Full Year results for the year ended 31 March 2021

18 May 2021, 07:00

Source - LSE Regulatory

RNS Number : 9143Y

McKay Securities Plc

18 May 2021

SOUTH EAST REGIONAL FOCUS, UNDERPINNED BY ROBUST TRADING AND ACHIEVEMENT OF KEY MILESTONES, LEAVES McKAY WELL PLACED FOR THE FUTURE

McKay Securities Plc, the only Real Estate Investment Trust (REIT) specialising exclusively in the South East and London office, industrial and logistics markets today announces its Full Year results for the year ended 31 March 2021.

Financial Highlights

· Adjusted profit before tax up 2.4% to £9.96 million (31 March 2020: £9.73 million)

· Adjusted earnings per share increased by 2.3% to 10.56 pence (31 March 2020: 10.32 pence)

· IFRS loss before tax of £16.58 million (31 March 2020: £9.49 million profit) due to a valuation deficit compared with a surplus in the comparable period

· EPRA EPS: 10.21 pence (31 March 2020: 10.60 pence)

· Gross rental income down 2.1% to £24.62 million (31 March 2020: £25.16 million) following disposals in the current and prior period

· Portfolio ERV £31.45 million (31 March 2020 £34.91 million) down 2.0% on a like for like basis

· IFRS NAV per share down 5.8% to 309 pence (31 March 2020: 328 pence)

· Portfolio valuation of £437.90 million (31 March 2020: £510.00 million), resulting in a 4.7% valuation deficit of £21.58 million

· EPRA NTA down 6.1% to 309 pence per share (31 March 2020: 329 pence)

· LTV reduced to 32.4% (31 March 2020: 37.6%) following the disposal of 30 Lombard Street, EC3 for £70.06 million (net)

· Cash and undrawn facilities of £103.25 million, well placed for new opportunities

· Share buy-back programme of up to £10.00 million (announced in March 2021) underway, accretive to both NAV and EPS

· 538,542 shares acquired by the year-end at a cost of £1.15 million

· Final dividend up 25.0% to 5.5 pence per share (31 March 2020: 4.4 pps), making a total dividend for the year of 8.3 pence per share (31 March 2020: 7.2 pps)

Portfolio and Operational Highlights

· ESG - Defined pathway towards reducing carbon across portfolio

o Company entering the next stage of its ESG journey through the announcement today of its 2021 Net Zero Carbon Pathway which provides details of its target to reduce the use of carbon across the portfolio

o ESG ambitions build on established track record, recognised through achieving a GRESB (Global Real Estate Sustainability Benchmark) Green-Star award for the fifth year running, and BREEAM Excellent rating at 135 Theale Logistics Park

· Strong rent collection and robust leasing activity

o Strong rent collection throughout the period, with 98.0% of contracted rent received or agreed

o 18 open market lettings completed at a combined contracted rent of £2.56 million pa, marginally ahead of ERV

o 10 year lease completed with Amazon at 135 Theale Logistics Park (135,095 sq ft)

o 34 lease renewals at a contracted annual rent of £3.87 million pa, securing a 10.4% uplift, including 37,400 sq ft at Swan Court, Wimbledon to D&G on a new 10 year lease

o Circa 75% of occupiers choosing to remain with McKay at lease break or expiry over the period despite the challenging backdrop

o Portfolio occupancy decreased slightly from 88.7% to 85.3%, providing scope to grow income through planned asset management initiatives

· Acquisitions and active asset management driving future rental growth:

o Acquisition of Willoughby Logistics Park, Bracknell, comprising two fully let modern, self-contained units totalling 54,157 sq ft for £10.00 million (5.6% yield)

o McKay+ refurbishments continue to attract new occupiers to the portfolio, including Maersk Line UK Limited who signed a five year lease on the 6^th floor of Portsoken House, EC3 at a contracted rent of £0.98 million pa

o Refurbishment of two floors at Corinthian House, Croydon completed with terms agreed on 51.0% of the new accommodation above ERV, reflecting McKay's ability to grow income through active asset management

o Lease expiries at Sopwith Drive, Weybridge (logistics: 63,140 sq ft) in March 2021 and at Great Brighams Mead, Reading (office: 84,840 sq ft) in April 2022 provide pipeline scope for future refurbishment, redevelopment or sale

o 28.0% of portfolio now weighted towards the industrial and logistics sector (31 March 2020: 18.0%), which continues to benefit from the accelerated rise in e-commerce

Simon Perkins, Chief Executive of McKay, said:

"McKay has delivered another positive set of results against a market backdrop that continues to be dominated by Covid-19, reflecting the portfolio's resilience during these challenging market conditions. As a result of our active asset management efforts, we exit the third lock down with a reduced LTV compared with twelve months ago, having completed a meaningful level of lettings and lease renewals at or above ERV, as well as achieving a number of substantial milestones. These included the sale of 30 Lombard Street, EC3; the letting of Theale Logistics Park to Amazon within six months of completion; and the acquisition of Willoughby Logistics Park, Bracknell, which has increased our portfolio weighting in the industrial and logistics sector to 28.0%.

"The successes we have achieved in office leasing this year reinforces our conviction that the office will continue to play an essential role within corporate life, while our assets, due to both their location and specification, remain well placed to support hybrid working practices as these evolve. We remain active in recycling our capital to drive income potential both in terms of refurbishment of vacant floorspace and acquisitions. The pace of recovery and market sentiment will influence the speed at which we are able to recycle capital from recent disposals. However with our South East focus, portfolio strength and substantial cash and undrawn facilities, we believe we are well positioned to benefit from this recovery and to respond quickly as opportunities present themselves."

Webcast Conference

There will be an audio webcast presentation for analysts at 11.00am today, hosted by Simon Perkins, Chief Executive Officer of McKay Securities, together with Giles Salmon, Chief Financial Officer, and Tom Elliott, Property Director and Head of Sustainability.

If you would like to join the webcast please use the registration link below:

https://webcasting.brrmedia.co.uk/broadcast/608adfff0386285386ccc59c

Date: 18 May 2021

- ENDS -

NOTE:

For reconciliation of adjusted profit before tax see note 4 below

For reconciliation of adjusted basic earnings per share see note 8 below

For reconciliation of NAV (EPRA) see note 21 below

LTV - Loan to value, being net debt as percentage of portfolio value

For further information please contact:

McKay Securities Plc	FTI Consulting
Simon Perkins, CEO	Dido Laurimore, Talia Jessener
Giles Salmon, CFO 01189 502333	020 3727 1000 McKay@fticonsulting.com

About McKay

McKay Securities Plc is a commercial property investment company with Real Estate Investment Trust (REIT) status, listed on the main market of the London Stock Exchange. It specialises in the development and refurbishment of office, industrial and logistics buildings within proven markets of South East England and London. The portfolio at 31 March 2021 comprised 33 properties, valued at £437.90 million, located in established areas, predominantly along the M4 corridor, where McKay has deep expertise, with a focus on growing satellite towns benefitting from strong connectivity to London and robust demand amongst leading occupiers.

Forward looking statements

This announcement is for information purposes only and contains certain forward-looking statements which, by their nature, involve risk and uncertainty because they relate to or depend upon future events and circumstances.

There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by these forward looking statements, including a number of factors outside McKay Securities Plc's control. All forward-looking statements are based upon information known to McKay Securities Plc on the date of this announcement and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. McKay Securities Plc gives no undertaking to update forward-looking statements whether as a result of new information, future events or otherwise. Information contained in this announcement relating to the Company should not be relied upon as an indicator of future performance.

Details of the programme for the payment of the final dividend of the Ordinary Shares is as follows:

Ex dividend date	27 May 2021
Record Date for the final dividend	28 May 2021
Report and Financial Statements dispatched to Shareholders with Notice of AGM	2 June 2021
Annual General Meeting to be held at The Royal Thames Yacht Club, 60 Knightsbridge, London SW1X 7LF	1 July 2021
Final dividend paid	22 July 2021

A final dividend of 5.5 pence per share is recommended by the Board making a total dividend for the year of 8.3 pence per share (31 March 2020: 7.2 pps). The final dividend will be paid as an Ordinary Dividend.

Chair's Statement

Overview

What an extraordinary year we have lived through! McKay has navigated this challenging environment well and so I am pleased to be able to report on a positive set of results which reflect a strong operational performance and the achievement of significant milestones following the sale of 30 Lombard Street, EC3 and the letting of 135 Theale Logistics Park, both on excellent terms.

Our strategic focus on the office, industrial and logistics sectors of the South East and London, the most economically resilient regions in the country, and a lack of exposure to the retail and hospitality sectors, has insulated us from the worst impact of the Covid-19 pandemic. Our industrial and logistics assets have performed well, benefitting from both our in-house management initiatives and the increase in on-line retail activity, with higher occupational demand driving rental and capital growth. The office market has been more challenging, and many of our buildings have not been occupied by their tenants for over a year due to the Government's 'work from home' policy. This has contributed to a reduction in office values, and held back our ability to maintain business growth.

The increase in working from home during the pandemic has generated much debate over future demand for the office, which is clearly of key importance to us with a 66.6% portfolio weighting to the sector. Working practices will continue to evolve, and whilst there will inevitably be change, we remain confident that the office market will recover as the country is released from lockdown. Our South East office assets are well placed to meet this evolving demand, strategically positioned to offer high quality, flexible business space with good environmental credentials in well established regional centres.

During the year under review, the three strategic priorities that we have been focused on in view of the Covid-19 trading environment were:

• Continued operational efficiency

• Positioning for growth post Covid-19

• Continued delivery of our ESG commitments

Continued operational efficiency

With the country in lockdown and at a standstill at the beginning of the financial year, our team responded quickly and effectively to maintain operational efficiency and to protect the profitability of the business. This was achieved without government aid and without the need to furlough any of our employees. The relationships built up over many years with our occupiers as a result of our in-house management model helped during this challenging period, enabling us to collect 96.0% of contracted rent for the financial year (with a further 2.0% due under agreed payment plans), and to maintain a high 74.3% occupier retention rate at lease break and expiry, which compares to 80.0% retention in 2020.

This activity, combined with the benefit of income from recent acquisitions and developments, contributed to stable net rental income for the year of £21.63 million (31 March 2020: £21.98 million) and a 2.4% increase in adjusted profit before tax to £9.96 million (31 March 2020: £9.73 million).

The independent valuation of the portfolio at the end of the period totalled £437.90 million (31 March 2020: £510.00 million). After taking into account capital expenditure, disposals and acquisitions, this reflects a 4.7% valuation deficit for the year of £21.58 million (31 March 2020: £0.11 million surplus), with the pace of decline slowing in H2 following a 3.4% deficit recorded in the first half. The deficit for the year, which is covered in more detail in the Property and Finance Review, was mainly due to the reduction in the valuation of our office assets. This was partially offset by a positive performance from our industrial and logistics assets, which now account for £122.4 million (28.0%) of the portfolio (31 March 2020: 18.1%).

Our weighting to the industrial and logistics sector has increased following the acquisition of Willoughby Logistics Park, Bracknell and a strong performance on completion of development and the letting at 135 Theale Logistics Park, Reading. The timing of this scheme has proved excellent, and we secured a letting of the whole asset to Amazon on a ten year term shortly after practical completion, at a rent of £1.51 million pa. The quality of the scheme and the letting terms achieved resulted in a 42.7% (£10.88 million) valuation surplus for the period, and a 49.5% profit on cost for the scheme.

Inclusion of the unrealised valuation movement is primarily responsible for the IFRS loss before tax of £16.58 million (31 March 2020: £9.49 million profit), and the 6.1% reduction in EPRA net tangible asset value per share ('EPRA NTA') to 309 pence (31 March 2020: 329 pence). IFRS NAV per share reduced by 5.8% to 309 pence (31 March 2020: 328 pence).

Growth prospects post pandemic

We began the year with cash and undrawn facilities of £53.25 million providing us with the headroom for acquisitions, or other value enhancing opportunities. The sale of 30 Lombard Street, EC3 which completed in September 2020, achieved an excellent headline price of £76.50 million, reflecting an initial yield of 4.2%. This sale significantly strengthened the balance sheet at the end of the year with reduced loan to value ('LTV') of 32.4% (31 March 2020: 37.6%) and increased cash and undrawn facilities for opportunities to £103.25 million.

Despite the negative impact on the economy of Covid-19, there have been few forced sellers in the market so far. Acquisition opportunities in the office sector have been limited as vendors wait for buildings to be reoccupied, whereas the high investor demand for warehouse and logistics assets has pushed pricing to record levels. Over the period we adopted a patient and selective approach, looking for accretive opportunities in our core South East and London markets to offset the £1.35 million of rental income that 30 Lombard Street contributed to the year, whilst maintaining a prudent balance sheet.

This approach led to the off-market acquisition of Willoughby Logistics Park, Bracknell (54,157 sq ft) in August 2020 for £10.00 million at a 5.6% yield. The two units are let until 2024 and provide scope for rental growth at expiry and medium term redevelopment potential.

Within the existing portfolio, we invested £6.71 million across a range of refurbishment projects to upgrade both the quality and environmental credentials of our assets. These targeted works have improved the rental values and letting prospects of these assets and have contributed to the 22.8% (£5.84 million pa) reversionary income potential remaining in the portfolio at the end of the period, being the difference between contracted rent of £25.61 million pa and the £31.45 million pa full rental value ('ERV') of the portfolio. This portfolio potential includes our logistics asset at Sopwith Drive, Weybridge (63,140 sq ft) which was vacated by a parcel distributor at the end of the period, and two floors at our office asset Swan Court, Wimbledon (16,400 sq ft) that we took back as part of the successful lease re-gear in January 2021. Refurbishment works and possible redevelopment in the case of Weybridge are planned to secure a combined ERV of £1.63 million pa.

Looking further ahead, it has now been confirmed that our tenant at Great Brighams Mead in central Reading (84,840 sq ft), which has been in occupation since the Company developed this office building in 2000, will vacate at lease expiry in March 2022. We are looking at a range of possible alternatives including a comprehensive office refurbishment, conversion to residential and other alternative uses which will determine whether we retain or sell the asset.

We have been frustrated by the share price discount resulting first from Brexit and then Covid-19 which triggered a significant decrease in share prices across the sector, which subsequently recovered to varying degrees dependent on market exposure. As one of a number of possible initiatives to help close the discount, we reviewed the possibility of a share buy-back throughout the year whilst waiting to establish a better feel for how Covid-19 was likely to impact on market conditions and business progress. In March 2021, with improved clarity on these issues in particular, we announced a share buy-back up to the value of £10.00 million, which equates to circa. 5.0% of the issued share capital.

By the year end, the buy-back programme had acquired 538,542 shares at an average price of 213 pence per share, which has proved accretive to both net asset value and earnings per share. We will keep the programme under review, ensuring that it continues as an efficient and effective means of generating value for shareholders.

Continued focus on our ESG commitments

ESG considerations have been a part of our decision making since we adopted our first sustainability strategy in 2013 in response to the shift in market demand to more environmentally friendly buildings. We reviewed our approach in 2019 and introduced a new ESG framework: "The Right Choice for a Sustainable Business", with three key priorities:

• Low carbon, resource efficient and healthy buildings

• A customer-focused and flexible landlord

• A progressive and transparent business

These priorities are integral to our strategy, supporting our commercial objectives and targeting the highest standards of corporate governance. Our positive performance against these priorities and externally set independent targets is set out in detail in our 2021 Sustainability Review in our Annual Report and Financial Statements, and on our website. Of particular note is the achievement of the high 4-star rating in our 2020 GRESB score, the BREEAM excellent rating achieved at 135 Theale Logistics Park, and the target to reduce the use of carbon across our business, which we plan to deliver with our 2021 Carbon Net Zero Policy announced today.

Board and employees

I am very pleased to welcome Helen Sachdev to the Board as an independent Non-Executive Director with effect from April 2021. Helen has considerable experience gained from a range of sectors, including real estate, and her knowledge and experience will be very helpful as we all emerge from the current pandemic. After a period of stability, the appointment marks the first stage in succession planning to maintain an independent board.

I would like to thank my Board colleagues for their support, particularly through the early stages of the pandemic when we held weekly meetings to discuss the impact on the business.

The pandemic created substantial challenges for our employees, and I would also like to thank them for their dedication and the impressive results that their efforts have delivered.

Dividend

The Board is recommending a final dividend of 5.5 pence per share. This represents a 25.0%% increase compared with the final dividend paid last year (31 March 2020: 4.4 pence), and takes the full year dividend to 8.3 pence per share, an increase of 15.3% over last year (31 March 2020: 7.2 pence).

Although we remain in a period of economic uncertainty, and the full impact of the pandemic remains to be seen, the Board considers this increase is justified based on the strong operational performance over the period, and the improved visibility of market conditions.

Outlook

As we work our way out of the third lockdown, there are clear signs that the speed of the national vaccine roll out is having a positive effect on the economy and corporate confidence. Current Government policy allows a full return to the workplace from mid June, and as this gathers pace, we expect activity across our markets to increase.

We believe that this activity will confirm the essential role of the office in corporate life, benefitting our office assets which are well placed in terms of specification and geography to support the hybrid working practices that will continue to evolve.

The pace of recovery and future market sentiment will influence our ability to replace earnings from recent disposals with new lettings and acquisitions. With our well positioned portfolio and substantial cash and undrawn facilities, we have maintained the ability to benefit from this recovery and to respond as opportunities present themselves.

Richard Grainger

Chair

Chief Executive's Review

Overview

Our initial challenge this year was to make the necessary operational adjustments in response to Covid-19 to maintain the safety of our team and occupiers, whilst ensuring the efficient running of the business.

The operating system that we put in place worked effectively from the outset, with recent investment in our IT systems enabling all staff to access Company networks remotely without difficulty. In between lockdowns, all but the most vulnerable of our team were working from the office, facilitated by being able to drive to work to our self-contained and secure low rise headquarters in Reading.

Faced with so much uncertainly, it was reassuring that the business was well capitalised and that our portfolio was focused in well established centres of the South East and London, with occupier diversity across the office, industrial and logistics sectors.

Moreover, we were pleased to complete the sale of 30 Lombard Street, EC3 and to let 135 Theale Logistics Park on such good terms.

The benefits of our in-house, internal management model were particularly apparent during the crisis. The close work with our occupiers secured high levels of rent collection and occupier retention, and resulted in many positive endorsements in our Occupier Survey carried out in mid 2020. In addition we continued to invest in the portfolio to benefit from likely trends in office occupier demand, particularly with our McKay+ offer and sustainable, flexible, business space.

Continued focus on the South East and London

We remain confident in our strategic focus in our core markets. We have extensive knowledge of these markets which are supported by a strong regional economy that contributes 39.0% of the national GVA, built on specialisation in high value and high technology sectors. The two regions support 9.4 million workers, 30% of the national total, and have a higher density of businesses than in the rest of the country and we believe this should support economic recovery and occupier demand as pandemic restrictions ease.

Market review

From the first lockdown at the beginning of the year, the office market stalled, whereas the industrial and logistics sector continued to operate benefitting from the boom in on-line shopping. This mix of fortunes contributed to a 2.6% reduction in our office portfolio ERV over the period and an 11.8% valuation deficit, whereas the ERV for our industrial and logistics assets held over the period (excluding developments) increased by 2.6% and their valuation by 9.0%. Overall, the portfolio valuation deficit was 4.7% (MSCI All Property Index: -2.9%) and the ERV for properties held over the period was down 2.0% (MSCI All Property Index: -2.0%).

The valuation deficit of our office portfolio was greater than the -6.1% MSCI All Property Index performance, which contributed to the relative under performance of the portfolio as a whole. This was due in part to the number of planned office refurbishment projects either completed or underway where we are carrying out upgrading works to improve rental prospects, and to deliver future value. However current values were particularly exposed to more cautious valuation assumptions to reflect the Covid-19 trading environment. This also applied to forthcoming lease expiries, as covered in more detail in the Property and Financial Review.

The fall in office values was partially offset by the valuation gains in our industrial and logistics assets, including a substantial 42.7% (£10.88 million) surplus following the letting success at 135 Theale Logistics Park. This took the valuation surplus for this segment of the portfolio to 18.1%.

Investor appetite reflected these sector variations, with demand from a wide range of investors outstripping the supply of industrial and logistics opportunities and pushing pricing to record levels. With the office market on pause, office transactions have been limited and values have fallen, with the exception of low risk assets with secure, long term income, where investor demand remains strong.

The largest segment of our portfolio is South East offices (53.8%), located predominantly along the M4 corridor. Named occupier demand at the end of the period, as monitored by BNP Paribas, totalled 2.25 million sq ft. This was an encouraging 24.9% increase over the previous quarter, but still 33.0% below the five year average of 3.37 million sq ft. Annual take up of 1.31 million sq ft for 2020 in our market area suffered as a result, being 36.4% below the five year average of 2.06 million sq ft and on a par with 2009, the lowest on record since 2000. Of this take up, 72.9% was for unit sizes below 60,000 sq ft, and 66.5% was for new or Grade A space. This continues the trend that we have reported on for a number of years of occupier demand for better quality floor space in smaller unit sizes.

With a lower level of letting activity over the year, supply in this market increased to 8.80 million sq ft, representing a vacancy rate of 9.4% (31 March 2020: 7.4%), but still well below the peak vacancy rate following the GFC of 14.2% in 2014. The low vacancy rate of 2.3% for new buildings (31 March 2020: 1.8%) continues to limit occupier choice and the speculative pipeline of new schemes is likely to remain restricted until the demand outlook is clearer.

Following the sale of 30 Lombard Street, the value of our remaining three central London buildings accounts for 12.8% of the portfolio (31 March 2020: 24.7%). Each asset continues to provide opportunities for income and capital growth, which we will monitor as the central London occupational market becomes clearer.

Office demand - all change?

As noted above, demand and letting activity in the South East office market has reduced this past year, and there has been much discussion regarding the impact of Covid-19, and the working from home experience in particular, on future occupier trends.

Around 30% of the workforce in the South East and London was already working from home some of the time prior to the pandemic, with the proportion rising to around 50% during the first lockdown. Hybrid working patterns will evolve from this, and although the number of employees in the office full time may reduce, this is likely to be offset by lower occupational densities to create safer working environments.

We believe that demand has been deferred rather than lost. To best position ourselves to benefit when it returns, the key considerations we are addressing are:

• How will offices be used in the future? The use of the office will vary between business size and type, but remain essential as a strategic tool in the management of most businesses. It is likely to be more of a collaborative space to enforce business identity and to encourage team-work and the effective integration of new and younger employees.

• What type of business space will be in demand? We expect the majority of demand to be for safe, sustainable and smart buildings of quality that help attract and retain employees. Ease and flexibility of occupation will be important considerations, as well as ease of access and local amenities. Letting activity is likely to remain predominantly for new and Grade A floor space within the sub 60,000 sq ft size range. A shift to shorter commuting could also result in decentralisation.

• How do we meet occupier expectations? Occupiers will expect a high quality service from their landlord to support the concept of the office being a welcoming, central and integral part of their business. Track record and customer focus will be key.

Many of these requirements reflect trends that we were seeing before the pandemic, and responding to with the quality and specification of our buildings and the delivery of high levels of service set out in 'The McKay Way' by our in-house occupier services team.

With our office properties located mainly in outer London and the South East, we are also able to offer a cost effective alternative should occupiers decide to decentralise to reduce exposure to congested public transport and long travel to work times. Construction of the Elizabeth Line from central London to Reading, once opened, will enhance our offer with improved connectivity.

Sustainability and ESG will play a key role

The importance of ESG considerations, and the environmental credentials of business space, will continue to increase. These considerations are integral to our decision making with regard to portfolio properties and the way that we run the business more generally.

Our 2021 Sustainability Review, available on our website, provides full details of our ESG policy and progress during the year. This includes the publication of our 2021 Net Zero Carbon commitment announced today, which sets out a number of ambitious targets in relation to our existing portfolio and future projects to support the delivery of our core sustainability objective of creating low carbon, resource efficient buildings.

We will continue to work on these ESG and property initiatives, such as our McKay+ offer of ready to occupy floor space, short form leases and fully connected buildings.

The year ahead

Within the existing portfolio, we look forward to improved confidence from the road map out of lockdown and the continued roll out of the vaccination programme driving a pick up in leasing activity of current vacancies and future refurbishments. The lease break exercised at Sopwith Drive, Weybridge provides scope for a major refurbishment or redevelopment of this 1980s warehouse, and at Great Brighams Mead, Reading we are considering a range of options to evolve a strategy ahead of lease expiry in March 2022.

With substantial cash and undrawn facilities, we will continue to progress portfolio initiatives and look for earnings and value accretive acquisitions in our core markets to offset the planned reduction in earnings from the sale of 30 Lombard Street. Full use of this headroom will be governed by maintaining a level of gearing appropriate to the macroeconomic climate and evolving outlook. We will also continue to closely monitor occupier demand and the possibility of recycling capital through further disposals, and maintain the current share buy-back programme while it continues to be an effective and efficient means of generating shareholder value.

Simon Perkins

Chief Executive Officer

Property and Financial Review

Introduction

As at 31 March 2021 our portfolio consisted of 33 assets with an independent valuation of £437.90 million. The majority of the portfolio falls within the office sector, but through a combination of development and valuation gains as well as the recycling of capital, we have increased our weighting over the year to the industrial and logistics sector. By value the breakdown is now 66.6% offices, 28.0% industrial and logistics and 5.4% other with no retail exposure (31 March 2020: 77.1%, 18.1% and 4.8% respectively). See Table 1.

Together with selling our largest asset and letting our most recent development project, Covid-19 and its repercussions have dominated this year. Operationally our business model of managing all our assets internally, rather than using third party managing agents, allowed us to respond with agility and resilience. With this business model, we know our tenants well and as a result we knew very quickly where to help, how to help and where to remain firm. In a crisis more economically damaging than the GFC, we maintained a strong tenant retention rate with 74.3% of our occupiers choosing to remain with McKay at lease break or expiry; collected or agreed plans for 98% of our annual rent; renewed 34 leases; secured 18 open market lettings; and achieved a positive customer survey with 90% of our occupiers happy with their direct McKay relationship.

Our total occupancy has fallen to 85.3% (31 March 2020: 88.7%) and there are two clear reasons for this. Firstly in February 2021 Hermes operated their break clause at Sopwith Drive in Weybridge (63,140 sq ft / £0.65 million pa contracted rent) which they had occupied for many years, in order to relocate to a larger unit. The industrial and logistics sector is currently very strong from both an occupational and investment perspective and this lease break frees up a prime development / refurbishment opportunity for us.

Secondly, while we successfully negotiated with our largest occupier, Domestic & General, to renew their occupation for a further five years at Swan Court in Wimbledon, they did hand back 30% of the building (ground and first floors totalling 16,400 sq ft) which they had not been using for some years. These floors will be refurbished and delivered into this popular under-supplied Greater London sub-market in the autumn.

These two new vacancies represent 5.2% of the overall portfolio ERV as at 31 March 2021.

We believe the office remains critical to business continuation and that the best and most engaging office space will remain in demand from businesses keen to attract and retain staff. As a result, we shall continue to upgrade and invest in our assets when vacancies occur to meet that demand.

Table 1: Properties

		Properties	% of Portfolio
Office	London	3	12.8%
Office	South East	17	53.8%
Total Office		20	66.6%
Industrial	South East	9	28.0%
Total Industrial		9	28.0%
Other	Health	1	1.3%
Other	Leisure	1	3.1%
Other	Residential	2	1.%
Total Other		4	5.4%
Overall Total		33	100.0%

Sustainability and ESG

We continue to recognise how important sustainability is to potential and existing occupiers, our investors, our employees and indeed all our stakeholders.

We are particularly proud this year to have achieved a 4* GRESB (Global Real Estate Sustainability Benchmark) rating, placing us in the top 40% of those who choose to be measured by this renowned benchmark.

Our 2021 Sustainability Review, included within our Annual Report and Financial Statements and available on our website, provides extensive detail of our ambitions and achievements under the three pillars for a sustainable business, the Environment, Social awareness and Governance (ESG).

Development

We completed 135 Theale Logistics Park (135,095 sq ft) in April 2020 and, with Covid-19 limiting mobility, we immediately stepped up our digital marketing campaign and successfully secured a letting of the whole scheme to Amazon. This lease completed in September 2020 for a ten year term with an option to extend for a further ten years to this strong covenant at £1.51 million pa, marginally ahead of 31 March 2020 ERV ("ERV") with a fixed uplift at the fifth year review. This resulted in a year end valuation surplus of £10.88 million which delivered a profit on cost for the development of 49.5%.

Asset management

Portfolio

We have always had a very active, hands-on approach to asset management which has benefited us in a year when occupiers need flexibility, potential reorganisations and above all a regular constructive dialogue with their landlord. Given the difficulty many occupiers have faced, during the year we negotiated many more lease renewals than a typical year (34 compared to the average of the previous two years of 17) at a contracted annual rent of £3.87 million pa (an uplift of 10.4% over the previous passing rent). The Covid-19 related agreements, in particular, had the win-win benefit for both us and our occupiers by introducing a rent free period now in return for a longer lease. Added to this, we achieved 18 open market lettings at a combined contractual rent of £2.56 million pa, marginally ahead of ERV, providing a total contracted rent (excluding acquisitions and disposals) of £25.02 million pa (31 March 2020: £24.93 million pa).

Offices

Within our office portfolio, the most significant lease renewal was at Swan Court, Wimbledon (57,500 sq ft) which has been the headquarters of Domestic & General (D&G) since we built the office building in 2006. Their lease expiry was February 2021 and in recent years they had sub-let the ground and first floors (16,400 sq ft). In January 2021 we exchanged an agreement to lease floors 2-5 (37,400 sq ft) on a ten year lease with a fifth year tenant break at a contracted rent of £1.76 million pa which will commence on completion of planned landlord upgrade works to the common parts at the end of the summer. The works will significantly enhance the look and feel of the building improving the lettability of the remaining ground and first floors which we will refurbish simultaneously.

Across selected parts of our office portfolio we continue to attract occupiers with the McKay+ specification. This provides the middle ground between conventional accommodation and serviced offices enabling speed and flexibility of occupation with no middle man or hidden costs and is managed directly by us, while at the same time giving the occupiers their own identity and privacy. At the Mille in Brentford (96,700 sq ft) this model attracted a tenant out of serviced accommodation into the entire 6th floor (8,174 sq ft) at a contracted rent of £0.18 million pa on a ten year lease with a tenant break at the end of the third year.

Further McKay + refurbishments attracted two new significant occupier names to the portfolio. Maersk Line UK Limited signed a five year lease on the 6th floor (1,870 sq ft) at Portsoken House, EC3 at a contracted rent of £0.98 million pa and Sedgewick International UK committed to the final vacant suite (4,112 sq ft) at Prospero in Redhill on a ten year lease at a contracted rent of £0.13 million pa.

Table 2: Capital Value Movement

12 months to 31 March 2021	March 2021 portfolio £m	March 2020 portfolio £m	12 month1 Movement	MSCI2 Movement
London offices	56.00	58.55	(5.9)%	(2.6)%
South East offices	235.60	267.30	(13.0)%	(6.1)%
Total offices	291.60	325.85	(11.8)%	(5.6)%
South East industrial/logistics	75.25	68.35	9.0%	10.3%
Other	23.90	23.80	0.3%	-
Total (excl. dev)	390.75	418.00	(7.7)%	(2.9)%3
Developments4	36.35	24.00	42.7%
Total portfolio (like for like)	427.10	442.00	(4.8)%	(2.9)%
Disposals	-	68.00
Acquisitions	10.80	-
Total (overall)	437.90	510.00	(4.7%)	(2.9%)

Valuation yields
Initial	4.8%	4.0%
Initial (topped up)	5.5%	5.2%
Reversion	6.7%	6.4%
Equivalent	6.1%	5.7%

1 Valuation movements (%) after allowing for cap-ex incurred during the period

2 MSCI Monthly Index by relevant sector. London = MSCI City sector

3 MSCI Monthly Index (All property)

4 Theale Logistics Park

Table 3: Rental Value Movement

12 months to 31 March 2021	March 2021 portfolio ERV £m pa	March 2020 portfolio ERV £m pa	12 month Movement	MSCI1 Movement
London offices	3.66	3.75	(2.5)%	(0.8)%
South East offices	20.60	21.15	(2.6)%	(0.6)%
Total offices	24.26	24.90	(2.6)%	(0.6)%
South East industrial/logistics	4.07	3.96	2.6%	3.4%
Other	1.00	1.14	(11.9)%	-
Total (excl. dev)	29.33	30.00	(2.2)%	(2.0)%2
Developments3	1.51	1.48	2.3%
Total portfolio (like for like)	30.84	31.48	(2.0)%	(2.0)%
Disposals	-	3.43
Acquisitions	0.61	-
Total (overall)	31.45	34.91

1 MSCI Monthly Index by relevant sector. London = MSCI City sector

2 MSCI Monthly Index (All property)

3 Theale Logistics Park

At Corinthian House, Croydon (44,590 sq ft), having upgraded the reception and common parts last year, we are now underway with floor by floor refurbishments as they become available on expiry of older legacy lettings, enabling us to achieve substantially higher rental values. Having just reached completion at year end of the 2nd and 5th floors (8,660 sq ft) we had already agreed terms on over 50% of the new accommodation above ERV reflecting the quality and prime location of this Croydon landmark office. We aim to refurbish a further four floors (18,550 sq ft) this year which have already attracted positive enquiries.

Industrial and logistics

28.0% of the portfolio by value is in the industrial and logistics sector which has performed very well over the year, driven by management initiatives, lettings at or above ERV and the development success referred to earlier.

At Five Acre in Folkestone, we pre-let our last upgraded unit (17,333 sq ft) to an existing expanding occupier on a ten year lease at a contracted rent of £0.09 million pa and at the McKay Trading Estate at Poyle we renewed four leases with our largest occupier (32,251 sq ft) for a further six years at a contracted rent of £0.34 million pa.

Well located trade parks continue to attract demand as evidenced by our latest refurbishment at Oakwood Trade Park in Crawley (52,400 sq ft). Prior to completion of a refurbishment of Unit 1 (2,717 sq ft) we signed a ten year lease at a new record rent equating to £18.00 psf which helped drive ERV growth and a subsequent capital surplus across the Park of 23.5%.

As mentioned above, the exercise of a lease break at Sopwith Drive, Weybridge (63,140 sq ft) has provided the potential to add to the value of the building through refurbishment or redevelopment in this excellent outer London location. A number of schemes are under review at present.

Table 4: Portfolio yields and reversions

	31st March 2021			31st March 2020
	£m pa	Yield²	Occupancy	£m pa	Yield²	Occupancy³
Current rental income¹	22.20	4.8%		21.90	4.0%

Contracted rental income¹	25.61	5.5%	85.3%	28.33	5.2%	88.7%
Uplifts at rent review/lease expiry	1.21			2.62
Void properties (exc developments³)	4.63		15.5%	2.48		7.4%
Void (developments)	-			1.48		3.9%
Portfolio reversion	5.84			6.58
Total portfolio ERV	31.45	6.7%		34.91	6.4%
Equivalent yield		6.1%			5.7%

1 Net of ground rents

2 Yield on portfolio valuation with notional purchaser's costs (6.75%) added

3 By ERV

Valuations

As at 31 March 2021 Knight Frank's independent valuation of the portfolio was £437.90 million (31 March 2020: £510.00 million).

The entire year has been characterised by Covid-19 and the economic uncertainty that it carried which is only now beginning to clear with the successful vaccine rollout. The total portfolio suffered to a greater degree in H1 with a valuation deficit of -3.4% followed by -1.3% in H2, delivering a total 12 month deficit of 4.7% set against the MSCI All Property Index of -2.9%. See Tables 2 and 3.

The valuers reflected uncertainty in the office sector by increasing void periods and rent free incentives while also pushing yields out to varying degrees depending on tenant covenant strength and lease length. These adjustments were more severe in H1 when there was still significant uncertainty at the September valuation date, resulting in a capital deficit in our office portfolio for H1 of -6.7%. Although the H2 valuation date of 31 March 2021 had the benefit of an improving outlook, there still remained uncertainty about the speed and quantum of a return to work. This resulted in further valuation risk adjustments and an H2 office portfolio deficit of -5.0%, delivering a total office portfolio deficit for the year of -11.8%. Rental value declines were less apparent and our office portfolio ERV fell by -2.6%. See Table 4.

There were two office assets which impacted our office portfolio performance which are worth highlighting. At the start of the year at Great Brighams Mead in central Reading (84,840 sq ft) discussions had been ongoing about the possibility of a lease extension with the sole tenant (expiry March 2022). However, towards Christmas the tenant confirmed that it would vacate at lease expiry, and at the valuation date the valuers had to assume vacancy at expiry, full refurbishment expenditure as well as estimated voids and rent free incentives.

Secondly at Corinthian House in Croydon, the valuation reduced due to the timing in the refurbishment cycle of the building, and the current vacancy and capex required for the launch of this re-positioned asset. Although strong pre-let interest is being pursued, at the date of valuation it had not crystallised.

Our industrial and logistics portfolio (28.0% by value) performed well, delivering a capital surplus of 16.4%. As referred to above, the letting at 135 Theale Logistics Park and the strength of investor demand generated a substantial 42.7% surplus of £10.88 million.

As at 31 March 2021 the portfolio net initial yield was 4.75% (31 March 2020: 4.02%) rising to 5.48% on the expiry of rent free periods (31 March 2020: 5.20%). This yield increase reflects the fall in values due to the Covid uncertainty coupled with the fact that we sold our largest asset at a low yield of 4.16%. The reversionary yield, adopting the full net ERV and current book value was 6.73% (31 March 2020: 6.41%).

Cash collection

The table below highlights the quarterly experience for the Group regarding cash collection. The overall result for the year shows 96.0% of contracted rents were collected in cash and a further 2.0% (£0.45 million) to be collected under agreements put in place during the year. Of the total contracted rent of £22.38 million demanded for the year to 31 March 2021, only £0.39 million has been impaired.

Table 5: Cash collection	Mar 20 Quarter		Jun 20 Quarter		Sep 20 Quarter		Dec 20 Quarter		Total 4 Quarters
	£	%	£	%	£	%	£	%	£	%
Paid within 7 days	3,342	62%	4,075	71%	3,872	69%	5,043	88%	16,333	73%
Paid after 7 days	1,714	31%	1,528	26%	1,477	26%	480	8%	5,200	23%
Cash received	5,056	94%	5,604	98%	5,348	96%	5,524	96%	21,532	96%

Paying monthly - O/S	0	0%	0	0%	0	0%	6	0%	6	0%
Not monthly - O/S	246	5%	19	1%	143	3%	34	1%	442	2%
Agreed but O/S	246	5%	19	1%	143	3%	40	1%	448	2%
Total received or agreed	5,302	99%	5,623	98%	5,491	98%	5,564	98%	21,980	98%

Impaired	78	1%	92	2%	92	2%	133	2%	395	2%
Total received or agreed	5,380	100%	5,715	100%	5,583	100%	5,697	100%	22,375	100%

Key: O/S - outstanding

Income statement

Adjusted profit before tax, our measure of recurring profit, increased by £0.23 million (2.4%) to £9.96 million (31 March 2020: £9.73 million). Gross rental income was 2.1% lower as a result of significant disposals in the current and prior period, offset by reduced interest costs on lower borrowings. Adjusted basic earnings per share increased by 2.3% to 10.56 pps (31 March 2020: 10.32 pps).

At headline level, the loss before tax (IFRS) of £16.58 million (31 March 2020: £9.49 million profit), was mainly as a result of the valuation deficit of £23.36 million (after the IFRS 16 adjustment) being bigger than the prior year (31 March 2020: deficit £2.20 million).

The 2.1% (£0.54 million) reduction in gross rental income to £24.62 million (31 March 2020: £25.16 million) was a result of the significant disposals of 30 Lombard St, EC3 and Station Plaza, Theale, offset by new rental income from the acquisitions at Willoughby Road, Bracknell and Rivergate, Newbury, the latter contributing a full year of rental income, and further increased by new lettings such as 135 Theale Logistics Park.

Property costs for the year of £3.15 million were £0.10 million less than the previous year (31 March 2020: £3.25 million) mainly due to the successful reclaiming of previously paid council rates received in the year which offset higher void costs.

Administration costs before IFRS 2 charges reduced to £5.17 million (31 March 2020: £5.39 million), primarily due to the 2018 Performance Share Plan outturn of zero which reduced the National Insurance charge compared to the prior year, and Covid-19 related savings. The IFRS 2 charge increased during the year (£0.49 million) compared to the £0.22 million credit in the previous year. The credit in the previous year resulted from an accounting change in the calculation methodology of IFRS 2.

Whilst cash collection was strong during the Covid-19 affected period, as noted above, £0.39 million of the rents receivable have been impaired (31 March 2020: Nil). These relate to tenants that have gone into administration or amounts assessed as irrecoverable. The two tenants that account for half of this amount are a professional services firm and a hospitality tenant.

The interest cost for the year reduced to £6.35 million (31 March 2020: £7.36 million), due to lower drawings after the sale of 30 Lombard St, EC3, which reduced drawn debt to £144.00 million at 31 March 2021 (31 March 2020: £194.00 million). The weighted average cost of debt prior to amortisation and finance lease interest reduced slightly to 3.1% (31 March 2020: 3.4%).

Balance sheet

Shareholders' funds decreased from £309.17 million to £289.90 million over the period, primarily due to the revaluation deficit for the year of £23.36 million as detailed above. In addition, the sale of 30 Lombard Street, EC3 resulted in a £2.82 million loss of disposal after adjustment for IFRS16 (letting incentives).

EPRA NTA per share reduced by 6.1% over the period to 309 pence (31 March 2020: 329 pence) and IFRS NAV per share reduced by 5.8% to 309 pence (31 March 2020: 328 pence). The revaluation movement was the main driver for these changes.

Debt facilities at the year end remained at £245.00 million (31 March 2020: £245.00 million), providing £101.00 million of headroom over our current drawings to support operational flexibility, deliver further portfolio initiatives and provide increased scope for new investments. The reduction in drawings was driven by the receipt from the sale of 30 Lombard St, EC3 (£70.06 million), offset by the purchase of Willoughby Rd, Bracknell (£10.66 million), capex on the portfolio of £6.71 million and paid dividends of £6.79 million.

The ratio of net debt to portfolio value (LTV) at the year end was 32.4% (31 March 2020: 37.6%).

Net cash inflow from operating activities was £7.43 million (31 March 2020: inflow £6.81 million) and interest cover based on adjusted profit plus finance costs as a ratio to finance costs was 2.49x (31 March 2020: 2.28x).

As a REIT, the Company is tax exempt in respect of qualifying capital gains and qualifying rental income, which covers the majority of the Company's activities. However the sale of 30 Lombard St, EC3, was within three years of practical completion and therefore triggered a capital gains tax charge of £1.26 million under REIT regulations. This was estimated in the prior year at £1.39 million, and finalised this year.

Defined benefit pension scheme

Under the application of accounting standard IAS19, the Company's pension deficit slightly increased over the period from £2.10 million to £2.18 million.

A triennial valuation was completed for the period to 31 March 2020, which shows a funding level of 77.8% on a SFO (Statutory Funding Objective) valuation basis. The previous triennial valuation showed a funding level of 87.5% on a SFO valuation basis. As a result of this valuation, the company will continue the annual cash contribution to the scheme of £0.24 million. The scheme was closed to new entrants in the 1980's, and now consists of six pensioners and no active members.

Share buy-back programme

The buy-back programme commenced on 8 March 2021. The Board set the total size of the programme at up to £10.00 million, or approximately 5% of the Company's issued ordinary share capital. As at 31 March 2021, 538,542 shares had been purchased by the company at a cost of £1.15 million. The reported IFRS Basic NAV is 309 pps, however this equates to 307 pps prior to the buyback and can therefore be considered NAV accretive.

Dividends

The final dividend of 5.5 pence per share (31 March 2020: 4.4 pps) will be paid on 22 July 2021 to those on the register as at 28 May 2021. With the interim dividend of 2.8 pence per share, this takes the total dividend for the year to 8.3 pence per share (31 March 2020: 7.2 pps), an increase of 15.3% on the previous year.

As a REIT, the Company is required to distribute at least 90.0% of rental income profits arising each financial year by way of a Property Income Distribution ("PID"). After taking into account allowable costs the final dividend will be paid as an ordinary dividend rather than a PID.

Financial risks

The financial risks are documented in the principal risks and uncertainty section of the Strategic Report.

Signed on behalf of the Board of Directors

T. Elliott

Property Director and Head of Sustainability

G. Salmon

Chief Financial Officer

Consolidated Profit and Loss and Other Comprehensive Income

For the year ended 31 March 2021

	Notes	2021 £'000	2020 £'000
Gross rents and service charges receivable	2	28,589	29,296
Other property income		157	69
Direct property outgoings		(7,112)	(7,384)
Net rental income from investment properties	2	21,634	21,981
Administration costs		(5,175)	(5,385)
IFRS 2 charge		(489)	222
Total administration costs	3	(5,664)	(5,163)
Operating profit before gains on investment properties		15,970	16,818
(Loss)/profit on disposal of investment properties		(2,854)	1,668
Revaluation of investment properties	10	(23,356)	(2,199)
Operating (loss)/profit		(10,240)	16,287
Finance costs	5	(6,351)	(6,805)
Finance income	5	8	5

(Loss)/profit before taxation	4	(16,583)	9,487
Taxation	6	133	(1,392)
(Loss)/profit for the year		(16,450)	8,095
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss
Remeasurement on defined benefit pension scheme		(278)	(185)
Total comprehensive (expense)/income for the year		(16,728)	7,910

(Loss)/earnings per share	8
Basic		(17.45)p	8.59p
Diluted		(17.45)p	8.57p

Adjusted earnings per share figures are shown in note 9

Dividends	9
31 March 2020 final dividend of 4.4 pence (31 March 2019: 7.4 pence) paid during the year		4,148	6,965

30 September 2020 interim dividend of 2.8 pence (30 September 2019: 2.8 pence) paid during the year		2,642	2,639

Proposed final dividend of 5.5 pence (31 March 2020: 4.4 pence)		5,116	4,148

The total comprehensive income for the year is all attributable to the equity holders of the Parent Company.

The accompanying notes form an integral part of these financial statements.

Consolidated Statement of Financial Position

As at 31 March 2021

Notes

2021

£'000

2020
£'000

Non-current assets

Investment properties - Valuation as reported by the valuers		437,900	510,000
- Adjustment for tenant incentives recognised under IFRS 16		(7,403)	(10,637)
- Assets held for sale		(13,500)	(79,365)
- Adjustment for grossing up of headleases	14	3,683	4,403
	10	420,680	424,401
Plant and equipment	11	125	148
Other receivables	13	7,403	6,982
Total non-current assets		428,208	431,531

Current assets
Trade and other receivables	13	3,063	3,200
Assets held for sale	10	13,500	83,020
Cash		2,249	2,245
Total current assets		18,812	88,465

Total assets		447,020	519,996

Current liabilities
Trade and other payables	14	(9,233)	(12,433)
Lease liabilities	15	(229)	(180)
Current tax liability		(654)	-
Liabilities directly associated with assets classified as held for sale	15	-	(1,520)
Total current liabilities		(10,116)	(14,133)

Non-current liabilities
Loans and other borrowings	14	(141,369)	(190,505)
Pension fund deficit	23	(2,180)	(2,097)
Deferred tax liability	6	-	(1,392)
Lease liabilities	15	(3,453)	(2,703)
Total non-current liabilities		(147,002)	(196,697)

Total liabilities		(157,118)	(210,830)

Net assets		289,902	309,166
Equity
Called up share capital	18	18,760	18,853
Capital redemption reserve		108	-
Share premium account		75,541	75,541
Retained earnings		80,598	81,531
Revaluation reserve		114,895	133,241
Total equity		289,902	309,166

IFRS net asset value per share	21	309p	328p
EPRA NTA/NRV value per share	21	309p	329p

The accompanying notes form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 17 May 2021 and were signed on its behalf by R Grainger and S Perkins.

Company Statement of Financial Position

As at 31 March 2021

Registration number 421479

	Notes	2021 £'000	2020 £'000
Non-current assets
Investment properties - Valuation as reported by the valuers		433,400	437,500
- Adjustment for tenant incentives recognised under IFRS 16		(7,403)	(6,982)
- Assets held for sale		(13,500)	(13,500)
- Adjustment for grossing up of head leases		3,682	2,883
	10	416,179	419,901
Plant and equipment	11	77	84
Investments in subsidiary		-	-
Other receivables	13	7,404	6,982
Total non-current assets		423,660	426,967

Current assets
Trade and other receivables	13	3,062	46,933
Assets held for sale	10	13,500	13,500
Cash		2,249	2,245
Total current assets		18,811	62,678

Total assets		442,471	489,645

Current liabilities
Trade and other payables	14	(34,750)	(12,423)
Lease liabilities		(229)	(180)
Total current liabilities		(34,979)	(12,603)

Non-current liabilities
Loans and other borrowings	14	(141,369)	(190,505)
Pension fund deficit	23	(2,180)	(2,097)
Lease liabilities		(3,453)	(2,703)
Total non-current liabilities		(147,002)	(195,305)

Total liabilities		(181,981)	(207,908)

Net assets		260,490	281,737

Equity
Called up share capital	18	18,760	18,853
Capital redemption reserve		108	-
Share premium account		75,541	75,541
Retained earnings		65,914	65,181
Revaluation reserve		100,167	122,162
Total equity		260,490	281,737

The accompanying notes form an integral part of these financial statements.

The loss for the financial year ended 31 March 2021 was £13,422,039 (2020 profit of: £8,340,645).

These financial statements were approved by the Board of Directors on 17 May 2021 and were signed on its behalf by R Grainger and S Perkins.

Consolidated Cashflow Statement

For the year ended 31 March 2021

	2021 £'000	2020 £'000
Operating activities
(Loss)/profit before tax	(16,583)	9,487
Adjustments for:
Depreciation	47	50
Amortisation of leasehold properties	1	1
Deferred bonus write-off	94	68
Fair value of share options	396	(290)
Letting fees amortisation	652	668
Defined benefit pension scheme adjustments	45	44
Taxation	133	(1,392)
Loss/(profit) on sale of investment properties	2,854	(1,668)
Movement in revaluation of investment properties	23,356	2,199
Net finance costs	6,342	6,800
Cashflow from operations before changes in working capital	17,337	15,967
Increase in debtors	(1,680)	(203)
Decrease in creditors	(2,394)	(2,903)
Cash generated from operations	13,263	12,861
Interest paid	(5,237)	(6,061)
Interest received	8	5
Corporation tax paid	(605)	-
Cashflows from operating activities	7,429	6,805

Investing activities
Proceeds from sale of investment properties	70,777	8,056
Purchase and development of investment properties	(19,925)	(33,395)
Purchase of other fixed assets	(24)	(126)
Cashflows from investing activities	50,828	(25,465)

Financing activities
Gross debt drawdowns	20,000	34,000
Gross debt repayments	(70,000)	(5,000)
Bank facility fees paid	(34)	(2,569)
Equity dividends paid	(6,790)	(9,604)
Share buybacks	(1,147)	-
Headlease interest and capital paid	(282)	(285)
Cashflows from financing activities	(58,253)	16,542

Net increase/(decrease) in cash and cash equivalents	4	(2,118)
Cash and cash equivalents at the beginning of the year	2,245	4,363
Cash and cash equivalents at the end of the year	2,249	2,245

The accompanying notes form an integral part of these financial statements.

Company Cashflow Statement

For the year ended 31 March 2021

	2021 £'000	2020 £'000
Operating activities
(Loss)/profit before tax	(13,422)	8,341
Adjustments for:
Depreciation	31	34
Amortisation of leasehold properties	1	1
Deferred bonus write-off	94	68
Fair value of share options	396	(290)
Letting fees amortisation	649	617
Defined benefit pension scheme adjustments	45	44
Profit on sale of investment properties	-	(1,668)
Movement in revaluation of investment properties	21,995	2,205
Net finance costs	6,205	5,374
Cashflow from operations before changes in working capital	15,994	14,726
Decrease/(increase) in debtors	43,403	(3,893)
Increase/(decrease) in creditors	24,677	(27)
Cash generated from operations	84,074	10,806
Interest paid	(5,125)	(6,061)
Interest received	92	1,327
Cashflows from operating activities	79,041	6,072

Investing activities
Proceeds from sale of investment properties	-	8,056
Purchase and development of investment properties	(20,813)	(32,847)
Purchase of other fixed assets	(24)	(46)
Cashflows from investing activities	(20,837)	(24,837)

Financing activities
Gross debt drawdowns	20,000	34,000
Gross debt repayments	(70,000)	(5,000)
Bank facility fees paid	(34)	(2,569)
Headlease interest and capital paid	(229)	(180)
Repurchase of shares	(1,147)	-
Equity dividends paid	(6,790)	(9,604)
Cashflows from financing activities	(58,200)	16,647

Net increase/(decrease) in cash and cash equivalents	4	(2,118)
Cash and cash equivalents at the beginning of the year	2,245	4,363
Cash and cash equivalents at the end of the year	2,249	2,245

The accompanying notes form an integral part of these financial statements.

Consolidated Statement of Changes in Equity

For the year ended 31 March 2021

	Attributable to equity holders of the Parent Company
	Share capital £'000	Capital redemption revenue £'000	Restated Share premium £'000	Revaluation reserve £'000	Restated Retained earnings £'000	Total equity £'000
At 31 March 2019	18,825	-	75,541	132,625	84,092	311,083
Profit for the year	-	-	-	-	8,095	8,095
Other comprehensive income:
Transfer deficit on revaluation of properties	-	-	-	(2,200)	2,200	-
Transfer on disposal of investment properties	-	-	-	2,816	(2,816)	-
Remeasurement on defined benefit pension scheme	-	-	-	-	(185)	(185)
Total comprehensive income for the year	-	-	-	616	7,294	7,910
Issue of new shares net of costs	28	-	-	-	(28)	-
Dividends paid in year	-	-	-	-	(9,605)	(9,605)
Deferred bonus	-	-	-	-	68	68
Costs of share-based payments	-	-	-	-	(290)	(290)
At 31 March 2020	18,853	-	75,541	133,241	81,531	309,166
Loss for the year	-	-	-	-	(16,450)	(16,450)
Other comprehensive (expense)/income:
Transfer deficit on revaluation of properties	-	-	-	(23,356)	23,356	-
Transfer on disposal of investment property	-	-	-	5,010	-	5,010
Remeasurement on defined benefit pension scheme	-	-	-	-	(278)	(278)
Total comprehensive (expense)/income for the year	-	-	-	(18,346)	6,628	(11,718)
Issue of new shares net of costs	15	-	-	-	(15)	-
Repurchase of shares	(108)	108	-	-	(1,247)	(1,247)
Dividends paid in year	-	-	-	-	(6,789)	(6,789)
Deferred bonus	-	-	-	-	94	94
Costs of share-based payments	-	-	-	-	396	396
At 31 March 2021	18,760	108	75,541	114,895	80,598	289,902

The accompanying notes form an integral part of these financial statements.

Company Statement of Changes in Equity

For the year ended 31 March 2021

	Share capital £'000	Capital redemption revenue £'000	Restated Share premium £'000	Revaluation reserve £'000	Restated Retained earnings £'000	Total equity £'000
At 31 March 2019	18,825	-	75,541	121,551	67,491	283,408
Profit for the year	-	-	-	-	8,341	8,341
Other comprehensive income:
Transfer deficit on revaluation of properties	-	-	-	(2,205)	2,205	-
Transfer on disposal of investment properties	-	-	-	2,816	(2,816)	-
Remeasurement on defined benefit pension scheme	-	-	-	-	(185)	(185)
Total comprehensive income for the year	-	-	-	611	7,545	8,156
Issue of new shares net of costs	28	-	-	-	(28)	-
Dividends paid in year	-	-	-	-	(9,605)	(9,605)
Deferred bonus	-	-	-	-	68	68
Costs of share-based payments	-	-	-	-	(290)	(290)
At 31 March 2020	18,853	-	75,541	122,162	65,181	281,737
Loss for the year	-	-	-	-	(13,422)	(13,422)
Other comprehensive (expense)/income:
Transfer deficit on revaluation of properties	-	-	-	(21,995)	21,995	-
Transfer on disposal of investment properties	-	-	-	-	-	-
Remeasurement on defined benefit pension scheme	-	-	-	-	(278)	(278)
Total comprehensive (expense)/income for the year	-	-	-	(21,995)	8,295	(13,700)
Issue of new shares net of costs	15	-	-	-	(15)	-
Repurchase of shares	(108)	108	-	-	(1,247)	(1,247)
Dividends paid in year	-	-	-	-	(6,789)	(6,789)
Deferred bonus	-	-	-	-	93	93
Costs of share-based payments	-	-	-	-	396	396
At 31 March 2021	18,760	108	75,541	100,167	65,914	260,490

The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements

For the year ended 31 March 2021

1 Accounting policies

Basis of preparation

McKay Securities Plc ('the Company') is a public company limited by shares incorporated in the United Kingdom under the Companies Act and is registered in England and Wales. The address of the Company's registered office is 20 Greyfriars Road, Reading, Berkshire RG1 1NL.

The principal activities of the Company and its subsidiaries ('the Group') and the nature of the Group's operations are set out in the Strategic Report.

These financial statements are presented in GBP sterling, which is the currency of the primary economic environment in which the Group operates and are rounded to the nearest thousand.

The financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRS Standards) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

The financial statements are prepared on a going concern basis as explained in the Principal Risks and Uncertainties and going concern statement.

In accordance with Section 408 Companies Act 2006 a separate Profit and Loss and Other Comprehensive Income for the Company is not presented. The loss for the year after tax of the Company is £13,422,039 (2020: profit of £8,340,645).

The consolidated financial statements of the Company and its subsidiary ('the Group') have been prepared on a historical cost basis, except for investment property which is measured at fair value through the Profit and Loss and Other Comprehensive Income.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 and leasing transactions that are within the scope of IFRS 16.

New and revised IFRS Standards in issue but not yet effective

At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS Standards that have been issued but are not yet effective:

IFRS 17 Insurance Contracts

IFRS 10 and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

Amendments to IAS 1 Classification of Liabilities as Current or Non-current

Amendments to IFRS 3 Reference to the Conceptual Framework

Amendments to IAS 16 Property, Plant and Equipment - Proceeds before Intended Use

Amendments to IAS 37 Onerous Contracts - Cost of Fulfilling a Contract

Annual Improvements to IFRS Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards,

Standards 2018-2020 Cycle IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture

The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods.

IFRS 16 was adopted for the first time for the year ended 31 March 2020.

For the year ended 31 March 2021 the following subsidiaries of the Company were entitled to exemption from audit under s479A of the Companies Act 2006 relating to subsidiary companies:

Subsidiary Name	Companies House Registration Number
Baldwin House Limited	00692181

Basis of consolidation

The subsidiary company is under the control of the Company. Control means being exposed or have rights to variable returns from its involvement and has the ability to affect those returns through its power over the subsidiary.

Control is achieved when the Company: has the power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affects its returns.

All intra-Group assets and liabilities, equity, income, expenses and cashflows relating to transactions between the members of the Group are eliminated on consolidation.

Critical accounting judgements and key sources of estimation uncertainty

In the process of preparing the Group's financial statements management is required to make judgements, estimates and assumptions when applying accounting policies that may affect the reported amounts of revenues, expenses, assets and liabilities. Any judgements, estimates and associated assumptions used in the preparation of the financial statements are based on management's best information at the time, however actual outcomes may differ from estimates used. Management does not consider there to be any critical accounting judgements in the preparation of the Group's financial statements. Management considers that the valuation of investment property represents a key source of estimation uncertainty, for which qualified external advisers are used. As a result of Covid-19, the level of estimation increased, as reflected by the inclusion of a material uncertainty clause within the valuation report, as at 31 March 2020. However no material uncertainty clause has been included for the year ended 31 March 2021. See further detail below and in note 10.

Investment properties

The Group's properties are held as investments to earn rental income and for capital appreciation and are stated at fair value at the balance sheet date. The value, reflecting market conditions, is determined at each reporting date by independent external valuers and any gain or loss arising from a change in value is recognised in the Profit and Loss and Other Comprehensive Income and transferred to the revaluation reserve in the Group Statement of Financial Position. Tenant incentives are recognised as a separate asset in accordance with the Group's accounting policy on lease incentives and are deducted from the external valuation.

Properties purchased are recognised on legal completion in the accounting period and measured initially at cost including transaction costs. Sales of properties are recognised on legal completion. Gains and losses arising on the disposal of investment properties are recognised in the Profit and Loss and Other Comprehensive Income, being the difference between net sale proceeds and the carrying value of the property.

Subsequent expenditure on investment properties is capitalised only when it increases the future economic benefits associated with the property. All other expenditure is charged to the Profit and Loss and Other Comprehensive Income.

Interest and other outgoings less rental income relating to investment properties in the course of development are capitalised, and added to the cost of the property. Interest capitalised is calculated on development outgoings, including material refurbishments to investment property, using the weighted average cost of general Group borrowings for the year. A property ceases to be treated as being in the course of development when substantially all the activities that are necessary to prepare the property for use are completed.

The Group owns a number of properties under long leaseholds. These are leased out to tenants under operating leases and included in the balance sheet at fair value (disclosed as head leases). The obligation to the freeholder for the buildings element of the leasehold is included in the balance sheet at the present value of the minimum lease payments at inception. The minimum lease payments are apportioned between finance charges in the Profit and Loss and Other Comprehensive Income and the reduction of the Group Statement of Financial Position liability. Contingent rents are charged as an expense in the Profit and Loss and Other Comprehensive Income in the period incurred.

Assets held for sale

Properties held for sale are classified as non-current assets if their carrying amount will be recovered principally through sale rather than through continuing use, they are available for immediate sale and sale is highly probable within one year.

Investment properties held for sale are carried at fair value in the Statement of Financial Position. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated.

Plant and equipment

Plant and equipment is stated at cost less accumulated depreciation. Depreciation is provided on a straight line basis at rates calculated to write off the cost less estimated residual value over their useful lives, which are estimated to be between three and five years.

Cash

Cash comprises cash at bank and short-term deposits held on call.

Financial assets

Financial assets do not carry any interest and are stated initially at fair value and subsequently at amortised cost as reduced by appropriate credit loss allowances. The Group always recognises lifetime expected credit losses ('ECL') on these financial assets are estimated using a provision matrix based on the Group's historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. The Group derecognises a financial asset when the contractual right to the cashflows of the asset expire or on transfer of the asset and the associated risks and rewards to another party.

Trade and other payables

Trade and other payables are not interest bearing and are initially recognised at fair value and subsequently at amortised cost. The Group derecognises trade and other payables liabilities when they are extinguished, which occurs when the obligation associated with the liability is discharged, cancelled or expires.

Interest bearing loans and borrowings

All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. Subsequent to initial recognition, loans and borrowings are measured at amortised cost using the effective interest rate method.

Reserves

The revaluation reserve represents the unrealised surpluses and deficits arising on fair value measurement of the Group's properties and is not available for distribution until realised through sale. This forms part of retained earnings.

Segmental analysis

All of the Group's revenue is derived from the ownership of investment properties located in the South East and London. The management team works within a single structure which includes the Executive Directors acting as chief operating decision maker. Responsibilities are not defined by type or location, each property being managed individually and reported on for the Group as a whole directly to the Board of Directors. Properties under development generate no revenue and are treated as investment properties in the portfolio. The Directors therefore consider there to be only one reporting segment.

Revenue

The Group has entered into commercial property leases on its investment property portfolio. The Directors consider, based on the terms and conditions, the significant risks and rewards of ownership of the properties are retained and therefore account for the leases as operating leases. Rental income receivable under operating leases less initial direct costs on arranging the leases is recognised on a straight line basis over the non-cancellable term of the lease.

The aggregate value of incentives for lessees to enter into lease agreements, usually in the form of rent free periods or capital contributions, is recognised over the lease term or to tenant option to break as an adjustment to rental income.

The revenue recognition policy for the following revenue streams are in line with IFRS 15, as revenue is recognised when it transfers control over a product or service to a customer.

Premiums received from tenants to terminate leases are recognised as income from investment properties when they arise.

Service charges and other such receipts arising from expenses recharged to tenants, with the Group acting as principal, are recognised in the period that the expense can be contractually recovered and included gross in income from investment properties.

Interest received on short-term deposits is recognised in finance income as it accrues.

Operating profit

Operating profit is identified in the income statement and represents the profit on activities before finance costs and taxation.

Borrowing costs

Interest on borrowings, including interest on finance leases, is recognised in the Profit and Loss and Other Comprehensive Income in the period during which it is incurred, except for interest capitalised in accordance with the Group's policy on properties under development (see investment properties above). Costs incurred on putting in place borrowing facilities are recognised in finance costs over the term of the facility.

Share-based payments

The Group operates an equity-settled share-based performance plan outlined in the Directors' Remuneration Report under which Directors and employees are able to acquire shares in the Company. Equity-settled share-based payments to employees' services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 17.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group's estimate of the number of equity instruments that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to reserves.

Post employment benefits

The Group operates two pension schemes. The defined benefit scheme is based on final pensionable pay and has been closed to new entrants since 1989. The assets of the scheme are held separately from those of the Group and are measured at fair value, the scheme obligations being calculated at discounted present value, with any net surplus or deficit recognised in the Group Statement of Financial Position. Current service cost and net interest on scheme liabilities and scheme assets are recognised as an expense in the Profit and Loss and Other Comprehensive Income. Actuarial gains and losses on scheme assets and liabilities are recognised in equity through the Profit and Loss and Other Comprehensive Income. The assumptions used by a qualified actuary are outlined in note 23.

The Group contributes to eligible employees' defined contribution personal pension plans and does not accept any responsibility for the benefits gained from these plans. The contributions are recognised as an expense in the Profit and Loss and Other Comprehensive Income as incurred but the Group does not recognise any gains or losses arising from movements in the value of the personal pension plans.

Taxation

Any tax charge recognised in the Proﬁt and Loss and Other Comprehensive Income comprises current and deferred tax except to the extent that it relates to items recognised directly in equity, in which case the related tax is recognised in equity.

Current tax is the expected tax liability on the results for the year adjusted for items that are not taxable or deductible, or taxable and deductible in other periods, together with any adjustment in respect of previous years calculated using tax rates and laws enacted or substantively enacted at the balance sheet date.

Deferred tax is the tax expected to be paid or recovered on temporary differences arising between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and their tax base. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Tax liabilities are recognised for all taxable temporary differences and tax assets to the extent that future taxable proﬁts will be available against which the asset can be utilised.

The Group converted to REIT status on 1 April 2007 and as a consequence substantially all the Group's activities as a property rental business are exempt from tax, including rental proﬁts and gains on rental property disposals that are compliant with the REIT rules.

2 Net rental income from investment properties

	2021 £'000	2020 £'000
Gross rents receivable	22,854	22,873
IFRS 16 adjustment (spreading of rental incentives)	1,771	2,291
Gross rental income	24,625	25,164
Service charges receivable	3,964	4,132
Gross rents and service charges receivable	28,589	29,296
Other property income	157	69
Direct property outgoings	(7,112)	(7,384)
Net rental income from investment properties	21,634	21,981

Rent receivable under the terms of the leases is adjusted, in accordance with IFRS 16, for the effect of any incentives given.

3 Administration costs

	2021 £'000	2020 £'000
Group
Directors' - remuneration	1,204	1,203
- bonus	449	523
Staff - costs	1,061	1,167
- bonus	252	239
Management fee service charge	(361)	(293)
National Insurance	227	507
Pension costs - defined benefit scheme	45	44
- defined contributions	308	275
Other staff costs	51	37
Share-based payment accounting charge (IFRS 2)	489	(222)
Staff related costs	3,725	3,480
Depreciation (note 12)	47	50
Office costs	676	575
Legal and professional fees	1,123	1,007
General expenses	93	51
Total administrations costs	5,664	5,163

The average number of persons employed by the Group and Company during the year was 18 (2020: 19).

Details of Directors' remuneration can be found in the Directors' Annual Remuneration Report.

In advance of each audit, the Committee obtains confirmation from the external auditor that it remains independent and that the level and nature of non-audit fees are not an independence threat. The table below details the total fees paid to the auditor. The Committee considers the current auditor Deloitte to be independent of the Group and Company.

	2021 £'000	2020 £'000
Fees paid to auditor
Statutory audit services
McKay Securities Plc audit	137	130
Subsidiary audit	10	10

Assurance services
Interim review	31	30
Service charge review	16	15
	194	185

4 Alternative performance measures

APM	IFRS	Note reference
Adjusted profit before tax The Group adjusts to present recurring profits by removing items not under management control	Profit before tax IFRS	Note 4

Total property return ('TPR')		Note 4
Management's indicator of return on portfolio during the period.

Debt to portfolio value ('LTV')		Note 4
Management guide to gearing levels.

EPRA net tangible asset value per share ('NTA')	Net asset value per share	Note 21
Assumes that entities buy and sell assets, crystalising unavoidable deferred tax.

EPRA net reinstatement asset value per share ('NRV')	Net asset value per share	Note 21
Assumes that entities never sell assets, therefore the value required to rebuild the entity.

EPRA net disposal asset value per share ('NDV')	Net asset value per share	Note 21
Represents a disposal scenario where deferred tax and other adjustments are calculated.

EPRA net asset value per share A future looking matrix by adding in share options that may vest	Net asset value per share	Note 21

EPRA ('NNNAV') EPRA NNNAV in the EPRA NAV adjusted to reflect the fair value of debt and derivatives and to include deferred taxation.	Net asset value per share	Note 21

Adjusted earnings per share Adjusted earnings as above by using recurring profits	Basic earnings per share	Note 8

EPRA earnings per share Adjusted earnings per share except for surrender premiums (included in other property income) and share based payments are added back.	Basic earnings per share	Note 8

Portfolio valuation Valuation of total property portfolio at period end as per Knight Frank valuation

The Group uses a number of Alternative Performance Measures ('APMs') which are not defined or specified within IFRS. The Directors use these measures in order to assess the underlying operational performance of the Group and allow greater comparability between periods but do not consider them to be a substitute for, or superior to, IFRS measures. The Directors consider adjusted profit before tax to be an additional informative measure of the ongoing profits from core rental activities before taxation, adjusted as set out. See further detail in the glossary.

These alternative performance measures are commonly used within the property sector.

	2021 £'000	2020 £'000
(Loss)/profit before tax	(16,583)	9,487
Movement in revaluation of investment properties (see note 11)	23,356	2,199
Other property income (see note 2)	(157)	(69)
Loss/(profit) on disposal of investment properties	2,854	(1,668)
IFRS 2 adjustment to share-based payments	489	(222)
Adjusted profit before tax	9,959	9,727

Total property return (TPR)

	2021 £'000	2020 £'000
Valuation (deficit) / surplus	(21,579)	111
Profit realised on disposal (excluding IFRS 16 write off)	2,155	1,668
Income from investment properties	21,663	21,981
	2,209	23,760
Book value	459,480	509,889
Total property return	0.5%	4.7%

As there are no remaining developments as at 31 March 2021 we have updated the table above to show TPR including developments to provide a more appropriate comparison.

Debt to portfolio value ('LTV')

	2021 £'000	2020 £'000
Drawn debt	144,000	194,000
Cash balances	(2,249)	(2,245)
Net debt - bank debt net of cash balances	141,751	191,755
Valuation as reported by external valuers	437,900	510,000
LTV	32.4%	37.6%

5 Net finance costs

	2021 £'000	2020 £'000
Interest on bank overdraft and loans	4,606	5,602
Commitment fee	564	462
Lease interest on leasehold property obligations	282	397
Finance arrangement costs	899	895
Capitalised interest (note 7)	-	(551)
	6,351	6,805
Interest receivable	(8)	(5)
Net finance costs	6,343	6,800

The capitalisation of interest has no effect on taxation.

6 Taxation

	2021 £'000	2020 £'000
Total tax in the Consolidated Profit and Loss and Other Comprehensive Income	133	(1,392)
Reconciliation to effective rate of tax:
(Loss)/profit on ordinary activities before tax	(16,583)	9,487
Tax charge on profit at 19% (2020: 19%)	(3,151)	1,803
Effects of:
REIT tax exemption	3,151	(1,803)
Tax provision movement	133	(1,392)
Tax for period (as above)	133	(1,392)

The taxation charge in the Consolidated Profit and Loss and Other Comprehensive Income relates to a movement in the taxation provision of £133,000 on the sale of 30 Lombard Street, EC3. As a REIT, the Group is tax exempt in respect of qualifying capital gains and qualifying rental income, which covers the majority of the Company's activities. The tax provision relating to the sale of 30 Lombard St arises as the completion of the sale was within three years of practical completion and therefore triggers a chargeable capital gain under REIT regulations.

7 Capitalised interest

Interest relating to investment properties in the course of development is dealt with as explained in note 1.

Interest capitalised during the year amounted to nil (2020: £550,933 related to works to Theale Logistics Park).

Total development interest capitalised amounts to £14,737,480 (2020: £14,737,480).

Interest is capitalised using the Group's weighted average cost of borrowings and the effective rate applied in the year was 3.10% (2020: 3.35%).

8 Earnings per share

Basic earnings per share	2021 pence	2020 pence
Basic (loss)/earnings per share	(17.45)	8.59
Movement in revaluation of investment properties	24.77	2.33
Other property income	(0.17)	(0.07)
Loss/(profit) on disposal of investment properties	3.03	(1.77)
Taxation	(0.14)	1.48
Share-based payments	0.52	(0.24)
Adjusted earnings per share	10.56	10.32
Share-based payments	(0.52)	0.24
Other property income	0.17	0.07
EPRA earnings per share	10.21	10.63

Basic (loss)/earnings per share on ordinary shares is calculated on the loss in the year of (£16,450,000) (2020: profit of £8,095,000) and 94,292,376 (2020: 94,234,253) shares, being the weighted average number of ordinary shares in issue during the year.

EPRA earnings per share is calculated on the same profit after tax and on the weighted average number of shares in issue during the year of 94,292,376 (2020: 94,234,253) shares.

	2021 Number of shares	2020 Number of shares
Weighted average number of ordinary shares in issue	94,292,376	94,234,253
Number of shares under option	-	463,819
Number of shares that would have been issued at fair value	-	(244,272)
Diluted weighted average number of ordinary shares in issue	94,292,376	94,453,800

The following potential ordinary shares are anti-dilutive and are therefore excluded from the weighted average number of ordinary shares for the purpose of diluted earnings per share.

2021

Number of shares

2020

Number of shares

Number of shares under option

144,921

Diluted earnings per share	2021 pence	2020 pence
Basic (loss)/earnings per share	(17.45)	8.59
Effect of dilutive potential ordinary shares under option	0.00	(0.02)
	(17.45)	8.57
Movement in revaluation of investment properties	24.77	2.33
Other property income	(0.17)	(0.07)
Loss/(profit) on disposal of investment properties	3.03	(1.77)
Share-based payments	0.52	(0.24)
Taxation	(0.14)	1.47
Adjusted diluted earnings per share	10.56	10.29

Adjusted earnings per share excludes the after tax effect of profit from the disposal of investment properties, share-based payments, deferred taxation, other property income, and the movement in revaluation of investment property.

The taxation charge in the Consolidated Profit and Loss and Other Comprehensive Income relates to a taxation provision movement of £133,000 on the sale of 30 Lombard Street, EC3.

9 Dividends

The final dividend is not included in the accounts as a liability as at 31 March 2021, as it is subject to shareholder approval at the Annual General Meeting. The final dividend for 2020 and interim for 2020 paid in the year are included in the Consolidated Statement of Changes in Equity above.

	2021 £'000	2020 £'000
Ordinary dividends
31 March 2020 final dividend of 4.4 pence (31 March 2019: 7.4 pence) paid during the year	4,148	6,965
30 September 2020 interim dividend of 2.8 pence (30 September 2019: 2.8 pence) paid during the year	2,642	2,639
Total recognised in financial statements	6,790	9,604
Proposed final dividend of 5.5 pence (31 March 2020: 4.4 pence)	5,116	4,148

10 Investment properties

	Group			Company
	Freehold £'000	Long leasehold £'000	Total £'000	Freehold £'000	Long leasehold £'000	Total £'000
Valuation
At 1 April 2020	401,998	101,768	503,766	401,998	31,402	433,400
Additions - capital expenditure	6,337	484	6,821	6,337	478	6,815
Additions - purchases	10,658	-	10,658	10,658	-	10,658
Revaluation deficit	(18,445)	(3,134)	(21,579)	(18,445)	(3,128)	(21,573)
Adjustment for tenant incentives recognised in advance under IFRS 16	(449)	(1,327)	(1,776)	(449)	28	(421)
Disposals	-	(69,520)	(69,520)	-	-	-
IFRS write off on disposal	-	5,009	5,009	-	-	-
Headlease adjustment	-	801	801	-	801	801
Amortisation of grossed up headlease liabilities	-	(1)	(1)	-	(1)	(1)
Book value as at 31 March 2021	400,099	34,080	434,179	400,099	29,580	429,679

Adjustment for grossing up of headlease liabilities	-	(3,682)	(3,682)	-	(3,682)	(3,682)
Adjustment for tenant incentives recognised in advance under IFRS 16	7,301	102	7,403	7,301	102	7,403
Valuation as at 31 March 2021	407,400	30,500	437,900	407,400	26,000	433,400

	Group			Company
	Freehold £'000	Long leasehold £'000	Total £'000	Freehold £'000	Long leasehold £'000	Total £'000
Valuation
At 1 April 2019	378,125	100,653	478,778	378,125	30,790	408,915
Additions - development	16,396	555	16,951	16,396	57	16,453
Additions - purchases	16,438	-	16,438	16,438	-	16,438
Revaluation (deficit)/surplus	(3,235)	3,346	111	(3,235)	393	(2,842)
Adjustment for tenant incentives recognised in advance under IFRS 16	474	(2,785)	(2,311)	474	163	637
Disposals	(6,200)	-	(6,200)	(6,200)	-	(6,200)
Amortisation of grossed up headlease liabilities	-	(1)	(1)	-	(1)	(1)
Book value as at 31 March 2020	401,998	101,768	503,766	401,988	31,402	433,400

Adjustment for grossing up of headlease liabilities	-	(4,403)	(4,403)	-	(2,882)	(2,882)
Adjustment for tenant incentives recognised in advance under IFRS 16	6,852	3,785	10,637	6,852	130	6,982
Valuation as at 31 March 2020	408,850	101,150	510,000	408,850	28,650	437,500

In accordance with the Group's accounting policy on properties there was an external valuation at 31 March 2021. These valuations were carried out by Knight Frank LLP, Chartered Surveyors and Valuers. All valuations were carried out in accordance with the Appraisal and Valuation Standards of RICS, on an open market basis.

The historical cost of properties stated at valuation is approximately £322 million (2020: £377 million) for the Group and £321 million (2020: £315 million) for the Company.

The amount of interest capitalised during the year was nil (2020: £550,933). The Group is a REIT and therefore does not obtain relief from Corporation Tax.

Investment property valuation method and assumptions

The fair value of the property portfolio has been determined using income capitalisation techniques, whereby contracted and market rental values are capitalised with a market value for properties under development, the fair value is calculated by estimating the fair value of the completed property using the income capitalisation technique less estimated costs to completion and a risk premium. The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable recent market transactions on arm's length terms.

These techniques are consistent with the principles in IFRS 13 Fair Value Measurement and use significant unobservable inputs such that the fair value measurement of each property within the portfolio has been classified as Level 3 in the fair value hierarchy. There were no transfers in or out of Level 3 for investment properties during the year.

Losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to £23.4 million (2020: £2.2 million) and are presented in the Group income statement in the line item 'Revaluation of investment properties'.

Due to Covid-19 there was a material uncertainty clause attached to the Knight Frank valuation for the year ended 31 March 2020. Whilst Covid-19 continues to impact financial markets and restrictions remain in place in many countries including the UK the stabilising conditions have meant that no material uncertainty clause is included in the year ended 31 March 2021.

The asset held for sale is The Planets, Woking totalling £13.5 million, all of which has been reclassified from investment property. This property remains held for sale at 31 March 2021, with the original exchange of sale contracts in March 2019. This sale remains conditional on the receipt of planning consent being achieved by the purchaser. Whilst the submitted planning consent was not approved on initial submission, management is confident that a successful appeal will be undertaken with an adjusted plan such that the disposal will be able to be completed within 12 months of the balance sheet date.

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Group's property portfolio, together with the impact of significant movements in these inputs on the fair value measurement, are shown below:

	London offices	South East offices	South East industrial
Valuation technique	Income capitalisation	Income capitalisation	Income capitalisation
Fair value	£56,000,000	£235,600,000	£122,400,000
ERV (psf pa) - average	£53.69	£23.62	£11.08
ERV (psf pa) - range	£7.50-£100.00	£14.50-£48.00	£5.00-£17.00
True equivalent yield - average	4.95%	7.84%	5.20%
True equivalent yield - range	4.36%-6.06%	5.95%-10.58%	4.25%-6.23%
Capital value psf	£741.20	£321.87	£216.70

A further £23.90 million has been designated 'other' and not included in the analysis above.

Definitions for ERV and true equivalent yield are provided in the glossary.

	Change in ERV		Change in equivalent yield
	+5%	-5%	+0.25%	-0.25%
Sensitivity analysis
Change in value of investment properties	+£19m	-£19m	-£20m	+£22m

11 Plant and equipment

	Group £'000	2021 Company £'000	Group £'000	2020 Company £'000
Cost
Opening	231	151	133	133
Additions	24	24	132	52
Disposals	(20)	(20)	(34)	(34)
Closing	235	155	231	151

Depreciation
Opening	83	67	61	61
Charge for year	47	31	50	34
Disposals	(20)	(20)	(28)	(28)
Closing	110	78	83	67
Net book value	125	77	148	84

12 Investments

	Shares in subsidiary undertakings £'000
Company
At 1 April 2020	-
At 31 March 2021	-

At 31 March 2021 McKay Securities Plc owned 100% of the ordinary share capital of Baldwin House Limited, representing 100 shares with nominal value of £1. Baldwin House Limited operates in England and is registered in England and Wales with a registered address of 20 Greyfriars Road, Reading, Berkshire RG1 1NL.

The principal activity of the subsidiary undertaking is property investment and development.

The Directors are of the opinion that the investment in the subsidiary undertaking is not worth less than the current book value.

13 Trade and other receivables

	Group £'000	2021 Company £'000	Group £'000	2020 Company £'000
Current
Rent receivables	2,072	2,072	2,360	2,360
Amounts due from subsidiary undertakings	-	-	-	43,918
Prepayments	336	336	822	637
Other debtors	655	654	18	18
	3,063	3,062	3,200	46,933
Non-current
IFRS 16 lease incentives	7,403	7,404	6,982	6,982

Rent receivables of £434,000 were written off during the year and are not included in the table above.

Group trade receivables that were past due but not impaired are as follows:

	2021 £'000	2020 £'000
Less than three months due	2,072	2,360
Between three and six months due	-	-
Between six and 12 months due	-	-
	2,072	2,360

The Group holds no collateral in respect of these receivables.

14 Liabilities

	Group £'000	2021 Company £'000	Group £'000	2020 Company £'000
Trade and other payables
Rent received in advance	5,806	5,806	5,389	5,389
Amounts due to subsidiary undertaking	-	25,517	-	-
Other taxation and social security costs	521	521	1,736	1,726
Accruals	2,612	2,612	4,551	4,551
Other creditors	294	294	757	757
	9,233	34,750	12,433	12,423

The fair value of current liabilities is estimated as the present value of future cashflows which approximate their carrying amounts due to the short-term maturities.

Creditor days for the Group were one day (2020: ten days).

Loans and other borrowings

The analysis of bank loans which are secured on certain of the freehold and leasehold properties of the Group is as follows:

	2021 £'000	2020 £'000
Group and Company
Secured bank loans	144,000	194,000
Bank facility fees	(2,631)	(3,495)
	141,369	190,505

The bank loans are secured against land and buildings with a carrying amount of £412,250,000 (2020: £476,750,000).

	Group £'000	2021 Company £'000	Group £'000	2020 Company £'000
Repayable in:
Less than one year	-	-	-	-
One to two years	-	-	-	-
Two to five years	77,181	77,181	126,373	126,373
Five to ten years	64,188	64,188	-	-
Greater than ten years	-	-	64,132	64,132
	141,369	141,369	190,505	190,505

	2021 £'000	2020 £'000
Changes in liabilities arising from financing activities

Current loans as at 1 April
Non-current loans as at 1 April	190,505	163,176
Total loans as at 1 April	190,505	163,176
Gross debt drawdowns	20,000	34,000
Gross debt repayments	(70,000)	(5,000)
Bank facility fees (cash)	(34)	(2,569)
Facility fee amortisation (non-cash)	898	898
Total loans as at 31 March	141,369	190,505

	2021 £'000	2020 £'000
Present value of lease liabilities as at 1 April	4,403	4,404
Headlease cash payments	(282)	(285)
Impact of unwind of discount rate (non-cash)	282	284
Headlease adjustment	800	-
Headlease write off on disposal	(1,520)	-
Present value of lease liabilities as at 31 March	3,683	4,403

Borrowing facilities

The Group has various undrawn committed borrowing facilities. The facilities available in respect of which all conditions precedent had been met were as follows:

	2021 £'000	2020 £'000
Expiring in less than one year	-	-
Expiring in one to two years	-	-
Expiring in two to five years	101,000	51,000
Expiring in five to ten years	-	-
	101,000	51,000

Liquidity risk

Liquidity risk is managed through committed bank facilities that ensure sufficient funds are available to cover potential liabilities arising against projected cashflows. The Group's facilities are revolving in part, allowing the Group to apply cash surpluses to temporarily reduce debt.

On 8 April 2019 the Company increased total facilities to £245 million. Three bilateral facilities (£125 million) were replaced with one revolving credit facility ('RCF') of £180 million.

The following table details the Group's remaining contractual maturities for its non-derivative financial liabilities. The tables have been drawn up based on the undiscounted cashflows of financial liabilities based upon the earliest dates on which the Group can be required to pay. The table includes both interest and principal cashflows. When the amount payable is not fixed, the amount disclosed has been determined by reference to the applicable interest rate as at the balance sheet date.

Financial instrument maturity

	Contractual cashflows
	Total	2 months or less	2-12 months	1-2 years	2-5 years	More than 5 years
At 31 March 2021
Non-derivative financial liabilities
Bank overdraft	-	-	-	-	-	-
Secured bank loans	144,000	-	-	-	79,000	65,000
Bank interest	28,304	-	4,114	4,114	9,349	10,727
Lease liabilities	22,252	-	230	230	690	21,102
Other taxation and social security costs	521	-	521	-	-	-
Accruals	2,612	-	2,612	-	-	-
Other creditors	294	-	294	-	-	-
	197,983	-	7,771	4,344	89,039	96,829

	Contractual cashflows
	Total	2 months or less	2-12 months	1-2 years	2-5 years	More than 5 years
At 31 March 2020
Non-derivative financial liabilities
Bank overdraft	-	-	-	-	-	-
Secured bank loans	194,000	-	-	-	129,000	65,000
Bank interest	38,798	-	5,709	5,709	14,040	13,340
Lease liabilities	25,798	-	285	285	857	24,371
Other taxation and social security costs	1,736	-	1,736	-	-	-
Accruals	4,551	-	4,551	-	-	-
Other creditors	757	-	757	-	-	-
	265,640	-	13,038	5,994	143,897	102,711

Credit risk

Credit evaluations are performed on all tenants looking to enter into lease or pre-lease agreements with the Group. Credit risk is managed by tenants paying rent in advance. Outstanding tenants' receivables are regularly monitored.

At the Statement of Financial Position date there were no significant concentrations of credit risk, except for the low risk lease commitments which were either government departments or held a top credit rating. The maximum exposure to credit risk is represented by the carrying amount of each financial asset including derivative financial instruments on the Group Statement of Financial Position.

The Group has no exposure to currency risks.

Market risk

The Group is exposed to market risk through changes in interest rates or availability of credit. The Group actively monitors these exposures.

Interest rate risk

The Group adopts a policy of ensuring that its exposure to interest rate fluctuations is mitigated by the use of financial instruments.

A 25 basis points change in interest rate levels would increase or decrease the Group's annual profit and equity £197,500 (2020: £322,500). This sensitivity has been calculated by applying the interest rate change to the variable rate borrowings at the year end. The comparative figure for 2020 was also based on a 25 basis points change in interest rates. The 25 basis points change being used shows how the profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at the year end.

Interest rate derivatives

The Group does not hold any interest rate derivatives as at 31 March 2021.

	2021	2020
Weighted average cost of borrowing	3.10%	3.35%

There are no liabilities at maturity and no material unrecognised gains or losses.

In both 2021 and 2020 there was no difference between the book value and the fair value of all the other financial assets and liabilities of the Group and Company.

15 Lease liabilities

	Minimum lease payments
	2021 £'000	2020 £'000
Group lease liabilities are payable as follows:
Year one	230	285
Year two	230	286
Year three	230	286
Year four	230	285
Year five	230	285
Greater than five years	21,102	24,371
	22,252	25,798
Less future finance charges	(18,569)	(21,395)
Present value of lease obligations	3,683	4,403

The above lease liabilities relate to investment properties with a carrying value of £26,000,000 (2020: £95,900,000). The terms of these lease agreements are for periods of between 97 and 125 years. There are no restrictions imposed by the lease agreements. No contingent rents are payable.

Lease liabilities are effectively secured as the rights to the leased assets revert to the lessor in event of default.

The annual obligation for the first five years is £230,000 pa.

16 Operating leases

The Group leases out all of its investment properties under operating leases.

The future aggregate minimum rentals receivable under non-cancellable operating leases are as follows:

	2021 £'000	2020 £'000
Not later than one year	20,081	20,224
Later than one year but not later than five years	52,613	52,964
Later than five years	24,987	55,336
	97,681	128,524

17 Share-based payments

During the year to 31 March 2021, the Group had one share-based payment arrangement, which is described below. In the case of the PSP awards, the expected volatility was determined by calculating historical volatility of the Group's share price.

Performance Share Plan

The performance targets for PSP awards are a combination of TSR and absolute NAV performance over a three-year period. If the performance criteria have not been met at the end of the vesting period then the awards will lapse.

The nil cost awards outstanding at 31 March 2021 have been fair valued using a Monte Carlo valuation pricing model using the following main assumptions:

	23 June 2020	10 June 2019	8 June 2018	18 July 2017
Share price	£1.94	£2.40	£2.67	£2.26
Term	3 years	3 years	3 years	3 years
Risk free rate	(0.05)%	0.49%	0.80%	0.26%
Dividend yield	0%	0%	0%	0%
Volatility - Company	37.0%	31.0%	31.0%	29.0%
TSR fair value	£1.10	£1.34	£1.73	£1.42
NAV fair value	£1.94	£2.40	£2.70	£2.26

Share-based payments

	2021 Number of shares	2020 Number of shares
Outstanding at the beginning of the period	1,721,829	1,732,473
Granted during the period	733,655	638,465
Forfeited during the period	-	(18,880)
Exercised during the period	(75,477)	(139,573)
Expired during the period	(273,287)	(490,656)
Outstanding at the end of the period	2,106,720	1,721,829

During the year 75,477 shares were issued to settle the 2017 PSP (First Grant) on 12 August 2020. These shares were issues out of distributable revenues under the Company's Articles of Association.

The above table includes outstanding shares at the end of the year relating to deferred bonus shares of 144,921 (2020: 107,055), of which 37,866 were granted during the year (2020: 50,845) and nil exercised in the period (2020: 57,480).

The weighted average life of the 2,106,720 shares outstanding is 7.82 years (2020: 8.29 years). The weighted average price on the date of exercise for options exercised during the year was £1.88 (2020: £2.40).

18 Called up share capital

	Issued £	2021 Number of shares	Issued £	2020 Number of shares
Ordinary 20 pence shares in issue
At 1 April	18,852,794	94,263,998	18,824,879	94,124,425
Issue of shares in year¹	15,095	75,477	27,915	139,573
Repurchase of shares	(107,708)	(538,542)	-	-
At 31 March	18,760,181	93,800,933	18,852,794	94,263,998

1. During the year 75,477 shares (2020: 139,573) were issued to settle the 2017 PSP (First Grant) on 12 August 2020.

19 Capital management

The Group's objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns to shareholders and to maintain an appropriate capital structure to minimise the cost of capital. The current capital structure of the Group comprises a mix of equity and debt. Equity comprises issued share capital, reserves and retained earnings, as disclosed in the Group Balance Sheet.

The Group uses a number of key metrics¹ to manage its capital structure, including:

• gearing

• LTV¹

The Board monitors the ability of the Group to pay dividends out of available cash and distributable profits.

1. See glossary.

20 Related party transactions

	Balance owed to/(owing from)
	2021 £'000	2020 £'000
Subsidiary undertakings
Baldwin House Limited	25,516	(43,918)
	25,516	(43,918)

There were no transactions with Directors, who are considered key management personnel, other than remuneration, details of which are provided in the Directors' Annual Remuneration Report.

See note 23 for details on the pension scheme.

These related party transactions are between Baldwin House Limited and the Company. They relate to property payments and receipts for the two properties held in Baldwin House Limited during the year. This balance is zero at Group level.

The Parent Company funded capital expenditure on behalf of Baldwin House in the year amounting to £6,088 (2020: £544,795).

2021

£'000

2020

£'000

Interest charge by McKay to Baldwin House

1,321

Management fee charged by McKay

174

338

21 Net asset value per share

In October 2019, EPRA issued new best practice reporting guidelines for Net Asset Value ('NAV') metrics. These recommendations are effective for accounting periods starting on 1 January 2020 and have been adopted by the Group in reporting the 31 March 2021 position.

EPRA have introduced three new NAV metrics: Net Tangible Assets ('NTA'), Net Reinvestment Value ('NRV') and Net Disposal Value ('NDV'). EPRA NTA is considered to be the most appropriate measure for McKay's operating activity and is now the primary measure of net asset value, replacing EPRA NAV.

	31 March 2021			31 March 2020
	Net assets £'000	Shares '000	NAV per share pence	Net assets £'000	Shares '000	NAV per share pence
Basic	289,902	93,801	309	309,166	94,264	328
Number of shares under option	-	145	-	-	143	(1)
Diluted/EPRA NDV	289,902	93,946	309	309,166	94,407	327
Deferred taxation	-	-	-	1,392	-	2
EPRA NTA	289,902	93,946	309	310,558	94,407	329

The table below shows the calculation for each of the three new EPRA metrics compared to those previously reported.

	Current measures			Previous measures
As at 31 March 2021	EPRA NTA £'000	EPRA NRV £'000	EPRA NDV £'000	EPRA NAV £'000	EPRA NNNAV £'000
Equity attributable to ordinary shareholders	289,902	289,902	289,902	289,902	289,902
Deferred taxation	-	-	-	-	-
Net assets	289,902	289,902	289,902	289,902	289,902

Diluted shares ('000)	93,946	93,946	93,946	93,946	93,946
Diluted net assets per share (pence)	309	309	309	309	309

	Current measures			Previous measures
As at 31 March 2020	EPRA NTA £'000	EPRA NRV £'000	EPRA NDV £'000	EPRA NAV £'000	EPRA NNNAV £'000
Equity attributable to ordinary shareholders	309,166	309,166	309,166	309,166	309,166
Deferred taxation	1,392	1,392	-	1,392	-
Net assets	310,558	310,588	309,166	310,558	309,166

Diluted shares ('000)	94,407	94,407	94,407	94,407	94,407
Diluted net assets per share (pence)	329	329	327	329	327

22 Commitments and contingent liabilities

2021

Group

£'000

Company

£'000

2020

Group

£'000

Company

£'000

Capital expenditure committed but not provided for

672

The 2020 commitments related to the Group's one development in place at the end of the year.

23 Pensions

The Group and Company operate a defined benefit pension scheme in the UK providing benefits based on final pensionable salary. The assets of the scheme are held separately from those of the Group, being invested with insurance companies and managed funds. The contributions are determined by a qualified actuary on the basis of a triennial valuation using the attained age method. The most recent actuarial valuation was as at 31 March 2020. The assumption which has the most significant effect on the results of the valuation are those relating to the rate of return on investments. It was assumed that the investment returns would be 5.0% per annum.

The Group contributes £240,000 per annum into the Scheme. This was reviewed as part of the 2020 triennial valuation.

At the 31 March 2020 actuarial valuation the scheme was 78.0% funded on the statutory funding objective basis. A recovery plan and schedule of contributions has been agreed designed to address this shortfall.

The IAS 19 valuation for the pension scheme disclosures is based on the most recent actuarial valuation at 31 March 2020 and updated by First Actuarial in order to assess the liabilities of the scheme at 31 March 2021. Scheme assets are stated at their market value at 31 March 2021.

The Scheme has been closed to new entrants since 1989.

The assets of the scheme have been taken at market value and the liabilities have been calculated using the following principal actuarial assumptions:

	2021	2020
Inflation	3.3%	2.6%
Salary increases	n/a	n/a
Rate of discount	1.7%	2.3%
Pension in payment increases	3.2%	2.6%

The mortality assumptions adopted at 31 March 2021 imply the following life expectancies for members currently aged 60:

Male = 27.8 years

	2021 £'000	2020 £'000
The fair value of scheme assets are as follows:
Equities	2,134	1,693
Gilts	557	264
Corporate and overseas bonds	266	252
Absolute return portfolios	2,173	1,984
Property	152	120
Cash	315	443
Other	89	83
	5,686	4,839

100.0% of the equities are in quoted equities.

The asset split is approximated using the current fund splits for each manager.

The plan assets do not expose the entity to any significant concentration risk.

	2021 £'000	2020 £'000
Changes in the value of scheme assets over the year
Market value of assets at start of year	4,839	5,332
Return on scheme assets	109	115
Actuarial gain	931	(417)
Employer contributions	240	240
Benefits paid	(433)	(431)
Market value of assets at end of year	5,686	4,839

Analysis of changes in the value of the defined benefit obligation over the period:

	2021 £'000	2020 £'000
Value of defined benefit obligation at start of period	6,936	7,440
Interest cost	155	159
Benefits paid	(433)	(431)
Actuarial gains: experience differing from that assumed	167	83
Actuarial gains: changes in demographic assumptions	313	-
Actuarial gains: changes in financial assumptions	728	(315)
Value of defined benefit obligation at end of period	7,866	6,936

Sensitivity analysis

Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, expected salary increase and mortality. The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. The RPI inflation assumption sensitivity factors in the impact of inflation on the rate of increase in pension in payment assumptions.

	Change in assumption	Change in defined benefit obligation
Assumption
Discount rate	+/-0.5% pa	-/+5%
RPI inflation	+/-0.5% pa	+4%/-3%
Assumed life expectancy	+1 year	+6%

Analysis of the amount charged to operating profit:

	2021 £'000	2020 £'000
Operating profit
Current service cost	-	-
Analysis of the amount (credited)/charged to finance (income) /costs
Return on pension scheme assets	(109)	(115)
Interest on pension scheme liabilities	155	159
Total charge to profit and loss	46	44

Analysis of the movement in the balance sheet deficit:

	2021 £'000	2020 £'000
Deficit in scheme at beginning of year	(2,097)	(2,108)
Movement in year:
Current service cost	-	-
Net interest/return on assets	(46)	(44)
Contributions	240	240
Actuarial loss	(277)	(185)
Deficit in scheme at end of year	(2,180)	(2,097)

The last active member reached retirement age in May 2013.

The weighted average maturity profile of the defined benefit obligation at the end of the year is ten years (2020: ten years).

24 Post balance sheet events

There has been no material post balance events between the balance sheet date and the signing of the accounts.

Supplementary information (unaudited)

Table 1: EPRA Summary

		2021		2020
	Reference	£'000	Pence per share	£'000	Pence per share
EPRA Earnings	Table 2	9,626	10.21	10,019	10.63
EPRA NTA	Table 3	290,556	309	310,558	329
EPRA NRV	Table 3	290,556	309	310,558	329
EPRA NDV	Table 3	289,902	309	309,166	327
EPRA NIY	Table 4		4.5%		3.8%
EPRA NIY (topped-up)	Table 4		5.2%		5.2%
EPRA Vacancy rate	Table 5		14.6%		11.3%
EPRA Cost Ratio (excluding vacant property costs)	Table 6		25.9%		25.3%
EPRA Cost Ratio (including vacant property costs)	Table 6		31.8%		34.3%

Table 2: EPRA Earnings

	Notes	2021 £'000	2020 £'000
Earnings per IFRS income statement		(16,450)	8,095

Adjustments to calculate EPRA Earnings:

Movement in revaluation of investment properties		23,356	2,200
Loss/(profit) on disposal of investment properties		2,854	(1,668)
Taxation		(134)	1,392
EPRA Earnings		9,626	10,019
Basic number of shares (000's)		94,292	94,234
EPRA Earnings per share		10.21	10.63
Company specific adjustments:
Share Based Payments (IFRS 2)		489	(222)
Other property income		(157)	(70)
Adjusted earnings		9,959	9,727
Adjusted EPS		10.56	10.32

Table 3: EPRA Net Asset Measures

In October 2019, the European Public Real Estate Association ('EPRA') published new Best Practices Recommendations ('BPR') for financial disclosures by public real estate companies. The BPR introduced three new measures of net asset value: EPRA net tangible assets ('NTA'), EPRA net reinstatement value ('NRV') and EPRA net disposal value ('NDV').

These recommendations are effective for accounting periods starting on 1 January 2020 and have been adopted by the Group in reporting the 31 March 2021 position.

EPRA NTA is considered to be most consistent with McKay Securities' business as a UK REIT providing long-term progressive and sustainable returns. EPRA NTA now acts as the primary EPRA measure of net asset value.

A reconciliation of the three new EPRA NAV metrics is shown in the table below. The previously reported EPRA NAV and EPRA NNNAV have also been included for comparative purposes.

As at 31 March 2021	Current Measures			Previous Measures
As at 31 March 2021	EPRA NTA £'000	EPRA NRV £'000	EPRA NDV £'000	EPRA NAV £'000	EPRA NNNAV £'000
Equity attributable to ordinary shareholders	289,902	289,902	289,902	289,902	289,902
Deferred taxation	-	-	-	-	-

Net assets	289,902	289,902	289,902	289,902	289,902
Diluted shares ('000)	93,946	93,946	93,946	93,946	93,946
Diluted net assets per share (p)	309	309	309	309	309

As at 31 March 2020	Current Measures			Previous Measures
As at 31 March 2020	EPRA NTA £'000	EPRA NRV £'000	EPRA NDV £'000	EPRA NAV £'000	EPRA NNNAV £'000
Equity attributable to ordinary shareholders	309,166	309,166	309,166	309,166	309,166
Deferred taxation	1,392	1,392	-	1,392	-

Net assets	310,558	310,558	309,166	310,558	309,166
Diluted shares ('000)	94,407	94,407	94,407	94,407	94,407
Diluted net assets per share (p)	329	329	327	329	327

Table 4: EPRA NIY

	Notes	2021 £'000	2020 £'000
Investment property - wholly owned		437,900	510,000
Investment property - share of JVs/Funds
Trading property (including share of JVs)
Less: developments		-	(24,000)
Completed property portfolio		437,900	486,000
Allowance for estimated purchasers' costs
Gross valuation of completed property portfolio	A	437,900	486,000

Annualised cash passing rental income		22,197	21,897
Property outgoings		(2,645)	(3,252)
Annualised net rents	B	19,552	18,645
Adjustment for notional rent and other lease adjustments		3,415	6,431
Topped-up net annualised rent	C	22,967	25,076

EPRA NIY	B/A	4.5%	3.8%
EPRA 'topped-up' NIY	C/A	5.2%	5.2%

Table 5: EPRA Vacancy Rate

	Notes	2021 £'m	2020 £'m
Annualised estimated rental value of vacant premises	A	4.6	4.0
Annualised estimated rental value of the completed property portfolio	B	31.5	34.9
EPRA Vacancy Rate	A/B	14.6%	11.3%

Table 6: EPRA Cost Ratio

	Notes	2021 £'000	2020 £'000
Administrative expenses		5,175	5,385
Net service charge costs		1,191	986
Direct vacancy costs		1,454	2,266
Management fees		(361)	(293)
Other operating income		-	-
EPRA costs (including direct vacancy costs)	A	7,820	8,637
Group vacant property costs		(1,454)	(2,266)
EPRA costs (excluding direct vacancy costs)	B	6,366	6,371

Gross rental income less ground rents	C	24,624	25,164

EPRA costs ratio (including vacant property costs)	A / C	31.8%	34.3%
EPRA costs ratio (excluding vacancy property costs)	B / C	25.9%	25.3%

The Report and Financial Statements will be posted to shareholders on 2 June 2021 with copies available from the Company's registered office at 20 Greyfriars Road, Reading, RG1 1NL from the same date, and from the Company's website www.mckaysecurities.plc.uk.

Glossary

Adjusted EPS

Earnings per share - based on profits and adjusted to exclude certain items as set out in note 8.

Adjusted profit before tax

Profit before tax adjusted to exclude profit from the disposal of investment properties, share-based payments, other property income, the change in fair value derivatives and the movement in revaluation of investment property. These items are excluded on the bases that they relate to non-core rental activity as set out in note 4.

Book value

The amount at which assets and liabilities are reported in the accounts.

BREEAM

Building Research Establishment Environmental Assessment Method. An environmental standard that rates the sustainability of buildings in the UK.

Carrying value

The value of an asset based on prior valuation with the addition of any subsequent capital expenditure.

Contracted rent

Rent payable under the terms of a lease, less ground rent, with no allowance for the value of incentives granted at lease commencement.

CRC

Carbon Reduction Commitment. A mandatory emissions reduction standard in the UK that covers all forms of energy excluding transportation fuels.

Diluted figures

Reported amount adjusted to include the effects of potential shares issuable under employee share schemes.

Dun and Bradstreet

Provider of business information and risk management insight.

Earnings per share ('EPS')

Profit after taxation attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year.

EPC

Energy Performance Certificate. Certificates carry ratings which measure the energy and carbon emission efficiency of the property using a grade from an 'A' to a 'G'.

EPRA

Standard calculation methods for adjusted EPS, NTA, NRV and NDV as set out by the European Public Real Estate Association ('EPRA') in their Best Practice and Policy Recommendations.

Equivalent yield (True)

The internal rate of return from an investment property, based on the value of the property assuming the current rent passing reverts to ERV and assuming the property becomes fully reoccupied over time. It assumes that rent is received quarterly in advance.

Estimated Rental Value ('ERV')

The valuers estimated amount for which floor space should let on the date of valuation on appropriate lease terms net of ground rents payable. Also known as MRV.

Extensible Business Reporting Language ('XBRL')

A computer language for electronic transmission of business and financial information.

Gearing

Drawn debt to shareholders' funds.

GRESB

Global Real Estate Sustainability Benchmark.

Industrial property

Term used to include light industrial, industrial and distribution warehouse property falling within classes B1c, B2 and B8 of the Town & Country Planning Use Classes Order. The term does not include retail warehousing, falling within class A1 of the Order.

Initial yield

Net rents payable at the valuation date expressed as a percentage of the value of property assets after allowing for notional purchasers' costs.

Interest cover ('ICR')

The number of times Group net interest payable is covered by adjusted profit before interest and taxation.

Interest rate swap

A financial instrument where two parties agree to exchange an interest rate obligation for a pre-determined amount of time.

IPD/MSCI

Investment Property Databank. Leading provider of independent statistical analysis to the commercial property sector.

Loan to value ('LTV')

Drawn debt divided by the value of property assets.

Net asset value ('NAV') per share

Total equity divided by the number of ordinary shares in issue at the period end.

Net debt

Total borrowings less cash credit balances.

Portfolio capital return ('PCR')

The annual valuation movement and realised surpluses/deficits from the Company's directly held investment portfolio expressed as a percentage return on the value at the beginning of the period, adjusted for acquisitions and capital expenditure.

Property Income Distribution ('PID')

PID dividend payments are taxable as letting income in the hands of shareholders who pay tax. They are paid after deduction of withholding tax at the basic rate.

Real Estate Investment Trust ('REIT')

A tax efficient structure for the management of property. It must be publicly quoted with 75% of its profits and assets derived from a qualifying property rental business which is exempt from tax on income and gains.

Rental value growth

Increase in rental value, as determined at the valuation date, over the period on a like-for-like basis.

Reversion

Potential uplift in rental value to market rent, as determined at the valuation date, likely to arise from a rent review, lease renewal or letting.

RPIX

Retail Price Index excluding mortgage interest.

Shareholders' funds

Total equity of the Company.

IFRS 16

The IFRS treatment in respect of letting incentives. It requires the Company to offset the value of incentives granted to lessees against the total rent due over the length of the lease, or to a break clause if earlier.

Stamp duty land tax

Government tax levied on certain legal transactions including the purchase of property.

Task force on Climate-related Financial Disclosure ('TCFD')

The TCFD climate-related financial disclosure recommendations are designed to promote advancements in the availability and quality of climate-related disclosure.

Total property return ('TPR')

Valuation surplus/(deficit) plus profit on disposal plus income from investment properties divided by the book value.

Total shareholder return ('TSR')

The growth in the value of an ordinary share plus dividends reinvested during the year expressed as a percentage of the share price at the beginning of the year.

True equivalent yield

The constant capitalisation rate, which, if applied to all cashflows from an investment property, including current net reversions and such items as voids and expenditure, equates to the market value having taken into account notional purchasers' costs and assuming rents paid quarterly in advance.

Weighted average unexpired lease term ('WAULT')

The average lease term remaining to expiry across the portfolio weighted by rental income. This is also disclosed assuming all break clauses are exercised at the earliest date.

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END

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