Source - RNS
RNS Number : 2879J
Regional REIT Limited
09 April 2020
 

9 April 2020

Regional REIT Limited

("Regional REIT", the "Group" or the "Company")

Regional REIT (LSE: RGL), the regional real estate investment specialist focused on building a diverse portfolio of income producing regional UK core and core plus office and industrial property assets, today announces its full year results for the year ending 31 December 2019.

Financial highlights:

 

Income focused - Continued reliable strong performance in 2019 from a highly diversified and defensive portfolio coupled with intensive asset management

· EPRA Total return of 43% since IPO in November 2015; representing 9% annualised returns for shareholders*

· Rental and property income remained stable £75.6m (2018: £74.0m)

· EPRA adjusted EPS of 7.8p (2018: 7.5p); EPRA adjusted EPS, including realised disposal proceeds 8.2p (2018:13.7p)

· EPRA NAV per share 112.7p (2018: 115.5p)

· Group cost of debt decreased to 3.5% (2018: 3.8%)

· Net LTV maintained below target of c.40% at 38.9% (2018: 38.3%)

· Weighted average debt duration increased to 7.3 years (2018: 6.4 years)

· Total dividend increased c.2.5% to 8.25p (2018: 8.05p)

· Adjusted EPRA EPS dividend cover of 95% (2018: 93%)

 

Operational highlights:

 

Deliberately diversified portfolio by location and tenant - regions remained strong

· Another year of good progress; positive growth and portfolio diversification achieved

· Successful oversubscribed equity raise supported strong performance in transactional activity with £87.1m (before costs) invested in new acquisitions and £24.3m (net of costs) received from three strategic disposals

· Increasingly diversified portfolio of 160 properties (2018: 150), 1,251 units (2018: 1,192) and 904 tenants (2018: 874)

· Core and core plus regional office and industrial property assets represented 93.6% of portfolio by value (with 79.9% in offices and 13.7% in industrial sites)

· Lease renewals for office and industrial assets achieved a 9.8% increase in rental roll YoY

· EPRA Occupancy rates remained robust due to active and intensive asset management at 89.4% (2018: 89.4%)

 

Post period end

· Continued positive momentum, disposing of two non-core assets totalling £8.6m(before costs) whilst actively managing the portfolio with three further quality lettings

· 24 March 2020, the Company announced as a result of current market volatility caused by the global spread of COVID-19, it was no longer considering an equity fundraise

· 31 March 2020, the Company confirmed its dividend for Q4 2019 of 2.55pps would be paid to shareholders on 9 April 2020. In light of recent events, and until we have greater clarity on the economic outlook, future dividend distributions remain under review, however, the quality and diversity of the Company's tenant base means that it remains in a strong position to deliver one of the sector's best income returns to shareholders.

· Since the period end £30.7m of available borrowing headroom has been drawn down ensuring ample liquidity with a cash balance post dividend of £58.1m

· As at 6 April 2020, the Company had collected 81.6% of the rent due, in comparison to 83.1% at the same date in 2019. Another 4.8% of tenants have switched to monthly payments and have either paid or have agreed to pay. Furthermore, we expect another 2.3% of tenants to settle within 7 days, which in aggregate amounts to 88.7% of rents to be collected. We wholly expect to collect in excess of 90% of rent in due course.

 

*Equivalent to a 10% internal rate of return

 

Stephen Inglis, CEO of London and Scottish Property Investment Management, the Asset Manager, commented:

"We are extremely pleased with the good progress achieved to further diversify and strengthen our income and asset mix throughout 2019 and into Q1 2020. A key component of this total return to Shareholders continues to be one of the sector's leading dividend paying REIT's, as we increased the dividend again by a further c.2.5%.

The year also marked a considerable milestone in our ongoing ambition to grow the Company, by a highly successful oversubscribed capital raise of £62.5m. Swift deployment of these proceeds helped to contribute to the continued growth in our investment properties under management to £787.9m, up 9.7% from £718.4m in 2018.

Whilst markets are currently experiencing considerable levels of volatility due to the COVID-19, we continue to believe that our highly diversified income led approach to shareholder returns will continue to offer investors the best defensive, risk adjusted income value in the sector. We have a very strong tenant base with c.51% of rents being secured against tenants regarded under the Government's definition as 'essential services' and other Government departments, and with a further c.12% of income secured from large international companies.

We have a hugely experienced senior management team which has delivered great results for shareholders through a number of recessions and downturns over the past 30 years, including most recently the 2008 recession. In the wake of the global financial crisis, we were able to deliver increased income, across a predominantly multi-let office and industrial portfolio, throughout the 2008-2012 period. This experience working with tenants in challenging times will be invaluable in the aftermath of the current COVID-19 crisis.

Our market fundamentals to date remain robust, however, we will inevitably be impacted by COVID-19 and though we are committed to paying a regular quarterly dividend to our shareholders this will be subject to market conditions, the Company's performance, its financial position and business outlook.

Our unique, vertically integrated, asset management platform continues to deliver considerable value for our shareholders and I believe our encouraging income collection rate for the current quarter is testament to this. Our platform, with so many property managers and asset managers on the ground supported by our accounts team and research enables a joined up, effective and understanding approach to supporting tenants and achieving the best outcome in this uncertain time.

 It is these unique aspects to the Company's proposition that we believe have helped deliver such strong Shareholder returns in 2019, outperforming the FTSE NAREIT Index and providing 43.0% EPRA NAV total return to Shareholders since IPO and will continue to deliver for shareholders over the longer term ."

- ENDS -

A meeting for analysts will be held via a conference call facility at 9.30am (London time, BST) on Thursday, 9 April 2020 . If you would like the conference call details please contact Henry Wilson on +44 (0) 207 466 5111 or [email protected] .

The presentation slides for the meeting will shortly be available to download from the Investors section of the Group's website at www.regionalreit.com .

Enquiries:

Regional REIT Limited

 

 

 

Toscafund Asset Management

Tel: +44 (0) 20 7845 6100

Investment Manager to the Group

 

Adam Dickinson, Investor Relations, Regional REIT Limited

 

 

 

London & Scottish Property Investment Management

Tel: +44 (0) 141 248 4155

Asset Manager to the Group

 

Stephen Inglis

 

 

 

Buchanan Communications

Tel: +44 (0) 20 7466 5000

Financial PR

[email protected]

Charles Ryland / Victoria Hayns / Henry Wilson

 

 

About Regional REIT  

Regional REIT Limited ("Regional REIT" or the "Company") and its subsidiaries (the "Group") is a United Kingdom ("UK") based real estate investment trust that launched in November 2015. It is managed by London & Scottish Property Investment Management Limited, the Asset Manager, and Toscafund Asset Management LLP, the Investment Manager.

Regional REIT's commercial property portfolio is comprised wholly of income producing UK assets and comprises, predominantly, offices and industrial units located in the regional centres outside of the M25 motorway. The portfolio is highly diversified, with 160 properties, 1,251 units and 904 tenants as at 31 December 2019, with a valuation of 787.9m.

Regional REIT pursues its investment objective by investing in, actively managing and disposing of regional core and core plus property assets. It aims to deliver an attractive total return to its Shareholders, targeting greater than 10% per annum, with a strong focus on income supported by additional capital growth prospects.

The purpose of the Company is to deliver long-term returns for Shareholders with income generated from investment in UK commercial property outside of the M25 motorway.  

For more information, please visit the Group's website at  www.regionalreit.com .

Cautionary Statement

This document has been prepared solely to provide additional information to Shareholders to assess the Group's performance in relation to its operations and growth potential. The document should not be relied upon by any other party or for any other reason. Any forward looking statements made in this document are done so by the Directors in good faith based on the information available to them up to the time of their approval of this document. However, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

ESMA Legal Entity Identifier ("LEI"): (549300D8G4NKLRIKBX73)

Chairman's Statement

"This was another good year for Regional REIT, marking four years since our IPO and representing a step change in the growth of the Group with the successful oversubscribed equity capital raise in July 2019. In addition, we continued to deliver to our Shareholders a sector-leading dividend that we increased again by a further c. 2.5%.

 

In line with our strategic objectives, our unique, integrated, proactive asset management platform continued to manage our regionally diverse portfolio on a granular level. This ensured that we delivered the bespoke and high-quality environments our tenants expect, resulting in robust occupancy, increased tenant renewals, increased rent roll, and increased WAULT to expiry.

 

Whilst the economic and geopolitical backdrop remained uncertain, we responded to both market opportunities and challenges and continued to focus on activities that create value for our Shareholders and deliver a regular source of robust income." Kevin McGrath , Chairman

 

As I write my Chairman's Statement, and before I comment on the Company's progress and growth during 2019, the world's focus is on COVID-19 and its impact on business and day to day life. I want to assure our Shareholders that the Board is monitoring the impact of the COVID-19 virus on the Group. Further details are given below.

 

I am pleased to report that the Group had another very active year and continued to achieve positive growth, with investment properties under management increasing significantly by 9.7% to £787.9m. The EPRA company adjusted diluted earnings per share was 7.8 pence per share ("pps") (2018: 7.5pps). IFRS earnings were 6.6pps (2018: 18.1pps) with the recycling of the 2018 disposal funds into assets which are currently undergoing our intensive asset management initiatives. The total dividend for the year of 8.25pps, is an increase of c. 2.5% on the 8.05pps dividend for 2018. We continued to work closely with our tenants via our distinctive offering of integrated asset, property and finance teams, ensuring we have supportive tenants, which added value to both rental income and capital appreciation.

 

Our priorities were to maintain occupancy levels, continue to provide vibrant spaces in which our tenants can thrive, and increase our diversification by tenant profile and geography, whilst seizing considerable ongoing anticipated opportunities from the challenging commercial property market. EPRA occupancy rates remained robust at 89.4% (2018: 89.4%), rent roll increased to £64.3m (2018: £59.7m), and WAULT to expiry increased to 5.5 years (2018: 5.4 years). These are encouraging achievements.

 

During the year, the Group acquired properties with an aggregate value of £87.1m, before costs, which was in part funded by the successfully oversubscribed £62.5m equity capital raise undertaken in July 2019. This funding enabled us to make opportunistic off-market aggregate property acquisitions of £63.9m (before costs), which further diversified the portfolio not only by property, but also by tenant. In addition, we continued our portfolio enhancement programme, with disposals amounting to £24.3m (net of costs), and our rolling capital expenditure programme amounted to £8.0m.

 

Furthermore, our debt profile continues to be rationalised with the settlement of the £39.9m 6.5% Zero Dividend Preference Shares ("ZDPs") issued by the Company's indirect subsidiary, Regional REIT ZDP Plc, which matured on 9 January 2019, coupled with the £121m refinancing in June 2019. These successful initiatives resulted in a reduction in the Group's WACD, including hedging costs, to c.3.5% at 31 December 2019 (31 December 2018: 3.8%), and a weighted average debt duration of 7.3 years (31 December 2018: 6.4 years).

 

The Group's overall net borrowings were 38.9% of gross investment properties as at 31 December 2019 (31 December 2018: 38.3%) and below the Company's target ratio of approximately 40%.

 

The combination of all of this positive momentum, together with our diverse portfolio and experienced management team, has ensured that the Group remains well positioned for the next stage of its development and to continue to effectively execute our proven business model.

 

Market Environment

 

Following muted investment at the beginning of 2019, the UK regions outside of London attracted £4.9 billion of investment during the final quarter of 2019 - equal to the five-year quarterly average. This brought investment in the second half of 2019 to £10.2 billion, 34% higher than the first half of 2019. Annual investment in the regional markets reached £17.9 billion in 2019.

 

Overseas investment in the UK property markets accounted for almost half (48%) of total investment in 2019 according to data from CoStar1. Furthermore, CoStar estimate that total overseas investment for 2019 reached £21.3 billion, 6% higher than the 10-year average.

 

1 CoStar, Investment Volumes, Q4 2019

 

Regional offices have outperformed in comparison to central London offices, delivering superior total returns of 8.6% in 2019 in comparison to central London office returns of 5.8% - a trend that has been witnessed over the past four years.

 

Dividends

 

The dividend is the major component of total Shareholder returns. Over the period under review, the Company declared total dividends of 8.25pps for the year, comprising three quarterly dividends of 1.90pps each, and a fourth quarterly dividend of 2.55pps, an increase of c.2.5% on the previous year's total dividend. This represented a yield of 7.3% at a share price of 113.2p at the close of 31 December 2019. Since inception, the Company has distributed dividends amounting to 30.25pps.

 

Performance

 

The EPRA Total Accounting Return performance since listing on 6 November 2015 amounted to 43.0%, and an annualised EPRA Total Accounting Return of 9.0%.

 

The Company's Total Shareholder Return of 32.5% for 2019 outperformed the FTSE EPRA NAREIT UK Index Total Return of 30.6%. Since inception, the Total Shareholder Return was 52.2% vs 12.5% for the FTSE EPRA NAREIT UK Index.

 

In accordance with the management arrangements, the Asset Manager and Investment Manager are each entitled to a 50% share of a performance fee of 15% of the Total EPRA Accounting Return in excess of an annual hurdle rate of 8%. A performance fee did not crystallise for the period from 1 January 2019 to 31 December 2019.

 

Management Agreements

The management agreements between the Company, the Asset Manager and the Investment Manager, entered into when the Company listed, had a five-year term to November 2020. In view of the strong returns of the Company, the significant increase in its size and there being less than one year to expiry of the current agreement, the Board sought to secure the services of the Managers. In doing so, the Management Engagement and Remuneration Committee conducted a review to ensure that the terms of these agreements remained appropriate. The Management Engagement and Remuneration Committee sought advice from Peel Hunt LLP, the Company's Financial Adviser and Broker, and Macfarlanes LLP, the Company's Legal Adviser. Following this review, which included comparisons of Shareholder returns against those of its peer group and consideration of the interests of the Company and the respective Managers, the Company and the Managers each agreed to waive their right to issue a termination notice on or before 3 November 2020 and the management agreement will now continue in force until 3 November 2023.

 

Shareholder and Stakeholder Engagement

 

Ultimately, the experience of our tenants and other stakeholders will influence our performance. Our aim is to continue to offer great workspaces and environments to businesses throughout their lifecycle, from a start-up in a small flexible unit to a landmark corporate headquarters. Direct engagement with our tenants is an important part of our asset management initiatives, to help us understand their needs and identify opportunities and challenges. We encourage our tenants to work openly and collaboratively with us to enable us to continually improve our workspaces and deliver mutual benefit. Likewise, we encourage this with our stakeholders to ensure we can continually improve our operations.

 

The Company has continued to develop its relations with investors. The Company's website can be found at www.regionalreit.com .

 

Annual General Meeting

 

The Company's 2020 Annual General Meeting ("AGM") was due to be held on Thursday, 21 May 2020. In accordance with the Company's Articles of Incorporation (the "Articles") and given the COVID-19 situation, in particular the compulsory measures (the Stay at Home Measures) published by the Government on 23 March 2020 prohibiting public gatherings of more than two people, the Board has made the decision to postpone the Company's 2020 AGM.  Notice of a revised time and date for the 2020 AGM will be published on our website ( www.regionalreit.com ) and, where appropriate, by RNS announcement as soon as practicable. In due course, a notice of AGM will be circulated in accordance with the requirements of the Company's Articles.

 

The Company is cognisant of its environmental impact and at the 2020 AGM will be seeking approval to implement electronic communications. Further details regarding this will be set out in the Company's Notice of AGM, which will be circulated in due course. I encourage all Shareholders to consider this proposal. We will also be removing paper proxies at the 2020 AGM from our voting process in favour of a quicker and more secure method of voting online via our registrar's website. You can, however, request a paper proxy if you wish from our registrars at the appropriate time.

 

Subsequent Events and COVID-19

The wellbeing of our tenants and other stakeholders in the Company are of utmost importance to the Board and we continue to manage the Company, cognisant of their needs in this current environment.

 

On 20 February 2020, the Company announced a potential equity fundraise to take advantage of its growing near-term pipeline of accretive growth. As a result of the current market uncertainty caused by the global spread of COVID-19, the Company took the decision to withdraw the potential equity fundraise. 

 

On 31 March 2020, and in view of the COVID -19 disruption to UK economic activity the Company announced a trading update. The rental collections were slightly reduced as at 30 March 2020, with 68.2% of invoiced rental income collected in comparison with 69.6% at the same date in 2019. In addition, £30.7m of available borrowing headroom from the Santander UK and Royal Bank of Scotland facilities had been drawn.

 

The Board will continue to closely monitor the developing situation and its effect on the Group, although the Board is re-assured by the Company's balance sheet, the breadth of tenants and geographical spread of assets, which will ensure it is well positioned to mitigate any prolonged periods of uncertainty.

 

Outlook

 

Subject to the above, the outlook for the Group is positive and the Board is encouraged by the Asset Manager's ability to secure attractive assets in regional locations which will support the Company's long-term return prospects. For the remainder of 2020, the Group is confident of maintaining the momentum of the asset management initiatives, which should continue to deliver income for our Shareholders.

 

We remain mindful of the backdrop of economic uncertainty, market cycles and tenant requirements in a structurally evolving property market, which will inevitably be impacted by COVID-19. However, our confidence for the long term is underpinned by the Group's focus on asset management initiatives that increase the number, quality and quantum of income streams, coupled with an ever-broadening Shareholder base and strengthened balance sheet.

 

Kevin McGrath

Chairman

8 April 2020

 

Asset and Investment Managers' Report

"We are pleased to have performed again for our Shareholders, delivering strong dividends and capital growth in 2019. A key component of this total return to Shareholders remains our sector-leading dividend income distributed on a quarterly basis. It is notable therefore that, as planned, distribution to Shareholders increased for the fourth consecutive year and has done so every year since IPO, to 8.25 pence per share.

 

The year also marked a considerable milestone in our ongoing ambition to grow the Company, marked by a highly successful oversubscribed capital raise of £62.5m. Swift deployment of these proceeds into our significant investment pipeline helped to contribute to the continued growth in our investment properties under management to £787.9m, up 9.7% from £718.4m in 2018. In turn, our enlarged portfolio of properties supported a further increase in both the volume of our gross rent roll to £64.3m and the diversity of our tenant base to 904 tenants.

 

Whilst markets are currently experiencing considerable levels of volatility due to COVID-19; we continue to believe that our income-led, defensive and risk-adverse approach to Shareholder returns will continue to offer investors the best risk-adjusted income return in the sector. Our market fundamentals remain robust and we continue to micro manage the portfolio utilising our unique, sector-leading asset and property management teams to assist tenants where possible, on health matters, good practice and also to access all of the assistance available from the Government, Bank of England and other banks and local authorities with an absolute focus on everyone's health and safety and on maintaining our income.

 

It is simply too early to tell what impact COVID-19 will have on the business, but we continue to monitor the situation extremely closely and are speaking regularly to our banks who remain hugely supportive and our occupiers. It is worth noting that we are lowly leveraged, have substantial headroom on bank covenants and that we have a hugely diverse portfolio, in terms of number of quality tenants, number of properties, geographic spread of the assets and no large exposure to any individual tenant, any individual property and very little exposure to retail and leisure. We also have a very broad spectrum of tenants operating across a wide range of sectors. We believe that this is important as it is likely that some sectors will be more detrimentally affected than others going forward.

 

Only a few weeks ago we announced that we were contemplating an equity raise, given the strength and value identified in our investment pipeline. It will come as no surprise that we are no longer considering an equity raise at this time and indeed we will be making no new acquisitions in the immediate future, focussing instead on conserving existing cash and maintaining our rental income  for ongoing expenses and  dividend distributions, in accordance with the HMRC REIT regime.

 

The Company's continuing focus on income have delivered strong Shareholder returns in 2019, outperforming the FTSE NAREIT Index and providing 43.0% EPRA NAV returns to Shareholders since IPO ." Stephen Inglis, CEO of London & Scottish Property Investment Management, the Asset Manager of Regional REIT Limited.  

 

Highlights from 2019

· Successfully oversubscribed £62.5m equity capital raise was undertaken in July 2019.

· Disposals during 2019 totalled £24.3m (net of costs) achieving an average uplift against December 2018 valuation of 10.3%, reflecting an average net initial yield of 6.8%.

· Acquisitions in 2019 totalled £87.1m (before costs) for 13 properties, reflecting an average net initial yield of 8.6%.

· Lease renewals for office and industrial assets during 2019 achieved an uplift in gross rental roll of 9.8%.

· Completed 71 new lettings in 2019, totalling 356,446 sq. ft.; when fully occupied, these will provide a gross rental income of c.£3.8m.

· The like-for-like value of the Group's core office and industrial segment (93.6% by value) also increased in 2019 by 1.4%, after adjusting for capital expenditure and disposals during the period.

· Improved WAULT (to first break) by 2.2%, to 3.5 years and improved WAULT (to expiry) by 1.9% to 5.5 years.

· Average rent by let sq. ft. increased by 8.3% from £9.40 per sq. ft. in December 2018 to £10.17 per sq. ft. in December 2019.

· Capital value per sq. ft. increased by 9.1% from £96.64 per sq. ft. in December 2018 to £105.42 per sq. ft..

 

Going forward, we believe that our diverse tenant base as well as the broad regional spread of our assets means that we are well positioned to weather not only current political uncertainty but also the wider economic uncertainty that will no doubt result from the emergence and spread of COVID-19. As always, the Asset Manager will continue to identify value in the market with a focus on income.

 

Investment Activity in the UK Commercial Property Market

 

Investment in the UK commercial property market reached £49.5 billion in 2019, according to research from Lambert Smith Hampton ("LSH") 2 , 13% below the five-year average. Although overall investment in 2019 was lower than 2018, it was 5.2% higher than 2016 levels, a year that was similarly dominated by political uncertainty. Investment in the final quarter of 2019 was slightly higher than Q3 2019 volumes, bringing investment in H2 2019 to £29.5 billion, indicating an increase of 47% when compared to H1 2019, which helped boost overall investment figures for 2019. 2019 proved to be another strong year for investment in portfolio deals, with investment totalling £13.0 billion. Investment in portfolios was particularly strong in the final quarter of 2019, reaching £4.7 billion, 35% higher than the five-year quarterly average.

 

Following muted investment at the beginning on 2019, the UK regions outside of London attracted £4.9 billion in investment during the final quarter of 2019 - equal to the five-year quarterly average. This brought investment in the second half of 2019 to £10.2 billion, 34% higher than the first half of 2019. Annual investment in the regional markets reached £17.9 billion in 2019. LSH research notes that there were significant contrasts between regions during 2019, with the East of England performing strongly through the year.

 

Overseas investment in the UK property markets accounted for almost half (48%) of total investment in 2019 according to data from CoStar3. Overseas investors continued to take advantage of favourable exchange rates, with investment in the final quarter of 2019 reaching £7.2 billion, 24% higher than the five-year average. Figures from LSH indicate that North America, Far East and Europe were all net investors in the final quarter of 2019. CoStar estimate that total overseas investment for 2019 reached £21.3 billion, 6% higher than the 10-year average.

 

 2 Lambert Smith Hampton UKIT Q4 2019 

3 CoStar, Investment Volumes, Q4 2019 

 

Research from CBRE indicates that regional offices have outperformed in comparison to central London offices, delivering superior total returns of 8.6% in 2019 in comparison to central London office returns of 5.8%, a trend that has been witnessed over the past four years. Outperformance reflected better capital returns and income returns. Rental growth in regional offices markets continued with growth of 1.2% in 2019.

 

Overseas investment in the UK property markets accounted for almost half (48%) of total investment in 2019 according to data from CoStar4. Despite ongoing political uncertainty, overseas investors continued to take advantage of favourable exchange rates, with investment in the final quarter of 2019 reaching £7.2 billion, 24% higher than the five-year average. Figures from LSH indicate that North America, Far East and Europe were all net investors in the final quarter of 2019. CoStar estimate that total overseas investment for 2019 reached £21.3 billion, 6% higher than the 10-year average.

 

4 CoStar, Investment Volumes, Q4 2019

 

Occupational Demand in the UK Regional Office Market

Avison Young estimates that take-up of office space across nine regional office markets5 reached 8.8 million sq. ft. in 2019; although this is below the level of take-up recorded in 2018, it is 3.9% above the 10-year average. Take-up during 2019 was marginally higher (+0.7%) than 2016, a year that was similarly dominated by political uncertainty. According to Savills, occupational demand was driven by the technology, media & telecoms sector, which accounted for the highest proportion of take-up at 27%. Following the technology, media & telecoms sector, the serviced office sector and the insurance & financial services sector accounted for the second and third largest proportion of take-up in the regional cities, accounting for 12% and 10% respectively. Whilst demand from Central Government fell in 2019 in comparison to 2018, Avison Young expect a number of deals to take place in 2020 as part of the next phase of the hub programme.

Nine regional office markets mentioned by Avison Young include: Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester & Newcastle

According to Savills, demand for regional office stock led to a decline in availability across nine regional UK markets6, with total availability falling by 8% in 2019 to 10.5 million sq. ft., 28% below the 10-year average. This marks the tenth consecutive year that supply of office stock has declined. Cushman & Wakefield research indicates that vacancy rates across the UK's regions fell to 7% in the final quarter of 2019, a decrease from 8% the 12 months previous7.

 

Nine regional office markets mentioned by Savills includes: Aberdeen, Birmingham, Bristol, Cambridge, Cardiff, Edinburgh, Glasgow, Leeds & Manchester  

7 Cushman & Wakefield Big Eight Office Report Q4 2019. Eight regional office markets mentioned by Cushman & Wakefield include: Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Manchester & Newcastle


Furthermore, it is estimated that approximately 5.9 million sq. ft. of office space is currently under construction in the Big Nine regional markets, with Manchester, Glasgow and Birmingham accounting for 26%, 19% and 17%, respectively. 56% of office buildings currently under construction are already pre-let.

Rental Growth in the UK Regional Office Market

A lack of availability in the Big Nine regional markets put an upward pressure on headline rents as well as a downward pressure on rent incentives, which led to an increase of 2.9% in city centre net effective rents in 2019, according to Avison Young. Additionally, research by Avison Young estimates that headline rents for out of town offices increased by 3.0% from Q4 2018 to Q4 2019.

The CBRE Monthly Index shows that rental value growth for the rest of UK office markets in the 12 months ending December 2019 was 1.2%.

Regional REIT's Office Assets

EPRA occupancy of the Group's regional offices rose to 88.4% (31 December 2018: 88.2%). A like-for-like comparison of the Group's regional offices' EPRA occupancy, 31 December 2019 versus 31 December 2018, shows that occupancy decreased to 86.8% (31 December 2018: 88.5%). This reduction in occupancy can largely be attributed to two properties becoming vacant: Brennan House, Farnborough (29,707 sq. ft.) and Niceday House, Meridian Park, Andover (34,262 sq. ft.). Further details on these are below.

 

· Brennan House, Farnborough - We were ahead of business plan when we took the opportunity to do a contract-led letting to Fluor Limited. Unfortunately, Fluor exercised a valid break notice as their contract was not extended. Brennan House presents well and we are exploring the opportunity to carry out works to upgrade the building. Activity levels remain good in the Farnborough market with 2019 take up slightly ahead of the five-year average. Take-up varies across a wide range of size from lettings of 5,500 to 46,000 sq. ft.. We have had a number of positive viewings recently and remain hopeful of securing a letting at the property in the near future.

· Niceday House, Andover - As expected, the tenant vacated at expiry. Following this, a dilapidations settlement has been agreed and an outline residential consent has been obtained for change of use.

 

WAULT to first break was 3.0 years (31 December 2018: 3.0 years); like-for-like WAULT to first break increased to 3.1 years (31 December 2018: 3.0 years).

 

Occupier Demand in the UK Industrial Market

Take-up in the final quarter of 2019 reached 6.8 million sq. ft., pushing annual take-up during 2019 to 34.5 million sq. ft.; although this is 18% below the record high reported in 2018, demand remained above the 10-year average8.  CBRE9 research shows that 60% of take-up was within the East Midlands and South East as the M1 corridor remains the most attractive location for occupiers. Following this, West Midlands, Yorkshire and North East accounted for 17% and 12% of take-up in 2019, respectively.

 

8 Cushman & Wakefield, Industrial Snapshot, Q4 2019

9 CBRE, Market Summary, Q4 2019

 

BNP Paribas Real Estate research highlights occupier demand was diverse in 2019 with no one sector dominating take-up10 . According to Colliers International, occupier demand was driven by occupier's requirements to future-proof their supply chain operations. Occupier demand within the industrial market continues to benefit from growth in online shopping, as online retailing currently accounts for 19.0% of total retail sales in the UK, according to the ONS11. BNP Paribas Real Estate research shows that Retailers were the most active in terms of take-up throughout 2019, accounting for 37% of annual take-up (including online sales).

 

10 BNP Paribas Real Estate, Industrial & Logistics Review, Q4 2019

11 ONS, Retail Sales, Great Britain, January 2020

 

In terms of development, 8.6 million sq. ft. of speculative development was delivered in 2019. However, availability levels remained relatively steady as a result of robust net absorption. Looking forward, there is currently only 6.6 million sq. ft. of speculative development expected to complete in 2020.

 

Industrial Rental Growth Continues

Research by BNP Paribas Real Estate illustrates that, although demand for standard industrial space led to rental growth in 2019, there were signs that rental growth cooled following several years of strong growth. Data from the CBRE Monthly Index shows rental growth of 3.1% in the 12 months to the end of December 2019, indicating that rental growth slowed in 2019 from 4.2% for the 12 months to the end of December 2018.

 

Regional REIT's Industrial Assets

EPRA occupancy of the Group's industrial sites increased to 95.5% (31 December 2018: 94.5%). A like-for-like comparison of the Group's industrial offices' EPRA occupancy, 31 December 2019 versus 31 December 2018, shows that occupancy increased to 95.4% (31 December 2018: 94.2%). WAULT to first break was 5.8 years (31 December 2018: 5.4 years); like-for-like WAULT to first break decreased marginally to 5.8 years (31 December 2018: 5.9 years).

 

Property Portfolio

As at 31 December 2019, the Group's property portfolio was valued at £787.9m (31 December 2018: £718.4m), with rent roll of £64.3m (31 December 2018: £59.7m), and an EPRA occupancy of 89.4% (31 December 2018: 89.4%).

 

On a like-for-like basis, 31 December 2019 versus 31 December 2018, EPRA occupancy was 88.1% (31 December 2018: 89.6%).

 

There were 160 properties (31 December 2018: 150) in the portfolio, with 1,251 units (31 December 2018: 1,192) and 904 tenants (31 December 2018: 874). If the portfolio was fully occupied at Cushman & Wakefield's view of market rents, the rental income would be £77.2m per annum as at 31 December 2019 (31 December 2018: £70.0m).

 

As at 31 December 2019, the net initial yield on the portfolio was 6.2% (31 December 2018: 6.5%), the equivalent yield was 8.3% (31 December 2018: 8.2%), and the reversionary yield was 9.1% (31 December 2018: 8.8%)

 

Property Portfolio by Sector

Sector

Properties

Valuation

% by valuation

sq. ft

Occupancy (EPRA)

WAULT to first break

Gross rental income

Average rent

ERV

Capital rate

Yield %

 

 

(£m)

 

(mil)

(%)

(yrs)

(£m)

(£psf)

(£m)

(£psf)

Net initial

Equivalent

Reversionary

Office

116

629.7

79.9

4.7

88.4

3.0

51.2

13.15

62.9

135.34

6.1

8.3

9.3

Industrial

18

107.7

13.7

2.2

95.5

5.8

8.0

4.17

9.0

48.85

5.3

7.4

7.6

Retail

23

39.2

5.0

0.5

90.9

4.6

4.3

10.53

4.3

84.19

9.0

9.2

9.7

Other

3

11.4

1.4

0.2

90.6

6.9

0.8

8.17

1.0

74.99

7.5

8.0

8.1

Total

160

787.9

100.0

7.5

89.4

3.5

64.3

10.17

77.2

105.42

6.2

8.3

9.1

Property Portfolio by Region

Region

Properties

Valuation

% by valuation

Sq. ft.

Occupancy (EPRA)

WAULT to first break

Gross rental income

Average rent

ERV

Capital rate

Yield %

 

 

(£m)

 

(mil)

(%)

(yrs)

(£m)

(£psf)

(£m)

(£psf)

Net initial

Equivalent

Reversionary

Scotland

43

141.8

18.0

1.7

86.2

3.3

12.8

9.73

15.7

81.70

6.7

9.3

10.3

South East

33

233.0

29.6

1.7

87.9

3.4

17.9

12.06

21.2

140.33

5.9

7.5

8.4

North East

20

81.2

10.3

0.9

88.1

2.8

6.8

8.56

8.4

87.29

5.9

9.0

9.6

Midlands

32

140.4

17.8

1.4

93.2

3.5

11.6

9.07

12.7

100.88

6.0

7.8

8.5

North West

16

92.4

11.7

1.0

89.1

4.9

6.7

8.32

9.8

91.21

5.5

8.7

9.4

South West

13

79.3

10.1

0.5

95.8

2.9

6.6

15.57

7.6

165.50

6.8

8.1

8.9

Wales

3

19.9

2.5

0.3

87.6

6.6

1.9

8.73

1.9

74.97

7.5

8.4

8.6

Total

160

787.9

100.0

7.5

89.4

3.5

64.3

10.17

77.2

105.42

6.2

8.3

9.1

* Table may not sum due to rounding

Top 15 Investments (market value) as at 31 December 2019

Property

Sector

Anchor tenants

Market value

% of portfolio

Lettable area

EPRA Occupancy

Annualised gross rent

% of gross rental income

WAULT to first break

 

(years)

 

(£m)

(Sq Ft)

(%)

(£m)

Tay House, Glasgow

Office

Barclays Execution Services Ltd, University of Glasgow

33.7

4.3

156,853

94.2

2.7

4.2

2.4

Juniper Park, Basildon

Industrial

Schenker Ltd, A Share & Sons Ltd, Vanguard Logistics Services Ltd

29.6

3.8

277,760

100.0

2.2

3.5

2.8

Genesis Business Park, Woking

Office

Nuvias (UK & Ireland) Ltd, Fernox Ltd, McCarthy & Stone Retirement Lifestyles Ltd

26.0

3.3

98,359

82.7

1.5

2.4

4.3

Buildings 2 & 3 HBOS Campus, Aylesbury

Office

Bank of Scotland Plc, The Equitable Life Assurance Society, Agria Pet Insurance Ltd

24.9

3.2

140,791

95.7

2.3

3.5

3.4

Norfolk House, Smallbrook Queensway, Birmingham

Office

Secretary of State for Communities & Local Government, Spark44 Ltd

20.5

2.6

114,982

100.0

1.7

2.6

1.6

Hampshire Corporate Park, Eastleigh

Office

Aviva Central Services UK Ltd, National Westminster Bank Plc

20.1

2.6

85,422

99.6

1.5

2.4

3.6

800 Aztec West, Bristol

Office

Edvance SAS, The Secretary of State for Defence

19.3

2.4

73,292

100.0

1.5

2.4

3.6

One & Two Newstead Court, Annesley

Office

E.ON UK Plc

16.9

2.1

146,262

100.0

1.4

2.2

3.9

Road 4 Winsford Industrial Estate, Winsford

Industrial

Jiffy Packaging Ltd

15.7

2.0

246,209

100.0

1.0

1.5

14.8

Portland Street, Manchester

Office

New College Manchester Ltd, Mott MacDonald Ltd, Darwin Loan Solutions Ltd

15.3

1.9

54,959

97.7

0.8

1.3

2.9

Ashby Park, Ashby De La Zouch

Office

Ceva Logistics Ltd, Hill Rom UK Ltd, Alstom Power Ltd

13.9

1.8

91,034

100.0

1.1

1.7

1.4

Columbus House, Coventry

Office

TUI Northern Europe Ltd

13.3

1.7

53,253

100.0

1.4

2.1

4.0

Templeton On The Green, Glasgow

Office

The Scottish Ministers, The Scottish Sports Council, Heidi Beers Ltd

11.7

1.5

142,512

97.4

1.3

2.0

4.1

Oakland House, Manchester

Office

HSS Hire Service Group Ltd, Please Hold (UK) Ltd, CVS (Commercial Valuers & Surveyors) Ltd

11.3

1.4

160,938

89.5

1.1

1.7

3.8

Kingscourt Leisure Complex, Dundee

Other

Odeon Cinemas Ltd, Jag Leisure (Scotland) Ltd

10.5

1.3

83,780

88.8

0.7

1.1

7.7

 

 

 

 

 

 

 

 

 

 

* Table may not sum due to rounding

Top 15 Tenants (share of rental income) as at 31 December 2019

Tenant

Property

Sector

WAULT to first break (yrs)

Lettable area 

 (sq ft)

Annualised gross rent  (£m)

% of gross rental income

Barclays Execution Services Ltd

Tay House, Glasgow

Administrative and support service activities

1.9

78,044

1.6

2.5

Bank of Scotland Plc

Buildings 3 HBOS Campus, Aylesbury

Banking

2.2

92,978

1.5

2.3

 

High Street, Dumfries

 

 

 

 

 

Secretary of State for Communities & Local Government

Bennett House, Hanley

Public sector

2.2

115,753

1.4

2.2

Cromwell House, Tritton Road, Lincoln

 

 

 

 

 

Norfolk House, Birmingham

 

 

 

 

 

 

Oakland House, Manchester

 

 

 

 

 

E.ON UK Plc

One & Two Newstead Court, Annesley

Electricity, gas, steam and air conditioning supply

3.9

146,262

1.4

2.2

TUI Northern Europe Ltd

Columbus House, Coventry

Professional, scientific and technical activities

4.0

53,253

1.4

2.1

The Scottish Ministers

Calton House, Edinburgh

Public Sector

1.5

111,076

1.3

2.1

 

Quadrant House, Dundee

 

 

 

 

 

 

Templeton On The Green, Glasgow

 

 

 

 

 

 

The Courtyard, Falkirk

 

 

 

 

 

Jiffy Packaging Ltd

Road 4 Winsford Industrial Estate, Winsford

Manufacturing

14.8

246,209

1.0

1.5

Edvance SAS

800 Aztec West, Bristol

Electricity, gas, steam and air conditioning supply

3.4

41,285

0.9

1.4

John Menzies Plc

2 Lochside Avenue, Edinburgh

Professional, scientific and technical activities

3.6

43,780

0.9

1.4

The Royal Bank of Scotland Plc

Cyan Building, Rotherham

Banking

1.5

67,458

0.9

1.3

SPD Development Co Ltd

Clearblue Innovation Centre, Bedford

Professional, scientific and technical activities

5.8

58,167

0.8

1.3

Aviva Central Services UK Ltd

Hampshire Corporate Park, Chilworth House, Eastleigh

Other service activities

4.9

42,612

0.8

1.2

Schenker Ltd

Juniper Park, Basildon

Transportation and storage

2.8

91,287

0.7

1.1

A Share & Sons Ltd

1-4 Llansamlet Retail Park, Swansea

Wholesale and retail trade

4.4

75,791

0.7

1.1

 

Juniper Park, Basildon

 

 

 

 

 

The Secretary of State for Defence

800 Aztec West, Bristol

Public sector

4.0

32,007

0.6

1.0

Total

 

 

3.8

1,295,962

15.9

24.8

 

Property Portfolio Sector and Region Splits by Valuation and Income

By Valuation

As at 31 December 2019, 79.9% (2018: 76.1%) of the portfolio by market value was offices and 13.7% (2018: 15.5%) was industrial. The balance was made up of retail, 5.0% (2018: 7.1%) and other, 1.4% (2018: 1.4%). By UK region, as at 31 December 2019, Scotland represented 18.0% (2018: 18.0%) of the portfolio and England 79.5% (2018: 79.3%); the balance of 2.5% (2018: 2.7%) was in Wales. In England, the largest regions were the South East, the Midlands and the North West.

By Income

As at 31 December 2019, 79.7% (2018: 77.3%) of the portfolio by income was offices and 12.4% (2018: 13.2%) was industrial. The balance was made up of retail, 6.7% (2018: 8.3%), and other, 1.2% (2018: 1.2%). By UK region, as at 31 December 2019, Scotland represented 19.9% (2018: 20.1%) of the portfolio and England 77.2% (2018: 77.2%); the balance of 2.9% was in Wales (2018: 2.7%). In England, the largest regions were the South East, the Midlands and the North East.

Lease Expiry Profile

The WAULT on the portfolio is 5.5 years (2018: 5.4 years); WAULT to first break is 3.5 years (2018: 3.4 years). As at 31 December 2019, 5.5% (2018: 10.1%) of income was from leases, which will expire within 1 year, 14.2% (2018: 4.4%) between 1 and 2 years, 33.0% (2018: 34.0%) between 2 and 5 years and 47.4% (2018: 51.6%) after 5 years.

Tenants by Standard Industrial Classification as at 31 December 2019

As at 31 December 2019, 13.0% of income was from tenants in the professional, scientific and technical activities sector (2018: 11.5%), 12.0% from the administrative and support service activities sector (2018: 10.4%), 9.1% from the information and communication sector (2018: 8.8%), 9.1% from the wholesale and retail trade (2018: 10.1%) and 8.7% from the manufacturing sector (2018: 7.4%). The remaining exposure is broadly spread.

 

No tenant represents more than 3% of the Group's rent roll as at 31 December 2019, the largest being 2.5% (2018: 2.7%).

 

Top 15 Properties by Sector: Office

Tay House, Glasgow

Market value (£m)

33.7

 

Sector

Office

 

Annualised gross rent (£m)

2.7

 

Lettable area (Sq. Ft.)

156,853

 

Anchor tenants

Barclays Execution Services Ltd, University of Glasgow

 

EPRA Occupancy (%)

94.2

 

WAULT (years) (to first break)

6.4 (2.4)

 

· Secure Income   -   The leases with Barclays were re-geared in December 2015, securing income until October 2021 at the earliest.

· Break Option Removed   - Removal of the University of Glasgow's break option in September 2019, securing income until September 2024.

· Tenant Expansion - New 10-year lease agreed with the University of Glasgow for an additional 9,791 sq. ft. in the building, with option to break in September 2024. This lease provides an additional gross rental income of c. £181,000 pa.

· Future Asset Management Initiatives -   Let of the balance of space on the first floor. Explore refurbishment options should Barclays Execution Services Ltd exercise November 2021 break option. This presents an opportunity for comprehensive repositioning of asset in a market with limited supply of high-quality large floor plates in an improving location.

Genesis Business Park, Woking

Market value (£m)

26.0

 

Sector

Office

 

Annualised gross rent (£m)

1.5

 

Lettable area (Sq. Ft.)

98,359

 

Anchor tenants

Nuvias (UK & Ireland) Ltd, Fernox Ltd, McCarthy & Stone Retirement Lifestyles Ltd

 

EPRA Occupancy (%)

82.7

 

WAULT (years) (to first break)

7.3 (4.3)

 

· Established Business Park -   Genesis is the premier out-of-town office park in the town, situated approximately one mile from Woking town centre.

· New Letting New 10-year lease agreed with Gallagher Benefit Services Management Company Limited for 4,594 sq. ft. (Suite 1C) subject to a break option after five years at a gross rent of c. £106,000 pa (£23.00 per sq. ft.).

· Asset Management Initiatives - Let balance of space.

Buildings 2 & 3 HBOS Campus, Aylesbury

Market value (£m)

24.9

 

Sector

Office

 

Annualised gross rent (£m)

2.3

 

Lettable area (Sq. Ft.)

140,791

 

Anchor tenants

Bank of Scotland Plc, The Equitable Life Assurance Society, Agria Pet Insurance Ltd

 

EPRA Occupancy (%)

95.7

 

WAULT (years) (to first break)

4.2 (3.4)

 

· High-Quality Asset -   Comprehensive refurbishment programme of Building 2 now completed with gross capital expenditure of c. £3.3m. The property is now the best accommodation in the town.

· Continued Letting Activity - Additional lettings on the ground floor of Building 2 to Product Compliance Specialists Limited on a 10-year lease commencing in April 2019, subject to a break option at the seventh anniversary. The lease provides a gross rental income of c. £87,000pa (c. £24.00 per sq.ft).

· Future Asset Management Initiatives -   Let balance of remaining space (5,550 sq. ft.) in Building 2. Additionally, advanced discussions are currently ongoing with the Bank of Scotland Plc to assess their intentions for renewal of their lease of Building 3 in November 2021. Opportunity exists to undertake similar successful refurbishment programme completed on Building 2.

Norfolk House, Smallbrook Queensway, Birmingham

Market value (£m)

20.5

Sector

Office

Annualised gross rent (£m)

1.7

Lettable area (Sq. Ft.)

114,982

Anchor tenants

Secretary of State for Communities & Local Government, Spark44 Ltd

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

4.0 (1.6)

 

· High-Quality Asset -   City centre building split over six floors with 12 retail units on the ground floor level.

· Business Plan - Engage with tenants to re-gear the leases, remove break options and improve rental value. Let remaining retail unit.

· Future Asset Management Initiatives -   Explore improving aesthetics and profile of exterior of building by way of potential cladding options/retail frontage improvements.

Hampshire Corporate Park, Eastleigh

Market value (£m)

20.1

Sector

Office

Annualised gross rent (£m)

1.5

Lettable area (Sq. Ft.)

85,422

Anchor tenants

Aviva Central Services UK Ltd, National Westminster Bank Plc

EPRA Occupancy (%)

99.6

WAULT (years) (to first break)

7.5 (3.6)

 

· Successful Refurbishment -   Interior and exterior refurbishment of Hampshire House. By advance programme and marketing, the void period was limited to only five months whilst the works were ongoing.

· Securing Income Streams - New 10-year lease agreed for 43,612. sq. ft. at Chilworth House, Hampshire Corporate Park, Eastleigh, at a rent of £775,000 per annum which is 15.7% ahead of the previous rent.

 

800 Aztec West, Bristol

Market value (£m)

19.3

Sector

Office

Annualised gross rent (£m)

1.5

Lettable area (Sq. Ft.)

73,292

Anchor tenants

Edvance SAS, The Secretary of State for Defence

EPRA Occupancy

100.0

WAULT (years) (to first break)

8.8 (3.6)

 

· Successful Refurbishment   -   Major "back to shell" refurbishment of the whole building completed in August 2018 into active Bristol market with limited city centre supply .

· Further Lettings -   The final floor comprising 9,736 sq. ft. has been let to Edvance SAS for a nine-year lease from August 2019 at a gross rental income of c. £224,000 pa.

· Full Let   -   Property now fully let and producing a gross rental income of £2.3m.

One & Two Newstead Court, Annesley

Market value (£m)

16.9

Sector

Office

Annualised gross rent (£m)

1.4

Lettable area (Sq. Ft.)

146,262

Anchor tenants

E.ON UK Plc

EPRA Occupancy

100.0

WAULT (years) (to first break)

5.6 (3.9)

 

· High-Quality Assets -   Two modern office pavilions in an established business park.

· Break Option Removed - Removal of EON's break option in May 2020 for Two Newstead Court, securing income until April 2025.

Portland Street, Manchester

Market value (£m)

15.3

Sector

Office

Annualised gross rent (£m)

0.8

Lettable area (Sq. Ft.)

54,959

Anchor tenants

New College Manchester Ltd, Mott MacDonald Ltd, Darwin Loan Solutions Ltd

EPRA Occupancy (%)

97.7

WAULT (years) (to first break)

5.3 (2.9)

 

· Tenant Retention -   Secured three lease re-gears with existing tenants during 2019 which will provide a revised combined gross rental income of c. £262,000 per annum, an uplift of 43.4% from previous gross rental income.

· Strong Investment Market - Strong investor demand remains for offices in the Manchester city centre.

· Asset Management Initiatives - Various initiative ongoing with existing tenants regarding lease extensions. Explore opportunity to undertake improvements to elements of the reception area.

 

Ashby Park, Ashby De La Zouch

Market value (£m)

13.9

Sector

Office

Annualised gross rent (£m)

1.1

Lettable area (Sq. Ft.)

91,034

Anchor tenants

Ceva Logistics Ltd, Hill Rom UK Ltd, Alstom Power Ltd

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

2.7 (1.4)

 

· Fully Let -   Dilapidations on the inherited vacated space agreed. Jigsaw agreed new lease over revised area with Dunwoody Airline Services taking the remaining void.

· Asset Management Initiatives - Re-gear lease with Ceva Logistics to secure longer income and complete lease surrender of Power House with Alstom Power Ltd and back-to-back re-letting to Brush Electrical Machines Ltd on a new 10-year lease.

 

Columbus House, Coventry

Market value (£m)

13.3

Sector

Office

Annualised gross rent (£m)

1.4

Lettable area (Sq. Ft.)

53,253

Anchor tenants

TUI Northern Europe Ltd

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

4.0 (4.0)

 

· Income Profile -   Let to TUI until 2024 on a geared lease with fixed annual uplifts. TUI has sublet the entire space to First Utility that provides an underpinning to the rent.

· Asset Management Initiatives - Potential to agree lease surrender with TUI, with benefits of existing sublets to First Utility who have recently been acquired by Shell Petroleum Company Limited.

Templeton On The Green, Glasgow

Market value (£m)

11.7

Sector

Office

Annualised gross rent (£m)

1.3

Lettable area (Sq. Ft.)

142,512

Anchor tenants

The Scottish Ministers, The Scottish Sports Council, Heidi Beers Ltd

EPRA Occupancy (%)

97.4

WAULT (years) (to first break)

7.5 (4.1)

 

· Diversified Income -   Multi-let to 39 tenants across 47 leases.

· Further Lettings -   Six new lettings took place during 2019 to five tenants across 13,547 sq. ft., providing a combined gross rental income of c. £130,000 per annum and representing a notable uplift of c. 19% from December 2018 ERVs.

· Reducing Vacancy -   EPRA Occupancy has increased by 5.4% in the 12 months to 31 December 2019, reaching 97.4%.

Oakland House, Manchester

Market value (£m)

11.3

Sector

Office

Annualised gross rent (£m)

1.1

Lettable area (Sq. Ft.)

160,938

Anchor tenants

HSS Hire Service Group Ltd, Please Hold (UK) Ltd, CVS (Commercial Valuers & Surveyors) Ltd

EPRA Occupancy (%)

89.5

WAULT (years) (to first break)

5.1 (3.8)

 

· Adding Value -   Front of house works undertaken to improve immediate presentation and installation of high-level external illuminated signage to "landmark" the building.

· New Lettings - New lease agreed with Please Hold (UK) Limited for 5,450 sq. ft. on the fifth floor for a 10-year term at a gross rental value of £12.50 per sq. ft., with a break option in 2024.

· Asset Management Initiatives - Refurbishment of ground floor to create smaller suites in response to changing occupational demand as well as proposed creation of hub style facility to provide welfare facilities (including showers and improved reception).

Top 15 Properties by Sector: Industrial

Juniper Park, Basildon

Market value (£m)

29.6

 

Sector

Industrial

 

Annualised gross rent (£m)

2.2

 

Lettable area (Sq. Ft.)

277,760

 

Anchor tenants

Schenker Ltd, A Share & Sons Ltd, Vanguard Logistics Services Ltd

 

EPRA Occupancy (%)

100.0

 

WAULT (years) (to first break)

4.4 (2.8)

 

· Diversified Income -   Multi-let to 11 tenants across 15 leases.

· New Letting - New lease agreed with DG International Group Limited for c. 30,100 sq. ft. for a five-year term at a gross rental income of c. £240,800 per annum, representing a notable uplift of 30% from the previous tenancy. The unit was re-let within 11 weeks of the previous lease coming to an end.

· Major Renewal Secured -   Unit 2 of the 16-unit site has successfully been renewed to Vanguard Logistics Services Limited for a five-year period with Vanguard having the option to extend beyond this. A stepped rent has been agreed on the 61,079 sq. ft. unit, increasing to £370,000 per annum representing an uplift of 15.4% to the previous annual rent of £320,665, and 5.4% ahead of ERV.

· Tenant Expansion -   Agreement for lease signed with   Schenker Limited to take a lease of the whole ground floor offices (c. 13,000 sq. ft.) at Juniper Place on a five-year term at a gross rent of c. £182,000 per annum (c. £14.00 per sq. ft. and 4.9% above ERV).

 

Road 4 Winsford Industrial Estate, Winsford

Market value (£m)

15.7

Sector

Industrial

Annualised gross rent (£m)

1.0

Lettable area (Sq. Ft.)

246,209

Anchor tenants

Jiffy Packaging Ltd

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

14.8 (14.8)

 

· Long-Term Lease - Let to Jiffy Packaging Limited until 2034.

· Business Plan -   Tenant company acquired by Airpack Group and lease guarantee assigned to new parent company. Discussions continue with tenant regarding a potential re-gear.

Top 15 Properties by Sector: Other

Kingscourt Leisure Complex, Dundee

Market value (£m)

10.5

Sector

Other

Annualised gross rent (£m)

0.7

Lettable area (Sq. Ft.)

83,780

Anchor tenants

Odeon Cinemas Ltd, Jag Leisure (Scotland) Ltd

EPRA Occupancy (%)

88.8

WAULT (years) (to first break)

8.0 (7.7)

 

· Adding Value - Works undertaken to transform 10 screen multiplex Odeon cinema to 'Odeon Deluxe' brand. Successfully negotiated re-gear of the lease to provide a further 10-year term subject to us contributing to the cost of the upgrade.

· Asset Management Initiatives -   Let balance of refurbished space

 

Financial Review

Net Asset Value

 

In the year ended 31 December 2019, the EPRA NAV of the Group increased by £55.8m to £486.3m (IFRS: £483.7m) from £430.5m (IFRS: £429.5m) as at 31 December 2018, equating to a decrease in the diluted EPRA NAV of 2.8pps to 112.7pps from 115.5pps. This is after the payment of dividends in the period amounting to 8.2pps.

 

The EPRA NAV increase of some £55.8m since 31 December 2018 is predominately sourced from the issuance of new equity and offset by the revaluation of investment properties held at 31 December 2019.

 

On 23 July 2019, the Company issued 58,685,447 Ordinary Shares at a price of 106.5pps pursuant to a capital raise of gross proceeds of £62.5m. The funds were deployed in three tranches, excluding transaction costs: on 21 August 2019, a portfolio of six offices were acquired for £25.9m; on 18 October 2019, four multi-let offices were acquired for £27.7m; and finally, on 31 December 2019, a company office headquarters was acquired for £10.3m.

 

The investment property portfolio valuation as at 31 December 2019 totalled £787.9m, (31 December 2018: £718.4m). The increase of £69.5m since the December 2018 year end is largely a reflection of the aforementioned £62.5m equity capital raise funds being deployed, £1.7m realised property disposals, offset by £3.5m of investment property revaluations, and gross capital expenditure amounting to £8.0m. Overall, on a like-for-like basis, the portfolio was broadly unchanged with a 0.1% decrease.

 

The below table sets out the acquisitions, disposals and capital expenditure for the respective periods:

 

 

 

 

Year ended

 

Year ended

 

 

 

31 December

2019

31 December

2018

 

 

 

(£m)

(£m)

 

Acquisitions

 

 

 

 

Net (after costs)

89.9

76.3

 

 

Gross (before costs)

87.1

73.3

 

 

 

 

 

 

Disposals

 

 

 

 

Net (after costs)

24.3

149.3

 

 

Gross (before costs)

24.9

152.5

 

 

 

 

 

 

Capital Expenditure

 

 

 

 

Net (after dilapidations)

5.8

7.0

 

 

Gross (before dilapidations)

8.0

 9.8

 

 

 

 

 

 

 

The diluted EPRA NAV per share decreased to 112.7pps (31 December 2018: 115.5pps). The EPRA NAV is reconciled in the table below:

 

 

Year ended

2019

 

£m

Pence per share

Opening EPRA NAV (31 December 2018)

430.5

115.5

Capital raise dilution

60.5

(1.7)

 

 

 

Opening EPRA NAV (incl. net capital raise)

491.0

113.8

 

 

 

Net rental and property income

55.0

12.7

Administration and other expenses

(10.9)

(2.5)

Gain on the disposal of investment properties

1.7

0.4

Change in the fair value of investment properties

(3.5)

(0.8)

Change in value of right of use

(0.2)

(0.0)

EPRA NAV after operating profit

533.0

123.5

Net finance expense

(13.7)

(3.2)

Impairment of goodwill

(0.6)

(0.1)

Taxation

0.4

0.1

 

 

 

EPRA NAV before dividends paid

519.1

120.3

Dividends paid

(32.8)

(7.6)

 

 

 

Closing EPRA NAV (31 December 2019)

 

486.3

 

112.7

 

Table may not sum due to rounding

As at 31 December 2018, there were 372,821,136 shares in issue. On 23 July 2019, the Company issued 58,685,447 shares which qualified for the Q2 2019 dividend of 1.90 pence per share and increased the total number of shares in issue to 431,506,583.

 

Income Statement

Operating profit before gains and losses on property assets and other investments for the year ended 31 December 2019 amounted to £44.1m (31 December 2018: £36.8m). Profit after finance items and before taxation was £26.3m (31 December 2018: £67.9m). This reduction is predominately the result of three factors: firstly, a reduction in the gains on the disposal of investment properties, with 2018 including a number of opportunistic disposals; secondly, the reduction in the change in fair value of investment properties, with 2018 values being driven by asset management initiatives; and finally, the combination of the two prior factors resulted in a reduction of the performance fee incurred. 2019 included a full rent roll for properties held as at 31 December 2018, plus the partial rent roll for properties acquired and disposed of during the period.

 

Rental and property income amounted to £64.4m, excluding recoverable service charge income and other similar items (31 December 2018: £62.1m). The increase was primarily the result of the enlarged investment property portfolio held in 2019.

 

Currently more than 85% of the rental income is collected within 28 days of the due date and bad debts in the period were £0.5m (31 December 2018: £0.4m).

 

Non-recoverable property costs, excluding recoverable service charge income and other similar costs, amounted to £9.4m (31 December 2018: £7.7m), and the rent roll increased to £64.3m (31 December 2018: £59.7m).

 

Realised gain on disposal of investment properties amounted to £1.7m (31 December 2018: £23.1m). These gains were primarily driven by asset management initiatives. The change in the fair value of investment properties amounted to a loss of £3.5m (31 December 2018: gain of £23.9m). Gross capital expenditure amounted to £8.0m. The change in value of right of use asset amounted to a charge of £0.2m; additional information is set out in note 2.4 below.

 

Finance expenses amount to £13.9m (31 December 2018: £16.0m). The decrease is largely as a result of the repayment of the 30m zero dividend preference shares ("ZDPs") on 9 January 2019.

 

The EPRA cost ratio, including direct vacancy costs, was 31.6% (31 December 2018: 40.1%), adjusting for ground rent. The decrease in the cost ratio is ostensibly a reflection of the decrease in realised gains from the disposal of investment properties in the period, coupled with the reduction in the fair value of the investment properties, resulting in a nil performance fee (31 December 2018: £7.0m). The EPRA cost ratio, including direct vacancy costs and excluding the performance fee, was 31.6% (31 December 2018: 28.6%).

 

The ongoing charges for the period ending 31 December 2019 were 4.5% (31 December 2018: 4.4%).

 

The EPRA Total Return from 6 November 2015 to 31 December 2019 was 43.0% (31 December 2018: 37.5%), an annualised rate of 9.0% pa (31 December 2018: 10.6% pa).

 

Dividend

 

In relation to the period from 1 January 2019 to 31 December 2019, the Company declared dividends totalling 8.25pps (2018: 8.05pps). Since the end of the period, the Company has declared a dividend for the fourth quarter of 2019 of 2.55pps.

Period  covered

Announcement date

Ex-date

Payment date

Pence  per share

1 Jan 2019 to 31 Mar 2019

23 May 2019

6 Jun 2019

12 July 2019

1.90

1 Apr 2019 to 30 Jun 2019

29 Aug 2019

5 Sep 2019

15 Oct 2019

1.90

1 Jul 2019 to 30 Sep 2019

14 Nov 2019

21 Nov 2019

19 Dec 2019

1.90

1 Oct 2019 to 31 Dec 2019

27 Feb 2020

5 Mar 2020

9 April 2020

2.55

1 Jan 2018 to 31 Mar 2018

17 May 2018

24 May 2018

13 Jul 2018

1.85

1 Apr 2018 to 30 Jun 2018

31 Aug 2018

13 Sep 2018

15 Oct 2018

1.85

1 Jul 2018 to 30 Sep 2018

15 Nov 2018

 22 Nov 2018

 21 Dec 2018

1.85

1 Oct 2018 to 31 Dec 2018

21 Feb 2019

28 Feb 2019

11 Apr 2019

2.50

  

Debt Financing and Gearing

 

Borrowings comprise third-party bank debt which is secured over properties owned by the Group and repayable over the next four to ten years, with a weighted average maturity of 7.3 years (31 December 2018: 6.4 years).

 

The Group's borrowing facilities are with the Royal Bank of Scotland, Scottish Widows Limited & Aviva Investors Real Estate Finance, Scottish Widows Limited and Santander UK. Total bank borrowing facilities at 31 December 2019 amounted to £294.0m (31 December 2018: £290.5m) (before unamortised debt issuance costs), with £27.9m available to be drawn. In addition to the bank borrowings, the Group has a £50m 4.5% retail eligible bond which is due for repayment in August 2024. In aggregate, the total debt available at 31 December 2019 amounted to £371.9m (31 December 2018: £380.4m).

 

During the period, the Company fully repaid the £39.9m ZDP shares on 9 January 2019. In addition, a new £66.0m 10-year facility was agreed with Santander, refinancing the existing £44.0m facility; a new £55.0m five-year facility was agreed with the Royal Bank of Scotland, which refinanced both the existing £26.5m facility with the Royal Bank of Scotland and the £19.0m facility with HSBC. The new Royal Bank of Scotland and Santander UK facilities had not been fully drawn as at 31 December 2019.

 

At 31 December 2019, the Group's cash and cash equivalent balances amounted to £37.3m (31 December 2018: £104.8m), after the repayment of the £39.9m ZDP shares and the acquisition of Norfolk House for £20.0m before costs.

 

The Group's net LTV ratio stands at 38.9% (31 December 2018: 38.3%) before unamortised costs. The Board continues to target a net LTV ratio of 40%, with a maximum limit of 50%.

 

Debt Profile and LTV Ratios as at 31 December 2019
 

Lender

Original facility

Outstanding debt*

Maturity date

Gross loan to value**

Annual interest rate

 

£'000

£'000

 

 %

 %

 

Royal Bank of Scotland

 

55,000

 

48,584

 

Jun-2024

 

39.8

 

2.15

over 3 months

£ LIBOR

 

 

 

 

 

 

 

Scottish Widows Ltd. & Aviva Investors Real Estate Finance

 

 

 

165,000

 

 

 

165,000

 

 

 

Dec-2027

 

 

 

45.1

 

 

 

3.28

 

 

 

Fixed

 

 

 

 

 

 

 

Scottish Widows Ltd.

 

36,000

 

36,000

 

Dec-2028

 

38.9

 

3.37

Fixed

 

 

 

 

 

 

 

Santander UK

65,870

44,416

Jun-2029

26.4

2.20

over 3 months

£ LIBOR

 

321,870

294,000

 

 

 

 

 

 

 

 

 

 

 

Retail eligible bond

50,000

50,000

Aug-2024

N/A

4.50

Fixed

 

371,870

344,000

 

 

 

 

* Before unamortised debt issue costs

** Based on Cushman and Wakefield property valuations

Table may not sum due to rounding

 

The Managers continue to monitor the borrowing requirements of the Group. As at 31 December 2019, the Group had substantial headroom against its borrowing covenants.

 

The net gearing ratio (net debt to Ordinary Shareholders' equity (diluted)) of the Group was   63.4% as at 31 December 2019 (31 December 2018: 64.1%).

 

Interest cover, including amortised costs, stands at 3.6 times (31 December 2018: 2.3 times) including the ZDP shares, and 3.6 times excluding the ZDP shares (31 December 2018: 2.7 times).  The interest cover, including amortised costs, increase was a result of the reduction of borrowings following the repayment of the ZDP shares on 9 January 2019.

 

Hedging

The Group applies an interest hedging strategy that is aligned to the property management strategy and aims to mitigate interest rate volatility on at least 90% of the debt exposure.

 

 

 

 

31 December 2019

31 December 2018

 

 

 

 

 

%

%

 

 

Borrowings interest rate hedged (incl. ZDP)

 

 

108.1

102.0

 

 

Thereof:

 

 

 

 

 

 

Fixed

 

 

73.0

76.5

 

 

Swap

 

 

17.6

12.8

 

 

Cap

 

 

17.6

12.8

 

 

 

 

 

 

 

 

 

WACD1

 

 

3.5

3.8

 

 

WACD - Excluding the ZDPs2

 

 

3.5

3.5

 

 

 

 

 

 

 

 

 

 

Table may not sum due to rounding

 

 

1 WACD - Weighted Average Effective Interest Rate including the cost of hedging

 

2 Zero Dividend Preference Shares, which were assumed on 24 March 2017 and fully repaid on 9 January 2019

               

 

The over hedged position has arisen due to the entire Royal Bank of Scotland and Santander UK facilities, including any undrawn balances, being hedged by interest rate cap derivatives which have no ongoing cost to the Group.

 

Tax

 

The Group entered the UK REIT regime on 7 November 2015 and all of the Group's UK property rental operations became exempt from UK corporation tax from that date. The exemption remains subject to the Group's continuing compliance with the UK REIT rules.

 

On 9 January 2018, the Company registered for VAT purposes in England.

 

At 31 December 2019, the Group recognised a tax credit of £0.3m, which comprised tax provisions for the year offset by releases of tax previously provided for in prior years which are now concluded and not payable.

 

Subsequent Events and COVID-19

 

The wellbeing of our tenants and other stakeholders in the Company are of utmost importance to the Board and we continue to manage the Company, cognisant of their needs in this current environment.

 

On 20 February 2020, the Company announced a potential equity fundraise to take advantage of its growing near-term pipeline of accretive growth. As a result of the current market uncertainty caused by the global spread of COVID-19, the Company took the decision to withdraw the potential equity fundraise. 

 

On 31 March 2020, and in view of the COVID-19 disruption to UK economic activity the Company announced a trading update. The rental collections were slightly reduced as at 30 March 2020, with 68.2% of invoiced rental income collected in comparison with 69.6% at the same date in 2019. In addition, £30.7m of available borrowing headroom from the Santander UK and Royal Bank of Scotland facilities had been drawn.

 

The Board will continue to closely monitor the developing situation and its effect on the Group, although the Board is re-assured by the Company's balance sheet, the breadth of tenants and geographical spread of assets, which will ensure it is well positioned to mitigate any prolonged periods of uncertainty.

 

Principal Risks and Uncertainties

Principal Risks and Uncertainties

 

The Board acknowledges that it faces a number of risks which could impact the achievement of its strategy, and that effective risk management is essential to the Group. A robust assessment is undertaken of the principal risks facing the Group, including those that would threaten its business model and future performance, solvency or liquidity.

 

Although the Board believes that it has a robust framework of internal controls in place, this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate risk.

 

The Group has established a risk management process to monitor and mitigate identifiable risks where possible, rather than eliminating them. The Audit Committee reviews the risk management matrix on a six-monthly basis. The below list sets out the current identifiable principal risks in no particular order which the Board is monitoring but does not purport to be an exhaustive list of all the risks faced by the Group.

 

The Board is aware that material emerging risks will arise which, to date, are not deemed material nor warrant significant resources to monitor. As and when such risks are identified, the Group will put in place controls to monitor and mitigate .

 

 

Principal Risk Summary    Movement trend in the period

1.  Inappropriate investment strategy    ó

2.  Valuation  ó

3.  COVID-19  ö

4.  Economic and political  ó

5.  Funding    ó

6.  Tenant  ó

7.  Financial and tax changes  ó

8.  Operational  ö

9.  Accounting, legal and regulatory  ó

10.  Environmental and efficiency standards  ö

 

Strategic

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD  ó

An inappropriate investment strategy could result in lower income and capital returns to Shareholders.

· An annual review of the investment strategy.

· A defined and rigorous investment appraisal process.

· Acquire portfolios which offer Shareholders diversification of investment risk by investing in a range of geographical areas and number of properties.

· Supply and demand market information is reviewed continuously to assist in acquisitions and disposals.

 

· The property portfolio remains balanced across a range of geographical areas and large number of investment properties.

 

· Only acquiring office and industrial properties in the UK and outside of the M25 motorway. However, the Group may invest in property portfolios in which up to 50% of the properties (by market value) are situated within the M25 motorway.

· The Group continues to purchase properties in the UK outside the M25 motorway.

 

· No single property, in the ordinary course of business, is expected to exceed 10% of the Group's aggregate Investment Properties. However, the Board may, in exceptional circumstances, consider a property having a value of up to 20% of the Group's investment property value at the time of investment.

· Tay House (31 December 2018: Tay House) remains the highest valued property, which equates to 4.3% (31 December 2018: 4.6%) of the Group's investment properties.

 

· No more than 20% of the Group's investment property value shall be exposed to any single tenant or group undertaking of that tenant.

· The Group's largest single tenant exposure is 2.5% (31 December 2018: 2.7%) of gross rental income, being Barclays Bank PLC (31 December 2018: Barclays Bank PLC).

 

· Speculative development (i.e., properties under construction, but excluding any refurbishment works, which have not been pre-let) is prohibited.

· No speculative construction was undertaken in the year.

 

· The value of the assets is protected by an active asset management programme, which is regularly reviewed against the business plan for each property.

· The Asset Manager continues to actively manage the investment properties in accordance with market conditions and the individual asset programme.

 

 

Valuation

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

The valuation of the Group's portfolio affects its profitability and net assets.

· External valuers, Cushman & Wakefield provide independent valuations for all properties and in accordance with the RICS Red Book.

· The Audit Committee has the opportunity to discuss with the external valuers the basis of their valuations.

· The Asset Manager's experience and extensive property market knowledge and are able to challenge the external valuers findings.

· The Company's Auditor to engage an independent third party to evaluate Cushman & Wakefield valuation.

 

· Cushman & Wakefield provide the valuation for the entire portfolio.

 

COVID-19

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD  ö

The economic disruption resulting from COVID-19 virus could impact rental incomes, the ability to access funding at competitive rates, maintain a progressive dividend policy, and adhere to the HMRC REIT regime requirements, especially if associated restrictions are in place for greater than one year.

 

· The retention of the Asset and Investment Manager, will be pivotal in the near-term in maintaining the rental income, given their experience and corporate memory. The Company and the Managers each agreed to waive their right to issue a termination notice on or before 3 November 2020 and the management agreement will now continue in force until 3 November 2023

· The Asset Manager stands ready, should it be required, to support tenants in accessing UK Government financial assistance

· The Asset Manager, where appropriate, has put in place social distancing measures as advised by the government

· The available borrowing facility headroom has been drawn down from Santander UK and Royal Bank of Scotland

· The Company is no longer considering a potential equity fundraise and any associated property acquisitions

· Close relationships with lenders ensuring early dialogue around covenants

· Dividend distributions remain under review

 

· This was a completely new and unforeseen risk. However, the Group continues to scrutinise all current risk mitigation approaches employed and to work closely with all parties through this disruptive period.

 

 

Economic and political

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

Significant political events could impact the health of the UK economy, resulting in borrowing constraints, change in demand by tenants for suitable properties, the quality of the tenants, and ultimately the portfolio value.

· The Group operates with a sole focus on the UK regions, with no foreign currency exchange exposure. It remains well positioned with a deliberately diverse standard industry classification of tenants generating in excess of 900 (31 December 2018: 800) income streams which are located in areas of expected economic growth.

· The Board receives advice on macro-economic risks from the Investment Manager and other Advisers and acts accordingly.

 

 

· There remains a risk that property valuations and the occupancy market may be impacted by the ongoing negotiations during the Brexit transition period.  

 

 

Funding

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

The Group may not be able to secure further debt on acceptable terms, which may impinge upon investment opportunities and the ability to grow the Group.

· Borrowings are currently provided by a range of institutions with targeted staggered maturities.

· Strong relationships with key long-term lenders.

· Funding options are constantly reviewed with an emphasis on reducing the weighted average cost of capital and lengthening the weighted average debt to maturity.

· Continual monitoring of LTV.

· Weighted average debt term increased to 7.3 years from 6.4 years in 2018.

· Weighted average cost of capital, including hedging costs was 3.5% (31 December 2018: 3.8%).

· LTV increased to 38.9% from 38.3% at 31 December 2018.

Bank reference interest rates may be set to rise accompanying higher inflation.

· Policy of hedging at least 90% of variable interest rate borrowings.

· Borrowings are currently provided by a range of institutions with targeted staggered maturities.

 

· Continued adherence to the hedging policy.

 

Tenant

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD 

ó

 

Type of tenant and concentration of tenant could result in lower income from reduced lettings or defaults.

· An active asset management programme with a focus on the Asset Manager working with individual tenants to assess any occupational issues and to manage any potential bad debts.

· Diversified portfolio of properties let, where possible, to a large number of low risk tenants across a wide range of different standard industrial classifications throughout the UK.

· Potential acquisitions are reviewed for tenant overlap.

· This risk remains stable in view of the increasing diversification of properties, tenants and geographies in the portfolio.

·T he tenant mix and their underlying activity has continued to increasingly diversify, with the number of tenants amounting to 904 at the year end (31 December 2018: 874).

 

A high concentration of lease term maturity and/or break options could result in a more volatile contracted rent roll.

· The portfolio lease and maturity concentrations are monitored by the experienced Asset Manager to minimise concentration.

· There is a focus on securing early renewals and increased lease period.

· The requirement for suitable tenants and the quality of the tenant is managed by the experienced Asset Manager which maintains close relationships with current tenants and with letting agents.

· The WAULT to first break as at 31 December 2019 was 3.5 years (31 December 2018: 3.4)

·T he largest tenant is 2.5% of the gross rental income, being Barclays Bank PLC (31 December 2018: 2.7%).

· The Asset Management team remains vigilant to the health of current tenants and continues to liaise with occupiers and agents.

 

 

Financial and Tax Change

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

Changes to the UK REIT and non-REIT regimes, tax and financial legislation.

· The Board receives advice on these changes where appropriate and will act accordingly.

· Advice is received from a number of corporate advisers including Grant Thornton UK LLP and the Group adapts to changes as required.

 

 

Operational

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ö

Business disruption could impinge on the normal operations of the Group.

·T he Asset and Investment Managers each have contingency plans in place to ensure there are no disruptions to the core infrastructure, including cyber security measures, which would impinge on the normal operations of the Group. These plans have been implemented in adherence to COVID-19 government guidelines, with limited disruption to operations.

· Both the Asset and Investment Managers annually review their Disaster and Business Continuity Plans.

 

· An annual due diligence exercise is carried out on all principal third-party service providers.

· Annual due diligence visits were undertaken with the Company's principal third party service providers.

· There were no concerns identified from these visits.

 

· As an externally managed investment Company, there is a continued reliance on the Asset and Investment Managers.

· Both the Asset and Investment Manager are viable going concerns.

 

· All acquisitions undergo a rigorous due diligence process and all multi-let properties undergo an annual comprehensive fire risk.

· The impact of physical damage and destruction to investment properties is mitigated by ensuring all are covered by a comprehensive building, loss of rent and service charge plus terrorism insurance with the exception of a small number of "self-insure" arrangements covered under leases.

· The Asset Manager remains vigilant to changes in Health and Safety regulations, including, where required, COVID-19 social distancing measures.

· The Asset Manager reviews the adequacy of insurance cover on an ongoing basis.

 

Accounting, Legal, and Regulatory

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

Changes to accounting, legal and/or regulatory legislation could result in changes to current operating processes.

· Robust processes are in place to ensure adherence to accounting, legal, regulatory requirements, and Listing Rules.

· All contracts are reviewed by the Group's legal advisers.

· The Administrator, in its capacity as Group Accountant, and the Company Secretary attend all Board meetings in order to be aware of all announcements that need to be made.

· All compliance issues are raised with the Financial Adviser.

· The Group continues to receive advice from its corporate advisers and has incorporated changes where required.

· The Administrator and Company Secretary continue to attend all Board meetings and advise on Listing Rule requirements in conjunction with the Corporate Broker and Financial Adviser.

 

Environmental and Energy Efficiency Standards

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ö

The Group's cost base could be impacted, and management time diverted, due to climate changes and associated legislation.

· The Board receives regular updates on environmental, social, governance and potential legislation changes (e.g. the Government Green Finance Strategy July 2019) from its advisers.

· The Group is currently reviewing its approach to these emerging risks with the assistance of specialist external advisers.

 

· Additional attention is currently being devoted in this area to ensure the appropriate approach and indicators are applied.

Changes to the environment could impact upon the operations of the Group.

· Property acquisitions undergo a rigorous due diligence process, including an environmental assessment.

· The Asset Manager monitors the portfolio for any detrimental environmental impact, by way of frequent inspections of the properties, and the annual insurance review process.

 

· The rigour of the environmental assessments process continues to be reviewed with the aim of enhancing it.

An Energy Performance Rating of E and below is required for each asset in order to be let or sold.

· The Group continues to review each property to ensure adherence with Energy Performance Rating requirements.

· The energy efficiency of investment acquisitions is fully considered as part of the buying due diligence.

· The Asset Manager is continually reviewing the feasibility of enhancing Energy Performance Ratings to exceed the minimum requirement.

 

Emerging Risks

 

In reviewing the principal risks, the Board also considers emerging risks on a regular basis. The Company has a procedure in place to identify emerging risks and manages them accordingly. One key emerging risk that was identified but is now considered an actual principal risk to the Company is COVID-19, as detailed above.

 

Changes to the Principal Risks and Uncertainties

 

The Board, via the Audit Committee, has agreed the movement during the period to each of the identified   principal risks and uncertainties following review of these risks, having considered the characteristics of these and the economic and geo-political factors. Any impact of these risks

to the Company's future strategy is considered on an ongoing basis.

 

Going Concern

 

The Directors have made an assessment of the Group's ability to continue as a going concern which included the current uncertainties created by COVID-19, coupled with the Group's cash resources, borrowing facilities, rental income, acquisition and disposals of investment properties, elective and committed capital expenditure, and dividend distributions.

 

The Group ended the year under review with £37.3m of cash and cash equivalents, of which £34.7m was unrestricted cash. In light of current uncertainties, the Directors prudently decided to draw down £30.7m of available borrowing headroom from the Santander UK and Royal Bank of Scotland facilities on 26 March 2020. As at 30 March 2020, the cash and cash equivalents amounted to £68.8m, of which £64.4m was unrestricted. As a result of the drawdown, the borrowing facilities increased from £344.0m at the year ended 31 December 2019 to £371.9m as at 31 March 2020, with an LTV of c. 39%, based upon the value of Company's investment properties as at 31 December 2019. In respect of the Company's borrowings, the first of its facilities to mature is for £55.0m in June 2024, and is held with the Royal Bank of Scotland.

 

As at 30 March 2020, the first quarter 2020 rent collected was only c.1.4% reduced from the position as at the same date in the first quarter 2019. As at 31 March 2020, the aggregate rent to be invoiced for the second and third quarters of 2020 would amount to some £30.4m, and the respective operating costs would amount to some £5.7m.

 

As part of the going concern assessment, and taking the above into consideration, the Directors reviewed a number of scenarios which included extreme downside sensitivities in relation to rental cash collection, no property acquisitions, no elective capital expenditure, REIT regime compliance, and no dividends. The 2019 dividend payment of 8.25 pence per share would amount to £35.6m if distributed in 2020, based on the current number of shares in issue. A range of scenarios up to 12 months with nil cash collection were considered, and taking into account mitigating management actions, the company had adequate resources to continue its operations.

 

To supplement the scenario planning, constructive discussions were held with all the Company's lenders around the ability to waive or change the respective covenants, if required. This was further underpinned by the, Bank of England's financial services regulatory and supervisory body, the Prudential Regulation Authority providing guidance to its regulated members on the 26 March 2020.

 

Given the substantial amount of unrestricted cash currently held by the Group, the limited level of committed capital expenditure in the forthcoming 12 months, and reasonable downside sensitivities the Directors  are satisfied that the Company has adequate resources to continue in operational existence, for a period of at least 12 months from the date that these Financial Statements were approved.

 

Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Accordingly, the Directors consider that it is appropriate to prepare the Financial Statements on a going concern basis.

 

Viability Statement

 

In accordance with the AIC Code of Corporate Governance, and taking into consideration COVID- 19, the Directors have assessed the prospects of the Group and future viability over a three-year period from the year end, being longer than the 12 months required by the 'Going Concern' provision. The Board conducted the review  with regard to the Group's long-term strategy, principal risks and risk appetite, current position, asset performance and future plans, and determined that  three years to 31 December  2022 is the maximum timescale over which the performance of the Group can be forecast with any material degree of accuracy, and so is an appropriate period over which to consider the Group's viability.

 

A range of downside sensitivity analyses were stress tested to form part of the review, with material inputs filtered to consider differing economic backdrops, and how such challenges would be met. Achievement of the one-year forecast has a greater level of certainty and is used to set near-term targets across the Group. Achievement of the subsequent forecasted years is less certain than the one-year. The Board's forecast, though provides a longer-term outlook against which strategic decisions can be made.

 

Assessment of Review Period

 

The Board chose to conduct the review for a three-year period giving consideration to:

 

· The Group's WAULT of 3.5 years to first break.

· The Group's detailed forecast covering a rolling three-year period.

· The Group's weighted average debt to maturity was 7.3 years as at 31 December 2019.

 

Assessment of Prospects and Viability

 

The financial planning process considers the Group's profitability, capital values, LTV, cashflows, dividend cover, banking covenants, and other key financial metrics over the three-year period. The metrics are subject to a sensitivity analysis, in which a number of the main underlying assumptions are flexed and tested to consider a range of alternative macro-environments and portfolio compositions. The review was updated to consider the impact of COVID-19, however, given the unpredictable nature of the outbreak, and how rapidly the responses to the outbreak are changing, the Board is unable to predict the full extent of the impact.

 

The downside scenarios considered the impact on the corporate model, including the loss of all rental income up to a 12 month period, taking into consideration, no property acquisitions, elective capital expenditure, or dividends, and compliance with the REIT regime. Taking into account mitigating management actions, the Company had adequate resources to continue is operations over the period of the assessment on the assumption the current economic turbulence resulting from the impact of COVID-19 will be ameliorated by the UK Government actions and normalise within one year.

 

Subject to this assumption, the results of the sensitivity analysis and stress testing demonstrated that the Group would have sufficient liquidity to meet its on-going liabilities and its currently committed capital expenditure as they fall due over the period of assessment.

 

Furthermore, the Board, in conjunction with the Audit Committee, carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that would threaten its business model, strategy, future performance, solvency or liquidity over the three-year period. The risk review process provided the Board with assurance that the mitigations and management systems are operating as intended. The Board believes that the Group is well positioned to manage its principal risks and uncertainties successfully, taking into account the current COVID-19 risk, and the economic and political environment.

 

The Board's expectation is further underpinned by the regular briefings provided by each of the Asset and Investment Manager. These briefings consider market conditions, opportunities, the ability to raise third-party funds and deploy these promptly, and changes in the regulatory landscape, and the current political and economic risks and uncertainties. These risks, and other potential risks which may arise, continue to be closely monitored by the Board.

 

Confirmation of Viability

 

The Board confirms that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years, taking account of the Group's current position,  the principal risks as set out in the Chairman's Statement and the principal risks and uncertainties report, and on the assumption the current economic turbulence resulting from the impact of COVID-19 will be ameliorated by the UK Government actions and normalise within one year.

 

The Directors have carefully reviewed areas of potential financial risk. The Directors have satisfied themselves that the Group has adequate financial resources to continue in operational existence for the foreseeable future.

 

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019

 

 

 

 

Notes

Year ended

31 December

2019

£'000

 

Year ended 

31 December 

2018 

£'000 

Continuing Operations

 

 

 

 

Revenue

 

 

 

 

Rental and property income

5

75,645

 

74,019 

Property costs

6

(20,681)

 

(19,644)

Net rental and property income

 

54,964

 

54,375 

Administrative and other expenses

7

(10,904)

 

(17,586)

Operating profit before gains and losses on property assets and other investments

 

 

44,060

 

 

36,789 

Gain on disposal of investment properties

14

1,662

 

23,127 

Change in fair value of investment properties

14

(3,513)

 

23,881 

Change in fair value of right of use assets

33

(194)

 

-

Operating profit

 

42,015

 

83,797 

Finance income

9

155

 

268 

Finance expenses

10

(13,880)

 

(15,983)

Impairment of goodwill

16

(557)

 

(557)

Net movement in fair value of derivative financial instruments

 

26

 

(1,479)

 

 

 

415 

Profit before tax

 

26,254

 

67,940 

Taxation

11

257

 

(567)

Total comprehensive income for the year

(attributable to owners of the parent Company)

 

 

26,511

 

 

67,373 

 

 

 

 

 

 

Total comprehensive income arises from continuing operations.

 

Earnings per share - basic and diluted

12

6.6p

 

18.1p

 

The notes below are an integral part of these consolidated financial statements.

 

Consolidated Statement of Financial Position

As at 31 December 2019

 

 

 

Notes

31 December

2019

£'000

 

31 December 

 2018 

£'000 

Assets

 

 

 

 

Non-current assets

 

 

 

 

Investment properties

14

787,915

 

718,375 

Right of use assets

33

16,351

 

-

Goodwill

16

558

 

1,115 

Non-current receivables on tenant loan

17b

1,156

 

1,396 

 

 

805,980

 

720,886 

Current assets

 

 

 

 

Trade and other receivables

18

32,158

 

22,163 

Cash and cash equivalents

19

37,248

 

104,823 

 

 

69,406

 

126,986 

 

 

873,737

 

 

Total assets

 

875,386

 

847,872

 

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

20

(22,153)

 

(30,663)

Deferred income

21

(13,301)

 

(11,043)

Taxation liabilities

22

(736)

 

(1,763)

Bank and loan borrowings

23

-

 

(400)

Zero dividend preference shares

24

-

 

(39,816)

 

 

(36,190)

 

(83,685)

Non-current liabilities

 

 

 

 

Bank and loan borrowings

23

(287,856)

 

(285,199)

Retail eligible bonds

25

(49,286)

 

(49,136)

Derivative financial instruments

26

(1,816)

 

(337)

Lease liabilities

33

(16,510)

 

-

 

 

(355,468)

 

(334,672)

 

 

 

 

 

Total liabilities

 

(391,658)

 

(418,357)

 

 

 

 

 

Net assets

 

483,728

 

429,515 

 

 

 

 

 

Equity

 

 

 

 

Stated capital

27

430,819

 

370,316 

Retained earnings

 

52,909

 

59,199 

 

 

 

 

 

Total equity attributable to owners of the parent Company

483,728

 

429,515 

 

 

 

 

 

 

Net asset value per share - basic and diluted

28

112.1p

 

115.2p

 

The notes below are an integral part of these consolidated financial statements.

 

These consolidated group financial statements were approved by the Board of Directors and authorised for issue on 8 April 2020 and signed on its behalf by:

 

Kevin McGrath,

Chairman and Independent Non-Executive Director

8 April 2020

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to owners of the parent Company

 

 

 

 

 

Notes

Stated

capital

£'000

 

Retained 

earnings 

£'000 

 

 

Total

£'000

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2019

 

 

370,316

 

59,199

 

429,515

 

Total comprehensive income

 

 

-

 

26,511

 

26,511

 

Issue of share capital

 

27

62,500

 

-

 

62,500

 

Share issue costs

 

27

(1,997)

 

-

 

(1,997)

 

Dividends paid

 

13

-

 

(32,801)

 

(32,801)

 

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2019

 

 

430,819

 

52,909

 

483,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                       

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to owners of the parent company

 

 

 

Notes

Stated

capital

£'000

 

Retained 

earnings 

£'000 

 

 

Total

£'000

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2018

 

 

370,318

 

22,581 

 

392,899

 

Total comprehensive income

 

 

-

 

67,373 

 

67,373

 

Share based payments

 

29.1

-

 

(930)

 

(930)

 

Share issue costs

 

27

(2)

 

 

(2)

 

Dividends paid

 

13

-

 

(29,825)

 

(29,825)

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2018

 

 

370,316

 

59,199 

 

429,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                       

The notes below are an integral part of these consolidated financial statements.

Consolidated Statement of Cash Flows

For the year ended 31 December 2019

 

 

 

 

 

Year ended

31 December

2019

£'000

 

Year ended 

31 December 

2018 

£'000 

Cash flows from operating activities

 

 

 

Profit for the year before taxation

26,254

 

67,940 

- Change in fair value of investment properties

3,513

 

(23,881)

- Change in fair value of financial derivative instruments

1,479

 

(415)

- Gain on disposal of investment properties

(1,662)

 

(23,127)

- Change in fair value of right of use assets

194 

 

Impairment of goodwill

557

 

557 

Finance income

(155)

 

(268)

Finance expenses

13,880

 

15,983 

Share based payments

-

 

(930)

Increase in trade and other receivables

(7,881)

 

(7)

(Decrease)/increase in trade and other payables

(12,416)

 

5,323 

Increase/(decrease) in deferred income

2,259

 

(2,358)

 

 

 

 

 

Cash generated from operations

 

26,022

 

38,817 

Financial income

 

-

 

250 

Finance costs

 

(12,165)

 

(12,173)

Payments for the interest portion of the lease liability

 

(583)

 

-

Taxation paid

 

(839)

 

(1,467)

 

 

 

 

 

Net cash flow generated from operating activities

 

12,435

 

25,427 

 

 

 

 

 

Investing activities

 

 

 

 

Purchase of investment properties

 

(49,917)

 

(48,675)

Sale of investment properties

 

24,294

 

149,276 

Interest received

 

163

 

220 

Acquisition of subsidiaries, net of cash acquired

 

(43,943)

 

(32,629)

 

 

 

 

 

Net cash flow (used in)/ generated from

investing activities

 

 

(69,403)

 

 

68,192 

 

 

 

 

 

Financing activities

 

 

 

 

Proceeds from the issue of shares

 

62,500

 

Share issue costs

 

(1,997)

 

(1,190)

Dividends paid

 

(32,534)

 

(29,429)

Zero Dividend Preference Shareholders repaid

 

(39,879)

 

Bank borrowings advanced

 

22,911

 

50,959 

Bank borrowings repaid

 

(19,398)

 

(101,506)

Bank borrowing costs paid

 

(2,168)

 

(1,345)

Proceeds from Bond issue

 

-

 

50,000 

Bond issue costs paid

 

(7)

 

(925)

Lease repayments

 

(35)

 

-

 

 

 

 

 

Net cash flow used in financing activities

 

(10,607)

 

(33,436)

 

 

 

 

 

Net (decrease)/ increase in cash and cash equivalents

(67,575)

 

60,183 

Cash and cash equivalents at the start of the year

104,823 

 

44,640 

 

 

 

 

 

Cash and cash equivalents at the end of the year

37,248 

 

104,823 

 

 

 

 

 

The notes below are an integral part of these consolidated financial statements.

Notes to the Consolidated Financial Statements  

For the year ended 31 December 2019

 

1.  Corporate Information

The Group's consolidated financial statements for the year ended 31 December 2019 comprise the results of the Co mpany and its subsidiaries (together constituting the "Group") and were approved by the Board and authorised for issue on 8 April 2020.

 

The Company is a company limited by shares incorporated in Guernsey under The Companies (Guernsey) Law, 2008, as amended (the "Law"). The Company's Ordinary Shares are admitted to the Official List of the Financial Conduct Authority ("FCA") and traded on the London Stock Exchange ("LSE").

 

The Company was incorporated on 22 June 2015 and is registered with the Guernsey Financial Services Commission as a Registered Closed-Ended Collective Investment Scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Schemes Rules 2018.

 

The Company did not begin trading until 6 November 2015 when the shares were admitted to trading on the LSE.

 

The nature of the Group's operations and its principal activities are set out in the Strategic Report which can be found in the full Annual Report.

 

The address of the registered office is Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey GY2 4LH.

 

2.  Basis of preparation

In accordance with Section 244 of The Companies (Guernsey) Law 2008, the Group confirms that the financial information for the year ended 31 December 2019 are derived from the Group's audited financial statements and that these are not statutory accounts and, as such, do not contain all information required to be disclosed in the financial statements prepared in accordance with International Financial Reporting Standards ("IFRS").

 

The statutory accounts for the year ended 31 December 2019 have been audited and approved, but have not yet been filed.

 

The Group's audited financial statements for the year ended 31 December 2019 received an unqualified audit opinion and the auditor's report contained no statement under section 263(2) or 263(3) of The Companies (Guernsey) Law 2008.

 

The financial information contained within this preliminary statement was approved and authorised for issue by the Board on 8 April 2020.

 

2.1 Functional and presentation currency

The financial information is presented in Pounds Sterling, which is also the functional currency, and all values are rounded to the nearest thousand (£'000) pound, except where otherwise indicated.

 

2.2 Going concern

The assessments of going concern are prepared in accordance with the FRC Guidance issued in September 2014.

The Directors have carefully considered areas of potential financial risk and have reviewed cash flow forecasts, evaluating a number of scenarios which included extreme downside sensitivities in relation to rental cash collection, no property acquisitions, no elective capital expenditure, REIT regime compliance, and no dividends. A range of scenarios of up to 12 months of nil rental cash collection were considered, and taking into account mitigating management actions, the company had adequate resources to continue is operations. Further effects of the post-year end COVID-19 outbreak are documented in the going concern and viability statements and within principal and emerging risks above.

No material uncertainties have been detected which would influence the Group's ability to continue as a going concern for a period of at least 12 months from the approval of these financial statements. The Directors have satisfied themselves that the Group has adequate financial resources to continue in operational existence for this period.

 

Accordingly, the Board of Directors continue to adopt the going concern basis in preparing the financial statements.

 

2.3 Business combinations

At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. For an acquisition of a business where an integrated set of activities are acquired in addition to the property, the Group accounts for the acquisition as a business combination under IFRS 3 Business Combinations ("IFRS 3").

 

Where such acquisitions are not judged to be the acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred tax arises.

 

2.4  New standards, amendments and interpretations

New standards, amendments to standards and interpretations which came into effect for accounting periods starting on or after 1 January 2019 and have had an impact on the financial statements are as follows:

 

IFRS 16, 'Leases' , is effective for accounting periods beginning on or after 1 January 2019. Under IFRS 16, most leased assets are capitalised as "right of use assets" by recognising the present value of the lease payments as an asset and a financial liability representing the obligation to make future lease payments.

 

The Group has a number of leases concerning the long-term lease of land associated with its long leasehold investment properties. At 31 December 2019, there was £ 50,054,000 ground rent committed under these leases (31 December 2018: £50,614,000) and the annual charge for ground rent for the period for the year ended 31 December 2019 was £ 618,000 (31 December 2018: £618,000).

 

Under IFRS 16, the Group recognises the right of use asset in the Consolidated Statement of Financial Position and this is valued at fair value as the underlying asset is an Investment Property. The change in fair value is recognised in the Consolidated Statement of Comprehensive Income. In addition, a financial liability is recognised in the Consolidated Statement of Financial Position which is valued at the present value of future lease payments using the Group's incremental borrowing rate. Lease payments (also known as ground rent) which were previously recognised within non-recoverable property costs, now upon payment, reduce the financial liability. The financial liability is recalculated at each reporting date, lease payments reduce the financial liability and interest on the financial liability is recognised in finance costs.

 

IFRS 16 has been applied from 1 January 2019 and the modified retrospective approach to measure the right of use asset at the same value as the financial liability has been taken and comparatives have not been restated. At 1 January 2019, a right of use asset and the financial liability of £16,545,000 and £16,545,000 respectively were recognised.

 

The right of use asset and the financial liability were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 January 2019. The incremental borrowing rate used to determine the right of use asset has been determined with consideration for the rate at which the Group would pay to borrow for an asset of similar value to the right of use asset. The Group considers this to be equivalent to the Group's weighted average cost of debt, being 3.5% and has applied. This single discount rate has been applied across the whole portfolio of leases.  

 

At 31 December 2019, the financial liability was adjusted for the interest as the lease liability is carried at fair value, with amounts recognised within finance costs for movements on the finance liability. The right of use asset was calculated at fair value with the change in fair value charged to the Consolidated Statement of Comprehensive Income. Under the modified retrospective approach in IFRS 16, comparative information is not required to be restated.

 

The table below illustrates the accounting treatment presented in the financial statements:

Transactions in the Condensed Consolidated Statement of Comprehensive Income

 

 

 

Year ended

31 December

2019

£'000

 

Year ended

31 December

2018

£'000

 

 

 

 

Ground rent charges included within non-recoverable property costs

-

 

618

Fair value movement on right of use asset

194

 

-

Finance charges

583

 

-

 

 

 

 

 

Total

777

 

618

 

Assets and liabilities recognised within the Condensed Consolidated Statement of Financial Position

 

 

 

 

Year ended

31 December

2019

£'000

 

Year ended

31 December

2018

£'000

 

 

 

 

Right of use assets included with investment property

16,351

 

-

Lease liabilities

(16,510)

 

-

 

 

 

 

 

Total

(159)

 

-

 

 

2.5 New standards, amendments and interpretations effective for future accounting periods

A number of new standards, amendments to standards and interpretations are effective for periods beginning on or after 1 January 2020 and have not been applied in preparing these financial statements. These are:

 

Amendments to  IFRS 3 'Business Combinations' (effective where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020) - makes amendments to clarify the definition of a business to help companies determine whether an acquisition is of a business or a group of assets. The amendments are expected to result in more acquisitions being accounted for as asset acquisitions. As detailed in notes 2.3 and 3.4, careful consideration is given to the accounting treatment for each acquisition. Most acquisitions made by the Group are treated as the acquisition of a group of assets, so the Directors do not expect the amendments to this standard to have any significant impact on the financial statements.

 

Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' (effective for annual periods beginning on or after 1 January 2020) - make amendments to clarify the definition of 'material'. The amendments make IFRSs more consistent but are not expected to have a significant impact on the preparation of the financial statements.

 

3. Significant accounting judgements, estimates and assumptions

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

 

3.1. Critical accounting estimates and assumptions

The principal estimates that may be material to the carrying amount of assets and liabilities are as follows:

 

3.1.1 Valuation of investment property

The fair value of investment property, which has a carrying value at the reporting date of £ 787,915,000 (31 December 2018: £718,375,000), is determined by independent property valuation experts to be the estimated amount for which a property should exchange on the date of the valuation in an arm's length transaction. Properties have been valued on an individual basis. The valuation experts use recognised valuation techniques applying the principles of both IAS 40 and IFRS 13.

 

The value of the properties has been assessed in accordance with the relevant parts of the current RICS Red Book.  In particular, we have assessed the fair value as referred to in VPS4 item 7 of the RICS Red Book.  Under these provisions, the term "Fair Value" means the definition adopted by the International Accounting Standards Board ("IASB") in IFRS 13, namely "The price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date". Factors reflected include current market conditions, annual rentals, lease lengths and location. The significant methods and assumptions used by the valuers in estimating the fair value of investment property are set out in note 14 .

 

In relation to Brexit, the ongoing negotiations with regards to the terms of the UK's exit from the EU has meant that property market uncertainty has increased. The independent property valuation experts are comfortable that, despite the property market uncertainty, there is sufficient transactional market evidence at the reporting date to support the fair value of investment property.  

 

3.1.2 Fair valuation of interest rate derivatives

In accordance with IAS 39, the Group values its interest rate derivatives at fair value. The fair values are estimated by the respective counterparties with revaluation occurring on a quarterly basis. The counterparties will use a number of assumptions in determining the fair values, including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate. The carrying value of the derivatives at the reporting date was £1,816,000 (31 December 2018: £337,000). The significant methods and assumptions used in estimating the fair value of the interest rate derivatives are set out in note 26.

 

3.1.3 Leases - the Group as lessee

The Group has a number of leases concerning the long-term lease of land associated with its long leasehold investment properties. Under IFRS16, the Group calculates the lease liability at each reporting date and at the inception of each lease and at 1 January 2019 when the standard was first adopted. The liability is calculated using present value of future lease payments using the Group's incremental borrowing rate as discount rate. At 31 December 2019, there were 13 leases with the range of the period left to run being 15 and 107 years. The Directors have determined that the discount rate to use in the calculation for each lease at 1 January 2019 and 31 December 2019 is 3.5% being the Group's weighted average cost of debt.

 

3.1.4 Dilapidation income

The Group recognises dilapidation income in the Group's Statement of Comprehensive Income when the right to receive the income arises. In determining accrued dilapidations, the Group has considered historic recovery rates, while also factoring in expected costs associated with recovery.

 

3.2. Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements:

 

3.2.1 Operating lease contracts - the Group as lessor

The Group has acquired investment properties that are subject to commercial property leases with tenants. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms and minimum lease payments, that it retains all of the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

 

3.2.2 Consolidation of entities in which the Group holds less than 50%

Management considered that up until 9 November 2018, the Group had de facto control of View Castle Limited (previously known as Credential Investment Holdings Limited) and its 27 subsidiaries (the "View Castle Sub Group") by virtue of the amended and restated Call Option Agreement dated 3 November 2015. Following a restructure of the View Castle Sub Group, the majority of properties held within the View Castle Sub Group were transferred into two new special purpose vehicles ("SPVs") with two additional properties to be transferred into these SPVs at a later date. A new call option was entered into dated 9 November 2018 with View Castle Limited and five of its subsidiaries (the "View Castle Group"). As per the previous amended and restated Call Option Agreement, under this new option the Group may acquire any of the properties held by the View Castle Group for a fixed nominal consideration. Despite having no equity holding, the Group is deemed to have control over the View Castle Group as the Option Agreement means that the Group is exposed to, and has rights to, variable returns from its involvement with the View Castle Group, through its power to control. 

 

3.2.3 Acquisitions of subsidiary companies

During the year, the Group has made two purchases of subsidiary companies which own investment properties. For each acquisition, the Directors consider whether the acquisition met the definition of the acquisition of a business or the acquisition of a group of assets and liabilities.

 

A business is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Furthermore, a business consists of inputs and processes applied to those inputs that have the ability to create outputs.

The companies acquired in the year have comprised portfolios of investment properties and existing leases with multiple tenants over varying periods, with little in the way of processes acquired. It has therefore concluded in each case that the acquisitions did not meet the criteria for the acquisition of a business as outlined above.

3.2.4 Recognition of income

Service charges and other similar receipts are included in net rental and property income gross of the related costs as the Directors consider the Group acts as principal in this respect.

 

4. Summary of significant accounting policies

The accounting policies adopted in this report are consistent with those applied in the financial statements for the year ended 31 December 2018 and have been consistently applied for the year ended 31 December 2019. The significant change arising from accounting standards effective for the first time, IFRS 16 Leases, is detailed in note 2.4.

 

4.1. Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at the date of the Statement of Financial Position.

 

4.2 Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

 

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets and liabilities acquired, and contingent liabilities assumed, in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred.

 

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.

 

For acquisitions of subsidiaries not meeting the definition of a business, the Group allocates the cost between the individual identifiable assets and liabilities in the Group based on their relative fair values at the date of acquisition. Such transactions or events do not give rise to goodwill.

 

Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated in full. When necessary, amounts reported by subsidiaries have been adjusted to conform to the Group's accounting policies.

 

The excess of the consideration transferred, and the amount of any non-controlling interest in the acquiree over the fair value of the identifiable net assets acquired, is recognised as goodwill.

 

4.2.1. Disposal of subsidiaries

When the Group ceases to have control over an entity, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in the carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

 

4.3. Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined that its chief operating decision-maker is the Board of Directors.

 

After a review of the information provided for management purposes, it was determined that the Group has one operating segment and therefore segmental information is not disclosed in these consolidated financial statements.

 

4.4. Investment property

Investment property comprises freehold or leasehold properties that are held to earn rentals or for capital appreciation, or both, rather than for sale in the ordinary course of business or for use in production or administrative functions.

 

Investment property is recognised, usually, on legal completion, when the risks and rewards of ownership have been transferred, and is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and other costs incurred in order to bring the property to the condition necessary for it to be capable of being utilised in the manner intended. Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair value are included in the Group's Consolidated Statement of Comprehensive Income in the period in which they arise under IAS 40, 'Investment Property'.

 

Additions to investment property include costs of a capital nature only. Expenditure is classified as capital when it results in identifiable future economic benefits, which are expected to accrue to the Group. All other property expenditure is charged in the Group's Consolidated Statement of Comprehensive Income as incurred.

 

Investment properties cease to be recognised when they have been disposed of or withdrawn permanently from use and no future economic benefit is expected. The difference between the net disposal proceeds and the carrying amount of the asset (being the fair value at the start of the financial year) would result in either gains or losses at the retirement or disposal of investment property. Any gains or losses are recognised in the Group's Consolidated Statement of Comprehensive Income in the period of retirement or disposal.

 

4.5. Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group's interest in the fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree plus the amount of the non-controlling interest of the acquiree.

 

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the subsidiaries, or groups of subsidiaries, that is expected to benefit from the synergies of the combination. Each subsidiary or group of subsidiaries to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

 

Goodwill impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of the value in use and the fair value less the costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.

 

4.6. Derivative financial instruments

Derivative financial instruments, comprising interest rate caps and swaps for hedging purposes, are initially recognised at fair value at acquisition and are subsequently measured at fair value, being the estimated amount that the Group would receive or pay to sell or transfer the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the lender and its counterparties. The gain or loss at each fair value remeasurement date is recognised in the Group's Consolidated Statement of Comprehensive Income.

 

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole.

 

4.7 Financial assets

The Group classifies its financial assets as at fair value through profit or loss or at amortised cost, depending on the purpose for which the asset was acquired. Currently the Group does not have any financial assets which it has classified at fair value through profit or loss.

 

Assets held at amortised cost arise principally from the provision of goods and services (e.g. trade receivables), but also incorporate other financial assets where the objective is to hold these assets in order to collect contractual cash flows which comprise the payment of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost being the effective interest rate method, less provision for impairment.

 

The Group's financial assets comprise 'trade and other receivables', 'tenant loan', 'surrender premium' and 'cash and cash equivalents'.

 

The tenant loan relates to a loan made to a tenant which is subject to interest. The amount receivable has been recognised at amortised cost using the effective interest method.

 

The lease surrender receivable relates to a lease surrender payment which has been received in instalments. The amount receivable has been recognised at amortised cost using the effective interest method.

 

4.8. Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently carried at amortised cost less provision for impairment. Where the time value of money is material, receivables are carried at amortised cost using the effective interest method. Impairment provisions are recognised based on the expected credit loss model detailed within IFRS 9.

 

The Group recognises a loss allowance for expected credit losses on trade receivables. The loss allowance is based on lifetime expected credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition. The expected credit losses on these financial assets are estimated based on the Group's historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date. Impaired balances are reported net, however, impairment provisions are recorded within a separate provision account with the loss being recognised within administration costs within the Consolidated Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

Lease premiums and other lease incentives provided to tenants are recognised as an asset and amortised over the period from date of lease commencement to termination date.

 

4.9. Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at banks with original maturities of three months or less. Cash also includes amounts held in restricted accounts that are unavailable for everyday use.

 

4.10. Trade payables

Trade payables are initially recognised at their fair value being at their invoiced value inclusive of any VAT that may be applicable. Payables are subsequently measured at amortised cost using the effective interest method.

 

4.11. Bank and other borrowings

All bank and other borrowings (comprising bank loans and retail eligible bonds) are initially recognised at cost net of attributable transaction costs. Any attributable transaction costs relating to the issue of the bank borrowings are amortised through the Group's Statement of Comprehensive Income over the life of the debt instrument on a straight-line basis. After initial recognition, all bank and other borrowings are measured at amortised cost, using the effective interest method.

 

Bank and other borrowings are derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in Group's Consolidated Statement of Comprehensive Income.

 

4.12 Zero Dividend Preference Shares

Zero Dividend Preference Shares ("ZDP Shares") are recognised as liabilities in the Group's Consolidated Statement of Financial Position in accordance with IAS 32 Financial Instruments: Presentation. After initial recognition, these liabilities are measured at amortised cost, which represents the value the liability is recognised at initial recognition, plus the accrued interest entitlement to the date of these financial statements.

 

4.13 Dividends payable to Shareholders

Equity dividends are recognised when paid.

 

4.14 Rental and property income

Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease terms and is included in gross rental and property income in the Group's Consolidated Statement of Comprehensive Income. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the lease asset and are recognised as an expense over the lease term on the same basis as the lease income.

 

For leases which contain fixed or minimum uplifts, the rental income arising from such uplifts is recognised on a straight-line basis over the lease term.

 

Tenant lease incentives are recognised as a reduction of rental revenue on a straight-line basis over the term of the lease. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.

 

Surrender premiums received from tenants to terminate leases or surrender premises are recognised in the Group's Statement of Comprehensive Income when the right to receive them arises.

 

Dilapidation income is recognised in the Group's Statement of Comprehensive Income when the right to receive it arises.

 

When the Group is acting as an agent, the commission, rather than gross income, is recorded as revenue.

 

Income arising from expenses recharged to tenants is recognised in the year in which the compensation becomes receivable. Service charges and other similar receipts are included in net rental and property income gross of the related costs as the Directors consider the Group acts as principal in this respect.

 

4.15 Property costs

Non recoverable property costs contain service and management charges related to empty properties. For the year ended 31 December 2018 this figure also included ground rents charges. As from 1 January 2019 a right of use asset and a lease liability are recognised instead of a ground rent cost. Please refer to notes 2.4 and 4.23.

 

Service and management charges are recognised in the accounting period in which the services are rendered.

 

Recoverable property costs contain service charges and other similar costs which are recognised in the accounting period in which the services are rendered.

 

4.16. Interest income

Interest income is recognised as interest accrued on cash balances held by the Group. Interest charged to a tenant on any overdue rental income is also recognised within interest income.

 

4.17. Dividend income

Dividend income is recognised when the right to receive payment is established.

 

4.18. Finance costs

Interest costs are expensed in the period in which they occur. Arrangement fees that an entity incurs in connection with bank and other borrowings are amortised over the term of the loan.

 

4.19. Taxation

As the Company is managed and controlled in the UK, it is considered to be tax resident in the UK.

 

The tax currently payable is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current and deferred tax is calculated using tax rates that have been enacted or substantively enacted at the date of the Statement of Financial Position.

 

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group's UK property rental business from UK Corporation Tax. Gains on UK properties are also exempt from tax, provided that they are not held for trading or sold in the three years after completion of development. The Group is otherwise subject to UK Corporation Tax.

 

There are a small number of entities within the Group which fall outside the REIT rules and are subject to UK taxes on profits and property gains.

 

4.20 Deferred tax

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates (and tax laws) enacted or substantively enacted at the date of the Statement of Financial Position. A deferred tax asset is recognised only to the extent that it is probable that future profits will be available for offset.

 

Deferred tax has been recognised on the unrealised property valuation gains of properties owned by Group entities which fall outside of the REIT tax rules.

 

The current rate of UK Corporation Tax is 19%. Reductions in UK Corporation Tax have been enacted, reducing the rate to 17% from 1 April 2020, however, it has been confirmed in the recent Budget Announcement, on 11 March 2020, that the government will legislate to retain the current 19% rate in April 2020.

 

4.21. Stated capital

Stated capital represents the consideration received by the Company for the issue of Ordinary Shares. Ordinary Shares are classed as equity.

 

4.22. Share-based payments

The Group has entered into Performance Fee arrangements with the Asset Manager and Investment Manager which depend on the growth in the net asset value of the Group exceeding a hurdle rate of return over a performance period. The fee will be partly settled in cash and partly in equity and the equity portion is therefore a share-based payment arrangement. The fair value of the obligation is measured at each reporting period, and the cost recognised as an expense. The part of the obligation to be settled in shares is credited to equity reserves. If circumstances change and the fee is no longer settled by the issue of shares, then the amounts previously credited to equity reserves are reversed.

 

4.23 Leased assets

The Group has a number of leases concerning the long-term lease of land associated with its long leasehold investment properties. These leased assets are capitalised as "right of use assets" by recognising the present value of the lease payments as an asset and a financial liability representing the obligation to make future lease payments.

 

Right of use assets are valued at fair value and the change in fair value is recognised in the Consolidated Statement of Comprehensive Income.

 

The associated financial liability is valued at the present value of future lease payments using the Group's incremental borrowing rate. The value of the financial liability is revalued at each reporting date. Lease payments reduce the financial liability and interest on the financial liability is recognised in finance costs.

 

5. Rental and property income

 

 

 

 

 

Year ended

31 December

2019

£'000

 

Year ended

31 December

2018

£'000

 

 

 

 

 

 

Rental income - freehold property

53,404

 

54,107

 

Rental income - long leasehold property

10,989

 

7,968

 

Recoverable service charge income and other similar items

11,252

 

11,944

 

 

 

 

 

 

 

Total

75,645

 

74,019

 

 

 

 

 

               

 

6. Property costs

 

 

 

 

 

Year ended

31 December 2019

£000

 

Year ended

31 December

2018

£'000

 

 

 

 

Operating lease expenses

-

 

618

Other property expenses and irrecoverable costs

9,429

 

7,082

Recoverable service charge income and other similar costs

11,252

 

11,944

 

 

 

 

 

Total

20,681

 

19,644

 

Property costs represent direct operating expenses which arise on investment properties that generate rental income. Operating lease expenses are now accounted for under IFRS16 as detailed in note 2.4.

 

7. Administrative and other expenses

 

 

 

 

 

Year ended

31 December

2019

£'000

 

Year ended

31 December

2018

£'000

 

 

 

 

Investment management fees

2,356

 

2,405

Property management fees

2,280

 

2,264

Performance fees

-

 

7,046

Asset management fees

2,356

 

2,405

Directors' remuneration (see note 8)

255

 

235

Administration fees

746

 

663

Legal and professional fees

2,107

 

1,714

Marketing and promotion

96

 

87

Other administrative costs (including bad debts)

657

 

595

Bank charges

51

 

172

 

 

 

 

 

 

 

 

 

Total

10,904

 

17,586

 

 

 

 

 

Services provided by the Company's Auditor and its associates

The Group has obtained the following services from the Company's Auditor and its associates:

 

 

 

Year ended

31 December

2019

£'000

 

Year ended

31 December

2018

£'000

 

 

 

 

Audit of the consolidated and parent Company financial statements

85

 

78

Audit-related services in respect of the half-year financial statements

26

 

26

Audit of the subsidiaries for their respective periods of account

114

 

171

Fees associated with share issue

80

 

-

 

 

 

 

 

Total

305

 

275

 

 

 

 

           

 

8. Directors' remuneration

Key management comprises the Directors of the Company. A summary of the Directors' emoluments is set out in the Directors' Remuneration Report.

 

 

 

 

 

Year ended

31 December

2019

£'000

 

 

Year ended

31 December

2018

£'000

 

 

 

 

Directors' fees

228

 

216

Employers National Insurance contributions

27

 

19

 

 

 

 

 

Total

255

 

235

 

 

 

 

9. Finance income

 

 

 

 

Year ended

31 December

2019

£'000

 

 

Year ended

31 December

2018

£'000

 

 

 

 

Interest income

155

 

224

Unwinding of the discount on financial assets

-

 

44

 

 

 

 

 

Total

155

 

268

 

 

 

 

 


10. Finance expenses

 

 

 

 

 

Year ended

31 December

2019

£'000

 

 

Year ended

31 December

2018

£'000

 

 

 

 

Interest payable on bank borrowings

9,904

 

11,267

Accrued capital entitlement on ZDP Shares

60

 

2,430

Amortisation of loan arrangement fees

912

 

1,172

Amortisation of ZDP Share acquisition costs

3

 

147

Bond interest

2,250

 

906

Bond issue costs amortised

157

 

61

Bond expenses

11

 

-

Lease interest

583

 

-

 

 

 

 

 

Total

13,880

 

15,983


11. Taxation

 

 

 

Year ended

31 December

2019

£'000

 

 

Year ended 

31 December 

2018 

£'000 

 

 

 

 

Corporation tax (credit)/charge

(359)

 

1,983 

Increase/(decrease) in deferred tax creditor

102

 

(1,416) 

 

 

 

 

Total

(257)

 

567 

 

 

 

 

 

The current tax charge is reduced by the UK REIT tax exemptions. The tax charge for the year can be reconciled to the profit in the Statement of Comprehensive Income as follows:

 

 

Year ended

31 December

2019

£'000

 

Year ended 

31 December 

2018 

£'000 

Profit before taxation

26,254

 

67,940 

 

 

 

 

UK Corporation Tax rate

19%

 

19%

Theoretical tax at UK Corporation Tax rate

4,988

 

12,909 

Effects of:

 

 

 

Revaluation of investment property

668

 

(4,537) 

Adjustments to tax charge in respect of previous periods

-

 

25 

Permanent differences

(556)

 

1,592 

Profits from the tax-exempt business

(5,459)

 

(8,006) 

Deferred tax movement

102

 

(1,416) 

Total

 (257)

 

567 

 

Permanent differences are the differences between an entity's taxable profits and its results as stated in the financial statements. These arise because certain types of income and expenditure are non-taxable or disallowable, or because certain tax charges or allowances have no corresponding amount in the financial statements.

 

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group's UK property rental business from corporation tax. Gains on UK properties are also exempt from tax, provided they are not held for trading or sold in the three years after completion of development. The Group is otherwise subject to UK corporation tax and UK income tax.

 

As a REIT, Regional REIT Ltd is required to pay PIDs equal to at least 90% of the Group's exempted net income. To retain UK REIT status, there are a number of conditions to be met in respect of the principal company of the Group, the Group's qualifying activity and its balance of business. The Group continues to meet these conditions.

 

UK corporation tax and UK income tax arise on entities which form part of the Group consolidated accounts but do not form part of the REIT group.

 

Due to the Group's REIT status and its intention to continue meeting the conditions required to obtain approval in the foreseeable future, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments held by entities within the REIT group.

 

No deferred tax asset has been recognised in respect of losses carried forward due to the unpredictability of future taxable profits.

 

12. Earnings per share

Earnings per share amounts are calculated by dividing profits for the year attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the year.

 

The calculation of basic and diluted earnings per share is based on the following:

 

 

 

 

 

Year ended

31 December

2019

£'000

 

Year ended

31 December

2018

£'000

Calculation of earnings per share

 

 

 

Net profit attributable to Ordinary Shareholders

26,511

 

67,373 

Adjustments to remove:

 

 

 

Changes in value of investment properties

3,513

 

(23,881)

Changes in fair value of interest rate derivatives and financial assets

1,479

 

(459)

Gain on disposal of investment property

(1,662)

 

(23,127)

Impairment of goodwill

557

 

557 

Deferred tax charge/ (credit)

102

 

(1,416)

Income tax charge on disposal profits

-

 

1,416 

Close out costs on borrowings and derivatives

487

 

430 

 

 

 

 

 

EPRA net profit attributable to Ordinary Shareholders

30,987

 

 

20,892 

Add performance fee

-

 

7,046 

 

 

 

 

Company specific adjusted earnings figure

30,987

 

27,938 

 

 

 

 

Weighted average number of Ordinary Shares

 

372,821,136 

Earnings per share - basic and diluted

6.6p

 

18.1p

EPRA earnings per share - basic and diluted

7.8p

 

5.6p

Company specific adjusted earnings per share - basic and diluted

7.8p

 

7.5p

 

 

 

 

 

 

13. Dividends

 

 

 

 

 

Year ended

31 December

2019

£'000

 

 

Year ended 

31 December 

2018 

£'000 

 

 

 

 

Dividend of 2.50 (2018: 2.45) pence per Ordinary Share

for the period 1 October 2018 - 31 December 2018

 

9,321

 

 

9,134

Dividend of 1.90 (2018: 1.85) pence per Ordinary Share

for the period 1 January 2019 - 31 March 2019

 

7,084

 

 

6,897

Dividend of 1.90 (2018: 1.85) pence per Ordinary Share

for the period 1 April 2019 - 30 June 2019

 

8,198

 

 

6,897

Dividend of 1.90 (2018: 1.85) pence per Ordinary Share

for the period 1 July 2019 - 30 September 2019

 

8,198

 

 

6,897

 

 

 

 

 

 

 

32,801

 

29,825

 

 

 

 

 

 

On 21 February 2019, the Company announced a dividend of 2.50 pence per share in respect of the period 1 October 2018 to 31 December 2018. The dividend payment was made on 11 April 2019 to Shareholders on the register as at 1 March 2019.

 

On 23 May 2019, the Company announced a dividend of 1.90 pence per share in respect of the period 1 January 2019 to 31 March 2019. The dividend payment was made on 12 July 2019 to Shareholders on the register as at 7 June 2019.

 

On 29 August 2019, the Company announced a dividend of 1.90 pence per share in respect of the period 1 April 2019 to 30 June 2019. The dividend payment was made on 15 October 2019 to Shareholders on the register as at 6 September 2019.

 

On 14 November 2019, the Company announced a dividend of 1.90 pence per share in respect of the period 1 July 2019 to 30 September 2019. The dividend payment was made on 19 December 2019 to Shareholders on the register as at 22 November 2019.

 

On 27 February 2020, the Company announced a dividend of 2.55 pence per share in respect of the period 1 October 2019 to 31 December 2019. The dividend will be paid on 9 April 2020 to Shareholders on the register as at 6 March 2020. The financial statements do not reflect this dividend.

 

The Board intends to pursue a progressive dividend policy and continue to pay quarterly dividends. However, in   view of ongoing circumstances, the Company reserves the right to review future dividend payments.

14. Investment properties

In accordance with International Accounting Standard, IAS 40, 'Investment Property', investment property has been independently valued at fair value by Cushman & Wakefield Chartered Surveyors, a accredited independent valuer with recognised and relevant professional qualifications and with recent experience in the locations and categories of the investment properties being valued. The valuations have been prepared in accordance with the Red Book and incorporate the recommendations of the International Valuation Standards Committee which are consistent with the principles set out in IFRS 13.

 

The valuations are the ultimate responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the Board.

 

All corporate acquisitions during the year have been treated as properties purchased rather than business combinations.

 

Group

 

Movement in investment properties for the year ended 31 December 2019

 

 

Freehold Property

£'000

 

Long Leasehold Property

£'000

 

 

 

Total

£'000

 

 

 

 

 

 

 

Valuation at 1 January 2019

 

625,020

 

93,355

 

718,375

Property additions - acquisitions

 

89,920

 

-

 

89,920

Property additions - subsequent expenditure

 

5,527

 

238

 

5,765

Property disposals

 

(24,003)

 

(291)

 

(24,294)

Gain/(loss) on the disposal of investment properties

 

1,679

 

(17)

 

1,662

Change in fair value during the year

 

(235)

 

(3,278)

 

(3,513)

 

 

 

 

 

 

 

Valuation at 31 December 2019

 

697,908

 

90,007

 

787,915

 

The net book value of properties disposed of during the year amounted to £22,632,000.

 

 

 

 

 

 

 

Movement in investment properties for the year ended 31 December 2018

 

 

 

 

 

 

 

Valuation at 1 January 2018

 

636,600

 

100,730 

 

737,330

Property additions- acquisitions

 

76,334

 

 

76,334

Property additions - subsequent expenditure

 

6,735

 

244 

 

6,979

Property disposals

 

(142,505)

 

(6,771)

 

(149,276)

Gain/(loss) on the disposal of investment properties

 

23,856

 

(729)

 

23,127

Change in fair value during the period

 

24,000

 

(119)

 

23,881

 

 

 

 

 

 

 

Valuation at 31 December 2018

 

625,020

 

93,355 

 

718,375

 

The net book value of properties disposed of during the year amounted to £126,149,000.

 

The historic cost of the properties is £ 751,638,000   (31 December 2018: £ 675,808,000 ).

 

The following table provides the fair value measurement hierarchy for investment property:

 

 

 

 

 

Date of valuation:

 

 

 

Total

£'000

 

Quoted active prices

(level 1)

£'000

Significant observable inputs

(level 2)

£'000

Significant unobservable inputs

 (level 3)

£'000

 

 

 

 

 

31 December 2019

787,915

-

-

787,915

 

 

 

 

 

 

 

 

 

 

31 December 2018

718,375

-

-

718,375

 

 

 

 

 

 

The hierarchy levels are defined in note 30 .

 

It has been determined that the entire investment properties portfolio should be classified under the level 3 category. The table below shows the movement in the year on the level 3 category:

 

 

 

 

Year ended

31 December

2019

£'000

 

 

Year ended

31 December

2018

£'000

Balance at the start of the year

 

718,375

 

737,330

Additions

 

95,685

 

83,313

Disposals

 

(24,294)

 

(149,276)

Gain on the disposal of investment properties

 

1,662

 

23,127

Change in fair value during the year

 

(3,513)

 

23,881

 

 

 

 

 

Balance at the end of the year

 

787,915 

 

718,375

 

 

 

 

 

 

The determination of the fair value of the investment properties held by each consolidated subsidiary requires unobservable inputs, such as the use of the estimated future cash flows from investment properties, which take into consideration lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property, and discount rates applicable to those assets. Future revenue streams comprise contracted rent (passing rent) and Estimated Rental Value ("ERV") after the contract period. In calculating ERV, the potential impact of future lease incentives to be granted to secure new contracts is taken into consideration. All these estimates are based on local market conditions existing at the reporting date.

 

Techniques used for valuing investment properties

The following descriptions and definitions relate to valuation techniques and key observable inputs made in determining the fair values: -

 

Valuation technique: market comparable method

Under the market comparable method (or market approach), a property fair value is estimated based on comparable transactions in the market.

 

Observable input: market rental

The rent at which space could be let in the market conditions prevailing at the date of valuation range: £ 6,000 - £ 3,092,291 per annum (2018: £1,500- £3,092,226 per annum).

 

Observable input: rental growth

The estimated average increase in rent is based on both market estimations and contractual agreements.

 

Observable input: net initial yield

The initial net income from a property at the date of purchase, expressed as a percentage of the gross purchase price including the costs of purchase range: 0.00%- 28.70 % (2018: 0.00%-26.98%).

 

Unobservable inputs:

The significant unobservable inputs (level 3) are sensitive to changes in the estimated future cash flows from investment properties such as increases and decreases in contracted rents, operating expenses and capital expenses, plus transactional activity in the real estate market.

 

As set out within the significant accounting estimates and judgements, the Group's property portfolio valuation is open to judgement and is inherently subjective by nature, and actual values can only be determined in a sales transaction.

 

15. Investment in subsidiaries

List of subsidiaries which are 100% owned and controlled by the Group

 

Country of incorporation

Ownership

%

 

 

 

Blythswood House LLP

United Kingdom

100%

Regional Commercial MIDCO Limited

Jersey

100%

RR Aspect Court Limited

Jersey

100%

RR Bristol Ltd

Jersey

100%

RR Hounds Gate Limited

Jersey

100%

RR Rainbow (Aylesbury) Limited

Jersey

100%

RR Rainbow (North) Limited

Jersey

100%

RR Rainbow (South) Limited

Jersey

100%

RR Range Limited

Jersey

100%

RR Sea Dundee Limited

United Kingdom

100%

RR Sea Hannover St. Limited

United Kingdom

100%

RR Sea Lamont I Ltd

Jersey

100%

RR Sea Lamont II Ltd

Jersey

100%

RR Sea Lamont III Ltd

Jersey

100%

RR Sea St. Helens Limited

United Kingdom

100%

RR Sea Stafford Limited

United Kingdom

100%

RR Sea Strand Limited

United Kingdom

100%

RR Sea TAPP Limited

Guernsey

100%

RR Sea TOPP Bletchley Limited

Guernsey

100%

RR Sea TOPP I Limited

Guernsey

100%

RR Skylar Limited

Jersey

100%

RR UK (Central) Limited

Jersey

100%

RR UK (Cheshunt) Limited

Jersey

100%

RR UK (Port Solent) Limited

Jersey

100%

RR UK (South) Limited

Jersey

100%

RR Wing Portfolio Limited

Jersey

100%

Tay Properties Limited

Jersey

100%

TCP Arbos Limited

Jersey

100%

TCP Channel Limited

Jersey

100%

Tosca Chandlers Ford Limited

Jersey

100%

Tosca Churchill Way Limited

Jersey

100%

Tosca Garnet Limited

Jersey

100%

Tosca Glasgow II Limited

United Kingdom

100%

Tosca Midlands Limited

Jersey

100%

Tosca North East Limited

Jersey

100%

Tosca North West Limited

Jersey

100%

Tosca Scotland Limited

Jersey

100%

RR Star Limited

Jersey

100%

Tosca South West Limited

Jersey

100%

Tosca Swansea Limited

Jersey

100%

Tosca Thorpe Park Limited

Jersey

100%

Tosca UK CP II Limited

Jersey

100%

Tosca UK CP Limited

Jersey

100%

Tosca Victory House Limited

Jersey

100%

Tosca Winsford Limited

Jersey

100%

Toscafund Bennett House Limited

Jersey

100%

Toscafund Bishopgate Street Limited

Jersey

100%

Toscafund Blythswood Limited

Jersey

100%

Toscafund Brand Street Limited

Jersey

100%

Toscafund Chancellor Court Limited

Jersey

100%

Toscafund Crompton Way Limited

Jersey

100%

RR Falcon Limited

Jersey

100%

Toscafund Glasgow Limited

Jersey

100%

Toscafund Harvest Limited

Jersey

100%

Toscafund Milburn House Limited

Jersey

100%

Toscafund Minton Place Limited

Jersey

100%

Toscafund Newstead Court Limited

Jersey

100%

Toscafund Portland Street Limited

Jersey

100%

Toscafund Sheldon Court Limited

Jersey

100%

Toscafund St Georges House Limited

Jersey

100%

Toscafund St James Court Limited

Jersey

100%

Toscafund Strathclyde BP Limited

Jersey

100%

Toscafund Wallington Limited

Jersey

100%

Toscafund Welton Road Limited

Jersey

100%

Toscafund Westminster House Limited

Jersey

100%

 

 

 

 

All of the above entities have been included in the Group's consolidated financial statements.

 

By virtue of an Amended and Restated Call Option Agreement dated 3 November 2015, the Directors consider that the Group has control of View Castle Limited (previously Credential Investment Holdings Limited) and its 27 subsidiaries (the "View Castle Group").

 

Under this option, the Group has the ability to acquire any of the properties held by the View Castle Group by issuing an option notice for a nominal consideration of £1. The recipient of the option notice will be obliged to convey its title within one month after receipt of the option notice.

 

Despite having no equity holding, the Group controls the View Castle Group as the option agreement has the effect that the Group is exposed to, and has rights to, variable returns from its involvement with the View Castle Group through its power to control.

 

The companies which make up the View Castle Group are as follows:

 

List of subsidiaries that are controlled by the Group:

 

 

Country of incorporation

Effective

Ownership

%

 

 

 

Castlestream Limited

United Kingdom

100%

Caststop Limited

United Kingdom

100%

Credential (Baillieston) Limited

United Kingdom

100%

Credential (Greenock) Limited

United Kingdom

100%

Credential (Wardpark North) Limited

United Kingdom

100%

Credential (Wardpark South) Limited (in liquidation)

United Kingdom

100%

Credential Bath Street Limited (in liquidation)

United Kingdom

100%

Credential Charing Cross Limited (in liquidation)

United Kingdom

100%

Credential Estates Limited

United Kingdom

100%

Credential Residential Finance Limited (in liquidation)

United Kingdom

100%

Credential Tay House Limited (in liquidation)

United Kingdom

100%

Hamiltonhill Estates Limited (in liquidation)

United Kingdom

100%

Lilybank Church Limited (in liquidation)

United Kingdom

100%

Lilybank Terrace Limited (in liquidation)

United Kingdom

100%

Old Mill Studios Limited (in liquidation)

United Kingdom

100%

Old Rutherglen Road Limited

United Kingdom

100%

Rocket Unit Trust

Jersey

100%

Squeeze Newco (Elmbank) Limited (in liquidation)

United Kingdom

100%

Squeeze Newco 2 Limited

United Kingdom

100%

Stock Residential Lettings Limited

United Kingdom

100%

The Legal Services Centre Limited

United Kingdom

100%

View Castle (Properties) Limited

United Kingdom

100%

View Castle (Milton Keynes) Limited

United Kingdom

100%

View Castle Limited

United Kingdom

100%

 

All of the above entities have been included in the Group's consolidated financial statements up to 31 December 2019.

 

Business Combinations

There have been no new business combinations entered into in the financial year.

 

During the year, there were two subsidiary company acquisitions that took place in order for the Group to acquire the investment property owned by that company. These acquisitions have not been treated as a business combination. For further details see note 3.4. The fair value of investment properties acquired through the purchase of subsidiary companies totalled £ 45,790,000 . Total consideration paid was £ 45,173,000 . The assets and liabilities of the companies acquired included the investment properties, mentioned above, net current liabilities totalling £ 716,000 (principally comprising debtors, cash, creditors and deferred income) and bank borrowings of £nil.

 

16. Goodwill

 

 

 

31 December

2019

£'000

 

31 December 

2018 

£'000 

Group

 

 

 

At start of year

1,115

 

1,672 

Impairment

(557)

 

(557)

 

 

 

 

At end of year

558

 

1,115 

 

 

 

 

 

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured at fair value is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the Group's Statement of Comprehensive Income.

 

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed. The impairment review is based on group pre-tax cash flow projections of cost savings of the Group as a whole as a single cash generating unit, using a discount factor of 6.9% (31 December 2018: 4.8%), which is based on the borrowing margins currently available. If a reasonable change occurs in a key assumption, the recoverable amount of goodwill would still be expected to be equal to the carrying value. The impairment review was conducted over a five-year period, which is predominately derived from the borrowings facility terms, and will result in a nil terminal value.

 

17. Non-current receivables

17a. Non-current receivables on lease surrender premium

 

 

31 December

2019

£'000

 

31 December 

2018 

£'000 

 

 

 

 

At start of year

-

 

206 

Movement in year

-

 

(250)

Unwinding of discount

-

 

44 

 

 

 

 

At end of year

-

 

 

 

 

 

 

           

 

In May 2014, the tenant of one of the subsidiaries (Blythswood House) surrendered their lease resulting in a lease surrender premium to be paid by the tenant in equal instalments over four years with the final instalment paid in the quarter ending 31 March 2018. The amount due was recognised initially at fair value and subsequently recorded at amortised cost using the effective interest method. The unwinding of the discount is included in finance income.

 

17b. Non-current receivables on tenant loans

 

 

31 December

2019

£'000

 

31 December

2018

£'000

 

 

 

 

At start of year

1,926

 

1,926

Amounts repaid in the year

(578)

 

-

 

 

 

 

At end of year

1,348

 

1,926

 

 

 

 

 

           

 

Asset due within 1 year

192

 

530

Asset due after 1 year

1,156

 

1,396

 

 

 

 

 

1,348

 

1,926

 

 

 

 

 

During 2016, the Group entered into a loan agreement with a tenant for £1,926,000. The loan is subject to interest of 4% above the base rate of the Bank of Scotland on late payments and is repayable in instalments over ten years.

 

18. Trade and other receivables

 

 

 

31 December

2019

£'000

 

31 December

2018

£'000

 

 

 

 

Gross amount receivable from tenants

8,206

 

7,294

Less provision for impairment

(891)

 

(1,115)

 

 

 

 

Net amount receivable from tenants

7,315

 

6,179

Current receivables - tenant loans (note 17b )

192

 

530

Value added tax

1,415

 

-

Income tax

70

 

-

Other receivables

6,385

 

3,256

Prepayments

16,781

 

12,198

 

 

 

 

 

32,158

 

22,163

 

 

 

 

 

 

 

 

 

 

 

           

The maximum exposure to credit risk at the reporting date is the carrying value of the amounts disclosed above. The Group does not hold any collateral as security.

 

The aged analysis of trade receivables that are past due but not impaired was as follows:

 

 

 

 

31 December

2019

£'000

 

31 December

 2018

£'000

 

 

 

 

< 30 days

4,369

 

3,974

30-60 days

1,055

 

720

> 60 days

2,782

 

2,600

 

 

 

 

 

8,206

 

7,294

Less provision for impairment

(891)

 

(1,115)

 

 

 

 

 

7,315

 

6,179

 

 

 

 

The Directors consider the fair value of receivables equals their carrying amount.

 

The table above shows the aged analysis of trade receivables included in the table above which are past due but not impaired. These relate to tenants for whom there is no recent history of default.

 

Provision for impairment of trade receivables movement as follows:

 

 

 

31 December

2019

£'000

 

31 December

2018

£'000

 

 

 

 

At start of year

1,115

 

1,033

Provision for impairment in the year

562

 

928

Receivables written off as uncollectable

(537)

 

(452)

Unused provision reversed

(249)

 

(394)

 

 

 

 

At end of year

891

 

1,115

 

 

 

 

 

           

 

Other categories within trade and other receivables do not include impaired assets.

 

19. Cash and cash equivalents

 

 

 

31 December

2019

£'000

 

31 December

2018

£'000

Group

 

 

 

Cash held at bank

34,731

 

82,396

Restricted cash held at bank

2,517

 

22,427

 

 

 

 

At end of year

37,248

 

104,823

 

 

 

 

Restricted cash balances of the Group comprise:

 

· £124,000 (2018: £20,259,000) of funds held in blocked bank accounts which are controlled by one of the Group's lenders and are released to free cash once certain loan conditions are met. The restricted funds arose on net proceeds from investment property disposals and were released after the year end.

· £2,312,000 (2018: £900,000) of funds which represent tenants' rental deposits.

· £ nil (2018: £1,268,000) of funds held in blocked bank accounts which are controlled by one of the Group's lenders and are released to free cash once certain conditions are met. The restricted funds arose on net proceeds held in relation to rental guarantees given by the seller of properties purchased by the Group. These funds can only be withheld by the lender and used to repay outstanding loans in the event of a default.

· £81,000 (2018: £nil) is held in other locked accounts.

 

All restricted cash balances will be available before 31 March 2020.

 

In addition, £ 4,225,000 (2018 £2,780,000) of cash funds represent service charge income received from tenants for settlement of future service charge expenditure. These amounts are not analysed as restricted balances.

 

20. Trade and other payables

 

 

 

31 December

2019

£'000

 

31 December

2018

£'000

 

 

 

 

Withholding tax due on dividends paid

1,569

 

1,302

Trade payables

3,650

 

2,462

Other payables

8,544

 

9,905

Value added tax

-

 

939

Accruals of incidental costs for fund raise and acquisitions

-

 

27

Accruals

8,390

 

16,028

 

 

 

 

At end of year

22,153

 

30,663

 

 

 

 

 

           

Other payables principally include rent deposits held and service charge costs.

21. Deferred income

Deferred rental income represents rent received in advance from tenants.

 

22. Taxation liabilities

 

 

 

31 December

2019

£'000

 

31 December

2018

£'000

 

 

 

 

Income tax

-

 

1,129

Deferred tax

736

 

634

 

 

 

 

 

736

 

1,763

 

 

 

 

 

The movement on deferred tax liability is shown below:

 

 

 

At start of year

634

 

2,050

Deferred tax on the valuation of investment properties

102

 

(1,416)

 

 

 

 

At end of year

736

 

634

 

 

 

 

 

23. Bank and loan borrowings

Bank borrowings are secured by charges over individual investment properties held by certain asset-holding subsidiaries. The banks also hold charges over the shares of certain subsidiaries and any intermediary holding companies of those subsidiaries. Any associated fees in arranging the bank borrowings unamortised as at the yearend are offset against amounts drawn on the facilities as shown in the table below:

 

 

 

 

31 December

2019

£'000

 

31 December 

 2018 

£'000 

 

 

 

 

Bank borrowings drawn at start of year

290,487

 

339,074 

Bank borrowings drawn

22,911

 

52,919 

Bank borrowings repaid

(19,398)

 

(101,506)

 

 

 

 

Bank borrowings drawn at end of year

294,000

 

290,487 

Less: unamortised costs at start of year

(4,888)

 

(4,693)

Less: loan issue costs incurred in the year

(2,168)

 

(1,367)

Add: loan issue costs amortised in the year

912

 

1,172

 

 

 

 

At end of year

287,856

 

285,599 

 

 

 

 

Maturity of bank borrowings

 

 

 

Repayable within 1 year

-

 

400 

Repayable between 1 to 2 years

-

 

400 

Repayable between 2 to 5 years

48,584

 

88,687 

Repayable after more than 5 years

245,416

 

201,000 

Unamortised loan issue costs

(6,144)

 

(4,888)

 

 

 

 

 

287,856

 

285,599 

 

 

 

 

 

As detailed in note 25, the Group has £50,000,000 retail eligible bonds in issue.

 

The table below lists the Group's borrowings.

 

Lender

 

Original facility

 

Outstanding debt*

 

Maturity

date

Gross

loan to value**

 

Annual interest rate

 

Amortisation

 

£'000

£'000

 

%

 

 

 

 

 

 

 

 

 

Royal Bank of Scotland

55,000

48,584

Jun -24

 

39.8%

2.15% over 3mth £ LIBOR

Mandatory prepayment

Scottish Widows Ltd. & Aviva Investors Real Estate Finance

165,000

165,000

Dec-27

45.1%

3.28% Fixed

None

Scottish Widows Ltd

36,000

36,000

Dec-28

38.9%

3.37% Fixed

None

Santander UK

65,870

44,416

Jun-29

26.4%

2.20% over 3mth £ LIBOR

Mandatory prepayment

 

 

 

 

 

 

 

Total bank borrowings

 

321,870

 

294,000

 

 

 

 

 

Retail eligible bond

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

 

 

Total

371,870

344,000

 

 

 

 

 

 

 

 

 

 

 

LIBOR = London Interbank Offered Rate (Sterling)

MP = Mandatory prepayment

 

* Before unamortised debt issue costs

** Based upon Cushman & Wakefield property valuations

 

The weighted average term to maturity of the Group's debt at the period end was 7.3 years (31 December 2018: 6.4 years). The weighted average interest rate payable by the Group on its debt portfolio, excluding hedging costs, as at the period end was 3.4 % (31 December 2018: 3.7%).

 

The Group weighted average interest rate, including the ZDP Shares, retail eligible bonds and hedging costs at the period end, amounted to 3.5% per annum (31 December 2018: 3.8% per annum, which included the ZDP Shares). The ZDP Shares were fully repaid on 9 January 2019.

 

The Group has been in compliance with all of the financial covenants relating to the above facilities as applicable throughout the year covered by these consolidated financial statements. Each facility has distinct covenants which generally include: historic interest cover, projected interest cover, LTV cover and debt service cover. A breach of agreed covenant levels would typically result in an event of default of the respective facility, giving the lender the right, but not the obligation, to declare the loan immediately due and payable. Where a loan is repaid in these circumstances, early repayment fees will apply, which are generally based on a percentage of the loan repaid or calculated with reference to the interest income foregone by the lenders as a result of the repayment.

 

As shown in note 26, the Group uses a combination of interest rate swaps and fixed rate bearing loans to hedge against cash flow interest rate risks. The Group's exposure to interest rate volatility is minimal.

 

24. Zero dividend preference shares

 

 

 

 

31 December

2019

£'000

 

31 December

 2018

£'000

 

 

 

 

At start of year

39,816

 

37,239

Amortisation of acquisition costs

3

 

147

Accrued capital entitlement

60

 

2,430

Repayment

(39,879)

 

-

 

 

 

 

At end of year

-

 

39,816

 

 

 

 

 

 

The Group entity, Regional REIT ZDP PLC, had 30,000,000 zero dividend preference shares ("ZDP shares") in issue, which were listed on the London Stock Exchange (LSE: RGLZ). The ZDP shares were issued at 100 pence per share. The ZDP shares had an entitlement to receive a fixed cash amount on 9 January 2019, being the maturity date, but did not receive any dividends or income distributions. Additional capital accrued to the ZDP shares on a daily basis at a rate equivalent to 6.5% per annum, resulting in a final capital entitlement of 132.9 pence per share, which was paid on 9 January 2019.  

 

25. Retail Eligible Bonds

During the prior year, the Company launched £50,000,000 4.5% Retail Eligible Bonds with a maturity date of 6 August 2024. These unsecured Bonds are listed on the London Stock Exchange ORB platform.

 

 

 

 

31 December

2019

£'000

 

31 December 

 2018 

£'000 

 

 

 

 

Bond principal at start of year

50,000

 

-

Bonds issued in the year

-

 

50,000 

Unamortised issue costs at start of year

(864)

 

-

Issue costs

(7)

 

(925)

Amortisation of issue costs

157

 

61