Source - LSE Regulatory
RNS Number : 4641Z
KCR Residential REIT PLC
18 September 2020
 

18 September 2020

 

KCR Residential REIT plc

 

("KCR" or the "Company")

 

Annual Results for the year ended 30 June 2020

 

KCR Residential REIT plc, the residential REIT group, announces its annual results for the year ended 30 June 2020.

 

Contacts:

KCR Residential REIT plc

Dominic White, Chief Executive

info@kcrreit.com
+44 20 3793 5236

Arden Partners plc

Richard Johnson

Benjamin Cryer

 

+44 20 7614 5900

Notes to Editors:

KCR's objective is to build a substantial residential property portfolio that generates secure income flow for shareholders. The Directors intend that the group will acquire, develop and manage residential property assets in a number of jurisdictions including the UK.

 

 

 

CHAIRMAN'S LETTER

 

Dear Shareholder

 

I am pleased to introduce the 2020 Annual Report for KCR Residential REIT plc ("KCR" or the "Company").

 

During the financial year under review we have been transitioning the business by reducing management and operating costs and modernising and lifting the standard of the property portfolio. 

 

The year started with the completion, following overwhelming support from shareholders, of the corporate transaction with Torchlight Fund LP ("Torchlight") that was announced in July (RNS 12 July 2019 - Subscription and Strategic Agreement) and closed on 6 August 2019. The introduction of a significant new shareholder, Torchlight, was a major step forward for KCR and its ability to create shareholder value.  It delivered immediate access to equity capital to restructure the balance sheet through the repayment of a number of expensive outstanding loans and assisted in the ability to pursue refinancing of the portfolio debt on more favourable terms. 

 

The transaction has given strength and support to the balance sheet enabling the Company to focus attention on maximising the performance of the existing portfolio, while systems and processes are upgraded, to establish a strong operating base ready to support portfolio growth. 

 

The Coronavirus has had a global negative impact on demand, supply chains, stock markets and consumer and business confidence.  The economic impact is now being felt by companies and families.  This has the potential to negatively impact the occupancy level and rentals that can be achieved in KCR's portfolio.  However, at the accounts issue date, KCR has maintained a high occupancy and rental collection level of more than 95% and rents overall have continued to increase. 

 

There is greater supply of studio, one- and two- bed flats in the letting market which has increased letting times from less than one week to up to three weeks in our London portfolio.  However, there continues to be strong tenant demand in all the Company's locations. UK residential rented property remains fundamentally under-supplied and KCR continues to target studio, one and two- bed units, that are in high demand and relatively short supply.

 

While it was envisaged that the Torchlight transaction would result in a move into international residential property markets, given global economic conditions, this expansion has been postponed.  The geographic strategy is to focus for the time being on the UK market and the opportunities that are certain to arise in the coming year.

 

KCR's objective continues to be to grow the size of its residential portfolio to deliver an increase in revenue that results over time in both profitability and an ability to pay dividends. At the same time, we focus on growing net asset value per share.

 

 

Michael Davies
Chairman

17 September 2020

 

 

 

 

CHIEF EXECUTIVE'S LETTER

 

 

Dear Shareholder

 

I have pleasure in reporting to you on the progress of the Group for the year to 30 June 2020.

 

This has been a difficult year in the UK with COVID-19 clearly being the major challenge in the second half to June 2020.  Fortunately, we were well prepared for the challenge following the balance sheet restructuring delivered by the transaction with Torchlight, portfolio refinancing with Hodge Bank, and the major efforts made to reduce operating costs within the business. The business remains cash negative however focus is on achieving a break even position over the next 18 months from a combination of ongoing cost management and enhanced operational performance from the existing assets.

 

This has been the first year of transition for KCR whereby the team size and costs have been reduced to better align with the size of the portfolio. The balance sheet has been restructured and debt costs have been reduced.  The focus now is on the existing portfolio to improve its overall quality, thereby increasing rental and capital values and reducing running costs.  Overall, we are part way through the transition process to create a stable platform that can be successfully scaled-up.

 

A detailed review of existing assets has been completed and we have taken significant steps to "right size" the cost base.  Solid progress has been made, with substantial further improvements expected during the current full year to June 2021. The majority of the restructuring costs have been incurred and expensed during the current financial year and first half of the current year will reflect the reductions made to date.

 

Property portfolio

 

Property transactions during the year

 

KCR acquired two one-bed apartments at its Heathside, Golders Green retirement property during the year.  This is explained in more detail below (see 4* retirement living property)

 

Existing portfolio

 

A bottom-up review of the existing portfolio has been completed.  KCR now has a performance enhancement focus whereby it is committing to more substantive capital expenditure (capex) to positively reposition its portfolio.  Whilst this will result in a higher spend per flat in the near term than has been undertaken in the past, much of the historical capex has been deferred maintenance expenditure resulting from underinvestment by previous owners.  These improvements will have a positive impact on rental and capital values.  KCR is focused on modernising and lifting the property standard so that minimal maintenance spend is required over the next five years.  Repositioned, better quality assets will move into a higher rental bracket with better quality tenant profiles, which we expect will enhance rental and capital returns.

 

KCR is in the process of creating two operating lines which will be clearly identified by a) operating brands and b) letting strategies.   

 

1.   Residential apartments, developed to a high modern specification, furnished and let on a Walk-In-Walk-Out (WIWO) basis (utilities, internet, furniture, council tax included in the rental payment) for a frictionless and flexible letting experience.  Rental contracts may be from a week to multi-year.

 

2.   4* retirement living property rented on the same basis as above, with optionality on furniture.  Rental contracts to be assured shorthold tenancies (six months and up).

 

1.     Residential property (WIWO letting strategy)

 

·    The property at Coleherne Road, held within K&C (Coleherne) Limited, which comprises ten studio and one-bedroom flats, continues to be in demand for letting given its prime location. As part of the investment into the current portfolio, KCR has started a whole-building refurbishment of the property including double-glazing, air conditioning, digital lock systems, modern interior designed apartments and furniture, to bring the property to a significantly higher standard.  Works are expected to complete in Q1 2021 with the property being fully income producing by 30 June 2021.  We expect a significant increase in gross rental income and significantly reduced operating and maintenance costs on an ongoing basis.

 

·    The Ladbroke Grove portfolio (owned by KCR (Kite) Limited) that consists of 16 one- and two-bedroom flats in three buildings, and one stand-alone flat in Harrow Road, continues to be fully let.  Units have been lightly refurbished as tenants leave and are relet in the private market.  The Company's intention is to undertake a whole building refurbishment of the Ladbroke Grove assets once the Coleherne Road property works have completed and it is fully let.

 

·    The Southampton block of 27 residential units at Deanery Court, Chapel Riverside (owned by KCR (Southampton) Limited) continues to be fully occupied.  Rental demand has remained strong, particularly from potential occupiers requesting a WIWO strategy.  Since the property was constructed in 2018 there is no capital investment required at the property.  The letting strategy will be adjusted to implement the WIWO strategy.

 

2.     4* retirement living property

 

The Osprey portfolio (K&C (Osprey) Limited) consists of 159 flats and 13 houses let on long leases in six locations, together with an estate consisting of 30 freehold cottages in Marlborough where Osprey delivers estate management and sales services.

 

For a second year, the portfolio generated higher income from sales commissions from leaseholders' sales, management fees and lease-renewal premium income than in the previous year. The portfolio has held its value and is expected to provide a medium-term value boost opportunity as the terms of the long-leasehold flats shorten and positive asset management initiatives continue. 

 

The key asset in the portfolio representing 68% of the Osprey portfolio value is the freehold block at Heathside, Golders Green, where 29 of the 37 residential units are held long leasehold.  The strategy continues to be selectively acquire long-leasehold units in the block, subject to pricing, refurbish the units to a high level and let them in the open market subject to assured shorthold tenancies.  This strategy is having good success; six of the eight acquired units are let, each at higher rental levels than the previous letting.  The remaining two units are expected to be let by the end of September shortly after refurbishment works are complete.

 

The Company has been investigating the potential to enhance value through redevelopment and roof extensions at four of the seven sites.  Following discussions with planning authorities, the proposals are likely to be positively received. KCR is proceeding with building structure and economic viability analysis before moving to the planning application stage. Until a planning approval has been received, any increase in value from these planning gains will not be included in the Company's accounts.

 

Financial

 

Following completion of the capital raise with Torchlight in August last year the balance sheet has been stabilised.  The corporate operating costs have been significantly reduced with the executive and operations team having reduced from seven to three.  Non-essential services have been cancelled.  The post-Torchlight transaction restructuring costs have been expensed in the profit and loss statement to June 2020. The first half of the current financial year is expected to reflect the outcomes flowing from the significant cost savings made to date with further improvement targeted during the course of the current financial year. 

 

This year's financial statements are impacted by a number of one-off costs relating to the Torchlight transaction, cancellation of the preference shares scheme, restructuring the balance sheet, portfolio debt refinancing, and personnel costs relating to restructure of the business. Following this investment of time and capital, the recurring corporate and property operating costs are now significantly lower than they have been at any time in KCR's history.

 

Further details regarding the financial performance of the Group can be found in the Strategic Report.

 

Refinancing

 

On 12 February 2020 KCR successfully completed a £7.9m refinancing of its Coleherne Road, Ladbroke Grove and Lomond Court portfolios, all assets in London. The refinancing, which has a 25-year term and a five year fixed rate, is interest only and is secured on the refinanced assets. The interest rate on loans relating to these properties moved from 3.75% p.a. to 3.5% p.a. This transaction delivered £2.9m of free capital to KCR post repayment of the existing bank facility.  

 

This refinancing delivered liquidity to the Company that has enabled the first phase of the refurbishment investment programme to be initiated and the acquisition of more units at Heathside to be completed. It also provided working capital to the Group.

 

Prospects

 

Although the business continues to be cashflow negative, it is so at a significantly reduced rate and the gap to break-even is the smallest since KCR's admission to AIM.

 

The transaction with Torchlight that completed in August 2019 is, we believe, the most significant event for KCR since the IPO. It enabled the restructuring of the balance sheet, provided a solid base for refinancing the portfolio with Hodge Bank, and has helped to refocus the Group on optimising its existing portfolio and its systems and processes at a greatly reduced cost level.  The Company will soon be ready to scale its portfolio.

 

We continue to be excited about the potential for the Company to grow from a solid operating base, and in particular are pleased by the significant progress made this year towards Group profitability.

 

Dominic White
Chief executive

17 September 2020

 

 

GROUP STRATEGIC REPORT

 

The directors present the strategic report of KCR Residential REIT plc ('KCR' or the 'Company') and its subsidiaries (together, the 'Group') for the year ended 30 June 2020. 

PRINCIPAL ACTIVITY

The Group carries on the business of acquiring, developing and managing residential property predominantly for letting to third parties on long and short leases.  At the year-end, the Group consisted of the Company, which is a public company limited by shares, and its wholly owned subsidiaries:

1.           K&C (Coleherne) Limited owns a freehold residential property in Chelsea, London containing ten studio flats

2.           K&C (Osprey) Limited owns eight freehold apartments and the freehold of several retirement properties let on long leases to residents and provides management services in respect of these properties and to third-party landlords

3.           KCR (Kite) Limited owns three freehold residential properties in Ladbroke Grove, London (16 flats) and a flat on Harrow Road

4.           KCR (Southampton) Limited owns a long leasehold block of 27 two-bedroom apartments at Chapel Riverside, Southampton. The lease is a 999 lease for which the company pays a peppercorn rent

5.           K&C (Newbury) Limited owns no property and is now effectively dormant.  The valuation of the company has been written down to nil.

GROUP STRATEGY

The directors intend to build a significant presence in the residential letting market, primarily through the acquisition of land with planning permission that will be developed into residential property and the acquisition of existing residential property. Assets are predominantly acquired with the purpose of letting to third parties.

RESULTS

The Group reports a consolidated operating loss of £3,079,531 for the year to 30 June 2020 (2019 - £3,014,023). 

REVIEW OF BUSINESS AND FINANCIAL PERFORMANCE

The Board has reviewed whether the Annual Report, taken as a whole, presents a fair, balanced and understandable summary of the Group's position and prospects, and believes that it provides the information necessary for shareholders to assess the Group's position, performance, and strategy.

 

In reporting financial information, KCR presents alternative performance measures, "APMs", which are not defined or specified under the requirements of IFRS.  For example, portfolio occupancy and rent collection percentage.  The Company believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business.  The Board reminds readers that these APMs are not GAAP measures, are not intended as a substitute for those measures, and that other companies may use different measures.

 

Revenue in this financial year increased to £1,035,816 (2019 - £777,827).  Portfolio occupancy and rent collection remained above 95% for the whole period and in the majority of cases rental levels increased as units were re-let.  Overall revenue was increased despite the Coleherne Road property being progressively vacated in the last quarter in preparation for refurbishment works. 

 

A large part of the year's operating loss (£2,054,883) is attributable to transition and refinancing costs and non-cash items relating to share-based payment charges. The Group therefore reports the operating loss both before and after non-cash and separately disclosed items. The Group's operating loss before non-cash and separately disclosed items was £1,024,648 (2019 - £878,213 loss). The operating loss was £3,079,531 (2019 - £3,014,023 loss). The loss before taxation was £3,560,818 (2019 - £3,737,372 loss). 

 

Total assets at 30 June 2020 increased to £25.2 million (2019 - £24.1 million).  Investments valuations fell slightly overall (£331,000) mainly following a reduction in the Southampton property valuation from £6.40 million to £5.83 million due to a change in the building's holding strategy.  The prior valuation methodology assumed an incremental sell-down of the building on a flat by flat and vacant possession basis. The current strategy is, as outlined above, to hold the property for the long term on a rental basis.

 

Net assets increased to £12.14 million (2019 - £9.58 million) and net asset value per share decreased to 44.03p (2019 - 60.67p), predominantly due to the capital raised and new shares issued in August 2019.

 

Upon completion of the Torchlight transaction, the Group entered into an option agreement to grant Torchlight an option to subscribe for a further 50,000,000 new Ordinary Shares during the Option Period (up to 6 August 2022). Torchlight could subscribe for the shares at a price per share of:

 

•      for any notice of exercise served on the Company on any date up to and including 31 December 2019, the Issue Price; and

•      for any notice of exercise served on the Company from 1 January 2020 until the end of the Option Period, the higher of (i) the price per Option Share which is equivalent to 95 per cent. of the 30-Day VWAP for the Ordinary Shares and (ii) the par value of each Ordinary Share.

 

The Option is only exercisable by Torchlight during the Option Period and if the Option is not exercised prior to the expiry of the Option Period, it will lapse. Any exercise of the Option by Torchlight shall be for not less than 2,000,000 Option Shares.

KEY PERFORMANCE INDICATORS

The directors and management team monitor key performance indicators relevant to each of the subsidiaries to improve Group performance.  Management reports to the board if data show significant variances against expected outcomes and proposes mitigation action as necessary.

 

Examples of the KPIs used to monitor aspects of performance include:

1. At property level

1.1.      Vacancy rate in terms of number of units available and potential rental income

Target occupancy of at least 90 per cent achieved

1.2.      Outstanding rents as a percentage of rental income

Target debtor balance of less than 10 per cent of rental revenue achieved.

2.   At Group level

2.1.      Gross assets under management

The target of £40 million of gross assets by 30 June 2020 was not achieved.  However, the restructuring of the business following an investment by Torchlight Fund LP, which started in August 2019, has significantly improved the prospects of profitable growth for the Company over the next 12 months.

Near term focus is on reducing costs, enhancing revenue and growing the business to achieve a cash break even position to provide a stable base to grow from. Solid progress in this respect is being made.

 RISKS AND UNCERTAINTIES

The Board regularly reviews the risks to which the Group is exposed and ensures through its meetings and regular reporting that these risks are minimised as far as possible.

The principal risks and uncertainties facing the Group at this stage in its development are:

·           Financing and liquidity risk

The Company has an ongoing requirement to fund its activities through the equity markets and in future to obtain finance for property acquisition and development. Although there is no certainty that such funds will be available when needed, the Company has plans in place with KCR's new Capital Partner regarding ongoing funding, and, the directors continue to focus on developing the Group's capital structure.

·           Financial instruments

Details of risks associated with the Group's financial instruments are given in note 21 to the financial statements.  The directors seek to mitigate these risks in manners appropriate to the risk.

·           Valuations

The valuation of the investment property portfolio is inherently subjective as it is made on the basis of assumptions made by the valuer that may not prove to be accurate. The outcome of this judgment is significant to the Group in terms of its investment decisions and results.  The directors, who have long experience of property, seek to mitigate this risk by employing independent valuation experts such as Lambert Smith Hampton to review values of the assets in the portfolio.

·           Brexit

The negative impact arising from the uncertainty about Brexit which has been impacting the UK property market has improved following the election outcome.  The board believes that the Company operates in a sector of the market, and with the advantage of REIT status, such that it will be able to build market share, income and net asset per share value over the coming years.

 

·       COVID-19

   In January 2020, an outbreak of a novel coronavirus, now classified as COVID-19, was detected in China's Hubei province. During the following months, COVID-19 has spread steadily throughout the World and on 11 March 2020, The World Health Organisation ("WHO") declared the outbreak a global pandemic. The impact of COVID-19 is widespread and continues to cause economic disruption. Governments in the UK and elsewhere around the world have taken drastic and unprecedented measures which include compulsory business closures and tight restrictions on movement of people and on their activities.

 

Whilst it is too early to assess the impact of the COVID-19 pandemic and the UK Government's lockdown and other measures on the Group, to date COVID-19 has not materially impacted Group operations, with minimal impact on rent collections during the lockdown period. Only a minimal number of tenants were in rent arrears at the balance sheet date and up to the date of this report.

 

The main risks that the Board have identified in relation to the pandemic are the potential income reduction and bad debts as tenants have difficulty in maintaining rent payments and potential voids within the portfolio arising from tenant failures.

 

The actions taken to mitigate the risks are summarised below:

 

·      The Group undertakes credit checks on prospective new tenants to assess credit risk. The checks include verification of income levels and capacity to pay, as well as checks of rental references. Any arrears are actively managed.

 

·      The Group has completed periodic monitoring of apartment usage for short let operators. Monitoring included car park usage (Southampton), power, water and gas readings as a proxy for occupancy. The purpose of this was to enable the directors to form a view as to the underlying occupancy profile of the short let operators as a proxy for their ability to continue to meet rent. Our sampling / testing has suggested an implied underlying occupancy rate of 80% or better which suggests adequate capacity for the short let operators to meet rent.

 

·      Recent re-lettings in both Ladbroke Grove and Southampton suggests there is also solid underlying demand in both catchments for rental properties so we would reasonably expect to be able to re-let in the event that a short let operator failed and defaulted on their rental obligations.

 

Due to the uncertainty and unprecedented nature of the challenges posed by COVID-19 the Directors continue to monitor this situation closely.

Directors' duty to promote the success of the Company under Section 172 Companies Act 2006

Section 172 (1) of the Companies Act 2006 requires Directors to act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of shareholders as a whole, and in doing so having regard to a diverse group of stakeholders.

 

The Directors continue to have regard to the impact of decisions made on all stakeholders and are aware of their responsibilities to promote the success of the Company, in accordance with section 172 of the Companies Act 2006.

 

We aim to work responsibly with our stakeholders and outline below the key Board decisions made during the 2020 financial year:

 

Key Decision

Stakeholders

Action and Impact

Torchlight transaction

Shareholders

Employees

During the year the Company entered into a transaction with Torchlight to raise working capital and provide support for potential additional acquisitions by issuing 9,000,000 Ordinary shares and granting Torchlight an option to subscribe for a further 50,000,000 new Ordinary shares during the option period.

 

The transaction was dilutive to existing shareholders however was strategically important to provide the Company with the financial support required.

 

Shareholder consultation took place and the transaction was put to shareholders to ensure there was wide support for the transaction.

 

As part of the transaction the Company also simplified its share structure by entering into the Redesignation and Gift Agreement with the Restricted Preference Shareholders.

 

This resulted in acceleration of the share-based charge negatively impacting near term financial performance, however removing the ongoing negative impact for shareholders had the Restricted Preference Shares continued.

 

The company consulted extensively with the Restricted Preference Shareholders as part of this process to agree mutually acceptable terms.

 

The Company also consulted with shareholders and put this matter to shareholders to vote on as well.

 

Restructure of funding arrangements

Creditors

Shareholders

Following completion of the Torchlight transaction and the strengthening of the balance sheet the Company entered into refinancing arrangements in respect of the existing funding arrangements.

 

This refinancing, whilst increasing overall leverage, provided the additional working capital required to support implementation of the current asset performance enhancement programme.

 

Improved working capital profile strengthens the position of the company overall.

 

 

 

The Directors considered raising additional equity from shareholders and the potential costs and dilution for non-participating shareholders and formed the view that the interests of all stakeholders were best served by optimising financing arrangements.

 

FORWARD-LOOKING STATEMENTS

This Annual Report contains certain forward-looking statements that have been made by the directors in good faith based on the information available at the time of the approval of the Annual Report and financial statements.  By their nature, such forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future.  Actual results may differ from those expressed in such statements.

OUTLOOK

Whilst the near-term focus remains on reducing costs and improving the operations performance of the existing assets, the Group is continuing to investigate the purchase of residential property assets that will be able to support an increasing income yield. To achieve these, the Group may be required to raise more capital and it is working closely with funding sources, both equity and debt providers, to achieve this objective.

ON BEHALF OF THE BOARD:

 

 

Dominic White
Director

17 September 2020

 

 

CORPORATE GOVERNANCE STATEMENT

 

Introduction

During the year to 30 June 2020 KCR Residential REIT plc, while an AIM Listed company, was a Family Office operating with five directors and three employees. In September 2018 it adopted the QCA code but with such a tightly controlled operational and risk environment was not able to, in all areas, fully comply with the principles. During the current year the directors will continue to update the website to comply as far as possible with the following QCA code principles, noting areas where the small scope of operations limits their ability to fully comply:

Principle 1: Establish a strategy and business model which promote long-term value for shareholders

The Company's objective is to build a substantial property portfolio predominantly in the residential sector that generates both secure income flow from rents and increasing net asset value for shareholders. The Company acquires or develops blocks of studio, one-and two-bed apartments that are close to transport links, shopping and leisure, mostly in London, its surrounds and the South East. These blocks are focused on attracting tenants seeking affordable rental accommodation.

 

The Company brings its property corporate finance expertise to the identification and execution of these acquisitions.

 

The Company looks to acquire properties at below market value to improve yield on cost and enhance net asset value. It aims to achieve this through acquisition strategies including:

 

·       using the REIT's inherent tax advantages; acquiring properties in corporate structures with embedded capital appreciation and deferred tax liabilities which are reduced to zero as the corporate becomes part of the REIT group, and

 

·       acquiring permitted land, funding the development process and retaining the developer's profit.

 

Over the medium to long term, the Company expects rental and property values to increase in line with inflation. These increases coupled with new acquisitions are designed to enable the Company, once it has reached scale, to pay dividends from cash flow generated by rents and deliver net asset value increases through positive property revaluations. Active asset management of the properties may also deliver value increases.   The Company as a REIT is required to distribute 90 per cent of its rental profits.

 

It is the Company's paramount intention to conduct its activities in a professional and responsible manner for the benefit of its shareholders, its employees, and the communities where it operates.

 

Further detail on the key challenges that the Board addresses are set out under Risks and Uncertainties in the Strategic Report.

 

Principle 2: Seek to understand and meet shareholder needs and expectations

In August 2019, a major equity re-capitalisation brought in £4.05m of capital and a substantial new shareholder, Torchlight Fund LP. This transaction was designed to stabilise and re-position the Company so that it can move forward in a way that all existing and new shareholders may benefit from future uplifts to profitability and increases in net asset value.

The Company remains committed to engaging with its shareholders to ensure its strategy and performance are clearly understood. Feedback from investors is obtained through direct interaction between the CEO and Executive Director and shareholders following the Company's full and half year results and certain other ad hoc meetings between executive management and shareholders that take place during the year.

The Company seeks to communicate with its shareholders on a timely and transparent basis at all times. Announcements through RNS are as comprehensive as possible. Digital communications platforms such as Vox Markets are used from time to time to communicate via video and podcast. Use of these platforms is limited to senior executives such as the CEO and only once appropriate media training has been completed. As part of the Company's repositioning, the intention is to improve the speed of reporting of the interim and full year results to shareholders.

The chief executive, Dominic White, attends and presents at investor forums from time to time, as well as holding discussions with analysts, shareholders and investment managers.

It is apparent from such interaction that shareholders have several concerns, including:

·           How do the directors propose to expand operations without dilution to existing shareholdings?

Since property companies are capital-intensive, the Company will raise equity over time to fund the acquisition of new properties. Torchlight Fund LP exercising its option rights as approved by shareholders will be dilutive to existing shareholders with this dilution having already being accepted and approved by shareholders. The board will aim to maximise the issuance price of any additional equity offerings such that issuances are accretive or, if that is not possible, offer all shareholders the opportunity to participate in the offering on an equal access.

 

·           When will the Company become profitable?

             Based on current overheads and interest forecasts, the Company may become profitable and cash flow positive once it has approximately £50m of investments generating satisfactory rental income. Executive management is focused on achieving this objective as soon as possible. This is naturally dependent on the availability of suitable transactions and the ability to complete the acquisitions either via raising additional equity capital or debt.

Shareholder liaison is managed by Dominic White (info@kcrreit.com).

 

Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success

The Company currently operates in the UK. It identifies the main stakeholders in the UK as being investors, tenants, and suppliers of services (accountant, nomad, broker, lawyers), employees, directors, third-party property managers, banks and other debt providers and property agents introducing investment opportunities.

The Company has an important social responsibility in its role as a landlord of residential housing. We commit to delivering great service to our tenants, which includes providing safe and high-quality residential units, at market prices, managed in a professional way.

Treating all our stakeholders well, and in particular our key customers - our tenants, is key to growing a sustainable business that will have long-term success.

 

Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation

The board is responsible for setting the risk framework within which the Company operates and ensuring that suitable risk-management controls and reporting structures are in place throughout the group.

The board seeks to minimise risk in the management of its operations. The Company uses third- party advisors to address specific issues that arise during operations where they bring complementary expertise and experience.

 

Principle 5: Maintain the board as a well-functioning, balanced team led by the chair

The Board comprises a balance of independent and non-independent directors with collective, specific and complementary skills that enable the Company to manage and direct its affairs in a professional manner, with embedded corporate governance procedures that are fit for purpose.

Full Board meetings are generally held on a quarterly basis and all necessary documentation is provided to the board in advance, so that they can understand the issues under review and make well- considered decisions. During the year, between full Board meetings, the Board convenes whenever necessary to consider and if appropriate approve the execution and completion by executive management of key matters that fall within the Board's defined remit as set out below.

The Board has audit and remuneration sub-committees that are chaired by non-executive directors.

All of the directors devote such time to the Company's affairs as the board considers appropriate.

Throughout the 2019 year, the sole non-executive director was Michael Davies who was regarded as Independent by the Board and shareholders. Following the Torchlight Transaction, which completed on 6 August 2019, two Torchlight directors Russell Naylor (executive director in charge of finance) and Richard Boon joined the Board. Richard Boon is regarded as a non-independent non-executive director. James Thornton also joined the Board at that time as an independent non-executive director.

During 2019, each of Michael Davies, Dominic White, James Cane, Timothy James, Oliver Vaughan attended all 6 Board meetings in person or by conference call as permitted by the company's articles. 

During 2020, 7 Board meetings were held, attended by all current directors.

The involvement of non-executive directors varies month by month but is estimated at 3-10 days a month.

 

Principle 6: Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities 

The Board maintains up-to-date skills, knowledge and experience to enable it to direct and manage the Company's operations, finances and its interface with investors, the public markets and its other stakeholders.

The Board takes great care to appoint managers and staff with the appropriate skills and experience, and is aware of the importance of encouraging diversity among its workforce.

The Board works as a team and regularly reviews its procedures and composition.

The relevant experience and skills of the current directors is set out in detail in the Circular relating to the Torchlight Transaction. Each director is involved in other organisations which keep their professional skills sharpened and up to date. In due course the details as they pertain to the directors will be added to the website but is included in the Circular of 12 July 2019.  

 

Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continual improvement

Following the transaction approved by the directors of KCR as at 31 July 2019, the Board of KCR now comprises:

Name

Role

Appointed

Status

 

Michael Davies

Non-Executive chairman

12 November 2015

Independent

Dominic White

CEO

1 January 2017

Non-independent

Russell Naylor

Executive director

06 August 2019

Non-independent

Richard Boon

Non-Executive director

06 August 2019

Non-independent

James Thornton

Non-Executive director

06 August 2019

Independent

In accordance with its obligations under the QCA code the Board will review internally its collective performance, and the performance of its committees and Board members. At this stage of its evolution and in view of the size of the Board, the Directors do not believe that it is practical to undertake an external or a wide-ranging evaluation of the performance of Board members.

The primary tasks of the chief executive, Dominic White, have been and will continue to be to grow the Company's asset base and revenue through the delivery of additional assets to the portfolio. This has included developing capital and asset partnerships and finding ways to raise appropriately priced and structured debt finance to support transactions and equity capital in an uncertain equity market. He is a key point of contact for the capital markets.

In these tasks he will be supported by Russell Naylor, Executive Director, who is additionally responsible for internal financial controls, financial management, capital planning and overseeing the preparation of financial reports to shareholders.

The primary task of the Chairman, Michael Davies, has been to ensure that the Board has performed its role correctly, that governance is adhered to, and that the Company works towards delivering value to shareholders in accordance with the Company's strategy. He is also a point of contact with many of the Company's shareholders and professional advisers.

Succession planning remains an important issue for the Board, and in particular the Chairman.

 

Principle 8: Promote a corporate culture that is based on ethical values and behaviours

The Board strives to promote a corporate culture based on sound ethical values and behaviours.

The Company has adopted a code for directors' and employees' dealings in securities, which is appropriate for a company whose securities are traded on AIM. The code is in accordance with the requirements of the Market Abuse Regulation that came into effect in 2016.

The Board is also aware that the tone and culture it sets will greatly impact all aspects of the Company and the way that employees behave, as well as the achievement of corporate objectives. A significant part of the Company's activities is centred upon an open dialogue with shareholders, employees and other stakeholders. Therefore, the importance of sound ethical values and behaviours is crucial to the ability of the Company to successfully achieve its corporate objectives.

 

Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board

The Board is committed to high standards of corporate governance. No system of internal control can completely eliminate the risk of process or individual failures. To an extent the corporate governance structures which the Company is able to operate are limited by the size of the executive management team and the small number of executive directors, which is itself dictated by the current size of the Company's operations. Within this limitation necessitated by the current small size of the business, the Board is dedicated to having strong internal control systems in place to enable it to maintain the highest possible standards of governance and probity.

 

The chairman, Michael Davies:

·              leads the Board and is primarily responsible for the effective working of the Board;

·              in consultation with the Board, ensures good corporate governance and sets clear expectations with regards to Company culture, values and behaviour;

·              sets the Board's agenda and ensures that all Directors are encouraged to participate fully in the activities and decision-making process of the Board;

·              takes responsibility for relationships with the Company's professional advisers and major shareholders.

The chief executive, Dominic White:

·              is primarily responsible for developing the Company's strategy in consultation with the Executive Director and the Board, for its implementation and for the operational management of the business;

·              is primarily responsible for new projects and expansion;

·              runs the Company on a day-to-day basis;

·              implements the decisions of the Board;

·              monitors, reviews and manages key risks;

·               is the Company's primary spokesperson, communicating with external audiences, such as investors, analysts and the media.

The executive director, Russell Naylor:

·              works with the CEO to develop and execute the Company's strategy;

·              is primarily responsible for the systems of financial controls in operation for the Company and each of its subsidiaries;

·              is primarily responsible for all financial management and financial planning matters;

·              monitors, reviews and manages key risks as they relate to financial impact;

·              implements the financial and internal control decisions of the Board.

On 28 October 2019 the Group established a Remuneration Committee chaired by Michael Davies, Chairman and Independent Director, and comprises Michael Davies and Richard Boon, Non-Independent Non-Executive Director, which meets on an ad hoc basis when required.   

Until 28 October 2019 the Audit committee comprised Michael Davies, the Chairman. From 28 October 2019 the Audit and Risk Committee is chaired by James Thornton, Independent Non-Executive Director and comprises James Thornton and Michael Davies. Russell Naylor is invited to attend as appropriate. The Audit and Risk committee is comprised of independent directors. It normally meets twice each financial year to consider the interim and final results. In the latter case, the auditors are present and the meeting considers and takes action on any matters raised by the auditors arising from their audit.

The chair of each of the Committees may invite executive management and Board members to attend any meeting.

 

Matters reserved for the Board include:

·              Vision and strategy

·              Review of budgets, asset plans and trading results

·              Approving financial statements

·              Financing strategy, including debt strategy

·              Business planning relating to acquisitions, divestments and major refurbishments not already agreed in the strategy and asset plans

·              Capital expenditure in excess of agreed budgets

·              Corporate governance and compliance

·              Risk management and internal controls

·              Appointments and succession plans at senior management level

·              Directors' remuneration

 

Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

The company website sets out the principal approach of the Company to governance. It contains all relevant documents and information for shareholders, including all RNS announcements, Financial Reports, Shareholder Circulars, and the Company's articles.

Shareholders are additionally encouraged to participate at the AGM, to ensure that there is a high level of accountability and identification with the Group's strategy and goals.

 

Audit Committee Report

The Executive Director Finance and the Chair of the Audit Committee met to plan the audit with the external auditor and to discuss the materiality to be used in the audit and the expected key issues to be covered. Progress of the audit was discussed with the external auditor before the year-end Audit Committee. 

 

At the completion of the audit, the auditor presented its Planning document and the Audit Completion Report to the Audit Committee before the Financial Statements were presented for Board approval.

 

The discussions enabled the auditor to explain the proposed work and its outcome and the Non-Executive Directors to raise any issues. It is considered that the process worked well and the audit did not raise any material issues therefore the auditors were able to issue their audit report in the usual form.

 

Remuneration Committee Report

During 2020, the Remuneration Committee met to review salaries and restricted preference share grants.

It is the Company's policy that the remuneration of Directors should be commensurate with the services provided by them to the Company and should take account of published data on reasonable market comparables, where available. During the financial year, the Directors accepted reduced remuneration in line with the Company's strategy to control costs. Details of the Directors' remuneration are set out in the Directors' Report on page 20.

RPS were all cancelled in conjunction with the Torchlight transaction.

 

REPORT OF THE DIRECTORS

 

The directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2020.

A review of the business, risks and uncertainties and future developments is included in the Chairman's Letter, the Chief Executive's Letter, the Group Strategic Report, and in note 21 to the financial statements.

DIVIDENDS

The directors do not recommend payment of a dividend for the year (2019 - £nil).

Political donations

The Group made no political donations during the year (2019 - £nil).

DIRECTORS

The following directors served during the year to 30 June 2020 and up to the date of approval of this Annual Report:

Name

 

Michael Davies

 

Dominic White

 

James Cane

resigned 6 August 2019

Timothy James

resigned 6 August 2019

Oliver Vaughan

resigned 6 August 2019

Russell Naylor

appointed 6 August 2019

Richard Boon

appointed 6 August 2019

James Thornton

appointed 6 August 2019

The beneficial interests of the directors holding office at 30 June 2020 in the issued share capital of the Company were as follows:

 

Ordinary
Shares

 

 

 

 

 

 

At 30 June 2019

 

 

 

Issued in the

 year

Restricted

Preference

 Shares

 converted in

 year

 

 

 

 

At 30 June 2020

Name

 

No.

No.

No.

No.

Michael Davies

 

195,428

--

--

195,428

Dominic White

 

557,143

152,114

486,675

1,195,932

Russell Naylor

 

--

--

--

--

James Thornton

 

--

22,222

--

22,222

Richard Boon

 

--

--

--

--

 

 

Restricted Preference
Shares

 

 

 

 

At 30 June 2019

 

Gifted to Company

Converted to

Ordinary Shares

 in the year

 

 

At 30 June 2020

Name

 

No.

No

No.

No.

Michael Davies

 

--

--

--

--

Dominic White

 

1,265,357

(778,682)

(486,675)

--

Russell Naylor

 

--

--

--

--

James Thornton

 

--

--

--

--

Richard Boon

 

--

--

--

--

The beneficial interests of the directors holding office at 17 September 2020 in the issued share capital of the Company were as follows:

 

At 30 June 2020

Issued in the period

At 17 September 2020

Name

No.

No.

No.

Michael Davies

195,428

-

195,428

Dominic White

1,195,932

-

1,195,932

Russell Naylor

-

-

-

James Thornton

22,222

-

22,222

Richard Boon

-

-

-

SUBSTANTIAL SHAREHOLDINGS

As at 17 September 2020, the directors had been notified that the following shareholders owned a disclosable interest of three per cent or more in the Ordinary shares of the Company:

Name

 

Interest
%

Torchlight Fund LP

 

32.64%

Energiser Investments Limited

 

8.83%

Moore House Holdings Limited

 

8.56%

Poole Investments Limited

 

6.53%

Venaglass Limited

 

5.74%

Timothy James

 

4.36%

Dominic White & White Amba Pension Scheme

 

4.34%

Oliver Vaughan

 

3.35%

DIRECTORS' REMUNERATION

The directors have received the following remuneration for their services during the year:

 

2020

2019

Name

Remuneration
  £

Benefits-in-kind
  £

Remuneration
  £

Benefits-in-kind
  £

Michael Davies

--

--

-

-

Dominic White

145,853

--

278,200

-

Russell Naylor*

44,000

--

-

-

James Thornton

27,192

--

-

-

Richard Boon*

18,130

--

-

-

James Cane

7,603

--

87,700

-

Timothy James

5,068

--

90,200

-

Oliver Vaughan

10,541

--

30,200

-

 

258,387

--

486,300

-

 

 

 

 

 

In addition, during the year, the Group were charged fees of £43,200 by DGS Capital Partners LLP, a limited liability partnership of which Michael Davies is a member (2019 - £43,200) (including irrecoverable VAT) for making available the services of Michael Davies to the Group.

* The remuneration paid to Russell Naylor consisted of fees of £44,000 charged by Naylor Partners, a business in which Russell Naylor is a Director (2019 - £nil) and the remuneration paid to Richard Boon consisted of fees of £18,130 (2019 - £nil) charged by Artefact Partners, a business in which Richard Boon is a Director.

During the year, the capital structure of the company was reviewed and the decision was taken to terminate the Restricted Preference shares. As a result, a number of Restricted Preference shares were converted to Ordinary shares and the remaining Restricted Preference shares were gifted to the Company and subsequently cancelled. A number of directors held Restricted Preference shares. The total gain made by the directors upon the conversion of Restricted Preference shares to Ordinary shares was £450,910 (2019 - £484,000). The gain has been calculated as the market value of the Ordinary shares at the date of conversion, less the nominal value of the Restricted Preference shares. However, the loss made by the directors as a result of gifting a number of Restricted Preference shares to the Company was £721,493 (2019 - £nil).

INTERNAL CONTROLS AND RISK MANAGEMENT

The directors are responsible for the Group's system of internal control.  Although no system of internal control can provide absolute assurance against material misstatement or loss, the Group's system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately.

In carrying out their responsibilities, the directors have put in place a framework of controls to ensure as far as possible that (i) ongoing financial performance is monitored in a timely manner, (ii) where required, corrective action is taken and (iii) risk is identified as early as practically possible. The directors have reviewed the effectiveness of internal controls.

The Board, subject to delegated authority, reviews, among other things, capital investment, property sales and purchases, additional borrowing facilities, guarantees and insurance arrangements.

Details of financial risk management are included within the Risks and Uncertainties section of the Group Strategic Report.

BRIBERY RISK

The Group has adopted an anti-corruption policy and whistle-blowing policy under the Bribery Act 2010. Notwithstanding this, the Group may be held liable for offences under that Act committed by its employees or subcontractors, whether or not the Group or the directors had knowledge of the commission of such offences.

 

OTHER MATTERS

i.       Environmental

The Group understands the importance of operating its business in a manner that minimises any risks to the environment.  Its policies seek to ensure that it achieves this goal.

ii.      Group employees

The Group considers its employees to be its most valuable assets and ensures that it deals with them fairly and constructively at all times.

iii.     Social matters

The Group is aware that it has a responsibility to the communities where it operates and seeks to respect them at all times.

iv.     Respect for human rights

The Group always respects the human rights of its stakeholders.

v.      Contributions to pension schemes

No pension scheme benefits are being accrued by the directors.

DIRECTORS' INDEMNITIES AND INSURANCE

The Company has made qualifying third-party indemnity provisions for the benefit of its directors during the year and they remain in force at the date of approval of this Annual Report.

GOING CONCERN

The directors have adopted the going-concern basis in preparing the financial statements.  

The directors consider, as at the date of approving the financial statements, that there is reasonable expectation that the Group has adequate financial resources to continue to operate, and to meet its liabilities as they fall due for payment, for at least twelve months following the approval of the financial statements.

 

Following the declaration by the World Health Organisation of Covid-19 as a global pandemic, governments in the UK and elsewhere have taken drastic and unprecedented lockdown and other measures which include compulsory business closures and tight restrictions on movement of people and on their activities. This event has the potential to impact the Group and its business and is considered further in the Strategic Report on pages 8 and 9.

 

The Company has undertaken procedures to ensure that the Company has sufficient cash resources and bank facilities and sufficient covenant margin to manage the potential financial impact of the Covid-19 pandemic on its business under going concern principles.

 

See note 2 to the financial statements for further details of the procedures undertaken.

 

POST BALANCE SHEET EVENTS

Post balance sheet events are detailed further in the Chief Executive's letter and note 23 of the financial statements.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year.  Under that law, the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS").  Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period.  In preparing these financial statements, the directors are required to:

·             select suitable accounting policies and then apply them consistently;

·             make judgments and accounting estimates that are reasonable and prudent;

·             state that the financial statements comply with IFRS;

·             prepare the financial statements on the going-concern basis unless it is inappropriate to presume that the Group will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's and the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006.  They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

STATEMENT AS TO DISCLOSURE OF INFORMATION TO THE AUDITOR

So far as the directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the Group's auditor is unaware, and each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Group's auditor is aware of that information.

AUDITOR

In accordance with section 489 of the Companies Act 2006, a resolution to reappoint BDO LLP as auditor will be proposed at the forthcoming annual general meeting.

ON BEHALF OF THE BOARD

 

Dominic White

Director

 

17 September 2020

 

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF

KCR RESIDENTIAL REIT PLC

 

Opinion

We have audited the financial statements of KCR Residential REIT Plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 30 June 2020 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statements of Financial Position, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Statements of Cash Flows and notes to the financial statements, including a summary of significant accounting policies.

 

The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

 

In our opinion:

 

•     the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 30 June 2020 and of the Group's loss for the year then ended;

•     the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

•     the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

•     the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

 

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Conclusions relating to going concern

 

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

 

•     the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

•     the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group or the Parent Company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

 

 

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. This matter was addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter.

 

 

Key audit matter

How we addressed the key audit matter in the audit

Valuation of investment properties

 

The Group holds investment properties which comprise properties owned by the Group held for rental income. Investment properties are valued by independent external valuers and the valuation approach is disclosed in Note 12. The valuation of investment properties requires significant judgement in determining the appropriate inputs to be used in the model and there is therefore a risk that the properties are incorrectly valued. We have therefore determined the valuation of investment properties to be a key audit matter. The accounting policies relating to investment properties are disclosed in Note 2.

In this area our audit procedures included:

 

·    We compared the key valuation assumptions, which we consider relate to the market yields appropriate to the sector and location of the properties, against our independently formed market expectations. Variances were evaluated through challenge of the valuers and accumulated to determine whether they supported the overall valuation.

 

·    We tested the accuracy of key observable valuation inputs, primarily passing rental income and lease terms, to the information provided to the valuers for use in their valuation for a sample of properties. 

 

·    We met with the external valuer to discuss and challenge the valuation methodology and key assumptions, and to determine whether there were any indicators of undue management influence on the valuations.

 

·    We assessed the competency, qualifications, independence and objectivity of the external valuers engaged by the company and reviewed the instructions provided to the valuer for completeness, unusual arrangements and to check that there was no evidence of management bias.

 

·    We reviewed the property valuation reports and through discussions with the valuer we assessed the impact of Covid-19 on the valuation of the investment properties.

 

Key observations:

 

We did not identify any indicators to suggest that the valuation of the Group's investment properties is inappropriate.

 

 

 

 

 

Our application of materiality

We set certain thresholds for materiality. These help us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take into account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.

 

We determined the materiality for the financial statements as a whole to be £306,000 (2019 - £301,000), calculated with reference to a benchmark of the Company's gross assets, which is a typical primary measure for users of the financial statements of investment property companies, of which it represents 1.2% (2019: 1.25%).

 

Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. The Group's performance materiality was set at £214,000 (2019 - £210,000) which represents 70% of the above materiality levels.

 

We also determined that for items within pre-tax profit, a misstatement of less than materiality for the financial statements as a whole, specific materiality, could influence the economic decisions of users. As a result, we determined materiality for these items at £161,000 (2019 - £187,000) which represents 5% of loss before tax adjusted for fair value movements on capital items. The Parent Company's materiality was calculated at £192,000 (2019: £154,000) based on the same as group basis.

 

Whilst materiality for the financial statements of a whole was £306,000 (2019: £301,700), each component of the Group was audited to a lower level of materiality. Significant component materiality ranged from £74,000 to £192,000.

 

We reported to the Audit Committee all potential adjustments in excess of £15,000 (2019: £15,000). We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds.

 

An overview of the scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of the valuation of unlisted investments which have a high level of estimation uncertainty involved.

 

We considered the risk of the financial statements being misstated or not prepared in accordance with the underlying legislation or standards. We then directed our work toward areas of the financial statements which we assessed as having the highest risk of containing material misstatements, including those set out above.

 

There are five significant components in the Group, which are all registered and operate in the UK. All significant components of the group, and the consolidation were subject to full scope audits by BDO LLP. There were no significant changes to this approach during the year compared to the previous year's audit.

 

Other information

The Directors are responsible for the other information.  The other information comprises the information included in the Annual Report, other than the financial statements and our auditor's report thereon.  Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.  If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information.  If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

 

We have nothing to report in this regard.

 

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

 

•       the information given in the Strategic Report and the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the financial statements; and

•       the Strategic Report and the Report of the Directors have been prepared in accordance with applicable legal requirements.

 

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Report of the Directors.

 

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

•    adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

•   the Parent Company financial statements are not in agreement with the accounting records and returns; or

•    certain disclosures of Directors' remuneration specified by law are not made; or

•   we have not received all the information and explanations we require for our audit.

 

Responsibilities of Directors

As explained more fully in the Statement of Directors' Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

 

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.  Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. 

 

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

 

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

 

Use of our report

This report is made solely to the Parent Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

 

 

Paul Fenner (Senior Statutory Auditor)

for and on behalf of BDO LLP

Statutory Auditor

Birmingham, UK

 

18 September 2020

 

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 2020

 

 

 

 

 

30 June
2020

 

30 June
2019

 

 

Notes

 

£

 

£

CONTINUING OPERATIONS

 

 

 

 

 

 

Revenue

 

3

 

1,035,816

 

777,827

Cost of sales

 

 

 

(152,605)

 

(212,743)

GROSS PROFIT

 

 

 

883,211

 

565,084

 

 

 

 

 

 

 

Administrative expenses

 

 

 

(1,610,547)

 

(1,446,565)

Other operating income

 

 

 

14,576

 

-

Fair value through profit and loss - Revaluation of investment properties

 

12

 

(311,888)

 

3,268

OPERATING LOSS BEFORE SEPARATELY DISCLOSED ITEMS

 

 

 

(1,024,648)

 

(878,213)

 

 

 

 

 

 

 

Separately disclosed administrative items

 

 

 

 

 

 

Share-based payment charge

 

19

 

(1,599,681)

 

(1,387,441)

Costs associated with third-party fundraising and issue of shares

 

6

 

(317,875)

 

(407,616)

Costs associated with refinancing

 

6

 

(137,327)

 

-

Loss on disposal of property SPV

 

13

 

-

 

(340,753)

OPERATING LOSS

 

 

 

(3,079,531)

 

(3,014,023)

 

 

 

 

 

 

 

Finance costs

 

5

 

(483,932)

 

(732,984)

Finance income

 

5

 

2,645

 

9,635

LOSS BEFORE TAXATION

 

6

 

(3,560,818)

 

(3,737,372)

Taxation

 

7

 

-

 

-

LOSS FOR THE YEAR

 

 

 

(3,560,818)

 

(3,737,372)

TOTAL COMPREHENSIVE EXPENSE FOR THE YEAR

 

 

 

(3,560,818)

 

(3,737,372)

Loss attributable to owners of the parent

 

 

 

(3,560,818)

 

(3,737,372)

 

 

 

 

 

 

 

Loss per share expressed in pence per share

 

8

 

 

 

 

Basic

 

 

 

(13.48)

 

(24.66)

Diluted

 

 

 

(4.98)

 

(24.66)

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

30 JUNE 2020

 

 

 

 

 

 

30 June
2020

 

30 June
2019

 

 

Notes

 

£

 

£

ASSETS

 

 

 

 

 

 

NON-CURRENT ASSETS

 

 

 

 

 

 

Property, plant and equipment

 

11

 

46,410

 

61,370

Investment properties

 

12

 

23,592,000

 

23,923,000

 

 

 

 

23,638,410

 

23,984,370

CURRENT ASSETS

 

 

 

 

 

 

Trade and other receivables

 

14

 

63,889

 

77,078

Cash and cash equivalents

 

15

 

1,535,946

 

29,298

 

 

 

 

1,599,835

 

106,376

TOTAL ASSETS

 

 

 

25,238,245

 

24,090,746

EQUITY

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Share capital

 

16

 

2,756,963

 

2,029,178

Share premium

 

 

 

13,535,468

 

10,018,986

Capital redemption reserve

 

 

 

344,424

 

67,500

Other reserves

 

 

 

14,930

 

14,930

Retained earnings

 

 

 

(4,511,633)

 

(2,550,496)

TOTAL EQUITY

 

 

 

12,140,152

 

9,580,098

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

Interest bearing loans and borrowings

 

18

 

11,052,419

 

9,881,344

CURRENT LIABILITIES

 

 

 

 

 

 

Trade and other payables

 

17

 

374,416

 

2,737,010

Interest-bearing loans and borrowings

 

18

 

1,671,258

 

1,892,294

 

 

 

 

2,045,674

 

4,629,304

TOTAL LIABILITIES

 

 

 

13,098,093

 

14,510,648

TOTAL EQUITY AND LIABILITIES

 

 

 

25,238,245

 

24,090,746

Net asset value per share (pence)

 

8

 

44.03

 

60.67

The financial statements were approved and authorised for issue by the Board of Directors on 17 September 2020 and were signed on its behalf by:

 

Dominic White

Director

 

COMPANY STATEMENT OF FINANCIAL POSITION

30 JUNE 2020

 

 

 

 

 

 

30 June
2020

 

30 June
2019

 

 

Notes

 

£

 

£

ASSETS

 

 

 

 

 

 

NON-CURRENT ASSETS

 

 

 

 

 

 

Property, plant and equipment

 

11

 

2,099

 

2,348

Investments

 

13

 

10,706,081

 

10,706,081

 

 

 

 

10,708,180

 

10,708,429

CURRENT ASSETS

 

 

 

 

 

 

Trade and other receivables

 

14

 

3,828,071

 

1,813,404

Cash and cash equivalents

 

15

 

1,476,379

 

3,334

 

 

 

 

5,304,450

 

1,816,738

TOTAL ASSETS

 

 

 

16,012,630

 

12,525,167

EQUITY

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Share capital

 

16

 

2,756,963

 

2,029,178

Share premium

 

 

 

13,535,468

 

10,018,986

Capital redemption reserve

 

 

 

344,424

 

67,500

Other reserves

 

 

 

14,930

 

14,930

Retained earnings

 

 

 

(9,147,860)

 

(7,592,921)

TOTAL EQUITY

 

 

 

7,503,925

 

4,537,673

LIABILITIES

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

Interest bearing loans and borrowings

 

18

 

-

 

4,756,956

 

 

 

 

-

 

4,756,956

CURRENT LIABILITIES

 

 

 

 

 

 

Trade and other payables

 

17

 

8,423,635

 

1,338,244

Interest-bearing loans and borrowings

 

18

 

85,070

 

1,892,294

 

 

 

 

8,508,705

 

3,230,538

TOTAL LIABILITIES

 

 

 

8,508,705

 

7,987,494

TOTAL EQUITY AND LIABILITIES

 

 

 

16,012,630

 

12,525,167

As permitted by Section 408 of the Companies Act 2006, the income statement of the Company is not presented as part of these financial statements. The Company's loss for the financial year was £(3,154,620) (2019 - £(3,548,447)).

 

The financial statements were approved and authorised for issue by the Board of Directors on 17 September 2020 and were signed on its behalf by:

 

Dominic White

Director

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2020

 

 

 

 

Share capital

Share

premium

Unissued share capital

Capital redemption reserve

 Other
reserve

Retained  earnings

  Total equity

 

£

£

£

£

£

£

£

Balance at 1 July 2018

1,435,721

7,358,244

1,260,299

67,500

29,862

(200,565)

9,951,061

Changes in equity

 

 

 

 

 

 

 

Transactions with owners:

Issue of share capital

 

593,457

 

2,660,742

 

(1,260,299)

 

-

 

-

 

-

 

1,993,900

Share-based payments

-

-

-

-

-

1,387,441

1,387,441

Total transactions with owners

593,457

2,660,742

(1,260,299)

-

-

1,387,441

3,381,341

Equity element of loan finance

-

-

-

-

(14,932)

-

(14,932)

Total comprehensive expense

-

-

-

-

-

(3,737,372)

(3,737,372)

Balance at 30 June 2019

2,029,178

10,018,986

-

67,500

14,930

(2,550,496)

9,580,098

Changes in equity

 

 

 

 

 

 

 

Transactions with owners:

Issue of share capital

 

727,785

 

3,516,482

 

-

 

276,924

 

-

 

-

 

4,521,191

Share-based payments

-

-

-

-

-

1,599,681

1,599,681

Total transactions with owners

727,785

3,516,482

-

276,924

-

1,599,681

6,120,872

Total comprehensive expense

-

-

-

-

-

(3,560,818)

(3,560,818)

Balance at 30 June 2020

2,756,963

13,535,468

-

344,424

14,930

(4,511,633)

12,140,152

 

 

 

 

 

 

 

 

 

 

 

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2020

 

 

Share capital

Share

 premium

Unissued share capital

Capital redemption reserve

Other reserve

Retained earnings

     Total equity

 

£

£

£

£

£

                    £

£

Balance at 1 July 2018

1,435,721

7,358,244

1,260,299

67,500

29,862

(5,431,915)

4,719,711

Changes in equity

 

 

 

 

 

 

 

Transactions with owners:

Issue of share capital

 

593,457

 

2,660,742

(1,260,299)

 

-

 

-

 

-

 

1,993,900

Share-based payments

-

-

-

-

-

1,387,441

1,387,441

Total transactions with owners

 

593,457

 

2,660,742

(1,260,299)

 

-

 

-

 

1,387,441

 

3,381,341

Equity element of loan finance

-

-

-

-

(14,932)

-

(14,932)

Total comprehensive expense

-

-

-

-

-

(3,548,447)

(3,548,447)

Balance at 30 June 2019

2,029,178

10,018,986

-

67,500

14,930

(7,592,921)

4,537,673

Changes in equity

 

 

 

 

 

 

 

Transactions with owners:

Issue of share capital

 

727,785

 

3,516,482

-

 

276,924

 

-

 

-

 

4,521,191

Share-based payments

-

-

-

-

-

1,599,681

1,599,681

Total transactions with owners

 

727,785

 

3,516,482

-

 

276,924

 

-

 

1,599,681

 

6,120,872

Total comprehensive expense

-

-

-

-

-

(3,154,620)

(3,154,620)

Balance at 30 June 2020

2,756,963

13,535,468

-

344,424

14,930

(9,147,860)

7,503,925

 

 

 

 

 

 

 

 

                 

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2020

 

 

 

 

2020

 

2019

 

Note

£

 

£

Cash flows from operating activities

 

 

 

 

Cash used in operations

1

(1,554,962)

 

(4,960,666)

Interest paid

 

(483,932)

 

(732,984)

Net cash used in operating activities

 

(2,038,894)

 

(5,693,650)

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant & equipment

 

(8,178)

 

(40,451)

Repayment of other borrowings

 

(1,738,076)

 

-

Purchase of investment properties

 

(518,888)

 

(24,732)

Disposal of investment properties

 

538,000

 

-

Disposal of property SPV

 

-

 

1,140,000

Interest received

 

2,645

 

9,635

Net cash generated from investing activities

 

(1,724,497)

 

1,084,452

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Loan repayments in year

 

(6,658,130)

 

(796,079)

New loans in year

 

7,868,169

 

3,434,250

Shares issued

 

4,060,000

 

1,993,900

Net cash generated from financing activities

 

5,270,039

 

4,632,071

 

 

 

 

 

Increase in cash and cash equivalents

 

1,506,648

 

22,873

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

29,298

 

6,425

Cash and cash equivalents at end of year

 

1,535,946

 

29,298

 

 

 

COMPANY STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2020

 

 

 

2020

 

2019

 

Note

£

 

£

Cash flows from operating activities

 

 

 

 

Cash used in operations

1

(1,868,397)

 

(2,165,998)

Interest paid

 

(178,040)

 

(428,185)

Net cash generated from/(used in) operating activities

 

(2,046,437)

 

(2,594,183)

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant & equipment

 

(980)

 

-

Disposal of property SPV

 

-

 

1,140,000

Interest received

 

2,569

 

9,619

Net cash generated from investing activities

 

1,589

 

1,149,619

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Increase in loans from group companies

 

7,787,070

 

-

Increase in loans to group companies

 

(2,024,997)

 

-

Loan repayments in year

 

(6,304,180)

 

(546,079)

Shares issued

 

4,060,000

 

1,993,900

Net cash (used in)/generated from financing activities

 

3,517,893

 

1,447,821

 

 

 

 

 

Increase in cash and cash equivalents

 

1,473,045

 

3,257

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

3,334

 

77

Cash and cash equivalents at end of year

 

1,476,379

 

3,334

 

NOTES TO THE STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2020

 

1)            RECONCILIATION OF LOSS BEFORE TAXATION TO CASH USED IN OPERATIONS

Group

2020

 

2019

 

£

 

£

Loss before taxation

(3,560,818)

 

(3,737,372)

Depreciation charges

23,138

 

18,074

Revaluation of investment properties

311,888

 

(3,268)

Loss on disposal of property SPV

-

 

340,753

Share-based payment charge

1,599,681

 

1,387,441

Finance costs

483,932

 

732,984

Finance income

(2,645)

 

(9,635)

 

(1,144,824)

 

(1,271,023)

Decrease in trade and other receivables

13,189

 

626,349

Decrease in trade and other payables

(423,327)

 

(4,315,992)

Cash used in operations

(1,554,962)

 

(4,960,666)

 

 

 

 

Company

2020

 

2019

 

£

 

£

Loss before taxation

(3,154,620)

 

(3,548,447)

Depreciation charges

1,229

 

1,636

Loss on disposal of property SPV

-

 

241,585

Share-based payment charge

1,599,681

 

1,387,441

Finance costs

178,040

 

428,185

Finance income

(2,569)

 

(9,619)

 

(1,378,239)

 

(1,499,219)

Decrease/(increase) in trade and other receivables

10,330

 

(894,340)

(Decrease)/increase in trade and other payables

(500,488)

 

227,561

Cash used in operations

(1,868,397)

 

(2,165,998)

 

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2020

 

1)            PRESENTATION OF FINANCIAL STATEMENTS

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board and as adopted by the European Union.

Functional and presentation currency

These consolidated financial statements are presented in Pounds Sterling ('GBP'), which is considered by the directors to be the functional currency of the Group.

Changes in accounting policies

Adoption of new and revised standards

The Group has applied the following accounting standards that are mandatorily effective for accounting periods commencing on or after 1 January 2019:

IFRS 16                                                              Leases

The application of this standard has not had a material impact on the amounts reported in these financial statements.

Changes in accounting policies for standards implemented in the year are as follows:

IFRS 16 Leases

IFRS 16 was adopted on 1 January 2019 without restatement of comparative figures. No transitional adjustments were required upon adoption.

The standard makes substantial changes to the recognition and measurement of leases by lessees. On adoption of the standard, lessees, with certain exceptions for short term or low value leases, are required to recognise all leased assets on their Statement of Financial Position as 'right-of-use assets' with a corresponding lease liability.

 

The requirements for lessors are substantially unchanged.

 

The Group has a small number of operating leases concerning office premises and plant and equipment. IFRS 16 provides an exemption for short term operating leases and leases of low value. The company has taken advantage of the exemptions rather than establishing a right to use asset.

New standards in issue but not yet effective

As at 30 June 2020, the Group has not applied the following new and revised standards that have been issued but are not yet effective:

·       Amendments to References to the Conceptual Framework in IFRS Standards (effective 1 January 2020)

·       Amendments to IFRS 3: Business Combinations - Definition of a business (effective 1 January 2020)

·       Amendments to IAS 1 and IAS 8: Definition of Material (effective 1 January 2020)

·       Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform (effective 1 January 2020)

·       Amendments to IAS 1: Classification of Liabilities as Current or Non-current (effective 1 January 2022).

The directors do not anticipate that the adoption of the above new and revised standards will have a significant impact on the financial statements of the Group in future periods.

 

2)            ACCOUNTING POLICIES

Basis of preparation

The consolidated financial statements have been prepared on the historical cost basis other than as set out in the following policies.

Going concern

The financial statements have been prepared on a going concern basis. This requires the directors to consider, as at the date of approving the financial statements, that there is reasonable expectation that the Group has adequate financial resources to continue to operate, and to meet its liabilities as they fall due for payment, for at least twelve months following the approval of the financial statements. This includes considering the borrowings of £1,586,188 which fall due for repayment during that period. It is the intention of the company to refinance which would potentially also provide further capital which the Group could use for future property acquisitions.

The Company has undertaken procedures to ensure that the Company has sufficient cash resources and bank facilities and with sufficient covenant margin to manage the potential financial impact of the Covid-19 pandemic on its business under going concern principles. These procedures included the following:

·    Reviewing and establishing that cash balances and bank facilities are sufficient to cover at least twelve months of operations;

·    Review of financial covenant ratios and the Group's ability to meet the covenants for a period of at least twelve months of operation; and

·    Reviewing cash flow forecast scenarios. Any decision on property acquisitions and developments in the next twelve months will be taken following review of revised cash flow forecasts.

In the light of the results of the procedures described above, the directors consider that the adoption of the going concern basis is reasonable and appropriate.

Basis of consolidation

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

The subsidiaries included in the consolidated financial statements, from the effective date of acquisition, are K&C (Newbury) Limited, K&C (Coleherne) Limited, K&C (Osprey) Limited, KCR (Kite) Limited, KCR (Cygnet) Limited and KCR (Southampton) Limited.

The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

Transaction costs, other than those of a capital nature and those associated with the issue of debt or equity securities that the Group incurs in connection with a business combination are expensed as incurred.

KCR (Cygnet) Limited was disposed of by the Group in December 2018. Details can be found in note 13.

Investments

Investments in subsidiaries are held at cost less provision for impairment.

Revenue recognition

Revenue of the Group for the year was derived mainly from its principal activity, being the letting to third parties of, and management of, property assets owned by the Group. This income includes rental income, management fees and sales commissions.

 

Revenue from contracts with customers is recognised when control of the services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those services net of discounts, VAT and other sales-related taxes. The Group concludes that it is the principal in its revenue arrangements, because it typically controls the goods or services before transferring them to the customer. Contracts with customers do not contain a financing component or any element of variable consideration.

 

Rental income from operating leases is recognised periodically in line with the time for which the property is rented. Rental income received in advance is recognised in deferred income.

Management fees derived from the management of property assets owned by third parties are recognised as the services are provided.

Revenue from sales commissions is recognised at the point in time when control of the asset is transferred from the vendor to the buyer.

Separately disclosed administrative items

Separately disclosed items are those that are deemed to be exceptional by size or nature in relation to the activities of the Group. In the case of share-based payment charges, these are included as a separately disclosed administrative item as a significant non-cash item.

Finance costs

Finance costs comprise interest expense on borrowings.

Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation.

Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life.

Fixtures and fittings

-

5% and 25% on cost

Computer equipment

-

25% on cost

Investment properties

Investment properties comprise properties owned by the Group which are held for capital appreciation, rental income or both. Investment properties are initially measured at cost, including expenditure that is directly attributable to the acquisition of the asset. Investment properties are revalued on acquisition by independent external valuers and then by the directors or independent valuers annually thereafter. Acquisitions and disposals are recognised on exchange of contracts. Any gain or loss arising from a change in fair value is recognised in profit or loss.

Further details of the investment property valuation methodology are contained in note 12 of the financial statements.

Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. Ongoing repairs and maintenance are expensed as incurred.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and balances held with banking institutions.

Financial assets

Recognition and derecognition

Financial assets are recognised initially on the date that the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial assets are transferred.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position only when the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Classification and initial recognition of financial assets

Except for trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with IFRS 15, all financial assets are initially measured at fair value plus adjusted for any directly attributable transaction costs.

 

Financial assets are classified into the following categories:

-       Amortised cost

-       Fair value through profit or loss (FVTPL)

-       Fair value through other comprehensive income (FVOCI)

 

The classification is determined by both:

-       The entity's business model for managing the asset

-       The contractual cash flow characteristics of the financial asset

              

All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within administrative expenses.

 

Subsequent measurement of financial assets

Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL):

 

-       They are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows;

-       The contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

After initial recognition, these are measured at amortised cost using the effective interest method.  Discounting is omitted where its effect is immaterial. The Group's cash and cash equivalents, trade and most other receivables fall into this category. 

 

Financial assets which are designated as FVTPL are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets in this category are determined with reference to active market transactions or using a valuation technique where no active market exists. The Group's investment properties are designated as FVTPL assets.

 

Impairment of financial assets

IFRS 9's impairment requirements use forward looking information to recognise expected credit losses - the 'expected credit loss (ECL) method'. Recognition of credit losses is no longer dependent on first identifying a credit loss event, but considers a broader range of information in assessing credit risk and credit losses including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

 

The group makes use of a simplified approach in accounting for trade and other receivables and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument. In calculating, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses.

 

Financial liabilities

Financial liabilities are recognised initially on the date that the Group becomes a party to the contractual provisions of the instrument.

 

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

 

The Group classifies non-derivative financial liabilities into the 'other financial liabilities' category. Such financial liabilities are recognised initially at fair value adjusted for directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.

 

'Other financial liabilities' comprise trade and other payables and other short-term monetary liabilities.

 

Bank and other borrowings are initially recognised at the fair value of the amount advanced net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

 

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

 

Share capital

Ordinary shares are classified as equity. Costs directly attributable to the issue of Ordinary shares are recognised as a deduction from equity.

 

Leasing

The company applies IFRS 16 Leases. The costs of leases of low value items and those with a short term at inception are recognised as incurred.

 

Taxation

Tax expense comprises current and deferred tax. Current and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. As a REIT, the Group is generally not liable to corporation tax.

 

Deferred tax would be recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is recognised for:

 

·      temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting nor taxable profit or loss;

 

·      temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

 

·      taxable temporary differences arising on the initial recognition of goodwill.

 

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised.  Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

 

Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.

 

Share-based payments

The Group allowed certain directors and other individuals to acquire shares in the parent company until the scheme was disbanded on 6 August 2019. The grant date fair value of share-based payment awards granted is recognised as an employee expense with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the options were granted. The fair value was charged as an expense in the income statement over the vesting period and the charge adjusted each year to reflect the expected and actual level of vesting. No adjustment is made to the charge after the vesting date.

 

Further details regarding the conversion and cancellation of the share-based payment awards are included in Note 19.

 

Critical accounting estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income, and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future years affected.

 

Information about critical estimates and assumptions that have the most significant effect on the amounts recognised in the consolidated financial statements and/or have a significant risk of resulting in a material adjustment within the next financial year is as follows:

§  Share-based payments

The total amount to be expensed is determined by reference to the fair value of the options granted. The fair values were estimated using the Black-Scholes valuation model. In arriving at the charge for the period, assumptions are made on the number of options likely to be exercised, the current market value of the shares and the volatility of the market value of the shares. Further details regarding share-based payments are contained in note 19 of the financial statements.

§  Determination of fair values

A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods.

 

When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

 

Investment properties

The Group's investment properties are valued, on the basis of market value. The fair value of investment properties is based either on independent professional valuations in accordance with the Royal Institution of Chartered Surveyors' Appraisal and Valuation Standards 2014 as amended or by the directors, based on market prices for similar items. The Group's investment properties were all valued independently at 30 June 2020 at £23,592,000

 

The directors are of the opinion that the estimates and assumptions that they have used in the valuation of investment properties are appropriate. Further details of the valuation methodology are contained in note 12 of the financial statements.

3)         REVENUE

The Group is involved in UK property ownership, management and letting and is considered to operate in a single geographical and business segment.

 

The total revenue of the Group for the year was derived from its principal activities, being the letting to third parties of, and management of, property assets owned by the Group, and, in certain cases, the management of property assets owned by third parties.

 

The Group's investment property consists of residential housing for the private rented sector and therefore has multiple tenants and as a result does not have any significant customers.

 

 

2020

 

2019

 

£

 

£

Revenue analysed by class of business

 

 

 

Rental income

727,859

 

619,906

Management fees

74,218

 

74,887

Resale commission

39,043

 

62,490

Ground rents

13,655

 

16,649

Leasehold extension income

168,916

 

-

Other income

12,125

 

3,895

 

1,035,816

 

777,827

 

4)            EMPLOYEES AND DIRECTORS

Group

 

2020

 

2019

 

£

 

£

Wages and salaries

635,023

 

657,793

Social security costs

69,628

 

86,735

Pension costs

12,732

 

(506)

 

717,383

 

744,022

The average monthly number of employees during the year was as follows:

 

2020

 

 

2019

 

Directors and management

7

 

5

 

Administration

3

 

3

 

 

10

 

8

 

 

 

 

 

 

           

 

 

 

 

 

2020

£

 

 

2019

£

Directors' remuneration (as per Report of the Directors)

258,387

 

486,300

Share-based payment charge relating to directors (see Note 19)

1,055,755

 

974,199

Remuneration of the highest-paid director

145,853

 

278,200

Amounts paid into a pension scheme of the highest-paid director

-

 

-

The Group directors are considered to be key management personnel. Certain directors and others held Restricted Preference shares in the Company until 6 August 2019, further details of which are contained in note 19 of the financial statements.

Company

 

2020

 

2019

 

£

 

£

Wages and salaries

573,637

 

597,700

Social security costs

60,631

 

78,320

Pension costs

10,110

 

(2,630)

 

644,378

 

673,390

 

The average monthly number of employees during the year was as follows

 

 

 

Directors and management

7

 

5

Administration

1

 

1

 

8

 

6

 

 

 

 

         

 

5)            FINANCE COSTS AND INCOME

 

2020

 

2019

 

£

 

£

Finance costs

 

 

 

Loan interest

483,932

 

732,984

 

 

 

 

Finance income

 

 

 

Bank interest

2,645

 

9,635

 

6)            LOSS BEFORE TAXATION

The loss before taxation is stated after charging:

 

2020

 

2019

 

£

 

£

Hire of plant and machinery

10,437

 

8,230

Other operating leases

20,639

 

23,052

Depreciation - owned assets

23,138

 

18,074

Auditors' remuneration for the Group - audit services for parent company

40,000

 

38,000

                              - audit services for subsidiaries

20,000

 

10,000

                              - taxation advisory services

-

 

29,675

 

Separately disclosed items

At the start of the year the Group incurred significant costs relating to third-party fundraising and issue of shares. The costs to the Group totalled £317,875 (2019 - £407,616).  The Group also incurred significant costs relating to refinancing during the second half of the year, these totalled £137,327 (2019 - £nil). It is considered that the size and nature of these costs are such that they should be disclosed on the face of the Consolidated Statement of Comprehensive Income.

Further information on the share-based payments, which are shown on the face of the Consolidated Statement of Comprehensive Income, can be found in note 19.

Also during the year, the Group has commenced substantial refurbishment work at investment properties owned by K&C (Coleherne) Limited and K&C (Osprey) Limited. The costs incurred in the 2020 financial year amounted to £41,602. The refurbishment costs will continue in the 2021 financial year.

7)            TAXATION

Analysis of tax

 

 

 

 

2020

 

2019

Current tax

£

 

£

UK corporation tax

-

 

-

Deferred tax

-

 

-

 

 

 

 

Total tax

-

 

-

 

Factors affecting the tax expense

The tax assessed for the year is higher than the standard rate of corporation tax in the UK. The difference is explained below:

 

2020

 

2019

 

£

 

£

Loss on ordinary activities before taxation

(3,560,818)

 

(3,737,372)

 

 

 

 

Loss on ordinary activities multiplied by the standard rate of corporation tax in the UK of 19% (2019 - 19%)

 

(676,555)

 

 

(710,101)

Effects of

 

 

 

Expenses not deductible

481,229

 

444,191

Income not taxable

(66,141)

 

(64,455)

Capital losses

-

 

23,238

Losses not recognised in deferred tax 

261,467

 

307,127

Tax credit

-

 

-

8)            LOSS PER SHARE AND NET ASSET VALUE

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of Ordinary shares outstanding during the year.

Fully diluted earnings per share is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential Ordinary shares.

Basic loss per share

 

2020

 

Loss

 

Weighted average number of shares

 

Per share amount

 

£

 

No

 

Pence

Loss attributable to ordinary shareholders

(3,560,818)

 

26,411,154

 

(13.48)

Effect of dilutive securities

-

 

-

 

-

 

 

 

 

 

 

 

2019

 

Loss

 

Weighted average number of shares

 

Per share amount

 

£

 

No

 

Pence

Loss attributable to ordinary shareholders

(3,737,372)

 

15,156,059

 

(24.66)

Effect of dilutive securities

-

 

-

 

-

 

 

Diluted loss per share

 

2020

 

Loss

 

Weighted average number of shares

 

Per share amount

 

£

 

No

 

Pence

Loss attributable to ordinary shareholders

(3,560,818)

 

71,493,121

 

(4.98)

Effect of dilutive securities

-

 

-

 

-

 

 

 

 

 

 

 

2019

 

Loss

 

Weighted average number of shares

 

Per share amount

 

£

 

No

 

Pence

Loss attributable to ordinary shareholders

(3,737,372)

 

15,156,059

 

(24.66)

Effect of dilutive securities

-

 

-

 

-

 

The net asset value is calculated by dividing the equity attributable to ordinary shareholders by the number of Ordinary shares in issue at the balance sheet date.

 

2020

 

Equity

 

Number of shares

 

Per share amount

 

£

 

No

 

Pence

Net asset value

12,140,152

 

27,569,631

 

44.03

 

 

 

 

 

 

 

2019

 

Equity

 

Number of shares

 

Per share amount

 

£

 

No

 

Pence

Net asset value

9,580,098

 

15,791,777

 

60.67

 

9)                 OPERATING LEASES RECEIVABLE

The Group leases residential units within certain of its investment properties under operating leases. The future minimum lease payments receivable under non-cancellable leases are as follows:

 

30 June
2020

 

30 June
2019

 

£

 

£

Within one year

507,513

 

508,096

Between one and five years

239,355

 

469,846

More than 5 years

45,531

 

53,969

Total

792,399

 

1,031,911

Lease revenue is generated from properties owned by K&C (Coleherne) Limited, KCR (Southampton) Limited and KCR (Kite) Limited that are let on short-term tenancy agreements.

10)               LEASING AGREEMENTS

Minimum lease payments, under non-cancellable operating leases, fall due as follows:

 

 

30 June
2020

 

30 June
2019

 

£

 

£

 

 

 

 

Within one year

24,784

 

29,784

Between one and five years

18,809

 

27,167

Total

43,593

 

56,951

 

11)          PROPERTY, PLANT AND EQUIPMENT

GROUP

Fixtures, fittings & computer equipment

 

£

COST

 

At 1 July 2018

49,111

Additions

40,451

At 30 June 2019

89,562

Additions

8,178

At 30 June 2020

97,740

 

 

DEPRECIATION

 

At 1 July 2018

10,118

Charge for year

18,074

At 30 June 2019

28,192

Charge for year

23,138

At 30 June 2020

51,330

 

 

NET BOOK VALUE

 

At 30 June 2020

46,410

At 30 June 2019

61,370

 

 

 

COMPANY

Fixtures, fittings & computer equipment

 

£

COST

 

At 1 July 2018 and 30 June 2019

6,536

Additions

980

At 30 June 2020

7,516

 

 

DEPRECIATION

 

At 1 July 2018

2,552

Charge for year

1,636

At 30 June 2019

4,188

Charge for year

1,229

At 30 June 2020

5,417

 

 

NET BOOK VALUE

 

At 30 June 2020

2,099

At 30 June 2019

2,348

12)          INVESTMENT PROPERTIES

Group

Total
£

COST

 

At 1 July 2018

26,695,000

Additions

24,732

Disposals

(2,800,000)

Revaluations

3,268

At 30 June 2019

23,923,000

Additions

518,888

Disposals

(538,000)

Revaluations

(311,888)

At 30 June 2020

23,592,000

 

 

NET BOOK VALUE

 

At 30 June 2020

23,592,000

 

 

At 30 June 2019

23,923,000

The investment properties disposed of in the prior year arose from the sale of a property SPV (KCR Cygnet).

In July 2020, all properties were valued by professionally qualified independent external valuers in accordance with the Royal Institution of Chartered Surveyors' Appraisal and Valuation Standards 2014 as amended. The  valuation of the investment properties was £23,592,000, which has been included in the financial statements. 

Fair value is based on current prices in an active market for similar properties in the same location and condition. The current price is the estimated amount for which a property could be exchanged between a willing buyer and willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Valuations are based on a market approach which provides an indicative value by comparing the property with other similar properties for which price information is available. Comparisons have been adjusted to reflect differences in age, size, condition, location and any other relevant factors.

The fair value for investment properties has been categorised as Level 3 inputs under IFRS 13. The valuer visited all material properties and his valuations were based on both internal and external site visits.

The valuation technique used in measuring the fair value, as well as the significant inputs and significant unobservable inputs are summarised in the table below:

Fair Value Hierarchy

Valuation Technique

Significant Inputs Used

Significant Unobservable Inputs

Level 3

Income capitalisation and or capital value on a per square foot basis

Adopted gross yield

3.00% - 5.60%

 

 

Adopted rate per square foot

£303 - £1,018

The fair value would increase if market rents were higher and/or the rates per square foot were higher and/or capitalisation rates were lower.

The fair values would decrease if market rents were lower and/or the rates per square foot were lower and/or capitalisation rates were higher.

The revenue earned by the Group from its investment properties and all direct operating expenses incurred on its investment properties are recorded in the Consolidated Statement of Comprehensive Income.

The total rental income in relation to investment properties for the Group equated to £727,859 (2019 - £619,906). The total rental expenses in relation to investment properties for the Group equated to £152,605 (2019 - £183,977).

13)     INVESTMENTS

Company

Shares in group undertakings
£

COST

 

At 1 July 2018

12,086,858

Disposals

(1,380,777)

At 30 June 2019 and 30 June 2020

10,706,081

 

 

NET BOOK VALUE

 

At 30 June 2020

10,706,081

 

 

At 30 June 2019

10,706,081

 

As at 17 September 2020, the Company's investments comprise the following:

Subsidiaries

Holding
%

K&C (Coleherne) Limited

Registered office: UK

100.00

Nature of business

Property letting

Class of shares

Ordinary

 

 

 

K&C (Osprey) Limited

Registered office: UK

100.00

Nature of business

Property letting and property management

Class of shares

Ordinary

 

 

 

KCR (Kite) Limited

Registered office: UK

100.00

Nature of business

Property letting

Class of shares

Ordinary

 

 

 

 

KCR (Southampton) Limited

Registered office: UK

100.00

Nature of business

Property letting

Class of shares

Ordinary

 

 

 

 

K&C (Newbury) Limited

Registered office: UK

100.00

Nature of business

Dormant

Class of shares

Ordinary

 

 

 

Disposal of KCR (Cygnet) Limited

On 20 December 2018, the Company sold the entire issued share capital of KCR (Cygnet) Limited for total consideration of £1,140,000, satisfied by cash of £1,140,000. The assets and liabilities of the subsidiary at the date of disposal were:

 

£

Investment property

2,800,000

Debtors

43,427

Bank loan

(1,293,286)

Other creditors

(69,388)

Net assets disposed of

1,480,753

 

 

Loss on disposal of property

(340,753)

Total consideration

1,140,000

 

 

Satisfied by cash

1,140,000

 

 

 

 

14)          TRADE AND OTHER RECEIVABLES

 

Group

 

Company

 

2020

 

2019

 

2020

 

2019

 

£

 

£

 

£

 

£

Trade debtors

23,460

 

3,000

 

-

 

-

Amounts owed by group undertakings

-

 

-

 

3,812,236

 

1,787,239

Other debtors

19,403

 

34,773

 

748

 

7,500

VAT

604

 

12,271

 

-

 

-

Prepayments

20,422

 

27,034

 

15,087

 

18,665

 

63,889

 

77,078

 

3,828,071

 

1,813,404

The Group and Company's exposure to credit risk is disclosed in note 21.

There is no material difference between the fair value of trade and other receivables and their book value.

All receivables are due within 12 months of 30 June 2020. None of those receivables has been subject to a significant increase in credit risk since initial recognition and, consequently, no expected credit losses have been recognised.

15)                  CASH AND CASH EQUIVALENTS

 

Group

 

Company

 

2020

 

2019

 

2020

 

2019

 

£

 

£

 

£

 

£

Cash in hand

40

 

40

 

-

 

-

Bank accounts

1,535,906

 

29,258

 

1,476,379

 

3,334

 

1,535,946

 

29,298

 

1,476,379

 

3,334

16)                  SHARE CAPITAL

Allotted, issued and fully paid

 

 

 

 

Number

Class

Nominal value

 

30 June
2020

 

30 June
2019

 

 

 

 

£

 

£

27,569,631

Ordinary

£0.10

 

2,756,963

 

1,579,178

-

Restricted Preference

£0.10

 

-

 

450,000

 

 

 

 

2,756,963

 

2,029,178

 

 

2020

Number

2020

£

 

2019 Number

2019

£

Ordinary shares of £0.10 each

 

 

 

 

 

At 1 July

15,791,777

1,579,178

 

9,857,207

985,721

Conversion of Restricted Preference Shares

1,730,765

173,077

 

1,500,000

150,000

Shares issued as loan repayments

577,778

57,778

 

946,286

94,629

Shares issued as creditor payments

447,089

44,708

 

2,200,427

220,042

Shares issued for cash

9,022,222

902,222

 

1,287,857

128,786

At 30 June

27,569,631

2,756,963

 

15,791,777

1,579,178

The Ordinary shares issued during the year, with the exception of the 1,730,765 issued upon conversion of Restricted Preference shares, were issued at £0.45 per share. The Ordinary shares issued upon conversion of Restricted Preference shares were issued at £0.10 per share.

 

2020

Number

2020

£

 

2019 Number

2019

£

Restricted Preference shares of £0.10 each

 

 

 

 

 

At 1 July

4,500,000

450,000

 

4,500,000

450,000

Shares issued for cash

-

-

 

1,500,000

150,000

Conversion to Ordinary shares

(1,730,765)

(173,077)

 

(1,500,000

(150,000)

Gifted back to company (and subsequently cancelled)

 

(2,769,235)

 

(276,923)

 

 

-

 

-

At 30 June

-

-

 

4,500,000

450,000

             

17)                TRADE AND OTHER PAYABLES

 

Group

 

Company

 

2020

 

2019

 

2020

 

2019

Current

£

 

£

 

£

 

£

Trade creditors

112,690

 

358,567

 

80,870

 

351,060

Amounts owed to group undertakings

-

 

-

 

8,210,910

 

423,840

Other taxes and social security

36,043

 

45,253

 

24,819

 

33,291

Other creditors

28,436

 

1,779,710

 

6,131

 

8,063

Accruals and deferred income

197,247

 

553,480

 

100,905

 

521,990

 

374,416

 

2,737,010

 

8,423,635

 

1,338,244

Other creditors include £nil (2019 - £1,738,076) owed to the vendor on the purchase of the investment property within KCR (Southampton) Limited.

The Group and Company exposure to liquidity risk related to trade and other payables is disclosed in note 21.

There is no material difference between the fair value of trade and other payables and their book value.

Amounts owed to group undertakings are repayable on demand.

18)                  FINANCIAL LIABILITIES - BORROWINGS

 

Group

 

Company

 

2020

 

2019

 

2020

 

2019

 

£

 

£

 

£

 

£

Current

 

 

 

 

 

 

 

Bank loans

-

 

82,224

 

-

 

82,224

Other loans

1,671,258

 

1,810,070

 

85,070

 

1,810,070

 

1,671,258

 

1,892,294

 

85,070

 

1,892,294

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

Bank loans

7,868,169

 

4,756,956

 

-

 

4,756,956

Other loans

3,184,250

 

5,124,388

 

-

 

-

 

11,052,419

 

9,881,344

 

-

 

4,756,956

 

Terms and debt repayment schedule

2020

 

1 year or less

 

1-2 years

 

2-5 years

 

More than 5 years

 

Totals

Group

£

 

£

 

£

 

£

 

£

Bank loans

275,386

 

275,386

 

825,195

 

15,375,714

 

16,751,681

Other loans

1,891,423

 

175,134

 

525,401

 

3,782,624

 

6,374,582

 

2,166,809

 

450,520

 

1,350,596

 

19,158,338

 

23,126,263

Company

 

 

 

 

 

 

 

 

 

Other loans

85,070

 

-

 

-

 

-

 

85,070

 

85,070

 

-

 

-

 

-

 

85,070

 

2019

 

1 year or less

 

1-2 years

 

2-5 years

 

More than 5 years

 

Totals

Group

£

 

£

 

£

 

£

 

£

Bank loans

265,740

 

265,740

 

797,220

 

6,288,388

 

7,617,088

Other loans

2,191,102

 

2,176,063

 

525,401

 

3,957,757

 

8,850,323

 

2,456,842

 

2,441,803

 

1,322,621

 

10,246,145

 

16,467,411

Company

 

 

 

 

 

 

 

 

 

Bank loans

265,740

 

265,740

 

797,220

 

6,288,388

 

7,617,088

Other loans

1,979,796

 

-

 

-

 

-

 

1,979,796

 

2,245,536

 

265,740

 

797,220

 

6,288,388

 

9,596,884

Details of the principal loans are as follows:

a)              On 28 June 2018, the Company took out a new loan of £4,930,000, with Metro Bank plc, repayable by 300 instalments of £22,145 and a final instalment of £1,239,328. The loan was secured by a first debenture over all assets and undertakings of the Company, a first legal charge over the freehold properties known as 272 Ladbroke Grove, 282 Ladbroke Grove and 284 Ladbroke Grove and the leasehold premises known as Flat 9 Lomond Court, and a cross-guarantee over the aforementioned properties. It was also secured by a cross-guarantee from K&C (Coleherne) Limited over the freehold property known as 25 Coleherne Road and a debenture over the assets and undertakings of K&C (Coleherne) Limited.  The loan was also secured by a pledge of shares of K&C (Coleherne) Limited and KCR (Kite) Limited. The loan was repaid in full during the 2020 financial year when the Group refinanced with Hodge Bank.

b)             A three-year loan of £1,995,000 was entered into during the 2018 financial year. The loan was repayable by 36 monthly instalments of £9,144 and a final instalment of £1,940,138. On 5 September 2019, the company repaid £353,950. The balance outstanding at 30 June 2020 was £1,586,188. The monthly repayments from that date reduced to £7,568. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 5.50 per cent per annum.  The loan is secured by a fixed and floating charge over all the property and assets of K&C (Osprey) Limited, including the property known as Heathside, 562 Finchley Road.

c)              On 24 June 2018, the Company entered into a loan agreement arranged by DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, with certain investors. The loan was for £1,475,000 and was subject to an interest rate of 12 per cent per annum.  The loan was to be repaid within 300 days of the initial drawdown date of 29 June 2018. The loan was extended during the previous financial year and from 10 April 2019, the interest rate was increased to 14 per cent per annum. In the 2020 financial year, the company incurred interest of £30,196 on the loan. On 6 August 2019 the loan and all outstanding interest and fees were repaid. The repayment consisted of £1,425,000 cash and £129,311 of Ordinary shares.

d)             During the previous financial year, the Company issued several convertible loan notes, totalling £200,000, the debt element of which totalled £185,070.  The convertible loan notes had a redemption date of 30 June 2020. £100,000 of the convertible loan notes was converted to Ordinary shares on 6 August 2019. At 30 June 2020 the debt element outstanding was £85,070. The loan was settled in full in July 2020.

e)             During the previous year, Oliver Vaughan, a director of the Company, loaned the Company £150,000. The loan was unsecured and was due for repayment on 15 May 2019. The loan was extended in June 2019. Upon extension of the loan, the lender charged the Company a fee of £10,000. The loan was interest free. £110,000 of the loan was repaid via the issue of Ordinary shares in the Company on 6 August 2019. The remaining £50,000 was repaid on 8 August 2019.

f)              On 4 December 2018, KCR (Southampton) Limited took out a new loan of £3,184,250, with Lendco Limited. The term of the loan was 10 years. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 3.19 per cent for the first 24 months. Interest for the remainder of the term will be charged at 4.79 per cent above LIBOR.  The loan was secured by a first legal mortgage and a first fixed charge over the land at Block B, Chapel Riverside, Endle Street, Southampton. The balance outstanding as at 30 June 2020 was £3,184,250.

g)              On 10 February 2020, K&C (Coleherne) Limited took out a new loan of £2,743,359 with Hodge Bank. The term of the loan is 25 years. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 3.5 per cent for the first 60 months. After this period the interest rate charged will be a standard variable rate. The loan is secured by a freehold charge over 25 Coleherne Road. The balance outstanding at 30 June 2020 was £2,743,359.

h)             On 10 February 2020, KCR (Kite) Limited took out a new loan of £5,124,810 with Hodge Bank. The term of the loan is 25 years. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 3.5 per cent for the first 60 months. After this period the interest rate charged will be a standard variable rate. The loan is secured by a freehold charge over 25 Coleherne Road. The balance outstanding at 30 June 2020 was £5,124,810.

 

Reconciliation of net movement in cash

Group

 

 

Net cash at 1 July 2019

 

Cash flow

Loans received in year

 

Repayments in year

Other non-cash movements

Net cash

at 30 June 2020

 

£

£

£

£

 

£

 

 

 

 

 

 

 

Cash at bank and in hand

29,298

1,506,648

   -

-

-

1,535,946

Borrowings

(11,773,638)

-

(7,868,169)

6,658,130

260,000

(12,723,677)

Total financial liabilities

(11,744,340)

1,506,648

(7,868,169)

6,658,130

260,000

(11,187,731)

 

 

 

 

Net cash at 1 July 2018

 

Cash flow

Loans received in year

 

Repayments in year

Other

non-cash movements

Net cash

at 30 June 2019

 

£

£

£

£

 

£

 

 

 

 

 

 

 

Cash at bank and in hand

6,425

22,873

   -

-

-

29,298

Borrowings

(10,420,535)

-

(3,434,250)

796,079

1,285,068

(11,773,638)

Total financial liabilities

(10,414,110)

22,873

(3,434,250)

796,079

1,285,068

(11,744,340)

 

Company

 

 

Net cash at 1 July 2019

 

 

Cash flow

 

Repayments in year

Other

non-cash movements

 

Net cash

at 30 June 2020

 

£

£

£

£

£

 

 

 

 

 

 

Cash at bank and in hand

3,334

1,473,045

   -

-

1,476,379

Borrowings

(6,649,250)

-

6,304,180

260,000

(85,070)

Total financial liabilities

(6,645,916)

1,473,045

6,304,180

260,000

1,391,309

 

 

 

Net cash at 1 July 2018

 

 

Cash flow

 

Repayments in year

Other

non-cash movements

 

Net cash

at 30 June 2019

 

£

£

£

£

£

 

 

 

 

 

 

Cash at bank and in hand

77

3,257

-

-

3,334

Borrowings

(7,180,397)

-

546,079

(14,932)

(6,649,250)

Total financial liabilities

(7,180,320)

3,257

546,079

(14,932)

(6,645,916)

19)          SHARE-BASED PAYMENT TRANSACTIONS

During the year ended 30 June 2020, the Company had one share-based payment arrangement in place, which is described below:

 

Restricted Preference shares

Outstanding at 1 July 2019

4,500,000

Exercised during the year

(1,730,765)

Gifted to the company during the year

(2,769,235)

Outstanding at 30 June 2020

-

Restricted Preference shares:

Restricted Preference shares had been acquired by certain directors and other senior managers. The Restricted Preference shares were purchased at nominal value. Details of the Restricted Preference shares held by the directors, along with movements in the year, can be found further in this note and also in the Report of the Directors. Upon the achievement by the Group of certain defined milestones, related to the NAV of the Group, the Restricted Preference shares of £0.10 were able to be converted into Ordinary shares of £0.10, for no further consideration. The following table shows the shares held at the year end, along with movements in the year:

 

 

Restricted Preference Shares

 

 

 

At 30 June 2019

Converted to ordinary shares in the year

Gifted to company in year

 

At 30 June 2020

Name

 

No.

No

No.

No.

Dominic White

 

1,265,357

(486,675)

(778,682)

-

Timothy James

 

905,357

(348,214)

(557,143)

-

Oliver Vaughan

 

805,357

(309,752)

(495,605)

-

James Cane

 

30,000

(11,538)

(18,462)

-

Timothy Oakley

 

465,357

(178,983)

(286,374)

-

Christopher James

 

614,286

(236,263)

(378,023)

-

Employees

 

414,286

(159,340)

(254,946)

-

Total

 

4,500,000

(1,730,765)

(2,769,235)

-

  

       The estimated fair value of each Restricted Preference share acquired is as follows:


 

Restricted Preference shares

Fair value of share option/warrant (£)

0.688-0.787

 

The fair values were estimated using the Black-Scholes valuation model. The following table lists the inputs to the model used:

 

Restricted Preference shares

Share price at grant date (£)

0.8-0.9

Exercise price (£)

0.1

Dividend yield (%)

0.00

Expected volatility (%)

51.86-63.79

Risk-free interest rate (%)

0.88-1.57

Expected life of share options/warrants (years)

1.3-8.8

The expected lives of the Restricted Preference shares were based on historical data and then-current expectations and were not indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility of comparator companies over the period similar to the life of the Restricted Preference shares is indicative of future trends, which may not necessarily be the actual outcome.

On 6 August 2019, 1,730,765 of the Restricted Preference shares were converted into Ordinary shares. The remaining 2,769,235 Restricted Preference shares were gifted back to the Company for no consideration as part of the Torchlight transaction. The restricted preference shares gifted back to the company were subsequently cancelled.

The conversion and cancellation of the restricted preference shares has been treated as an acceleration of vesting and therefore the amount that would have been recognised for services received over the remainder of the vesting period have been recognised immediately, in the 2020 financial year. The expense recognised during the year is shown in the following table:

 

30 June 2020

 

30 June 2019

 

£

 

£

Expenses arising from Restricted Preference shares

1,599,681

 

1,387,441

Total expense from share-based payments

1,599,681

 

1,387,441

20)                  FINANCIAL INSTRUMENTS

The Group's financial assets, as defined under IFRS 9, and their estimated carrying amount are as follows:

 

Group

 

Company

 

2020

 

2019

 

2020

 

2019

 

£

 

£

 

£

 

£

Carrying amount of financial assets at amortised cost

 

 

 

 

 

 

 

Trade and other receivables

    63,889

 

77,078

 

3,828,071

 

1,813,404

Cash at bank and in hand

1,535,946

 

29,298

 

1,476,379

 

3,334

 

 

 

 

 

 

 

 

21)          FINANCIAL RISK MANAGEMENT

The Company's directors have overall responsibility for the establishment and oversight of the Group's risk management framework.

The Company's and Group's risk management policies are established to identify and analyse the risks faced by the Company and Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect the changes in market conditions and the Group's activities. The Company and Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Company and Group has exposure to the following risks arising from financial instruments:

o    credit risk

o    liquidity risk

o    market risk

Capital risk management

The Company and Group's objective when managing capital is to safeguard its accumulated capital in order to provide an adequate return to shareholders by maintaining a sufficient level of funds, in order to support continued operations.

The Company and Group considers its capital to comprise equity capital less accumulated losses.

The share premium reserve includes premiums received on the issue of share capital during the year.

The Group refinanced their loan portfolio in the 2020 financial year. As a result, the Group entered into new loan agreements with Hodge Bank. The total loans with Hodge Bank at 30 June 2020 totalled £7,868,169. The loan agreements contain the following covenants:

The maximum available loan amount relative to the value of the properties will not be, at any time, during the term of the loan, more than 75% of the market value of the properties (as determined from time to time in accordance with the lenders requirements by a valuer appointed by the lender) ; and

The aggregate of all rental income from the properties shall not, in any twelve month period, be less than 125% of the aggregate of all scheduled interest instalments or other payments due under the loan in that period.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations.

The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk is as reported in the statement of financial position.

Liquidity risk

Liquidity risk is the risk that the Company and Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company's and Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's and Group's reputation.

The contractual maturities of financial liabilities are disclosed in note 18.

Market risk

Market risk is the risk that changes in market prices, such as interest rate and equity prices will affect the Group and the Company's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return.

Sensitivity

Interest rate sensitivity:

At 30 June 2020, if interest rates had been 0.5 percentage point higher and all other variables were held constant, it is estimated that the Group's loss before tax would increase to £3,604,930 (2019 - £3,803,492).  This is attributable to the Group's exposure on its borrowings and is based on the change taking place at the beginning of the financial year and held constant throughout the reporting period.

22)          RELATED PARTIES

On 24 June 2018, the Company entered into a loan agreement arranged by DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, with certain investors. The loan was for £1,475,000 and was subject to an interest rate of 12 per cent per annum.  The loan was to be repaid within 300 days of the initial drawdown date of 29 June 2018. The loan was extended during the previous financial year and from 10 April 2019, the interest rate was increased to 14 per cent per annum. In the 2020 financial year, the company incurred interest of £30,196 on the loan. On 6 August 2019 the loan and all outstanding interest and fees were repaid. The repayment consisted of £1,425,000 cash and £129,311 of Ordinary shares.

During the year, the Group paid DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, fees of £36,000 plus VAT of £7,200 (2019 - £36,000 and VAT of £7,200). At the year end, £7,200 was outstanding and included in trade and other payables.

During the previous year, Oliver Vaughan, a director of the Company, loaned the Company £150,000. The loan was unsecured and was due for repayment on 15 May 2019. The loan was extended in June 2019. Upon extension of the loan, the lender charged the Company a fee of £10,000. The loan was interest free. £110,000 of the loan was repaid via the issue of Ordinary shares in the Company on 6 August 2019. The remaining £50,000 was repaid on 8 August 2019.

During the previous year, the Company issued £50,000 of convertible loan notes to Kimono Investments Limited, an entity in which Oliver Vaughan's children have a financial interest. The Company was charged £340 interest in the year. The principal loan was repaid on 22 August 2019. The repayment consisted of £50,000 of Ordinary shares.

During the previous year, the Company issued convertible loan notes to the White Amba Pension Scheme of £25,000. The Company was charged £170 interest in the year. The principal loan was repaid on 22 August 2019. The repayment consisted of £25,000 of Ordinary shares.

During the previous year, the Company issued convertible loan notes to Katie James, relative of Timothy James of £25,000. The Company was charged £170 interest in the year. The principal loan was repaid on 22 August 2019. The repayment consisted of £25,000 of Ordinary shares.

During the year, Timothy Oakley, a director of a number of subsidiary companies, received remuneration of £10,541 (2019 - £30,200). During the previous year Timothy Oakley also loaned the Company £50,000 as part of the loan arranged by DGS Capital Partners LLP, as detailed above. Interest of £595 was charged to the Company in the year. The loan was repaid on 22 August 2019. The repayment consisted of £50,000 of Ordinary shares.

During the year, Christopher James, a director of a number of subsidiary companies, received remuneration of £70,881 (2019 - £51,200).

 

23)         POST-BALANCE SHEET EVENTS

 

In July 2020, the remaining convertible loan notes of £100,000 that were outstanding at 30 June 2020 were repaid in full.

 

On 13 July 2020, following an internal strategic and legal review, the Group determined that it was no longer necessary for it to maintain its AIFM status. The Group has now deregistered as an AIFM.

                                                                                                      

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