Group is otherwise subject to UK corporation tax.

 

Realised profits from the Group's German rental operations are taxable in Germany, in respect of which a tax charge of £0.1 million arose in the period.  As the Group's German operations are subject to German tax, the results also include a deferred tax liability of £6.9 million relating to unrealised German capital gains tax on those investment properties.

 

In the event that a UK REIT has financing costs arising on its UK property rental business that are not covered at least 1.25 times by property rental business profits, tax is payable at the UK corporation tax rate on the excess interest over that level, up to a cap of 20% of the taxable profit.  In the prior year the Group incurred a £1.3 million tax charge as a result but, following completion of the Group's debt refinancing in October 2015, no such excess interest has arisen so there is no tax charge in the current period and none is expected on the current portfolio in future.

 

 

 

 

Investment Adviser's Report continued

 

 

Financial review (continued)

Currency translation

The majority of the Group's assets are located in the UK and the financial statements are therefore presented in Sterling.  Just under 4% of the Group's EPRA NAV relates to assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros.  The fact that both assets and liabilities are Euro denominated acts as a partial hedge of the currency risk, but the Group remains exposed to translation differences on the net results and net assets of these operations, with movements recognised in the statement of other comprehensive income.  The assets are held for long term investment and the net currency exposure is not hedged.

 

The German properties are valued at €103.4 million as at 30 June 2016, with the Euro tranches of the Group's secured debt facilities amounting to €71.8 million.  The Euro strengthened against Sterling over the period by nearly 13% and as a result there was a net currency translation gain of £2.7 million in EPRA NAV in relation to the German net assets.

 

Cash flow

The movement in cash over the period comprises:

 

Six months to

30 June 2016

Six months to

30 June 2015

 

 

£m

Pence per share

£m

Pence per share

 

Cash from operating activities

34.5

19.1

39.3

21.6

 

Net interest and finance costs paid

(25.1)

(13.9)

(41.8)

(23.2)

 

Amounts received in respect of advisory fee subsidy

2.8

1.6

2.5

1.4

 

Repayment of secured debt - loan amortisation

(2.3)

(1.3)

(3.3)

(1.9)

 

Costs of secondary placing

(2.1)

(1.2)

-

-

 

Sale of investment properties

-

-

49.0

27.2

 

Net repayment of secured debt - accelerated

-

-

(44.7)

(24.8)

 

Early debt repayment costs

-

-

(3.6)

(2.0)

 

Cash flow in the period

7.8

4.3

(2.6)

(1.7)

 

Cash at the start of the period

81.6

45.3

38.8

23.0

 

Effect of exchange rate movements

0.2

0.1

(0.2)

(0.1)

 

Dilution from 2014 incentive fee share issue

-

-

-

(1.5)

 

Cash at the end of the period

89.6

49.7

36.0

19.7

 

 

 

Comprising:

£m

Pence per share

£m

Pence per share

 

Free cash

69.3  

38.5   

10.3  

5.4   

 

Cash reserved for regulatory capital

0.6  

0.3   

0.5  

0.2  

 

Cash secured under lending facilities

19.7  

10.9   

25.2  

14.1 

 

 

89.6  

49.7   

36.0  

19.7 

           

 

The investment properties of the Group are let on full repairing and insuring terms, with each tenant obliged to keep the premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing premises where necessary.  Consequently, no capital expenditure, property maintenance or insurance costs have been incurred in the period and it is not expected that material costs of that nature will be incurred on the current portfolio in future.

 

 

 

 

Investment Adviser's Report continued

 

 

Financing

The key terms of the Group's secured loan facilities are as follows:

 

 

Healthcare

Healthcare

Leisure

Loan principal at 30 June 2016

£219.3m

£313.8m

£376.2m*

Number of assets securing loan

9

11

6

Fixed interest rate

4.29%

5.30%

5.69%

Amortisation per annum (assuming full covenant compliance)

£1.0m

 

£3.2m

 

£3.8m

(in years 6 and 7)

Final repayment

September 2025

October 2025

October 2022

* comprising £316.8 million of senior and mezzanine Sterling loans secured on the English assets and €71.8 million of senior and mezzanine Euro denominated loans secured on the German assets (translated at the 30 June 2016 exchange rate of €1:£0.82775) with these Sterling and Euro loans cross-collateralised.

 

The Group's gross and net debt at 30 June 2016 was as follows:

 

 

Healthcare

Healthcare

Leisure

Portfolio total

Unsecured

Group

total

 

£m

£m

£m

£m

£m

£m

Gross debt

219.3

313.8

376.2

909.3

-

909.3

Secured and regulatory cash

(5.3)

(6.6)

(7.8)

(19.7)

(0.6)

(20.3)

Free cash

-

-

(1.8)

(1.8)

(67.5)

(69.3)

Net debt

214.0

307.2

366.6

887.8

(68.1)

819.7

 

 

 

 

 

 

 

Property value

378.7

471.0

528.8

1,378.5

-

1,378.5

 

 

 

 

 

 

 

Net LTV

56.5%

 65.2%

69.3%

64.4%

 

59.5%

 

Following scheduled amortisation payments in July 2016, total gross debt at the date of this report, including Euro denominated debt at the 30 June 2016 exchange rate, is £908.2 million.

 

Nick Leslau

Chairman, Prestbury Investments LLP

8 September 2016

 

 

 

Group Income Statement

 

 

 

Notes

Unaudited

six months to

30 June

2016

£000

Audited

year to

31 December

2015

£000

Unaudited

six months to 30 June

2015

£000

Revenue

45,014

99,479

52,886

Property outgoings

(14)

(33)

(24)

Gross profit

45,000

99,446

52,862

Administrative expenses

(7,418)

(7,656)

(3,766)

Corporate costs

(326)

(482)

(272)

Total administrative expenses

(7,744)

(8,138)

(4,038)

Investment property revaluation

13,077

70,435

76,551

Profit on sale of investment properties

-

23,962

23,967

Operating profit

50,333

185,705

149,342

Finance income

69

61

24

Finance costs

(24,546)

(146,613)

(46,251)

Profit before tax

25,856

39,153

103,115

Tax charge

(458)

(2,382)

(1,196)

Profit for the period

25,398

36,771

101,919

 

 

 

 

Earnings per share

Pence

per share

Pence per

share

Pence per

share

Basic and diluted

14.1 

20.4 

56.5 

 

All amounts relate to continuing activities.

 

The notes form part of this interim report.

 

 

 

Group Statement of Other Comprehensive Income

 

 

 

 

Unaudited

six months to

30 June

2016

£000

Audited

year to

31 December

2015

£000

Unaudited

six months to 30 June

2015

£000

Profit for the period

 

25,398

36,771

101,919

Items that may subsequently be reclassified to profit or loss:

 

 

 

Currency translation differences

 

1,948

(899)

(1,433)

Fair value adjustment of interest rate derivatives in effective hedges

 

-

31,703

24,823

Reclassification of interest rate derivative fair value adjustment to the income statement

 

-

88,125

3,627

Tax effect of interest rate derivative fair value adjustment

 

-

(147)

(161)

Deferred tax written off following early termination of interest rate derivatives

 

-

(480)

-

Total comprehensive income for the period, net of tax

 

27,346

155,073

128,775

 

The notes form part of this interim report.

 

 

 

Group Statement of Changes in Equity

 

 

 

Share capital

£000

Share premium reserve

£000

Other reserve

£000

Cash flow hedging reserve

£000

Retained earnings

£000

Total

£000

Period ended 30 June 2016 (unaudited)

At 1 January 2016

18,034

52,377

652

-

433,348

504,411

Profit for the period

-

-

-

-

25,398

25,398

Other comprehensive income

-

-

1,948

-

-

1,948

Total comprehensive income, net of tax

-

-

1,948

-

25,398

27,346

Issue of shares

-

2,788

-

-

-

2,788

At 30 June 2016

18,034

55,165

2,600

-

458,746

534,545

 

 

 

 

 

 

 

Year ended 31 December 2015 (audited)

At 1 January 2015

16,844

16,156

33,929

(119,201)

396,577

344,305

Profit for the year

-

-

-

-

36,771

36,771

Other comprehensive income

-

-

(899)

119,201

-

118,302

Total comprehensive income, net of tax

-

-

(899)

119,201

36,771

155,073

Issue of shares

1,190

36,221

(32,378)

-

-

5,033

At 31 December 2015

18,034

52,377

652

-

433,348

504,411

 

 

 

 

 

 

 

Period ended 30 June 2015 (unaudited)

At 1 January 2015

16,844

16,156

33,929

(119,201)

396,577

344,305

Profit for the period

-

-

-

-

101,919

101,919

Other comprehensive income

-

-

(1,433)

28,289

-

26,856

Total comprehensive income, net of tax

-

-

(1,433)

28,289

101,919

128,775

Issue of shares

1,190

33,579

(32,378)

-

-

2,391

At 30 June 2015

18,034

49,735

118

(90,912)

498,496

475,471

 

The notes form part of this interim report.

 

 

 

Group Balance Sheet

 

 

 

Notes

Unaudited

30 June

2016

£000

Audited

31 December

2015

£000

Unaudited

30 June

2015

£000

Non-current assets

 

 

 

 

Investment properties

3,8

1,378,492

1,349,547

1,346,867

Deferred tax asset

11

-

-

467

 

 

1,378,492

1,349,547

1,347,334

Current assets

 

 

 

 

Cash and cash equivalents

10

89,639

81,611

36,043

Trade and other receivables

9

67

114

152

Investment property sale proceeds receivable

 

-

-

332,361

Current tax asset

 

-

-

275

 

 

89,706

81,725

368,831

Total assets

 

1,468,198

1,431,272

1,716,165

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

12

(30,576)

(29,293)

(39,310)

Secured debt

13

(2,469)

(2,707)

(213,246)

Current tax payable

 

(57)

(862)

(328)

Interest rate derivatives

 

-

-

(18,501)

 

 

(33,102)

(32,862)

(271,385)

Non-current liabilities

 

 

 

 

Secured debt

13

(893,622)

(888,312)

(892,732)

Deferred tax liability

11

(6,929)

(5,687)

(5,407)

Interest rate derivatives

 

-

-

(71,170)

 

 

(900,551)

(893,999)

(969,309)

Total liabilities

 

(933,653)

(926,861)

(1,240,694)

 

 

 

 

 

Net assets

 

534,545

504,411

475,471

 

 

 

 

 

 

 

 

 

 

Share capital

14

18,034

18,034

18,034

Share premium reserve

15

55,165

52,377

49,735

Retained earnings

15

458,746

433,348

498,496

Other reserve

15

2,600

652

118

Cash flow hedging reserve

15

-

-

(90,912)

Total equity

 

534,545

504,411

475,471

 

 

 

 

 

 

 

Pence per share

Pence per share

Pence per share

Basic NAV per share

16

296.4

279.7

263.7

EPRA NAV per share

16

300.2

282.8

316.1

 

The notes form part of this interim report.

 

 

 

Group Cash Flow Statement

 

 

 

Notes

Unaudited

six months to

30 June

2016

£000

Audited

year to

31 December

2015

£000

Unaudited

six months to 30 June

2015

£000

Operating activities

 

 

 

 

Profit before tax

 

25,856

39,153

103,115

Adjustments for non-cash items:

 

 

 

 

Investment property revaluation

8

(13,077)

(70,435)

(76,551)

Profit on sale of investment properties

 

-

(23,962)

(23,967)

Movement in rent smoothing adjustment

8

(6,587)

(13,011)

(6,756)

Finance income

 

(69)

(61)

(24)

Finance costs

5

24,546

146,613

46,251

Cash flows from operating activities before changes in working capital

 

30,669

78,297

42,068

Changes in working capital:

 

 

 

 

Trade and other receivables

 

46

(11)

(2,510)

Trade and other payables

 

2,487

(8,155)

(143)

Cash generated from operations

 

33,202

70,131

39,415

Tax (paid) / received

 

(847)

(316)

7

Cash flows from operating activities

 

32,355

69,815

39,422

 

 

 

 

 

Investing activities

 

 

 

 

Proceeds from sale of investment properties

 

-

379,316

48,994

Interest received

 

69

61

24

Cash flows from investing activities

 

69

379,377

49,018

 

 

 

 

 

Financing activities

 

 

 

 

Drawdown of secured debt

 

-

905,158

-

Repayment of secured debt

 

(2,308)

(1,154,923)

(48,082)

Interest and finance costs paid

 

(25,013)

(86,804)

(45,432)

Costs of early termination of interest rate derivatives

 

-

(60,289)

-

Loan costs paid on new facilities

 

(87)

(14,437)

-

Net proceeds of share issues

 

2,788

5,033

2,526

Cash flows from financing activities

 

(24,620)

(406,262)

(90,988)

 

 

 

 

 

Increase / (decrease) in cash and cash equivalents

 

7,804

42,930

(2,548)

Cash and cash equivalents at the beginning of the period

 

81,611

38,771

38,771

Effect of currency translation movements

 

224

(90)

(180)

Cash and cash equivalents at the end of the period

 

89,639

81,611

36,043

 

The notes form part of this interim report.

 

 

 

Notes to the Interim Report

 

 1.    General information about the Group

The financial information set out in this report covers the six month period to 30 June 2016, with comparative amounts relating to the year to 31 December 2015 and the six month period to 30 June 2015, and includes the results and net assets of the Company and its subsidiaries, together referred to as the Group.

 

The Company is incorporated in the United Kingdom. The address of the registered office and principal place of business is Cavendish House, 18 Cavendish Square, London, W1G 0PJ.

 

The Company is listed on AIM.  Further information about the Group can be found on its website, www.SecureIncomeREIT.co.uk.

 

2.    Basis of preparation and accounting policies

The financial information contained in this report has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union, and on a going concern basis.  The accounting policies adopted in this report are consistent with those applied in the Group's statutory accounts for the period ended 31 December 2015 and are expected to be consistently applied in the year to 31 December 2016.

 

At the end of the interim reporting period, the Directors are required to assess whether it is appropriate to make provision for an incentive fee payable at the end of the current financial year as a result of the Group's performance in that interim period.  In making this assessment, the Directors estimate the EPRA NAV per share of the Group at the end of the financial year.  As described in note 17, this estimate does not constitute a forecast but represents an estimated illustrative case only, and is considered to provide a reasonable basis for estimating whether an incentive fee will be payable while recognising the limitations inherent in any estimate of future values.

 

Euro denominated results for the German assets have been converted to Sterling at an average exchange rate for the period of €1:£0.77881 and period end balances converted to Sterling at the 30 June 2016 exchange rate of €1:£0.82775.

 

The condensed financial statements for the period are unaudited and do not constitute statutory accounts for the purposes of the Companies Act 2006.  The annual report and financial statements for 2015 have been filed with Companies House.  The independent auditor's report on the annual report and financial statements for 2015 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under sections 498 (2) or 498 (3) of the Companies Act 2006.

 

The Group's financial performance is not subject to material seasonal fluctuations.

 

3.    Operating segments

IFRS 8 "Operating Segments" requires operating segments to be identified on the basis of internal reports about components of the Group that are reviewed by the chief operating decision maker to make decisions about resources to be allocated between segments and assess their performance.  The Group's chief operating decision maker is considered to be the Board as a whole.

 

The Group owns two property portfolios.  Although these are described individually within the Investment Adviser's report, the Board receives quarterly management accounts prepared on a basis which aggregates the performance of the portfolios and focuses on Total Shareholder Return.  The Board has therefore concluded that the Group has operated in and was managed as one business segment, being property investment, in both the current and prior periods.

 

 

 

 

Notes to the Interim Report continued

 

 

3.    Operating segments (continued)

The geographical split of revenue and applicable non-current assets required by IFRS 8 was as follows:

 

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Revenue

 

 

 

  UK

41,320

92,587

49,414

  Germany

3,694

6,892

3,472

 

45,014

99,479

52,886

 

Investment property valuation

 

 

 

  UK

1,292,898

1,276,003

1,275,997

  Germany

85,594

73,544

70,870

 

1,378,492

1,349,547

1,346,867

 

Revenue, which reflects the impact of rent smoothing adjustments, includes £26.9 million (year to 31 December 2015: £55.3 million; six months to 30 June 2015: £28.1 million) relating to the Group's largest tenant, and £16.2 million (year to 31 December 2015: £41.8 million; six months to 30 June 2015: £23.6 million) relating to the Group's second largest tenant.  No other single tenant or guarantor contributed more than 10% of the Group's revenue in any reporting period.

 

4.    Revenue

Revenue comprised:

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Cash rents receivable

38,427  

86,468  

46,130

Rent smoothing adjustments

6,587  

13,011 

6,756

 

45,014  

99,479 

52,886

 

The rent smoothing adjustment arises through the Group's accounting policy in respect of leases, which requires the recognition of rental income on a straight line basis over the lease term in certain circumstances, including for the 68% (31 December 2015 and 30 June 2015: 67%) of passing rent as at 30 June 2016 which increases by a fixed percentage each year.  At this stage in the lease terms, this results in an increase in revenue and an offsetting entry is recognised in the income statement as a reduction in the gains on investment property revaluation.

 

 5.    Finance costs

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Interest on secured debt

23,705

66,781

38,402

Amortisation of loan costs (non-cash)

841

7,561

1,636

Exit and other fees

-

11,646

2,586

Reclassification of fair value adjustment of interest rate derivatives from the cash flow hedging reserve

-

60,625

3,627

 

24,546

146,613

46,251

 

 

 

 

Notes to the Interim Report continued

 

 

6.    Tax

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

Analysis of tax charge in the period

£000

£000

£000

Current tax - UK

 

 

 

  UK REIT excess interest charge

-

1,293

328

  Adjustments in respect of prior periods

(182)

50

25

Current tax - Germany

 

 

 

  Corporation tax charge

147

242

122

  Adjustments in respect of prior periods

-

(226)

(227)

Deferred tax

 

 

 

  Deferred tax charge

493

1,023

948

 

458

2,382

1,196

 

The tax assessed for the period varies from the standard rate of corporation tax in the UK applied to the profit before tax.  The differences are explained below:

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Profit before tax

25,856

39,153

103,115

Profit before tax at the standard rate of corporation tax in the UK of 20% (31 December 2015 and 30 June 2015: 20.25%)

5,171

7,928

20,881

Effects of:

 

 

 

Investment property revaluation not taxable

(3,440)

(15,875)

(15,922)

Qualifying property rental business not taxable

(2,598)

(3,633)

(1,537)

Movement in previously unrecognised tax losses

935

15,512

2,392

Expenses and financing costs not deductible

425

1,943

413

Adjustments in respect of prior periods

(182)

(176)

(202)

German current tax charge

147

242

122

Profit on sale of investment properties not taxable

-

(4,852)

(4,853)

UK REIT excess interest charge

-

1,293

328

Transfer pricing adjustments

-

-

(305)

Double tax relief

-

-

(121)

Tax charge for the period

458

2,382

1,196

 

The Company and its subsidiaries operate as a UK Group REIT.  Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's UK and German property rental business from UK corporation tax.  Gains on the Group's UK and German properties are also generally exempt from UK corporation tax, provided they are not held for trading or in certain circumstances sold in the three years after completion of a development.

 

To remain a UK REIT, there are a number of conditions to be met in respect of the Company, the Group's qualifying activity and the Group's balance of business.  Since entering the UK REIT regime the Group has continued to meet these conditions.  The condition requiring that the Company must not be a close company includes a grace period of three years from entry into the UK REIT regime, which expires in June 2017.  The Company was a close company when it entered the UK REIT regime but the secondary share placing in March 2016 has widened the Company's ownership such that it now complies with the relevant condition.

 

 

 

Notes to the Interim Report continued

 

 

6.    Tax (continued)

Furthermore, one of the ongoing REIT tests is an interest cover test which requires the profits of the tax exempt property rental business of the Group to be at least 1.25 times its cost of financing.  If this condition is not met, the Company remains within the UK REIT regime but is required to pay UK corporation tax on an amount equivalent to the excess interest costs or 20% of the tax exempt property rental business profits if that is less.  The Group has met this test in the period to 30 June 2016 so no tax was payable, but did not meet it in the prior year when it incurred a tax charge of £1.3 million (six months to 30 June 2015: £0.3 million).

 

The Group is subject to German corporation tax on its German property rental business at a rate of 21%, resulting in a tax charge of £0.1 million (year to 31 December 2015: £0.2 million; six months to 30 June 2015: £0.1 million).  In the prior year, a German tax credit of £0.2 million (year to 31 December 2015: £0.2 million; six months to 30 June 2015: £0.2 million) also arose following the conclusion of a tax audit relating to the years between 2007 and 2012.  A deferred tax liability of £6.9 million (31 December 2015: £5.7 million; 30 June 2015: £5.4 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties.

 

7.    Earnings per share

Earnings per share is calculated as profit attributable to ordinary shareholders of the Company for each period divided by the weighted average number of ordinary shares in issue throughout the relevant period and is adjusted in diluted EPS to reflect any shares to be issued.  Where shares are issued in one reporting period relating to the results of the prior period, the shares are treated, for the purposes of calculating the weighted average of shares in issue, as having been issued at the end of that prior period regardless of the actual date of issue.

 

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Profit

25,398  

36,771  

101,919

 

 

 

 

 

Number

Number

Number

Weighted average number of shares in issue

180,344,231  

180,344,213  

180,344,207

 

 

Pence

per share

Pence per

share

Pence per

share

Basic and diluted EPS

14.1  

20.4  

56.5  

 

 

 

 

 

Notes to the Interim Report continued

 
 

7.    Earnings per share (continued)

The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings designed to represent core operational activities.  As well as the standard EPRA earnings figure, an adjusted EPRA earnings calculation has also been presented, excluding any incentive fee, which is largely derived from investment property revaluations, and any non-recurring costs.  EPRA earnings have also been adjusted to exclude the effect of smoothing fixed rental uplifts in order not to distort dividend cover calculations.  This results in a restatement of the prior period comparatives for 30 June 2015 shown in the table below.

 

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Basic earnings attributable to shareholders

25,398

36,771

101,919

EPRA adjustments:

 

 

 

Investment property revaluation

(13,077)

(70,435)

(76,551)

German deferred tax on investment property revaluations

493

1,023

948

Profit on sale of investment properties

-

(23,962)

(23,967)

Costs of early termination of interest rate swaps

-

60,625

3,627

Other early debt repayment costs

-

13,666

229

EPRA earnings

12,814

17,688

6,205

Other adjustments:

 

 

 

Rent smoothing

(6,587)

(13,011)

(6,756)

Costs of secondary placing

2,123

-

-

Investment feasibility costs

1,416

-

-

Adjusted EPRA earnings

9,766

4,677

(551)

 

 

Pence per share

Pence per

share

Pence per

Share

EPRA EPS

7.1

9.8

3.4

Adjusted EPRA EPS

5.4

2.6

(0.3)

 

 

 

 

Notes to the Interim Report continued

 

 

8.    Investment properties

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

Freehold investment properties

£000

£000

£000

At the start of the period

1,349,547

1,625,435

1,625,435

Revaluation movement

19,664

83,446

83,307

Currency translation movement

9,281

(3,980)

(6,521)

Disposals

-

(355,354)

(355,354)

At the end of the period

1,378,492

1,349,547

1,346,867

 

As at 30 June 2016 the properties were externally valued at £1,378.5 million (31 December 2015: £1,349.5 million; 30 June 2015: £1,346.9 million) by CBRE Limited, Commercial Real Estate Advisors, in their capacity as external valuers.  The valuation was prepared on a fixed fee basis, independent of the portfolio value, and was undertaken in accordance with RICS Valuation - Professional Standards January 2014 on the basis of fair value, supported by reference to market evidence of transaction prices for similar properties.

 

The valuation report included the following statement from the valuer highlighting the potential future impact on property values of the result of the EU referendum: "Following the Referendum held on 23 June 2016 concerning the UK's membership of the EU, a decision was taken to exit.  We are now in a period of uncertainty in relation to many factors that impact the property investment and letting markets.  Since the Referendum date it has not been possible to gauge the effect of this decision by reference to transactions in the market place.  The probability of our opinion of value exactly coinciding with the price achieved, were there to be a sale, has reduced.  We would, therefore, recommend that the valuation is kept under regular review and that specific market advice is obtained should you wish to effect a disposal."

 

The historic cost of the Group's investment properties as at 30 June 2016 was £1,063.6 million (31 December 2015 and 30 June 2015: £1,063.6 million).

 

Included within the carrying value of investment properties at 30 June 2016 is £166.2 million (31 December 2015: £156.6 million; 30 June 2015: £153.7 million) in respect of the smoothing of fixed contractual rental uplifts as described in note 4.  The difference between rents on a straight line basis and rents actually receivable is included within, but does not increase, the carrying value of investment properties.  The effect of this adjustment on the revaluation movement was as follows:

 

 

Unaudited

Audited

Unaudited

 

six months to

year to

six months to

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Revaluation movement

19,664

83,446

83,307

Rent smoothing adjustment

(6,587)

(13,011)

(6,756)

Revaluation movement in the income statement

13,077

70,435

76,551

 

All of the investment properties are held, within three ring-fenced security pools, as security under fixed charges in respect of secured debt.

 

The Board determines the Group's valuation policies and procedures, and is responsible for overseeing the valuations.  Valuations are based on information provided from the Group's financial and property reporting systems, such as current rents and the terms and conditions of lease agreements, together with assumptions used by the valuer (based on market observation and their professional judgement) in the valuation model.

 

 

 

 

Notes to the Interim Report continued

 

 

8.    Investment properties (continued)

At each reporting date, certain partners of the Investment Adviser, who have recognised professional qualifications and are experienced in valuing the types of property owned by the Group, initially analyse the external valuer's assessment of movements in the property valuations from the prior reporting date.  Fair value changes (positive or negative) over a certain materiality threshold are considered.  Changes in fair value are also compared to external sources (such as the Investment Property Databank or other relevant benchmarks) for reasonableness.  Once the Investment Adviser has considered the valuations, the results are discussed with the Group's external valuers, focusing on properties with unexpected fair value changes and, if applicable, properties undergoing significant refurbishment.  The Audit Committee also considers the valuation process as part of its overall responsibilities, and reports on its assessment of the procedures to the Board.

 

The fair value of the investment property portfolio has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate.  This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13.  There have been no transfers to or from other levels of the fair value hierarchy during the year.

 

The key inputs for the level 3 valuations were as follows:

 

 

 

Inputs

Portfolio

Fair value £000

Key unobservable input

Range

Weighted average

At 30 June 2016:

 

 

 

 

Healthcare

849,652

Net initial yield

4.5% - 5.8%

5.2%

 

 

Reversionary yield

4.5% - 5.9%

5.4%

Leisure - England

443,240

Net initial yield

5.2% - 6.1%

5.4%

 

 

Reversionary yield

5.3% - 6.2%

5.5%

 

 

Future RPI assumption per annum

2.0%

2.0%

Leisure - Germany

85,600

Net initial yield

6.1%

6.1%

 

 

Reversionary yield

6.5%

6.5%

At 31 December 2015:

 

 

 

 

Healthcare

834,437

Net initial yield

4.5% - 5.8%

5.2%

 

 

Reversionary yield

4.6% - 5.9%

5.4%

Leisure - England

441,560

Net initial yield

5.2% - 6.1%

5.4%

 

 

Reversionary yield

5.3% - 6.2%

5.5%

 

 

Future RPI assumption per annum

2.0%

2.0%

Leisure - Germany

73,550

Net initial yield

6.3%

6.3%

 

 

Reversionary yield

6.5%

6.5%

At 30 June 2015:

 

 

 

 

Healthcare

834,437

Net initial yield

4.5% - 5.8%

5.2%

 

 

Reversionary yield

4.6% - 5.9%

5.4%

Leisure - England

441,560

Net initial yield

5.2% - 6.1%

5.4%

 

 

Reversionary yield

5.3% - 6.2%

5.5%

 

 

Future RPI assumption per annum

2.0%

2.0%

Leisure - Germany

70,870

Net initial yield

6.1%

6.1%

 

 

Reversionary yield

6.3%

6.3%

 

The principal sensitivity of measurement to variations in the significant unobservable outputs is that decreases in net initial yield, decreases in reversionary yield and increases in RPI will increase the fair value (and vice versa).

 

9.    Trade and other receivables

 

Unaudited

Audited

Unaudited

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Prepayments and accrued income

67   

114   

152

 

 

 

 

Notes to the Interim Report continued

 

 

10.  Cash and cash equivalents

 

Unaudited

Audited

Unaudited

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Secured cash

19,665

25,598

25,207

Regulatory capital

621

375

479

Free cash

69,353

55,638

10,357

 

89,639

81,611

36,043

 

Secured cash is held in accounts over which the providers of secured debt have fixed security.  As the Company is considered to be an internally managed Alternative Investment Fund, it is also required by the Financial Conduct Authority to hold a balance of regulatory capital in liquid funds, which is maintained in cash.

 

11.  Deferred tax

The movements in deferred tax balances in each period were as follows:

 

 

Unrealised gains on investment properties

£000

Interest rate derivatives at fair value

£000

Total

£000

Unaudited:

 

 

 

Balance at 1 January 2016

(5,687)

-

(5,687)

Charge to the income statement

(493)

-

(493)

Movement in other comprehensive income

(749)

-

(749)

Balance at 30 June 2016

(6,929)

-

(6,929)

 

 

 

 

 

Unrealised gains on investment properties

£000

Interest rate derivatives at fair value

£000

Total

£000

Audited:

 

 

 

Balance at 1 January 2015

(4,938)

627

(4,311)

Charge to the income statement

(1,023)

-

(1,023)

Movement in other comprehensive income

274

(627)

(353)

Balance at 31 December 2015

(5,687)

-

(5,687)

 

 

 

 

 

Unrealised gains on investment properties

£000

Interest rate derivatives at fair value

£000

Total

£000

Unaudited:

 

 

 

Balance at 1 January 2015

(4,938)

627

(4,311)

Charge to the income statement

(948)

-

(948)

Movement in other comprehensive income

479

(160)

319

Balance at 30 June 2015

(5,407)

467

(4,940)

 

12.  Trade and other payables

 

Unaudited

Audited

Unaudited

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Trade payables

110

251

-

Taxation and social security

1,410

1,347

2,116

Accruals and deferred income

29,056

27,695

37,194

 

30,576

29,293

39,310

 

 

Notes to the Interim Report continued

 

 

13.  Secured debt

 

Unaudited

Audited

Unaudited

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Amounts falling due within one year

 

 

 

Secured debt

4,156

4,387

215,116

Unamortised finance costs

(1,687)

(1,680)

(1,870)

 

2,469

2,707

213,246

 

 

 

 

 

Unaudited

Audited

Unaudited

 

30 June

31 December

30 June

 

2016

2015

2015

 

£000

£000

£000

Amounts falling due in more than one year

 

 

 

Secured debt

905,100

900,521

889,712

Exit fee

-

-

4,095

Unamortised finance costs

(11,478)

(12,209)

(1,075)

 

893,622

888,312

892,732

 

 

 

 

As at 30 June 2016, the fair value of the Group's secured debt was £968.8 million (31 December 2015: £912.2 million; 30 June 2015: £1,104.8 million).  The secured debt was externally valued by JC Rathbone Associates Limited in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the last working day prior to each balance sheet date, adjusted for the credit risk of the Group.  The Group had no undrawn, committed borrowing facilities at either balance sheet date.

 

The debt is secured by charges over the Group's investment properties and by fixed and floating charges over the other assets of certain Group companies, not including the Company itself save for a limited share charge over the parent company of one of the ring-fenced subgroups.  There have been no defaults or breaches of any loan covenants during the current period or any prior year.

 

14.  Share capital

Share capital represents the aggregate nominal value of shares issued.  At 30 June 2016, the Company had an issued and fully paid share capital of 180,344,240 ordinary shares of £0.10 each (31 December 2015: 180,344,228 shares; 30 June 2015: 180,344,216 shares).

 

Under the terms of the Commitment Agreement described in note 17, the Company's shareholders prior to listing agreed to subscribe in cash for one ordinary share per quarter to cover the fees payable to the Investment Adviser.  During the period, 12 ordinary shares of £0.10 each were issued under this arrangement for total proceeds of
£2.8 million (year to 31 December 2015: 24 shares for total proceeds of £5.0 million; six months to 30 June 2015: 12 shares for total proceeds of £2.5 million).  The excess over nominal value in each case was credited to the share premium account.

 

As a result of these transactions, the movement in the number of shares in issue over the period was as follows:

 

 

Unaudited

Audited

Unaudited

 

30 June

31 December

30 June

 

2016

2015

2015

 

Number

Number

Number

At the start of the period

180,344,228

168,443,772

168,443,772

Issue of ordinary shares in settlement of incentive fee earned in respect of the period to 31 December 2014

-

11,900,432

11,900,432

Issue of ordinary shares under Commitment Agreement

12

24

12

 

180,344,240

180,344,228

180,344,216

 

 

 

 

Notes to the Interim Report continued

 

 

15.  Reserves

The nature and purpose of each of the reserves included within equity at 30 June 2016 is as follows:

 

Share premium reserve: represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of equity issues.

 

Other reserve: represents the cumulative exchange gains and losses on the translation of the Group's net investment in its German operations, as well as the impact on equity of any shares to be issued after the balance sheet date, as described in note 17, under the terms of both the Commitment Agreement and the incentive fee arrangements.

 

Retained earnings: represent the cumulative profits and losses recognised in the income statement, together with any amounts transferred or reclassified from the other Group reserves.

 

16.  Net asset value per share

The net asset value per share of 296.4 pence (31 December 2015: 279.7 pence; 30 June 2015: 263.7 pence) is calculated as the net assets of the Group attributable to shareholders divided by the number of shares in issue at the end of the period of 180,344,240 (31 December 2015: 180,344,228; 30 June 2015: 180,344,216).  Diluted NAV per share is adjusted for any shares that will be issued, including any in settlement of incentive fees payable as explained in note 17.  Since no incentive fee was payable in the current period or prior year, the diluted NAV per share at each date was the same as the basic NAV per share.

 

The European Public Real Estate Association ("EPRA") has issued guidelines aimed at providing a measure of net asset value on the basis of long term fair values.  The EPRA measure excludes items that are considered to have no impact in the long term, such as the fair value of derivative instruments and deferred tax balances.  The Group's EPRA NAV is calculated as follows:

 

 

Unaudited

30 June 2016

Audited

31 December 2015

Unaudited

30 June 2015

£000

Pence per share

£000

Pence per share

£000

Pence per share

Basic NAV

534,545

296.4

504,411

279.7

475,471

263.7

EPRA adjustments:

 

 

 

 

 

 

Deferred tax on investment property revaluations

6,929

3.8

5,687

3.1

5,407

3.0

Fair value of interest rate derivatives

-

-

-

-

89,671

49.7

Deferred tax on interest rate derivatives

-

-

-

-

(467)

(0.3)

EPRA NAV

541,474

300.2

510,098

282.8

570,082

316.1

 

 

 

 

Notes to the Interim Report continued

 

 

17.  Related party transactions and balances

Interests in shares

The direct and indirect interests of the directors and their families in the share capital of the Company are as follows:

 

 

Unaudited 30 June 2016

 

 

Number of

shares

Percentage of issued share capital

Nick Leslau * †

 

22,524,387

12.49%

Mike Brown †

 

574,712

0.32%

Sandy Gumm †

 

114,942

0.06%

Martin Moore

 

57,471

0.03%

Jonathan Lane

 

57,471

0.03%

Ian Marcus

 

28,735

0.02%

Leslie Ferrar

 

14,367

0.01%

* Comprises 22,466,916 ordinary shares held by PIHL Property LLP and 57,471 ordinary shares held by the Saper Trust.  Nick Leslau has an ultimate beneficial interest of 36.9% in PIHL Property LLP through various indirect holdings.  The Saper Trust is a trust whose beneficiaries include Nick Leslau.

 

† In addition to the amounts shown in the table above, as at 30 June 2016 a further 9,826,009 ordinary shares (31 December 2015 and 30 June 2015: 11,900,432 ordinary shares), representing 5.4% (31 December 2015 and 30 June 2015: 6.6%) of the issued share capital, were owned by a subsidiary of Prestbury Investments LLP ("Prestbury"), the Investment Adviser to the Group.  Nick Leslau, Mike Brown and Sandy Gumm hold partnership interests in, and are respectively Chairman, Chief Executive and Chief Operating Officer of Prestbury.

 

Directors' fees

Fees of £185,000 per annum are payable to the four non-executive directors not connected to Prestbury Investments LLP.  The directors connected to Prestbury (Nick Leslau, Mike Brown and Sandy Gumm) do not receive directors' fees.  Directors' fees of £93,000 were payable for the period (year ended 31 December 2015: £185,000; six months ended 30 June 2015: £93,000).  No fees were outstanding at any balance sheet date.

 

Advisory fees payable

Nick Leslau, Mike Brown and Sandy Gumm are Directors of the Company and also hold partnership interests in, and are Chairman, Chief Executive and Chief Operating Officer respectively of Prestbury Investments LLP, which is Investment Adviser to the Group under the terms of an agreement that became effective on listing in June 2014 (the "Investment Advisory Agreement").  Under the terms of the Investment Advisory Agreement, advisory fees of £3.2 million were payable in cash to Prestbury in respect of the period (year to 31 December 2015: £6.5 million; six months to 30 June 2015: £3.1 million), £nil (31 December 2015: £0.2 million; 30 June 2015: £0.2 million) of which was outstanding at the balance sheet date.

 

Commitment Agreement

In May 2014, in connection with its listing, the Company entered into an agreement (the "Commitment Agreement") with its existing investors at that time in order to fund (in whole or in part) the Company's payment of its contracted advisory fee to Prestbury Investments LLP during the period from listing on 5 June 2014 to 10 July 2016 (the "Commitment Agreement Period").

 

Under the terms of the Commitment Agreement, the cash funding of the advisory fees was required to be satisfied by way of subscription for shares.  Each existing investor agreed to subscribe for one share per quarter over the Commitment Agreement Period amounting to an aggregate of 12 (year to 31 December 2015: 24; six months to 30 June 2015: 12) new shares in the Company during this reporting period.  The total subscription price payable by the existing investors for the shares to be issued to them in any quarter was equal to the advisory fee payable by the Company to Prestbury in respect of that quarter, subject to a maximum aggregate subscription price of £1.3 million per quarter and £1.5 million in the extended period to 10 July 2016.  Since the advisory fees have exceeded that maximum in the period, those investors have contributed £2.8 million towards the fees and the remaining £0.4 million has been borne by the Group.  The final subscriptions made in June 2016 covered the period following the balance sheet date to 10 July 2016, so no further payments are receivable from the existing investors under these arrangements.

 

 

 

 

Notes to the Interim Report continued

 

 

17.  Related party transactions and balances (continued)

Incentive fee

Under the terms of the Investment Advisory Agreement, Prestbury may become entitled to an incentive fee which rewards growth in Total Shareholder Return above an agreed threshold return and is intended to strongly align Prestbury's interests with those of shareholders.  The fee entitlement is calculated annually on the basis of the Group's audited financial statements, with any fee payable settled in shares in the Company (subject to certain limited exceptions).  Sales of any shares are restricted, with the restriction lifted on a phased basis over a period from 18 to 42 months from the date of listing, subject to a release in the event that Prestbury needs to sell shares to settle any tax liability on the fee income it recognises.

 

The incentive fee is calculated annually by reference to growth in EPRA NAV per share and distributions paid.  If this growth exceeds a hurdle rate of 10% per annum, an incentive fee equal to 20% of this excess is payable to Prestbury.  Dividends or other distributions paid in any period are treated as payments on account against achievement of the hurdle rate of return.  In the event of an incentive fee being payable at the end of an accounting period, as it was for the period ended 31 December 2014, a "high watermark" is established, represented by the closing EPRA NAV per share after the impact of the incentive fee, which is then the starting point for the cumulative hurdle calculations for future periods.  The hurdle will therefore be set at the higher of the EPRA NAV at the start of the year plus 10% or the high watermark EPRA NAV plus 10% per annum.

 

Irrecoverable VAT arises on any element of the fee that relates to the healthcare portfolio.  Since new ordinary shares are issued in satisfaction of an incentive fee, the cost of that fee in the financial statements only impacts the net asset value of the Group to the extent of that irrecoverable VAT.  However, the shares to be issued do reduce the Group's net asset value per share.

 

No incentive fee has been recognised in the period (year to 31 December 2015: £nil; six months to 30 June 2015: £nil).  Assuming no changes in capital structure, EPRA NAV growth per share, including any distributions, will have to exceed 30.8 pence per share for a fee to be earned for the year ending 31 December 2016.  As a result, assuming dividend payments of 2.9375 pence per share per quarter in the second half of 2016 (in line with the Company's current stated intentions), EPRA NAV will have to exceed 307.6 pence per share (£554.8 million) at 31 December 2016 before any incentive fee becomes payable.

 

In determining whether or not an incentive fee will be payable for the current year, the Directors have estimated the EPRA NAV of the Group at 31 December 2016, assuming that the property portfolio valuation yields do not change from those applied as at 30 June 2016, that there are no material currency translation gains or losses, and that there is no material variation in actual movements in RPI (against which the UK leisure rents are indexed) compared to current expectations.  This estimate does not constitute a forecast but represents an estimated illustrative case only, and is considered to provide a reasonable basis for estimating whether an incentive fee will be payable while recognising the limitations inherent in any estimate of future values.

 

18.  Events after the balance sheet date

On 8 September 2016 the Group announced that it had conditionally agreed to acquire 55 hotels let on long upwards only RPI-linked leases to Travelodge Hotels Limited at a total cost of £196.2 million.  To finance the acquisition, the Group proposes a placing of up to 46.9 million new ordinary shares in the Company, targeting gross proceeds of c. £140 million, together with a new £60 million seven year non-recourse secured debt facility in respect of which the Group has credit approval from the lender and is in advanced negotiations on documentation.

 


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