TIDMSIR
RNS Number : 8452F
Secure Income REIT PLC
12 March 2020
12 March 2020
Secure Income REIT Plc
Results for the year ended 31 December 2019
Secure Income REIT Plc (AIM: SIR) (the "Company" or the
"Group"), the specialist long term income UK REIT, today announces
its results for the year ended 31 December 2019.
Highlights
31 December 31 December
2019 2018 Change in year
---------------------------------- ------------- ------------- ----------------
Net assets GBP1,384.5m GBP1,281.6m Up 8.0%
EPRA net assets GBP1,396.9m GBP1,292.9m Up 8.0%
EPRA net assets per share 431.1p 400.5p Up 7.6%
Net Loan To Value ratio 31.9% 43.0% Down 26%
Uncommitted cash GBP234.2m GBP66.4m Up 350%
Annualised passing rent: like
for like (1) GBP110.7m GBP108.5m Up 2.0%
Portfolio blended net initial
valuation yield: like for like
(1) 4.95% 5.05% Down 10 bps
Running Yield within 12 months:
like for like (1),(2) 5.08% 5.16% Down 8 bps
Weighted Average Unexpired Lease
Term 21.0 years 20.9 years Up 0.5%
---------------------------------- ------------- ------------- ----------------
(1) Like for like data excludes the effect of sales in either
period
(2) Using independent external valuers' RPI estimates averaging
2.6%
Year to Year to
31 December 31 December
2019 2018 Change in year
--------------------------------------- -------------- -------------- ----------------
Total Accounting Return 11.7% 11.9% Down 1.7%
Total Shareholder Return 19.4% 8.3% Up 134%
Adjusted EPRA earnings per share 15.3p 14.7p Up 4.1%
Earnings per share 47.5p 48.9p Down 2.9%
Dividends per share 16.3p 13.9p Up 17.3%
Latest dividend per share annualised,
as a percentage of EPRA NAV 3.9% 3.9% -
--------------------------------------- -------------- -------------- ----------------
-- 7.6% g rowth in NAV per share and EPRA NAV per share
-- Shareholder Returns:
-- Total Shareholder Return of 19.4% in the year
-- Total Accounting Return of 11.7% in the year
-- Total Accounting Return of 19.0% per annum since listing in
June 2014
-- Adjusted EPRA EPS up 4.1% to 15.3p for the year
-- Distributions:
-- dividends per share up 17.3% year on year to 16.3 pence per
share in the year
-- Adjusted EPRA EPS distributed as a fully covered dividend of
15.2 pence per share, plus 1.1 pence per share of 'top-up'
dividends paid out of surplus realised on the August 2019 hospitals
sale
-- Eight of the Group's 19 private hospitals sold for gross
consideration of GBP347 million in the year:
-- contract price 19% above 31 December 2018 book value
-- net debt reduced by GBP316 million contributing to
uncommitted cash of GBP234 million at 31 December 2019
-- 65% capital return and over 100% unlevered property return on
the sold hospital assets since IPO
-- Portfolio of 161 Key Operating Assets in defensive sectors:
-- like for like portfolio valuation up 4.0% over the year to
GBP2.1 billion
-- externally valued at a blended Net Initial Yield of 4.95%
-- like for like passing rents up 2.0% to GBP110.7 million
-- Running Yield within 12 months 5.08% (assuming independent
external valuers' estimates of RPI uplifts averaging 2.6%)
-- Weighted Average Unexpired Lease Term as at 31 December 2019
of 21.0 years with no breaks, up from 20.9 years at 31 December
2018
-- strong and predictable growth prospects underpinned by
upwards only RPI-linked rent reviews (59% of passing rents) and
fixed rental uplifts (41% of passing rents)
-- Close Management Team alignment with shareholders through
management shareholding of 12% worth GBP173.5 million at 31
December 2019 EPRA NAV
Martin Moore, Non-Executive Chairman of the Company,
commented:
"We are pleased to report another set of strong results with
over GBP360 million of very profitable disposals and a 7.6% rise in
EPRA Net Asset Value per share contributing to our Total Accounting
Return of 19% per annum since listing in 2014. Stock market
volatility has returned in recent days prompting a flight to safety
that has driven bond yields around the world to historic lows.
Safety has rarely, if ever, been as expensive in offering such low
income returns which seem unlikely to match the level of inflation.
In this environment we strongly believe in the attraction of the
safe, inflation-linked long term income streams provided by Secure
Income REIT, with its properties valued at a net initial yield of
almost 5% driving secure and growing long term dividends. With
GBP234 million of uncommitted cash, net leverage at the Company's
lowest ever level, and with materially the longest leases amongst
the major UK long lease REITs, we are well placed to both ride out
any short term storms and take advantage of any opportunities that
arise in the market."
For further information on the Company, please contact:
Secure Income REIT Plc +44 20 7647 7647
Nick Leslau enquiries@SecureIncomeREIT.co.uk
Mike Brown
Sandy Gumm
Stifel Nicolaus Europe Limited
(Nominated Adviser) +44 20 7710 7600
Mark Young StifelSecureIncomeREIT@stifel.com
Stewart Wallace
FTI Consulting
(PR Adviser) +44 20 3727 1000
Dido Laurimore SecureIncomeREIT@fticonsulting.com
Claire Turvey
Eve Kirmatzis
Preliminary Results Presentation
Secure Income REIT will be holding a presentation for analysts
and investors today at 9.00am at Stifel, 150 Cheapside, London,
EC2V 6ET. If you would like to attend, please contact FTI
Consulting on 020 3727 1000, or email
SecureIncomeREIT@fticonsulting.com .
A conference call facility will be available. The dial-in
details are:
Participants: Local, United
Kingdom: +44 (0)330 336 9126
Confirmation code: 5997280
Webcast link:
https://webcasting.brrmedia.co.uk/broadcast/5e380cd6b9710760e29256d2
The presentation will subsequently be uploaded on the Company's
website www.SecureIncomeREIT.co.uk
About Secure Income REIT Plc
Secure Income REIT specialises in generating long term,
inflation protected, secure income from real estate investments.
Its investment strategy is designed to satisfy investors' growing
requirements for high quality, safe, inflation protected income
flows.
At 31 December 2019, the Group's investment property portfolio
was valued at GBP2.1 billion, producing GBP110.7 million per annum
of rental income from long term leases with a weighted average
unexpired term to expiry of 21.0 years with no breaks. All rental
income is subject to fixed uplifts or RPI upwards only rent reviews
with 59% of rental income subject to RPI-linked reviews and 41%
having fixed uplifts.
The Group's portfolio comprises key operating assets let to
strong businesses in defensive sectors with high barriers to entry.
The upwards only RPI-linked rent reviews and fixed rental uplifts
combine with fixed cost debt to drive healthy dividend growth,
creating attractive and predictable returns.
The Company is advised by Prestbury Investment Partners Limited,
owned by the team which advised Max Property Group Plc until August
2014, when all of the assets of Max Property Group Plc were sold to
Blackstone Group. Prestbury is owned and run by a team of real
estate and finance professionals including Nick Leslau, Mike Brown,
Tim Evans, Ben Walford and Sandy Gumm.
The Company's Board is chaired by Martin Moore together with
three further independent Directors: Leslie Ferrar, Jonathan Lane
and Ian Marcus, as well as three members of the Prestbury Team:
Nick Leslau, Mike Brown and Sandy Gumm.
The Company is a UK REIT which floated on the AIM market of the
London Stock Exchange in June 2014.
The Company's LEI is 213800M1VI451RU17H40.
Further information on Secure Income REIT is available at
www.SecureIncomeREIT.co.uk.
Chairman's Statement
Dear Shareholder,
Secure Income REIT listed in June 2014 with a modest market
capitalisation of under GBP300 million, but with an ambition to
become a sector-leading REIT by providing attractive investor
returns through safe, inflation-linked upward only long term income
streams. In our sixth annual report we are pleased to report
continuing progress, with a net asset value that has grown to
GBP1.4 billion whilst delivering a Total Accounting Return of 19%
per annum since listing and significantly reducing leverage.
Results and financial position
We remain as focussed as ever on delivering attractive income
and total returns to shareholders, and this year we report a Total
Accounting Return of 11.7% and a Total Shareholder Return of 19.4%.
The Group's NAV per share at 31 December 2019 was up 7.6% at 428.8
pence and the Group's EPRA NAV per share was 431.1 pence, also an
increase of 7.6% over the year.
IFRS Net Assets EPRA Net Assets
-------------------- --------------------
Pence per Pence per
GBPm share GBPm share
----------------------------------------- -------- ---------- -------- ----------
At 1 January 2019 1,281.6 398.5 1,292.9 400.5
Investment property revaluation 75.7 23.4 86.3 26.7
Realised profits on sale of properties
net of all debt repayment and
other costs 23.8 7.3 23.8 7.3
Other retained earnings 55.9 15.9 46.4 12.9
Dividends paid:
Dividends covered 1:1 by earnings (49.0) (15.2) (49.0) (15.2)
Dividends paid out of surplus
on sale of hospitals (3.5) (1.1) (3.5) (1.1)
At 31 December 2019 1,384.5 428.8 1,396.9 431.1
----------------------------------------- -------- ---------- -------- ----------
Our most significant transaction in 2019 was the GBP347 million
sale of eight hospitals at 19% above their December 2018 book
value, highlighting the attraction of well-let long lease property.
The net profit on the sale contributed 7.1 pence per share to the
30.6 pence per share growth in EPRA NAV, before the impact on
valuation yield of the pricing achieved on the sale. Excluding the
impact of property sales in the year, the like for like valuation
increase over the year was 4.0%. The portfolio passing rent grew by
2.0% on a like for like basis following rent reviews on 69% of
total portfolio income. The blended Net Initial Yield on the
portfolio was 4.95% at 31 December 2019 compared to 5.05% at the
start of the year.
The Group's Adjusted EPRA EPS was 15.3 pence for the year, an
increase of 4.1% over the 2018 result. The main factor contributing
to this increase is the earnings accretion from the GBP436 million
of portfolio acquisitions in 2018 being reflected for a full year.
The Group's EPS, measured on an IFRS basis without the industry
standard EPRA adjustments, was 47.5 pence in the year compared to
48.9 pence for 2018. That figure includes the uplifts in property
valuations recognised in each year and is explained in the
Investment Adviser's report.
These results contribute to the consistently strong returns that
the Company has delivered since listing in 2014.
Outlook
The relief rally following the decisive UK election result
proved short-lived as the spread of the Covid-19 virus has
precipitated sharp stock market corrections across the globe. Aside
from the human tragedy, attempts to supress its spread will likely
also dampen global economic activity. It is unknown how far the
virus might spread or the extent of the measures the UK Government
may introduce to try to contain it. However, we do think it is safe
to make the judgement that eventually it will pass and economic
activity should revert to normal levels. In the same way, we
anticipate that the strong branded businesses making up our tenant
base, together with the Key Operating Assets that we lease to them,
will prove just as attractive to investors once the virus has
passed as they were before. Rental income should continue to rise
along the path of inflation and therefore our earnings should not
suffer the same interruption that operational businesses will face
should events deteriorate.
In every reporting period since the Company listed, the Group's
Net Loan To Value ratio has fallen and this trend continued in the
year, with a reduction to 31.9% at 31 December 2019. If the
correction in equity markets were to fuel a disruption in the
market for long lease property (and there are no signs of it yet)
we hold GBP234 million of uncommitted cash, significantly more than
our historic cash buffer of around GBP60 million, which can be
deployed to take advantage of any opportunities that arise. The
current flight to safety by investors has driven bond yields around
the world to historic lows. Safety has rarely, if ever, been as
expensive in offering such meagre income returns, which seem
unlikely to match the level of inflation. We believe that those
investors willing to keep their nerve and focus on the medium term
horizon have the potential to make significantly higher returns
with only a modest amount of incremental risk by investing in
secure, inflation-linked income streams such as those provided by
SIR.
Martin Moore
Chairman
12 March 2020
Investment Adviser's Report
Prestbury Investment Partners Limited, the investment adviser to
Secure Income REIT Plc, is pleased to report on the operations of
the Group for the year ended 31 December 2019.
EPRA measures
We focus in this report on financial measures recommended by the
European Public Real Estate Association ("EPRA") to facilitate
comparison with other real estate investment companies. The
calculation of the EPRA measures and their reconciliation to the
main financial information prepared under IFRS is presented in the
unaudited supplementary information included with these reports.
The EPRA disclosures are made with reference to the guidelines
currently in force which are those issued in 2016. With effect from
the Company's 2020 financial year, three new EPRA NAV measures will
replace the EPRA NAV and EPRA Triple NAV measures that are
currently recommended. We have included the calculation of the
three new measures in the unaudited supplementary information. The
analysis in this report uses the measures in effect for the 2019
year, calculated on a consistent basis with those in the 2018
accounts.
The business model
The Company is a specialist REIT investing in real estate assets
that provide long term rental income with inflation protection. The
business is financed with leverage considered by the Board to be
appropriate to portfolio and wider market risks, with significant
in-built protections intended to enhance returns for shareholders
without taking undue borrowing risk.
The Board exercises strict asset selection criteria with a view
to delivering income streams that are not just long, but also
secure and predictable. The Board seeks to build on the Company's
existing, high quality portfolio by only sourcing assets with long
leases let to businesses of appropriate financial strength and with
inflation protected rental streams whether by way of fixed uplifts
or RPI-linked reviews. Acquisitions should be accretive to
shareholder returns and meet the following criteria:
i) the properties should be Key Operating Assets: properties
that are essential for the tenant to carry out their business and
generate earnings;
ii) the relevant businesses should be in defensive sectors which
are likely to be more resilient to disruption from technology,
including the internet, to economic downturn or other threats to
their sustainability; and
iii) the properties should have high barriers to entry, making
them difficult to replace whether because of planning challenges or
high replacement cost.
By meeting these tests the Board considers that tenants would be
more likely to renew or extend their leases, making the assets less
prone to obsolescence and thus preserving shareholder value.
While any acquisition is required to have a Weighted Average
Unexpired Lease Term of 15 years or more, income longevity alone is
not enough. When we and the Board consider how sustainable rental
income is likely to be, we evaluate various aspects of income
security including:
i) protections at site level, such as high residual values,
alternative use value, or the profitability of a given site
enhancing its attractiveness to alternative operators;
ii) protections relating to the tenant, including its financial
strength, the sustainability of its business model, the strength of
any restrictions relating to lease assignability and the spread of
the tenant's operations, whether that is by segment or geography;
and
iii) protections afforded by any lease guarantor in addition to
the direct tenant, including its financial strength and spread of
operations which add to those at site and tenant level.
Financing assets that meet the various criteria outlined above
with appropriately structured debt, where interest costs are either
entered into at a fixed rate or where interest rate risk is hedged
by way of interest rate swaps or caps, means that returns to
shareholders can be enhanced in a way that takes risk properly into
account. To date all credit facilities have been non-recourse
bilateral facilities, where the equity at risk is limited to the
net assets within six ring-fenced subgroups. Each subgroup is
self-contained, with no cross-default provisions between the six of
them. In all cases, substantial financial covenant headroom has
been negotiated into loan terms together with appropriate 'cure'
rights where cash can be diverted to a security group in order to
maintain covenant compliance if that becomes necessary. As new
investments are acquired or existing facilities refinanced, the
appropriateness of the financing structure is kept under review in
order to deliver well priced borrowings while protecting
shareholders' equity.
With the Group's debt costs largely fixed, and the running costs
of the Group predominantly represented by the advisory fee which is
a simple calculation on a reducing scale relative to EPRA NAV, the
medium to long term prospects for shareholders are predictable and
transparent.
The portfolio
The Group held 161 properties at 31 December 2019 with annual
passing rent of GBP110.7 million and a very long Weighted Average
Unexpired Lease Term of 21.0 years without break. With two thirds
of the portfolio subject to annual rent reviews and the entire
portfolio being subject to either fixed uplifts or upwards only
RPI-linked rent reviews, the Group can continue to offer long term,
secure, inflation protected income streams.
Passing
Number of Valuation rent
properties GBPm GBPm
------------------------------------------ ----------- --------- -------
At the start of the year 175 2,306.7 125.0
Increase, net of exchange rate movements - 81.0 2.2
Hospitals portfolio disposal (8) (292.3) (15.6)
Non-core budget hotel disposals (6) (12.3) (0.9)
------------------------------------------ ----------- --------- -------
At the end of the year 161 2,083.1 110.7
------------------------------------------ ----------- --------- -------
Excluding the impact of the 2019 property sales to provide a
meaningful comparison, the external portfolio valuation has
increased by 4.0% over the year. The growth in like for like
passing rent was 2.0% over the year and follows the completion of
reviews on 69% of portfolio rents in the year.
Basis of review
The income arising on the portfolio benefits from fixed
contractual rental uplifts which average 2.8% per annum on 41% of
the income and upwards only RPI-linked rent reviews on the
remaining 59% of the income. Two thirds of the rent is subject to
annual review, underpinning the expected dividend growth for the
Company.
31 December 31 December
2019 2018
------------------------------- ----------------------------------- -----------
Reviewed
Reviewed three or Total Total
Percentage of passing rents annually five yearly portfolio portfolio
------------------------------- --------- ------------ ---------- -----------
Upwards only RPI:
Uncapped 25% 28% 53% 47%
Collared 4% 2% 6% 5%
------------------------------- --------- ------------ ---------- -----------
Total upwards only RPI linked
reviews 29% 30% 59% 52%
------------------------------- --------- ------------ ---------- -----------
Fixed uplifts:
Annual reviews 38% - 38% 45%
Five-yearly reviews - 3% 3% 3%
------------------------------- --------- ------------ ---------- -----------
Total fixed uplifts 38% 3% 41% 48%
------------------------------- --------- ------------ ---------- -----------
Total portfolio 67% 33% 100% 100%
------------------------------- --------- ------------ ---------- -----------
Lease lengths
The leases on the Group's portfolio are very long with a
Weighted Average Unexpired Lease Term of 21.0 years without break
from 31 December 2019. 97% of the portfolio has an unexpired lease
term longer than 17 years without break.
Leisure Healthcare Budget hotels Total
-------------- -------------- --------------- --------------
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2019 2018 2019 2018 2019 2018 2019 2018
------------------ ------ ------ ------ ------ ------- ------ ------ ------
Weighted Average
Unexpired Lease
Term (years) 22.5 21.7 17.8 18.6 22.4 23.4 21.0 20.9
------------------ ------ ------ ------ ------ ------- ------ ------ ------
During the year, the lease term for the Brewery on Chiswell
Street, London, was extended, with no premium payable to the tenant
and no change to the current passing rent of GBP3.4 million per
annum on the property, from 12 to 37 years unexpired without break.
From a Group perspective this added 0.7 years to the Weighted
Average Unexpired Lease Term and the disposal of eight hospitals
during the year had a further positive impact of 0.3 years.
The portfolio Weighted Average Unexpired Lease Term of 21.0
years is significantly longer than that of any other major UK REITs
(defined as those with a market capitalisation in excess of GBP1
billion).
No material vacancies or landlord costs
The portfolio is fully let. All occupational leases are on full
repairing and insuring terms, meaning that property running costs
are low and there is no material capital expenditure
requirement.
Portfolio valuation
The portfolio is valued by qualified independent external
valuers every six months.
Leisure Healthcare Budget hotels Total
------------------- --------------------- -------------------- ------------------
Like
Like for Like for Like for for like
GBPm like change GBPm like change GBPm like change GBPm change
--------------- ----- ------------ ------- ------------ ------ ------------ ------- ---------
Passing rent:
31 December
2018 45.7 50.2 29.1 125.0
Disposals - (15.6) (0.9) (16.5)
Exchange rate
movement (0.3) (0.8%) - - - - (0.3) (0.3%)
----- ------- ------ -------
Like for like 45.4 34.6 28.2 108.2
Uplifts 1.4 3.1% 1.0 2.8% 0.1 0.6% 2.5 2.3%
31 December
2019 46.8 2.3% 35.6 2.8% 28.3 0.6% 110.7 2.0%
--------------- ----- ------------ ------- ------------ ------ ------------ ------- ---------
Valuation:
31 December
2018 826.7 984.8 495.2 2,306.7
Additions - - 0.3 0.3
Disposals - (292.3) (12.3) (304.6)
Exchange rate
movement (6.0) (0.8%) - - (6.0) (0.3%)
Like for like 820.7 692.5 483.2 1,996.4
Revaluation 31.2 3.8% 55.9 8.1% (0.4) 0.0% 86.7 4.3%
----- ------- ------ -------
31 December
2019 851.9 3.0% 748.4 8.1% 482.8 0.0% 2,083.1 4.0%
--------------- ----- ------------ ------- ------------ ------ ------------ ------- ---------
Movements in portfolio rents and valuation are further explained
in the following sections.
The movement in valuation in the year comprises:
Year to 31 Year to 31
December 2019 December 2018
GBPm GBPm
---------------------------------------------------- -------------- --------------
Investment properties at the start of the year 2,306.7 1,770.2
---------------------------------------------------- -------------- --------------
Portfolio held throughout the year:
Revaluation movement at constant currency 86.7 92.1
Currency translation movements on Euro denominated
investment properties (6.0) 1.2
---------------------------------------------------- -------------- --------------
Like for like portfolio revaluation 80.7 93.3
Hospitals portfolio disposal (292.3) -
Budget hotels disposals (12.3) (3.0)
Acquisition of freehold interest in leasehold
property 0.3 -
Portfolios acquired - 446.2
Net (decrease)/increase in portfolio (223.6) 536.5
---------------------------------------------------- -------------- --------------
Investment properties at the end of the year 2,083.1 2,306.7
---------------------------------------------------- -------------- --------------
Yield profile
Leisure Healthcare Budget hotels Total
-------------- -------------- --------------- --------------
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2019 2018 2019 2018 2019 2018 2019 2018
------------------- ------ ------ ------ ------ ------- ------ ------ ------
Net Initial
Yield * 5.07% 5.11% 4.46% 4.78% 5.50% 5.50% 4.95% 5.05%
Running Yield
within 12 months 5.19% 5.25% 4.58% 4.82% 5.66% 5.50% 5.08% 5.16%
------------------- ------ ------ ------ ------ ------- ------ ------ ------
* the healthcare yields take no account of any uplift from an
outstanding May 2018 open market review on the Ramsay hospitals,
which account for 94% of the healthcare rents at 31 December
2019
the leisure and budget hotels Running Yields are calculated
using the independent external valuers' estimates of RPI averaging
2.6%
Overall, the blended Net Initial Yield has fallen by ten basis
points, with the healthcare yields reflecting the positive impact
of the GBP347 million sale by the Group to Medical Properties
Trust, Inc during the year.
Portfolio total rents
The Group's principal lease counterparties, analysed by passing
rent as at 31 December 2019, are as follows:
31 December 31 December
2019 2018
Tenant/guarantor GBPm GBPm
---------------------------------------- ------------- -------------
Merlin Entertainments Limited * 34.5 33.8
Ramsay Health Care Limited:
Hospitals held throughout the year 33.5 32.6
Hospitals sold in July 2019 - 15.6
Travelodge Hotels Limited:
Budget hotels held throughout the year 28.3 28.2
Budget hotels sold during the year - 0.9
SMG & SMG Europe Holdings Limited 4.0 3.8
The Brewery on Chiswell Street Limited 3.4 3.4
Orpea SA 2.1 2.0
Stonegate Pub Company Limited 2.0 2.0
Others (each below GBP1.4 million) 2.9 2.7
110.7 125.0
---------------------------------------- ------------- -------------
* GBP6.5 million (2018 GBP6.6 million) of the Merlin rents are Euro denominated
Further information on the principal portfolio tenants and
guarantors is given within the portfolio analyses that follow.
Leisure assets (41% of portfolio value)
31 December 31 December
2019 2018
Passing rents GBPm GBPm
----------------------------------------------- ------------- -------------
UK assets 40.3 39.1
German assets (at constant Euro exchange rate) 6.5 6.3
46.8 45.4
----------------------------------------------- ------------- -------------
The leisure properties comprise four well known visitor
attractions let to subsidiaries of Merlin Entertainments Limited
together with Manchester Arena, the Brewery events venue on
Chiswell Street in the City of London and a portfolio of 18
freehold high street pubs located in England and Scotland.
The Merlin assets include two of the UK's top three theme parks,
Alton Towers and Thorpe Park, together with the Alton Towers hotel
and Warwick Castle. The German assets operated by Merlin are Heide
Park theme park in Soltau, Saxony, which is the largest in Northern
Germany, and its adjacent hotel. These assets are all held freehold
and are let to subsidiaries of Merlin Entertainments Limited, which
owns all of Merlin's operating businesses and which is the
guarantor of all lease obligations for these assets. Measured by
the number of visitors, Merlin is Europe's largest and the world's
second largest operator of leisure attractions, second only to
Disney. During the year, Merlin was the subject of a takeover from
a consortium of substantial, established, long term investors that
took the business private at a price representing an enterprise
value of some GBP6 billion.
The average term to expiry of the Merlin leases is 22.5 years
without break from 31 December 2019 and the tenants have two
successive rights to renew them for 35 years at the end of each
term. The leases are on full repairing and insuring terms. There
are upwards only uncapped RPI-linked rent reviews every June
throughout the term (based on RPI over the twelve months to April
each year) for the UK properties, which in 2019 resulted in a
rental increase of 3.0%. The German properties are subject to fixed
annual increases of 3.34% every July throughout the term, as a
result of which the German rents increased from GBP6.3 million to
GBP6.5 million on 30 July 2019 (translated at the 31 December 2019
exchange rate).
Manchester Arena is a strategic site of eight acres, held long
leasehold and located on top of Manchester Victoria Railway and
Metrolink station. It comprises the UK's largest indoor arena by
capacity, some 160,000 sq ft of office and leisure space, a
multi-storey car park with approximately 1,000 spaces, and
advertising hoardings. The leases on the Manchester site as a whole
have an average term to expiry of 16.1 years from 31 December 2019
and produce net passing rent of GBP6.2 million per annum at that
date.
The Arena is let to SMG and SMG Europe Holdings Limited, part of
ASM Global, with 25.5 years unexpired without break from 31
December 2019. Rent is reviewed annually every June in line with
RPI, collared between 2% and 5%, which in 2019 resulted in a rental
increase of 2.9%. ASM Global was created by a merger of AEG
Facilities and SMG and is the world's largest venue management
company, operating over 322 venues in 21 countries and with pro
forma annualised revenues of $500 million. The offices and
ancillary leisure space at Manchester Arena are let to tenants
including Serco, Manchester City Council, Unison, JCDecaux and
go-karting operator TeamSport.
The Brewery on Chiswell Street is a predominantly freehold
investment let to a specialist venue operator on a full repairing
and insuring lease. It is the largest catered event space in the
City of London and is located within five minutes' walk of the
Moorgate entrance to the new Crossrail Station at Liverpool Street.
Following the completion during the year of a 25 year lease
extension at no cost to the Group, the lease term to expiry is now
36.5 years without break from 31 December 2019. The lease terms,
which were unaffected by the extension, include five-yearly fixed
uplifts of 2.5% per annum compounded and the passing rent is GBP3.4
million per annum as at 31 December 2019. The next rental uplift to
GBP3.8 million will take effect in July 2021.
The portfolio of 18 high street pubs produces passing rent of
GBP2.0 million per annum as at 31 December 2019 and the leases have
an average term to expiry of 20.1 years without break. Rents are
subject to five-yearly RPI-linked increases collared between 1% and
4% per annum compounded. No rent reviews fell due on these assets
during the financial year but the reviews in February 2020 resulted
in an increase in passing rent of GBP0.2 million per annum (13.2%
or 2.5% per annum compounded) and the pub portfolio rents now total
GBP2.2 million per annum. The pubs are let on individual leases
either to, or guaranteed by, Stonegate Pub Company Limited.
Stonegate announced in July 2019 its recommended offer for Ei Group
Plc in a deal that placed an enterprise value of GBP3 billion on
Ei. The combined group is expected to generate annualised EBITDA of
GBP435 million on revenues of GBP1.55 billion from a 4,828 pub
estate, making it the UK's largest pub business.
Healthcare assets (36% of portfolio value)
31 December 31 December
2019 2018
Passing rents GBPm GBPm
------------------------------------------ ------------- -------------
Ramsay hospitals held throughout the year 33.5 32.6
Ramsay hospitals sold in July 2019 - 15.6
London psychiatric hospital 2.1 2.0
35.6 50.2
------------------------------------------ ------------- -------------
The healthcare assets are 11 freehold private hospitals located
throughout England and let to a subsidiary of Ramsay Health Care
Limited, the listed Australian healthcare company, and a private
psychiatric hospital in central London, held freehold and let to
Groupe Sinoué, a French company specialising in mental health care.
During the year, eight Ramsay hospitals were sold to the specialist
US healthcare REIT Medical Properties Trust, Inc in a GBP347
million deal agreed in July 2019. The price reflected a 19% premium
over the 31 December 2018 book value.
The Ramsay hospitals are let on full repairing and insuring
leases with a term to expiry at 31 December 2019 of 17.4 years
without break. The rents increase in May each year by a minimum of
a fixed 2.75% per annum throughout the lease term. Following the
May 2019 fixed uplifts, the rents on the retained hospitals
portfolio increased from GBP32.6 million to GBP33.5 million. In
addition, there is an upwards only open market review within each
lease as at 3 May 2018 and then in May 2022 and every five years
thereafter. The May 2018 open market review remains outstanding as
it is subject to a formal arbitration process which is ongoing, and
this financial information takes no account of any potential
increase in rental income that may arise from it.
The leases on the Ramsay hospitals are all guaranteed by Ramsay
Health Care Limited, the listed parent company of one of the top
five private hospital operators in the world and a constituent of
the ASX 50 index of Australia's largest companies, with a market
capitalisation at 10 March 2020 (and using the exchange rate on
that date) of GBP6.5 billion.
The London psychiatric hospital is let on a full repairing and
insuring lease with a term to expiry at 31 December 2019 of 24.6
years without break. The rent increases in May each year by a fixed
3.0% per annum throughout the lease term and as a result increased
from GBP2.0 million to GBP2.1 million on 3 May 2019. The lease is
guaranteed by Orpea SA, a leading European operator of nursing
homes, post-acute care and psychiatric care, listed on Euronext
Paris with a market capitalisation at 10 March 2020 (and using the
exchange rate on that date) of GBP5.8 billion.
Budget hotel assets (23% of portfolio value)
31 December 31 December
2019 2018
Passing rents GBPm GBPm
---------------------------------------- ------------- -------------
Budget hotels held throughout the year 28.3 28.2
Non-core budget hotels sold in the year - 0.9
28.3 29.1
---------------------------------------- ------------- -------------
At 31 December 2019 the Group owned 123 (2018: 129) Travelodge
hotels in England, Wales and Scotland, let to Travelodge Hotels
Limited which is the main operating company within the Travelodge
group trading in the UK, Ireland and Spain. Travelodge is the UK's
second largest budget hotel brand, with 586 hotels and over 44,600
rooms as at 30 September 2019.
Six budget hotels not considered core to the portfolio were sold
in the year for net proceeds of GBP13.0 million, representing a
gain of GBP0.7 million (5.7%) over 31 December 2018 book value and
GBP1.4 million (12.3%) over their purchase price. During the year,
the Group purchased the freehold interest of an existing leasehold
hotel for GBP0.3 million.
The average term to expiry of the Travelodge leases is 22.4
years from 31 December 2019 with no break clauses. The leases are
on full repairing and insuring terms and Travelodge is also
responsible for the cost of any headlease payments and other
amounts owing to the freeholders of the 52 leasehold properties.
There are upwards only uncapped RPI-linked rent reviews every five
years throughout the term of each lease, with reviews falling due
over a staggered pattern across the portfolio. Reviews on four
budget hotels (4% of the portfolio by rental value) took effect
during 2019, with passing rent on those assets increasing by 12.6%
from GBP1.3 million to GBP1.4 million, equivalent to an average
uplift of 2.4% per annum. The following three financial years will
see a considerably higher proportion of rents subject to review,
amounting to 22% of the 31 December 2019 passing rent in 2020, 24%
in 2021, 39% in 2022 and 11% in 2023.
Financing
The Group's Net LTV ratio fell from 43.0% to 31.9% over the
year, including the impact of the GBP164 million cash surplus
generated on the hospitals portfolio disposal which completed in
August 2019.
Unsecured Regulatory Group
Secured amounts amounts capital total
GBPm GBPm GBPm GBPm
-------------------- --------------- --------- ---------- ---------
Gross debt 930.7 - - 930.7
Secured cash (26.3) - (0.6) (26.9)
Free cash * (9.2) (231.0) - (240.2)
-------------------- --------------- --------- ---------- ---------
Net debt 895.2 (231.0) (0.6) 663.6
-------------------- --------------- --------- ---------- ---------
Property valuation 2,083.1 2,083.1
-------------------- --------------- --------- ---------- ---------
Net LTV 43.0% 31.9%
-------------------- --------------- --------- ---------- ---------
* free cash within secured facilities is released to parent
company free cash after each quarterly interest payment date for as
long as all loan covenants are complied with.
Key terms of the facilities are as follows:
Number of Maximum
properties annual
Principal securing interest Interest Annual cash Final repayment
GBPm loan rate rate protection amortisation date
-------------------- --------- ----------- --------- ---------------- ------------- ---------------
GBP3.8m
from Oct
Merlin leisure 377.8* 6 5.7% Fixed 2020 Oct 2022
Budget hotels loan 78% fixed
2 66.9 70 3.3% 22% capped None April 2023
83% fixed
Leisure loan 2 60.0 20 3.2% 17% capped None June 2023
Budget hotels loan
1 59.0 53 2.7% Fixed None Oct 2023
Healthcare loan
1 64.2 2 4.3% Fixed GBP0.3m Sept 2025
Healthcare loan
2 302.8 10 5.3% Fixed GBP3.2m Oct 2025
Total 930.7 161 4.9%
-------------------- --------- ----------- --------- ---------------- ------------- ---------------
* GBP316.8 million of senior and mezzanine Sterling loans and
EUR71.8 million of senior and mezzanine Euro denominated loans
translated at the year end exchange rate of EUR1:GBP0.85. All loan
tranches within the total GBP377.8 million are
cross-collateralised.
amortisation in each of the years ending October 2021 and
October 2022 comprises GBP3.2 million on the Sterling facility and
EUR0.7 million on the Euro facility.
The Board ensures that interest rate risk is managed by either
fixing or capping rates over the term of each loan. Currently, 92%
of the Group's borrowings are fixed rate facilities.
The weighted average interest cost in the year was 4.9% per
annum. The fixed rate on the debt prepaid from the hospitals sale
was 4.3% per annum which means that the Group's weighted average
cost of debt has increased marginally to 4.9% compared to 4.8% in
2018. Interest cover, measured for these purposes as passing rent
divided by annualised interest cost, has remained at 2.4 times on
the debt portfolio held at 31 December 2019, consistent with the
prior year.
There have been no defaults or potential defaults in any
facility during the year or since the balance sheet date. The
extent of headroom on financial covenants at the balance sheet date
is analysed in the business review on the following pages.
Business review
The Board monitors the following key performance indicators,
which are further commented on in this report.
Year to 31
Year to 31 December
December 2019 2018
---------------------------------------------------- ---------------- ------------
Financial measures:
Total Accounting Return 11.7% 11.9%
Total Shareholder Return 19.4% 8.3%
Adjusted EPRA earnings per share 15.3p 14.7p
Net LTV ratio 31.9% 43.0%
Uncommitted cash GBP234.2m GBP66.4m
Other measures:
Headroom on debt covenants before any preventative
cash cure or other remedial action:
Valuation headroom before tightest LTV default
test is triggered 38% 32%
Rent headroom before tightest interest cover
default test is triggered 33% 32%
---------------------------------------------------- ---------------- ------------
Key performance indicator - Total Accounting Return
In measuring progress towards the Board's objective to deliver
attractive and sustainable shareholder returns, both Total
Accounting Return (the movement in EPRA NAV per share plus
dividends) and Total Shareholder Return (the share price movement
plus dividends) are monitored. The principal focus for the Board is
on Total Accounting Return as the Total Shareholder Return, while
important, is also subject to wider market fluctuations not
necessarily related to the Group itself.
The movements in net asset value reported under IFRS in the
consolidated balance sheet and the calculation of Total Accounting
Return on that basis are as follows:
Year to 31 December Year to 31 December
2019 2018
----------------------------- -----------------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------------- ---------- ----------------- ---------- -----------------
NAV at the start of the
year 1,281.6 398.5 860.6 373.3
Investment property revaluation
* 75.7 23.4 98.2 30.3
-------------------------------------- ---------- ----------------- ---------- -----------------
Profit on disposal of investment
properties 53.1 16.4 0.2 -
Cost of early repayment
of debt (29.3) (9.1) - -
-------------------------------------- ---------- ----------------- ---------- -----------------
Net contribution from disposals 23.8 7.3 0.2 -
Rental income * less administrative
expenses, finance costs
and tax 57.9 18.0 53.7 17.9
Dividends paid (52.5) (16.3) (41.4) (13.9)
Currency translation movements (2.0) (0.6) 0.5 0.2
Dilution from shares issued
in settlement of previous
year's incentive fee - (1.5) - (7.3)
March 2018 share placing
net of costs - - 309.8 (2.0)
-------------------------------------- ---------- ----------------- ---------- -----------------
NAV at the end of the
year 1,384.5 428.8 1,281.6 398.5
-------------------------------------- ---------- ----------------- ---------- -----------------
Growth in NAV 102.9 30.3 106.6 25.2
Dividends paid 52.5 16.3 41.4 13.9
-------------------------------------- ---------- ----------------- ---------- -----------------
IFRS Total Accounting Return 155.4 46.6 148.0 39.1
-------------------------------------- ---------- ----------------- ---------- -----------------
IFRS Total Accounting Return
- percentage 11.7% 10.5%
-------------------------------------- ---------- ----------------- ---------- -----------------
* including GBP10.5 million or 3.2 pence (2018: GBP10.9 million
or 3.7 pence) of Rent Smoothing Adjustments
The industry standard EPRA NAV measure takes IFRS net asset
value and excludes items that are considered to have no relevance
to the assessment of long term performance. Consistent with the
EPRA Guidance, the Group's reported IFRS NAV is adjusted to exclude
deferred tax on investment property revaluations (in this case
relating to the German assets) and fair value movements on
derivatives. EPRA NAV and EPRA NAV per share is reconciled to net
asset value measured in accordance with IFRS in note 24 to the
financial information.
The Group's EPRA NAV per share at 31 December 2019 was 431.1
pence, up 7.6% over the year. The 30.6 pence per share uplift,
together with dividends of 16.3 pence per share, results in a Total
Accounting Return over the year of 11.7%.
Year to 31 December Year to 31 December
2019 2018
------------------------- -------------------------
Pence per Pence per
GBPm share GBPm share
------------------------------------- --------- -------------- --------- --------------
EPRA NAV at the start of
the year 1,292.9 400.5 870.8 370.4
Investment property revaluation
* 86.3 26.7 109.1 33.9
------------------------------------- --------- -------------- --------- --------------
Profit on disposal of investment
properties 53.1 16.4 0.2 -
Cost of early repayment
of debt (29.3) (9.1) - -
------------------------------------- --------- -------------- --------- --------------
Net contribution from disposals 23.8 7.3 0.2 -
Rental income * less administrative
expenses, finance costs
and current tax 49.3 15.4 44.2 14.7
Dividends paid (52.5) (16.3) (41.4) (13.9)
Incentive fee: 0.4% (2018:
0.4%) dilution from shares
to be issued (0.3) (1.7) (0.4) (1.6)
Currency translation movements (2.6) (0.8) 0.6 0.2
March 2018 share placing
net of costs - - 309.8 (3.2)
EPRA NAV at the end of
the year 1,396.9 431.1 1,292.9 400.5
------------------------------------- --------- -------------- --------- --------------
Growth in EPRA NAV 104.0 30.6 106.6 30.1
Dividends paid 52.5 16.3 41.4 13.9
------------------------------------- --------- -------------- --------- --------------
Total Accounting Return 156.5 46.9 148.0 44.0
------------------------------------- --------- -------------- --------- --------------
Total Accounting Return
- percentage 11.7% 11.9%
------------------------------------- --------- -------------- --------- --------------
* adjusted by GBP10.5 million or 3.2 pence (2018: GBP10.9
million or 3.7 pence) of Rent Smoothing Adjustments
The Total Shareholder Return is calculated as:
Year to Year to
31 December 31 December
2019 2018
Pence per Pence per
share share
-------------------------- ----- --------------- --------------
Share price at the end
of the year 434.0 377.0
Share price at the start
of the year (377.0) (360.8)
Increase in the year 57.0 16.2
Dividends paid 16.3 13.9
---------------------------------- --------------- --------------
Total Shareholder Return 73.3 30.1
---------------------------------- --------------- --------------
Total Shareholder Return
- percentage 19.4% 8.3%
---------------------------------- --------------- --------------
Key performance indicator - Adjusted EPRA earnings per share
The calculation of basic and diluted EPS under IFRS, as reported
in the financial information, is shown below.
Year to 31 December Year to 31 December
2019 2018
------------------------ ------------------------
Basic and diluted EPS (IFRS Pence per Pence per
basis) GBPm share GBPm share
---------------------------------- -------- -------------- -------- --------------
Rental income net of property
outgoings 131.4 40.7 125.3 41.6
Investment property revaluation 75.7 23.4 98.2 32.6
Profit on disposal of investment
properties 53.1 16.4 0.2 0.1
Cost of early repayment
of debt (29.3) (9.1) - -
Net finance costs (54.2) (16.7) (54.5) (18.1)
Administrative expenses (16.9) (5.2) (15.3) (5.1)
Incentive fee and irrecoverable
VAT thereon (5.3) (1.6) (5.3) (1.8)
Tax charge (1.1) (0.4) (1.1) (0.4)
Basic earnings 153.4 47.5 147.5 48.9
---------------------------------- -------- -------------- -------- --------------
Diluted earnings 47.3 48.7
---------------------------------- -------- -------------- -------- --------------
The IFRS earnings measure includes unrealised property
revaluations, gains or losses on property disposals and certain
other factors which are considered to distort an assessment of
underlying long term performance and which are therefore excluded
from the EPRA measure of earnings.
A further element of the IFRS calculations considered to have a
distorting effect on Dividend Cover is the impact of the weighting
of share issues where they relate to incentive fee payments. The
Group's basic and diluted EPS, calculated in accordance with IFRS,
must be calculated on the assumption that any shares issued in
settlement of an incentive fee are treated as having been issued on
the first day of the year, regardless of when they are actually
issued. As a result, basic EPS for 2019, for example, is calculated
on the basis that the 1.3 million shares issued in March 2019 in
settlement of the 2018 incentive fee were in issue for the whole
year, artificially reducing EPS. The calculation of diluted EPS for
2019 under the IFRS rules also includes the 1.2 million shares not
yet issued in settlement of the 2019 incentive fee as if they had
been issued, creating a further artificial reduction.
There are also certain items within EPRA earnings which create a
material disconnect for the Company between the calculated EPRA
earnings and the Group's funds from operations available for the
payment of dividends, principally the Rent Smoothing Adjustments
and the incentive fees paid in shares. The Board considers that
including these items results in both IFRS earnings and EPRA
earnings being an unreliable basis for calculating the Company's
Dividend Cover.
A further measure, Adjusted EPRA EPS, is therefore presented,
both for comparison of the performance of the Group from year to
year and with its peer group, and to avoid distortions in the per
share figures which in turn would result in unreliable measures of
Dividend Cover.
The Company's dividend policy is to distribute Adjusted EPRA
earnings through payment of a fully covered cash dividend, paid
quarterly. In addition to that fully covered distribution, the
Board intends, for as long as the surplus proceeds of the hospitals
portfolio disposal are not fully deployed or returned to
shareholders, to top up the dividend to the extent that Adjusted
EPRA EPS was reduced by that disposal. The annualised reduction in
earnings as a result of the sale is 2.7 pence per share and the
impact on the results for the year ended 31 December 2019 for the
four and a half months following the sale of the properties was 1.1
pence per share.
Adjusted EPRA EPS is derived from EPRA EPS by:
-- removing the Rent Smoothing Adjustments from rental income;
-- excluding any significant non-recurring costs;
-- excluding the charge for the incentive fee, on the basis that
it is a non-cash payment and considered to be linked to revaluation
movements and therefore best treated consistently with
revaluations; and
-- calculating the weighted average number of shares to reflect
the actual dates on which shares are issued.
Year to 31 December Year to 31 December
2019 2018
------------------------ ------------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- -------- -------------- -------- --------------
Rental income net of property
outgoings 129.7 40.1 124.1 41.3
Net finance costs (52.5) (16.3) (53.3) (17.6)
Administrative expenses (16.9) (5.2) (15.3) (5.1)
Incentive fee (including
irrecoverable VAT) (5.3) (1.6) (5.3) (1.8)
Tax charge (0.4) (0.1) (0.3) (0.2)
EPRA earnings 54.6 16.9 49.9 16.6
Rent Smoothing Adjustments (10.5) (3.2) (10.9) (3.6)
Incentive fee 5.3 1.6 5.3 1.8
Adjustment for weighted
average number of shares - - - (0.1)
Adjusted EPRA earnings 49.4 15.3 44.3 14.7
------------------------------- -------- -------------- -------- --------------
Adjusted EPRA EPS is reconciled to basic EPS in note 11 to the
financial information. We show below the analysis of the Adjusted
EPRA earnings in the year in order to demonstrate where the
adjusting items take effect.
Year to 31 December Year to 31 December
2019 2018
------------------------ ------------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- -------- -------------- -------- --------------
Rental income net of property
outgoings:
Portfolio owned throughout
the year 83.5 25.9 82.2 27.2
Acquisitions April and
July 2018 25.9 8.0 15.5 5.3
Hospitals sold August 2019 9.8 3.0 15.4 5.2
Net finance costs:
Facilities drawn throughout
the year (44.3) (13.8) (44.2) (14.7)
Loans drawn down April
and July 2018 (4.7) (1.4) (2.7) (0.9)
Healthcare loan prepaid
August 2019 (4.2) (1.3) (6.7) (2.2)
Finance income 0.7 0.2 0.4 0.1
Administrative expenses (16.9) (5.2) (15.3) (5.1)
Tax charge (0.4) (0.1) (0.3) (0.1)
Adjustment for weighted
average number of shares - - - (0.1)
Adjusted EPRA earnings 49.4 15.3 44.3 14.7
------------------------------- -------- -------------- -------- --------------
The key components of the Group's earnings are its rental
income, administrative expenses and finance costs. An analysis of
the Group's rental income is included in the portfolio review
earlier in this report and the other components of earnings are
analysed below.
Property outgoings in the year to 31 December 2019 include
GBP0.4 million of costs relating to ongoing but as yet unsettled
rent reviews, and GBP0.2 million relating to a feasibility study
for a capital project which has not proceeded (and might not
proceed). These are not recurring costs but are included within
costs for the purpose of calculating Adjusted EPRA earnings.
Adjusted EPRA EPS: administrative expenses
The Group's administrative expenses for the year are the same
under the IFRS and the EPRA measures, while Adjusted EPRA EPS
excludes any incentive fees which are payable in shares.
Year to 31 December Year to 31 December
2019 2018
---------------------- ----------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------- ------ -------------- ------ --------------
Advisory fees 14.7 4.6 13.3 4.4
Other recurring administrative
expenses 1.6 0.4 1.5 0.5
Corporate costs 0.6 0.2 0.5 0.2
-------------------------------- ------ -------------- ------ --------------
Recurring administrative
expenses 16.9 5.2 15.3 5.1
Incentive fee payable
in shares 4.9 1.5 4.9 1.7
VAT on incentive fee,
payable in cash 0.4 0.1 0.4 0.1
Total administrative expenses 22.2 6.8 20.6 6.9
-------------------------------- ------ -------------- ------ --------------
Because VAT cannot be applied to the rents on the Healthcare
assets, there is an element of irrecoverable VAT incurred on the
Group's running costs which is included within each relevant line
item in the table above. The proportion of disallowed VAT on
administrative expenses averaged 26% during the year and was 30% as
at 31 December 2019.
As an externally managed business, the majority of the Group's
overheads are covered by the advisory fees paid to the Investment
Adviser, which meets office running costs, administrative expenses
and remuneration for the whole management and support team out of
those fees. The basis of calculating the advisory fees is explained
in note 26 to the financial information. In summary, the fees are
calculated on a reducing scale based on the Group's EPRA NAV,
at:
-- 1.25% per annum on EPRA NAV up to GBP500 million; plus
-- 1.0% on EPRA NAV from GBP500 million to GBP1 billion; plus
-- 0.75% on EPRA NAV from GBP1 billion to GBP1.5 billion: plus
-- 0.5% thereafter.
In February 2020 the Independent Directors approved a proposal
made by the Investment Adviser to exclude the surplus cash on the
hospitals portfolio disposal from the advisory fee calculation.
With effect from 1 April 2020, for the purposes of calculating the
advisory fee only, EPRA NAV will exclude the balance of that
surplus cash to the extent that those funds have not been:
-- deployed in topping up the dividends to replace the net income on the sold hospitals;
-- invested in acquisitions;
-- used for liability management; or
-- returned to shareholders.
The current annualised saving as a result of this change is
estimated at GBP1.2 million. The surplus cash realised on the
disposal was GBP164 million. Prior to the balance sheet date,
GBP3.5 million was applied in dividend top ups resulting in a
balance of the surplus at 31 December 2019 of GBP160.5 million, and
since then a further GBP2.2 million has been applied in dividend
top-up with the balance of GBP158.3 million available to be
deployed at 11 March 2020.
The advisory fee for the year amounted to GBP13.8 million plus
irrecoverable VAT of GBP0.9 million (2018: GBP12.2 million plus
irrecoverable VAT totalling GBP1.1 million). If there were no
change in EPRA NAV in the 2020 financial year and assuming that
surplus cash is not deployed other than for the dividend top-up,
the advisory fee for 2020 would be GBP13.4 million plus VAT.
The management contract between the Company and the Investment
Adviser has a term through to December 2025 and will be subject to
its next review by the Remuneration Committee in December 2022.
There are no renewal rights or payments at the time of expiry. Any
payments triggered by a change of control of the Company are
limited to four times the most recent quarterly fee at the time any
such change occurs which is the maximum amount payable on any form
of termination of the contract.
The other recurring administrative expenses are principally
professional fees, including the costs of independent external
property valuations, external trustee and administration costs, tax
compliance fees and audit fees, which are largely billed directly
to subsidiary undertakings. Fees paid to the auditors are disclosed
in note 8 to the financial information.
Corporate costs are those costs necessarily incurred as a result
of the Company being listed and comprise:
-- fees payable to the four Independent Directors amounting to
GBP0.2 million in the year (2018: GBP0.2 million), with the other
three Directors being shareholders in the Investment Adviser who
receive no directors' fees from the Company; and
-- other costs of being listed, such as the fees of the
nominated adviser required under the AIM Rules, registrars' fees
and AIM fees, whi ch together totalled GBP0.4 million (2018: GBP0.3
million) in the year .
If the Total Accounting Return to investors over a financial
year, as set out in the audited accounts, exceeds a compound growth
rate of 10% per annum above the EPRA NAV per share the last time
any incentive fee was paid, the Investment Adviser earns an
incentive fee amounting to 20% of any surplus above that priority
return to shareholders, subject to a cap of 5% of EPRA NAV (other
than in the event of a sale of the business, where an incentive fee
would not be capped). Any such fee is payable in shares which are
not permitted to be sold, save in certain limited circumstances,
for a period of between 18 and 42 months following the end of the
year for which they were earned.
Having adjusted for dividends paid in the year, the benchmark
EPRA NAV per share for the year ended 31 December 2019 was 425.1
pence. As explained in note 26 to the financial information,
shareholder returns for the year were in excess of the benchmark so
the Investment Adviser has earned a fee of GBP4.9 million plus VAT
in respect of the year. The fee payment will be satisfied by the
issue of approximately 1.2 million shares, expected to occur in
March 2020 .
Adjusted EPRA EPS: net finance costs
Year to 31 December Year to 31 December
2019 2018
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
----------------------------------- ------- -------------- ------- --------------
Interest on secured debt
facilities:
----------------------------------- ------- -------------- ------- --------------
Outstanding throughout
the year 42.1 13.0 42.2 14.0
Repaid in August 2019 4.1 1.3 6.7 2.2
Drawn in the prior year 4.1 1.3 2.4 0.8
----------------------------------- ------- -------------- ------- --------------
50.3 15.6 51.3 17.0
Amortisation of costs of
arranging facilities (non-cash):
----------------------------------- ------- -------------- ------- --------------
Routine amortisation over
loan term 2.4 0.7 2.2 0.7
Accelerated amortisation
on prepayment from property
sales 1.4 0.5 - -
----------------------------------- ------- -------------- ------- --------------
3.8 1.2 2.2 0.7
Interest charge on headlease
liabilities 1.7 0.4 1.2 0.4
Loan agency fees and other
lenders' costs 0.5 0.2 0.2 0.1
Interest income on cash
and cash equivalents (0.7) (0.2) (0.4) (0.1)
Net finance costs for the
year
(IFRS basis) 55.6 17.2 54.5 18.1
Accelerated amortisation
on prepayment from property
sales (1.4) (0.5) - -
----------------------------------- ------- -------------- ------- --------------
Net finance costs for the
year
(EPRA basis) 54.2 16.7 54.5 18.1
Reclassification of interest
charge on headlease liabilities
against revenue * (1.7) (0.4) (1.2) (0.4)
Adjustment for weighted
average number of shares - - - (0.1)
----------------------------------- ------- -------------- ------- --------------
Net finance costs for the
year (Adjusted EPRA basis) 52.5 16.3 53.3 17.6
----------------------------------- ------- -------------- ------- --------------
* headlease interest is reclassified against rental income net
of property outgoings in Adjusted EPRA EPS
The nature and principal terms of the Group's loan facilities
are explained in the Financing section earlier in this report.
Adjusted EPRA EPS: Tax
The Group is a UK Group REIT, so its rental operations, which
make up the majority of the Group's earnings, are exempt from UK
corporation tax, subject to the Group's continuing compliance with
the UK REIT rules. The Group is otherwise subject to UK corporation
tax on any net income not arising from its rental operations.
Tax is payable on the Group's German rental operations at an
effective tax rate in the year of 15% (2018: 15%), resulting in a
tax charge of GBP0.3 million (2018: GBP0.3 million). The balance
sheet includes a deferred tax liability of GBP11.3 million (2018:
GBP11.1 million) relating to unrealised German capital gains tax on
the German properties, which would only be crystallised on a sale
of those assets. There are no plans at present to sell these
assets, so the deferred tax is not currently expected to be
crystallised.
On an IFRS basis, the current tax charge and the movement in
deferred tax result in a net tax charge of GBP1.1 million (2018:
GBP1.1 million). Deferred tax is excluded from Adjusted EPRA EPS as
shown in note 11 to the financial information.
Adjusted EPRA EPS: Currency translation
95% by value of the Group's property assets are located in the
UK and the financial information is therefore presented in
Sterling. 3.5% (2018: 3.7%) of the Group's EPRA NAV comprises
assets and liabilities relating to properties located in Germany,
valued in and generating net earnings in Euros. Exposure to
currency fluctuations is partially hedged through assets,
liabilities, rental income and interest costs being Euro
denominated. The Group remains exposed to currency translation
differences on the net results and net assets of these unhedged
operations. Foreign currency movements are recognised in the
statement of other comprehensive income.
The German properties are valued at EUR129.7 million as at 31
December 2019 (2018: EUR125.5 million), with the Euro denominated
secured debt amounting to EUR71.8 million (2018: EUR71.8 million).
The Euro weakened against Sterling over the year by c. 5% and as a
result there was a net currency translation loss of GBP2.0 million
(2018: gain of GBP0.5 million) on an IFRS basis. The deferred tax
liability is excluded from EPRA NAV and as a result a further
currency translation loss of GBP0.6 million arises in the movement
in EPRA NAV in relation to the German operations (2018: gain of
GBP0.1 million).
Key performance indicator - Net LTV ratio
The Board structures debt facilities with a view to maintaining
a capital structure that will enhance shareholder returns while
withstanding a range of market conditions. During the year, the
Group's Net LTV fell from 43.0% to 31.9% which reflects the impact
of the retention of the cash surplus on the hospitals portfolio
disposal, which was initially GBP164.0 million and which stood at
GBP160.5 million at 31 December 2019, together with the impact of
GBP80.7 million of property valuation uplifts. While the Net LTV
ratio is one indicator of borrowing risk it is not the complete
picture and the Board always considers it in conjunction with a
wider assessment of headroom and financial covenants within debt
facilities and the security of portfolio rental income.
Key performance indicator - headroom on debt covenants
The Board's approach to managing the Group's capital structure
includes ensuring that the risk of any breach of covenants within
secured debt facilities is carefully monitored on a range of
scenarios and, within a realistic range of outcomes, with stress
tested scenarios able to be managed. This includes structuring
facilities to ring-fence the extent to which the Group's assets are
at risk, ensuring that levels of headroom over financial covenants
are appropriate and maintaining a level of uncommitted cash to
apply in curing debt defaults in the event that it is needed.
When evaluating the appropriateness of the level of secured
debt, the Board has regard to the unusual nature of the Group's
income streams, specifically that all of the occupational leases
are significantly longer than conventional UK real estate leases
and that the Group's rental income increases annually as a result
of the annual minimum fixed rental uplifts on 38% of portfolio
income, with a further 3% subject to three or five yearly uplifts
and the additional prospect of increases from the upwards only
RPI-linked reviews on the rest of the portfolio. Overall, two
thirds of the portfolio rents are subject to annual review with the
remainder subject to three or five yearly reviews. This structure
gives rise to predictable improvements in interest cover and a
naturally deleveraging debt profile on the assumption of constant
valuation yields.
The Board reviews the headroom on all financial covenants at
least quarterly, including stress tested scenarios. The headroom on
key financial covenants at 31 December 2019 is summarised below,
including the Net Initial Yield, the fall in valuation or the fall
in rent that would trigger a breach of the relevant covenant at the
first test date after the balance sheet date, before any
preventative or remedial actions were taken. Defensive actions
could include utilising any of the Group's significant uncommitted
cash of GBP234.2 million as at 31 December 2019 and which is
further explained in the following section.
Scenarios before any remedial
action
---------------------------------------------
Rental
Valuation fall before
Net Initial fall before interest
Yield triggering LTV test cover test
Actual Covenant LTV test triggered triggered
---------------------------------- ------ -------- ----------------- ------------ ------------
Leisure facility
(GBP377.8 million loans at
31 December 2019)
Cash trap LTV test (1% per annum
loan amortisation if triggered) 58% <80% 6.9% 28%
Cash trap LTV test (full cash
sweep if triggered) 58% <85% 7.3% 32%
Healthcare facility
(GBP302.8 million loan at 31
December 2019)
Cash trap LTV test (full cash
sweep if triggered) 50% <74% 6.6% 33%
LTV test 50% <80% 7.1% 38%
Cash trap projected interest
cover test (full cash sweep
if triggered) 185% >140% 24%
Projected interest cover test 185% >120% 35%
Budget hotels facility
(GBP66.9 million loan at 31
December 2019)
Partial cash trap LTV test (50%
of surplus cash swept to lender
if triggered) 27% <40% 8.3% 33%
Cash trap LTV test (full cash
sweep if triggered) 27% <45% 9.4% 41%
LTV test 27% <50% 10.4% 46%
Cash trap projected interest
cover test (full cash sweep
if triggered) 654% >300% 54%
Projected interest cover test 654% >250% 62%
Healthcare facility
(GBP64.2 million loan at 31
December 2019)
LTV test 45% <80% 8.0% 44%
Cash trap projected debt service
cover test (full cash sweep
if triggered) 217% >150% 31%
Projected debt service cover
test 217% >125% 42%
Leisure facility
(GBP60.0 million loan at 31
December 2019)
Partial cash trap LTV test (50%
of surplus cash swept to lender
if triggered) 30% <40% 7.2% 24%
Cash trap LTV test (full cash
sweep if triggered) 30% <45% 8.1% 32%
LTV test 30% <50% 9.0% 39%
Projected interest cover test 520% >150% 71%
Budget hotels facility
(GBP59.0 million loan at 31
December 2019)
Partial cash trap LTV test (50%
of surplus cash swept to lender
if triggered) 25% <40% 8.9% 38%
Cash trap LTV test (full cash
sweep if triggered) 25% <45% 10.0% 45%
LTV test 25% <50% 11.1% 51%
Cash trap projected interest
cover test (full cash sweep
if triggered) 867% >300% 65%
Projected interest cover test 867% >250% 71%
---------------------------------- ------ -------- ----------------- ------------ ------------
Key performance indicator - uncommitted cash
The ability to prevent or mitigate debt covenant breaches is an
important part of the Board's leverage strategy. Headroom
considered appropriate to the business has been negotiated on all
financial covenants together with certain contractual cure rights,
including the ability to inject cash (subject to some limitations
as to the frequency and duration of cash cures) into ring-fenced
financing structures in the event of actual or prospective breaches
of financial covenants. The Board regularly monitors the Group's
levels of uncommitted cash, which are the cash balances outside
ring-fenced structures secured to lenders, net of any creditors or
other cash commitments at the balance sheet date and excluding any
capital required to be retained under the AIFMD regulatory capital
rules.
The Group's uncommitted cash was GBP234.2 million as at 31
December 2019, up from GBP66.4 million as at 31 December 2018,
having increased largely as a result of the GBP164.0 million cash
surplus realised on the sale of the hospitals portfolio which
completed in August 2019. The Board has committed to topping up the
Company's quarterly dividends to the extent that Adjusted EPRA EPS,
and therefore dividends, have been reduced as a result of the
hospitals portfolio disposal and not compensated by way of
acquisitions or liability management. The top-up currently amounts
to an annualised 2.7 pence per share, or GBP8.7 million per annum,
and this sum will reduce the uncommitted cash balance for as long
as the surplus cash has not been deployed. The surplus cash balance
stands at GBP160.5 million at 31 December 2019 and, since the
balance sheet date, GBP2.2 million has been applied in topping up
the January 2020 dividend. The amounts that may be applied in
future dividend top-ups have not been excluded from uncommitted
cash on the basis that the extent of the surplus over time is not
known with certainty. The current annualised top-up payment amounts
to less than 4% of the total uncommitted cash balance.
Cash flow
The business is structured to provide an efficient flow through
of net rental income to the payment of dividends. Rents are
predictable, financing costs are in the main fixed and the majority
of operating costs are represented by the advisory fees which are
transparently calculated relative to EPRA NAV.
Year to 31 December Year to 31 December
2019 2018
----------------------------- -----------------------------
Pence per Pence per
GBPm share GBPm share
Cash from operating activities 100.7 31.2 110.9 36.7
Net interest and finance
costs paid (52.9) (16.4) (51.6) (17.2)
Tax paid (0.2) (0.1) (0.2) (0.1)
47.6 14.7 59.1 19.4
Dividends paid (52.5) (16.3) (41.4) (13.9)
-------------------------------- ----------- ---------------- ----------- ----------------
(4.9) (1.6) 17.7 5.5
-------------------------------- ----------- ---------------- ----------- ----------------
Disposal of investment
properties 357.8 110.8 0.4 0.1
Repayment of secured debt
from sale proceeds, including
costs (155.2) (48.1) - -
Cost of early repayment
of debt (27.9) (8.6) - -
-------------------------------- ----------- ---------------- ----------- ----------------
Net property disposals 174.7 54.1 0.4 0.1
Issue of ordinary shares,
net of costs - - 309.8 96.3
Loans drawn down, net
of costs - - 126.0 39.2
Acquisition of investment
properties (0.3) (0.1) (436.8) (135.8)
-------------------------------- ----------- ---------------- ----------- ----------------
Net property acquisitions (0.3) (0.1) (1.0) (0.3)
Scheduled amortisation
of secured debt (4.0) (1.2) (4.2) (1.4)
Cash flow in the year 165.5 51.2 12.9 3.9
Cash at the start of the
year 101.7 31.6 88.8 38.5
Currency translation movements (0.1) - - -
Dilution from incentive
fee share issues - (0.1) - (0.8)
Dilution from March 2018
share issue - - - (10.0)
Cash at the end of the
year 267.1 82.7 101.7 31.6
-------------------------------- ----------- ---------------- ----------- ----------------
The Group's investment properties are let on full repairing and
insuring terms, with each tenant obliged to keep the premises in
good and substantial repair and condition, including rebuilding,
reinstating, renewing or replacing premises where necessary.
Consequently, no material unrecovered capital expenditure, property
maintenance or insurance costs have been incurred in the year and
it is not currently expected that material costs of that nature
will be incurred on the portfolio as it stands at 31 December 2019.
Risks to future cash flows are summarised in the Principal Risks
and Uncertainties section of the Strategic Review.
Nick Leslau
Chairman, Prestbury Investment Partners Limited
12 March 2020
Strategic Review
Strategy and investment policy
Strategy
Against a backdrop of a significant reduction in income security
in the UK real estate market, caused by a marked decline in the
average term to first tenant lease break or expiry, and mindful of
the requirement amongst investors for long term, secure income
flows, the Board aims to further build on the Group's existing
portfolio of Key Operating Assets to create a substantial
diversified long term income portfolio providing stable and growing
income and capital returns for its shareholders. The Board defines
a long term income stream as one with a Weighted Average Unexpired
Lease Term in excess of 15 years at the time of acquisition, and
income security is assessed by reference either to the financial
strength of the tenants or to the extent of asset cover provided by
way of residual asset value.
The Board believes that the Company offers attractive geared
returns from high quality real estate, with financially strong
tenants operating with well established brands in industry sectors
with strong defensive characteristics. An important characteristic
of the portfolio is that assets acquired are Key Operating Assets,
meaning they are business critical from the tenant's perspective.
In that way, rental security is more certain as the asset in
question forms an essential part of the value of the tenant's own
business and the tenants are strongly motivated to continue to
invest in the assets.
The Board's intention is for the Group to continue to hold a
diversified portfolio of long term, secure income streams from real
estate investments across a range of property sectors, enhancing
prospects for attractive total returns both from the existing
portfolio and when appropriate through earnings accretive
acquisitions.
The Board believes that it will be able to deliver
return-enhancing deals in the interests of all shareholders. This
could include further acquisition opportunities from a range of
sources including operating businesses, non-REITs with latent
capital gains fettering sale prospects, and opportunities where the
Company's shares may be used as currency to unlock value.
Acquisitions should be accretive to shareholder returns and will be
financed with modest leverage and non-dilutive equity issues.
Investment policy
The Company invests in long term, secure income streams from
real estate investments. A long term income stream is considered to
be one with (or a portfolio with) a Weighted Average Unexpired
Lease Term in excess of 15 years at the time of acquisition.
Security of income is assessed with reference to both the extent of
rent cover from underlying earnings, the credit strength of tenants
and (where relevant) guarantors and the reversionary potential of
the assets.
The portfolio is considered by the Board to offer attractive
geared returns from high quality real estate, with financially
strong tenants which have well established brands in industry
sectors with strong defensive characteristics. The Board proposes
to build on this strong foundation by seeking to:
-- diversify sources of income and enhance prospects for
attractive Total Shareholder Returns through acquisitions; and
-- manage the Company's capital structure in order to enhance
income returns for investors whilst maintaining discipline over net
debt levels.
The Group's business model is explained in the Investment
Adviser's Report.
Key performance indicators
In order to oversee the successful delivery of the investment
strategy, the Board regularly monitors the following key
performance indicators which are reported on in the Investment
Adviser's quarterly reports to the Board, and more frequently if
appropriate:
-- Total Accounting Return and Total Shareholder Return
-- Adjusted EPRA EPS
-- Net LTV Ratio
-- Headroom on debt covenants
-- Uncommitted cash
Each of these is reported on in the Investment Adviser's
Report.
Corporate responsibility
The Board is mindful of its responsibilities to its all of
stakeholders, including the wider community, when it takes
decisions in setting and implementing the Company's strategy.
Diversity
The Board is committed to fairness and to encouraging diversity
on the Board and in its operations, including prevention of any
forms of discrimination under the terms of the Equality Act
2010.
The terms of reference of the Nominations Committee include a
requirement for the Committee to regularly review the structure,
size and composition of the Board including the skills, knowledge,
experience and diversity of the Directors.
As an externally managed business, no Group company has any
employees and therefore the Group does not report on gender balance
or the gender pay gap, nor on recruitment policies or procedures
for employees. The Board has, however, satisfied itself with the
appropriateness of the Investment Adviser's approach to fairness
and equality in its own operations. The Investment Adviser has
confirmed that it complies with all relevant laws and regulations
in that respect.
Sustainability
The Board has had regard to the Sustainability Accounting
Standards Board's Real Estate Sustainability Accounting Standard,
published in October 2018. That standard sets out certain metrics
that are considered relevant for REITs, and has categorised certain
'activity metrics' against which the Group reports as follows:
Leisure Hospitals Budget hotels Total
--------------------------- ----------- ------------- ---------------- --------
Number of assets 26 12 123 161
Lettable floor area The nature of the majority of the Group's
assets is such that lettable area measured
in square feet is not a relevant measure.
As the assets are operational assets, lettable
floor area is not monitored by the Board
and so is not provided.
Percentage of indirectly
managed assets (where
tenants have operational
control) * 99.2% 100% 100% 99.7%
Average occupancy rate 99.8% 100% 100% 99.9%
--------------------------- ----------- ------------- ---------------- --------
* measured by ERV
For the overwhelming majority of the Group's assets, operational
control of the asset rests with the tenant. Consequently the energy
management and water management data outlined in the standard is
not provided in this report, nor is it monitored by the Board as in
most cases the information is not able to be obtained from the
tenants under the terms of the leases, all of which have been in
place since before the Group purchased the assets.
The standard suggests disclosure of the approach to "management
of tenant sustainability impacts", described as the manner in which
agreements, contracts and relationships with tenants are structured
to be instrumental in effectively managing the sustainability
impacts of tenants. This can include aligning sustainability
outcomes, creating systems for measuring and communicating resource
consumption information and/or mandating minimum sustainability
performance criteria. In all cases within the investment property
assets held during the year, leases were already in place at the
time of their acquisition, so the Group has no influence over their
terms, including in so far as sustainability is concerned. None of
the Group's leases have provisions which are relevant to management
of tenant sustainability (aside from the requirement for tenants to
abide by all laws and regulations, including environmental law), in
large part because the majority were granted at least five years
ago and in most cases some 12 years ago, when it was very uncommon
for sustainability criteria or reporting to be included in leases.
The Group has only negligible amounts of vacant space and therefore
has extremely limited opportunity to introduce tenant
sustainability management measures. Where space becomes available
for letting or lease renewal, compliance with environmental
standards forms part of the assessment of appropriate lease terms.
However, 97% of the Group's leases by rental value have terms to
expiry (with no breaks) of greater than 17 years therefore it is
not anticipated that this will change in the near term.
Finally, the standard suggests reporting on Climate Change
Adaptation which is an assessment of the approach to managing
climate change risk. The Board considers that the structures of the
Group's leases, where the risks of continuing to operate each asset
rest with the tenants and guarantors (where relevant), together
with the insurance of assets in accordance with the principles of
good estate management, mean that this risk is managed to the
extent that is proportionate for a company with the vast majority
of its assets being subject to very long leases on full repairing
and insuring terms where the tenants bear the majority of these
risks.
Modern Slavery Act 2015
Both the Company and the Investment Adviser have complied with
their responsibilities under the Modern Slavery Act 2015 and the
relevant confirmations are included on their respective
websites.
Statement on stakeholder relationships made under Section 172(1)
of the Companies Act
The Directors consider that in conducting the business of the
Company over the course of the year ended 31 December 2019, they
have complied with Section 172(1) of the Companies Act 2006 ("the
Act"). The business is externally managed and the Group has no
employees. The Board is of the opinion that its conduct and that of
its external management team culminated from decisions made in good
faith to promote the success of the Company for the benefit of all
of its members, having regard to the impact of decisions on the
following matters specified in Section 172 of the Companies
Act:
-- the interests of the workforce, for whom the Senior
Independent Director has special responsibility and who are also
represented on the Board by the three Prestbury directors;
-- business relationships with suppliers, customers and other
counterparties, where engagement is managed by the Investment
Adviser;
-- the community and the environment, where the Board takes overall responsibility;
-- the reputation of the business for high standards of business conduct;
-- fair treatment as between all members of the Company where
the Investment Adviser engages routinely and where the Chairman of
the Company and other Independent Directors make themselves
available for meetings as appropriate; and
-- the likely long term consequences of decisions made by the Board.
The strategy of the Company was initially laid out in the AIM
Admission document issued in May 2014 and which was approved by the
Board at that time. In running the business, any deviation from or
amendment to that strategy is subject to Board and, if necessary,
shareholder approval. At least annually, the Board considers a
business plan and budget for the delivery of its strategic
objectives. Through regular engagement with its stakeholder groups,
the Board aims to gain a rounded and balanced understanding of the
impact of its decisions. In the main, that information is gathered
in the first instance by the Investment Adviser and communicated to
the Board in its regular quarterly meetings and otherwise as
required.
The key strategic decisions for the Board are those relating to
asset acquisitions, financing, disposals and distributions, and
where these types of transaction, or any other material transaction
or decision, is considered, the Board has regard to its wider
obligations under Section 172 of the Act.
Specifically, during the 2019 financial year the principal
non-routine decision made by the Board was the consideration of the
terms of the disposal of eight hospitals in a portfolio disposal
and the application of the net cash received following that sale.
This transaction resulted in a 13% reduction in the gross value of
property assets owned by the Group but the business remains very
substantial with GBP2.1 billion of gross property assets owned
immediately after the sale. As such the Company's relationships
with the workforce and its key customers and suppliers did not
change significantly as a result. The sale reduced the proportion
of the Group's rental income received from the relevant tenant from
39% to 30%, reducing the Group's reliance on that particular source
of income but where the tenant remains significant to the Group
and, as usual for a property sale, the terms of the lease were
unaffected. The Investment Adviser maintains regular contact with
all tenants and in this particular case worked to achieve a smooth
transition for the tenant from the ownership of the properties by
the Group to the new owner. The reasons for the disposal and the
related decision for the Group to retain the net cash proceeds in
the near term were announced at the time, so that all stakeholders
were aware of the decision, and through the shareholder engagement
programme investors have had an opportunity to ask questions to
understand the Board's decision. The Board's commitment to keeping
in mind the long term consequences of its decisions underlies the
focus on risk, including risks to the long term success of the
business, leading to the conclusion that, during a period of
heightened political and market uncertainty both in the UK and
globally, the net cash proceeds should be retained by the Company
until such time as it is in the best interests of shareholders to
invest it, deploy it in debt reduction, or return it to
shareholders.
While the Group has no employees as a result of its external
management structure, the Directors have regard to the interests of
the individuals who are responsible for delivery of the management
services to the Company to the extent that they are able to. Three
of the seven Directors are representatives of the Investment
Adviser and, in their capacity as directors and majority owners of
the Investment Adviser, have direct responsibility for the
employees of the entities providing management services to the
business. In addition, the Chairman of the Remuneration Committee
has responsibility for workforce engagement so that there is a line
of communication from the workforce to the Independent Directors.
There have been no strategic initiatives or transactions in the
year that were considered to have a direct bearing on the employees
of the external management business. After the balance sheet date
the Investment Adviser proposed a reduction in the advisory fee as
explained in note 27 to the financial information. This proposal
was advanced by members of the Management Team, rather than at the
request of the Board, and the interests of the workforce had been
taken into account.
The Board's annual review of the internal control environment
operating in the business, the appropriateness of staffing levels
and staff qualifications are kept under review, but it is noted
that the Board does not have direct responsibility for any
employees.
In the main, the Company's suppliers, customers and
counterparties are professional firms such as lenders, property
agents, accounting and law firms, tenants with which we have
longstanding relationships and transaction counterparties which are
generally large and sophisticated businesses or institutions. Most
professional firms and advisers acting for the business have also
had longstanding relationships with the Company and the Investment
Adviser. Where material counterparties are new to the business,
checks, including anti money laundering checks, are conducted prior
to transacting any business to ensure that no reputational or legal
issues would arise from engaging with that counterparty. The
Company also reviews the compliance of all material counterparties
with relevant laws and regulations such as the Modern Slavery Act
2015. All Group entities have a policy of paying suppliers in
accordance with pre agreed terms as reported in the Supplier
Payment Policies below.
The interaction of Group entities with the wider community and
its impact on the environment is relatively limited as a result of
the Group's business operations being entirely related to
investment in properties let on very long leases, where the
operation of the properties, their upkeep and environmental impact
is the responsibility of the occupational tenants. The Board's
approach to sustainability is explained in the Strategic Review.
The Board and the Investment Adviser have committed to limiting the
impact of the business on the environment where possible,
including, for example, the cessation during the year of the use of
single use plastics.
The Board is mindful that the ability of the Company to continue
to conduct its investment business and to finance its activities
depends in part on the reputation of the Board and Management Team
The risk of falling short of the high standards expected and
thereby risking business reputation is included in the Board's
review of the Company's risk register, which is conducted at least
annually. Principal risks and uncertainties facing the business are
summarised in the Strategic Review.
The Company's shareholders are a very important stakeholder
group. The Board oversees the Management Team's formal investor
relations programme which is supported by the Company's brokers and
financial PR advisers. The Board and management of the Company aim
to be open with shareholders and available to them, subject to
compliance with relevant securities laws. The investor relations
programme is designed to promote formal engagement with major
investors, generally defined as those holding more than
approximately 1% of the shares in the Company. Major investors are
offered meetings after each results announcement. The Board and
Management Team also engage with major investors, other investors
who may request meetings and with potential new investors on an ad
hoc basis throughout the year including where prompted by Company
announcements. All formal shareholder presentations are made
available on the Company's website and remain available to any
interested party. The whole Board attends the Company's Annual
General Meeting. The Company has a single class of shares in issue
with all members of the Company having equal rights.
The investment strategy of the Group is focussed on medium to
long term returns and as such the long term is firmly within the
sights of the Board when all material decisions are made.
Supplier payment policies
Neither the Company nor any of its subsidiary undertakings
exceeds the thresholds for reporting payment practices and
performance. The following voluntary disclosures relate to the
Group:
-- the Group does not have standard or maximum payment terms,
but seeks to settle supplier invoices in accordance with pre-agreed
terms;
-- invoices may be submitted electronically but as the volume of
payments is relatively low, the Group does not operate electronic
tracking for suppliers;
-- the Group does not offer supply chain finance;
-- there are no arrangements for participation on supplier lists
and no charges for being on such a list;
-- the Group is not a member of a payment code of conduct; and
-- the average number of days taken to make payments in the year was 23 days (2018: 20 days).
Principal risks and uncertainties
The Board considers that the principal risks and uncertainties
facing the Group over the long term are as follows:
Risk and change
in assessment since
prior year Impact on the Group Mitigation
-------------------------- ------------------------------------ ---------------------------------
Property valuation
movements Investment properties make The Group uses experienced
The Group invests up the majority of the independent external valuers
in commercial property Group's assets, so material whose work is reviewed
which is held on changes in their value by suitably qualified
the balance sheet will have a significant members of the Investment
at its fair value impact on measures of net Adviser and, separately,
at each balance asset value including EPRA the Audit Committee before
sheet date. The NAV, with any effect of being considered by the
Company is therefore the valuation changes on Board in the context of
exposed to movements NAV magnified by the impact the financial information
in property valuations, of borrowings. as a whole.
which are subjective
and may vary as Falls in the value of investment The Board seeks to structure
a result of a number properties could lead to the Group's capital such
of factors, many a breach of financial covenants that the level of borrowing
of which are outside in secured debt facilities, and the protections available
the control of resulting in increased to cure a covenant default
the Board. interest margins payable are appropriate having
to lenders, restricted regard to market conditions
No change in risk cash flows out of secured and financial covenant
assessment since debt groups, restrictions levels.
prior year. of distributable reserves
available for dividend The Board reserves unsecured
payments or default under and uncommitted cash outside
secured debt agreements. ring-fenced debt structures
which would be available
The Board notes the relative to cure certain covenant
resilience in value demonstrated breaches to the extent
by long lease properties of the uncommitted cash
through the dramatic property available.
market decline in 2008-11.
-------------------------- ------------------------------------ ---------------------------------
Tenant risk
During the year A default of lease obligations 32% (2018: 67%) of passing
the Group derived by a material tenant and rent at the balance sheet
its rental income its guarantor (if any) date is contractually
from ten (2018: would have an impact on backed by large listed
ten) tenant groups, the Group's revenue, earnings companies and a further
two (2018: three) and cash flows and could 31% (2018: nil) by global
of which have the have an impact on debt businesses with multi
benefit of guarantees covenant compliance. The billion pound valuations,
from or joint tenancies specialised use of the all with capital structures
with substantial properties may mean that, considered by the Board
listed parent companies. in the event of an unexpected to be strong and with
The three largest vacancy, re-letting takes impressive long term earnings
tenant groups account time. growth and (where relevant)
for 87% of passing share price track records.
rent as at the Investment property valuations The balance of the income
balance sheet date reflect a valuer's assessment is payable by substantial
(2018: 89%). of the future security businesses also considered
of income. A loss of income by the Board to be financially
Although the Board would therefore impact strong in the context
considers the tenant net asset value as well of their lease obligations.
and guarantor groups as earnings. It could also
to be financially lead to a breach of interest The properties themselves
strong, there can cover or debt service cover are Key Operating Assets,
be no guarantee covenants, resulting in which should have the
that they will increased interest rate effect of enhancing rental
remain able to margins payable to lenders, income security, as explained
comply with their restricted cash flows out in the summary of the
obligations throughout of secured debt groups business model in the
the term of the or ultimately default under Investment Adviser's Report.
relevant leases. secured debt agreements.
The availability of distributable The Board reviews the
We consider this reserves could also be financial position of
risk moderately restricted. the tenants and guarantors
reduced this year at least every quarter,
as a result of based on publicly available
lower political financial information
risk in the UK and any other trading
but we are mindful information which may
of the potential be obtained either under
risks presented the terms of the leases
by the Covid-19 or informally.
virus which, at
the date of this The Board reserves unsecured
report, results and uncommitted cash outside
in a risk level ring-fenced debt structures
unchanged overall. which would be available
to be used to cure certain
covenant defaults to the
extent of the cash available.
-------------------------- ------------------------------------ ---------------------------------
Risk and change in
assessment since
prior year Impact on the Group Mitigation
---------------------------- -------------------------------- -------------------------------------
Borrowing
Certain Group companies In the event of a breach The Group's borrowing arrangements
have granted security of a debt covenant, comprise six ring-fenced
to lenders in the the Group may be required subgroups with no cross-guarantees
form of mortgages to pay higher interest between them and no recourse
over each of the costs or to increase to other assets outside
Group's investment debt amortisation out the secured subgroups.
properties and fixed of cash flows arising A financial covenant issue
and floating charges on a particular portfolio in one portfolio should
over other assets. which would affect therefore be limited to
Group cash flows and that portfolio, save for
Following the sale earnings. If a financial tenant related events (such
of eight hospitals covenant breach is as a tenant insolvency)
which completed in the result of financial where the two healthcare
August 2019, the weakness of a tenant subgroups would both be
Group holds an uncommitted or a guarantor, the affected by any issue relating
cash balance that property valuations to the Ramsay Health Care
is substantially and therefore net asset group and the two hotels
higher than the level value may also be adversely facilities would be affected
of approximately affected. In certain by any issue relating to
GBP60 million held circumstances the Company's Travelodge.
historically. For ability to make cash
such time as significant distributions to shareholders Five of the facilities
surplus cash is retained may be reduced. have LTV default covenants
on the balance sheet, (the Merlin Leisure facility
the borrowing risk Where a Group company has no LTV default covenant)
can be considered is unable to make loan and all facilities have
to be lower than repayments out of existing interest cover or debt
in prior periods cash resources, it service cover covenants.
as the ability to may be forced to sell The Board reviews compliance
cure breaches of assets to repay part with all financial covenants
financial covenants, or all of the Group's at least every quarter,
should they occur, debt. It may be necessary including forward-looking
is significantly to sell assets at below tests for at least twelve
greater. book value, which would months, and considers whether
adversely impact net there is sufficient headroom
assets and future earnings. on relevant loan covenants
Early debt repayments to withstand stress test
would in most cases scenarios.
crystallise penalties
which would also adversely The Board seeks to structure
impact cash balances the Group's capital such
and net asset value that gearing is appropriate
and reduce distributable having regard to market
reserves. conditions and financial
covenant levels, with appropriate
cure rights within debt
facilities.
The Board reserves unsecured
cash outside ring-fenced
debt structures which would
be available to be used
to cure certain covenant
defaults to the extent
of the uncommitted cash
available.
Tax risk
The Group is subject If subject to UK corporation The Board reviews compliance
to the UK REIT regime. tax, the Group's current with the UK REIT rules
A failure to comply tax charge would increase, at least every quarter.
with certain UK REIT impacting cash flows,
conditions resulting net asset value and The REIT conditions which,
in the loss of this earnings, and reducing if breached, could result
status could result cash and reserves available in automatic expulsion
in property income for distributions. from the REIT regime are
being subject to Further, any asset those relating to the Company's
UK corporation tax. sales would be subject share and loan capital,
to corporation tax, and are therefore (with
No change in risk reducing the net amounts the exception of a successful
assessment since receivable on sale hostile takeover of the
prior year. and requiring deferred Company by a non-REIT)
tax to be provided within the control of the
on inherent capital Group.
gains.
---------------------------- -------------------------------- -------------------------------------
Risk and change in Impact on the Group Mitigation
assessment since
prior year
-------------------------- ------------------------------- ----------------------------------
Liquidity risk
Working capital must A breach of a lending Unless there is a tenant
be managed to ensure covenant, or the insolvency default (the risk of which
that both the Group of either the Group is explained under 'tenant
as a whole and all as a whole or an individual risk') the Group's cash
individual entities entity within a secured flows are generally highly
are able to meet subgroup, could result predictable. The cash position
their liabilities in a loss of net assets, is reported to the Board
as they fall due, impacting net asset at least quarterly, projections
though with highly value and earnings, at least two years ahead
predictable income and reducing cash and are included in the Group
and costs there is reserves available budget and are updated
limited scope for for distributions for review when the interim
unexpected liquidity and annual reports are
pressures outside As a result, there approved, and projections
those risks described could be insufficient for a five year period
under the heading cash and/or distributable are reviewed for the viability
'tenant risk'. reserves to meet the statement in the annual
Property Income Distribution report.
For as long as the ("PID") requirement
Group holds a material under the UK REIT rules, The Group has uncommitted
uncommitted cash which could result cash reserves out of which
balance, as is the in UK corporation tax any tax liabilities or
case following the becoming payable on increases in required PIDs
2019 hospitals portfolio the Group's property above the cash flow generated
disposal, this risk rental business. This from operations could be
is considered reduced. would in turn reduce met in the medium term.
free cash flows. A scrip dividend alternative
could also be offered to
meet the PID requirement.
-------------------------- ------------------------------- ----------------------------------
There are certain overarching risks where the direct impact on
the Company's operations is limited, but which the Board considers
to be relevant to most of the major risk areas identified. These
are the terms of the departure of the UK from the European Union
following the end of the current transition period (generally
referred to as Brexit risk) and climate risk. They are not
classified as direct risks in their own right but as general risks
which are also kept under review.
Brexit risk
The Board does not consider that Brexit presents a risk to the
Group in and of itself, largely as the Group is not dependent on
access to European markets and is not expected to be directly
impacted by changes in regulations or tariffs. The tax treatment of
the German assets (the only non-UK assets held) is considered
unlikely to change as a result of Brexit, although the terms of
access to non-UK financial markets may be of relevance in any
future equity and debt issues.
Nevertheless, the Board considers that Brexit does potentially
weigh on all of the risks described above, principally through the
heightened risk of market uncertainty or disruption and in
particular on how the Group's tenants are affected. In this respect
we take some comfort from the fact that a large majority of passing
rents are underpinned by businesses with globally diverse sources
of income, not solely dependent on the UK and its trade relations
with the rest of the world.
There have been periods of significant political, economic and
market uncertainty since the referendum to leave the EU in 2016 and
this has at times affected equity, debt, property and foreign
exchange markets. Delivery of the Group's growth aspirations
depends on access to capital markets and external factors,
including market volatility, can have an impact on the ability to
implement the growth strategy. Given the Group's long term income
profile and the characteristics of its debt, where the finance
costs are ultimately fixed or capped, such conditions are currently
considered unlikely to have a material impact on the status quo for
the Group, but are considered to be relevant to the Group's growth
aspirations in so far as there is an impact on the availability of
debt and equity capital.
Climate risk
As the Company has very limited direct impact on the environment
(as explained under the sustainability section of the Strategic
Report), this risk is not one where the Company can take steps to
make a material impact. However, in assessing the strength of the
credit quality of our tenants and of potential tenants, we take
climate risk into account together with its likely impact on how we
consider that any assets that we are considering for acquisition
meet the criteria for defensive business sectors set out in the
explanation of the Company's business model in the Investment
Adviser's Report.
Going concern
The Board regularly monitors the Company's and the Group's
ability to continue as a going concern. Summaries of the Company's
and the Group's liquidity position, compliance with loan covenants
and the financial strength of its tenants and guarantors are
considered at the scheduled quarterly Board meetings and more often
if required. Scenarios for the Group's future performance and cash
flows, including stress test scenarios, are also considered by the
Board at those Board meetings and more often if required, for
example in connection with a transaction. Based on this
information, the Directors are satisfied that the Company and the
Group are able to continue in business for the foreseeable future
and therefore have adopted the going concern basis in the
preparation of this financial information.
Viability statement
The Board has assessed the prospects of the Group over the five
years from the balance sheet date to 31 December 2024, which is the
period covered by the Group's longer term financial projections.
The Board considers the resilience of projected liquidity, as well
as compliance with debt covenants and UK REIT rules, under a range
of RPI and property valuation assumptions.
The principal risks and the key assumptions that were relevant
to this assessment are as follows:
Risk Assumptions
------------ -----------------------------------------------------------------
Tenant risk
* Tenants (and guarantors where relevant) continue to
comply with their rental obligations over the term of
their leases and do not suffer any insolvency events
over the term of the review.
Borrowing
risk * The Group continues to comply with all loan
covenants.
* The Group is able negotiate acceptable terms to
refinance GBP377.8 million of debt in the Merlin
Leisure facility falling due in 2022 and GBP185.9
million in two hotel facilities and one leisure
facility falling due in 2023.
Liquidity
risk * The Group continues to generate sufficient cash to
cover its costs while retaining the ability to make
distributions, which includes the Group's continuing
compliance with loan covenants.
------------ -----------------------------------------------------------------
Based on the work performed, the Board has a reasonable
expectation that the Group will be able to continue in business
over the five year period of its assessment.
The Strategic Report, which comprises the Chairman's Statement,
Investment Adviser's Report and Strategic Review, was signed on
behalf of the Board on 12 March 2020.
Martin Moore Sandy Gumm
Chairman Director
Group Income Statement
Year to Year to
31 December 31 December
2019 2018
Notes GBP000 GBP000
-------------------------------------------- ----- ------------- -------------
Revenue 3 , 4 132,677 125,874
Property outgoings 5 (1,327) (548)
-------------------------------------------- ----- ------------- -------------
Gross profit 131,350 125,326
Administrative expenses 6 (22,128) (20,575)
Profit on disposal of investment properties 7 53,074 183
Investment property revaluation 12 75,708 98,167
Operating profit 8 238,004 203,101
Finance income 9 730 371
Finance costs 9 (84,234) (54,878)
-------------------------------------------- ----- ------------- -------------
Profit before tax 154,500 148,594
Tax charge 10 (1,141) (1,081)
-------------------------------------------- ----- ------------- -------------
Profit for the year 153,359 147,513
-------------------------------------------- ----- ------------- -------------
Pence per Pence per
Earnings per share share share
-------------------------------------------- ----- ------------- -------------
Basic 11 47.5 48.9
Diluted 11 47.3 48.7
-------------------------------------------- ----- ------------- -------------
All amounts relate to continuing activities.
The notes form part of this financial information.
Group Statement of Other Comprehensive Income
Year to Year to
31 December 31 December
2019 2018
Notes GBP000 GBP000
-------------------------------------------- ----- ------------- -------------
Profit for the year 153,359 147,513
Items that may subsequently be reclassified
to profit or loss:
Currency translation differences 22 (2,000) 468
14 ,
Fair value movements in derivatives 22 (851) (200)
Other comprehensive (loss) / income (2,851) 268
-------------------------------------------- ----- ------------- -------------
Total comprehensive income for the year 150,508 147,781
-------------------------------------------- ----- ------------- -------------
The notes form part of this financial information.
Group Statement of Changes in Equity
Share premium Retained
Share capital reserve Other reserves earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------------- --------------- ---------------- ----------- ---------
Year to 31 December 2019
At 1 January 2019 32,156 513,675 9,977 725,780 1,281,588
---------------------------- --------------- --------------- ---------------- ----------- ---------
Profit for the year - - - 153,359 153,359
Other comprehensive loss - - (2,851) - (2,851)
---------------------------- --------------- --------------- ---------------- ----------- ---------
Total comprehensive (loss)
/ income - - (2,851) 153,359 150,508
Issue of shares 129 4,740 (4,869) - -
Shares to be issued - - 4,907 - 4,907
Interim dividends of 16.3
pence per share - - - (52,461) (52,461)
At 31 December 2019 32,285 518,415 7,164 826,678 1,384,542
---------------------------- --------------- --------------- ---------------- ----------- ---------
Share premium Retained
Share capital reserve Other reserves earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------------- --------------- ---------------- ----------- ---------
Year to 31 December 2018
At 1 January 2018 23,054 196,975 20,852 619,696 860,577
---------------------------- --------------- --------------- ---------------- ----------- ---------
Profit for the year - - - 147,513 147,513
Other comprehensive income - - 268 - 268
---------------------------- --------------- --------------- ---------------- ----------- ---------
Total comprehensive income - - 268 147,513 147,781
Issue of shares 9,102 316,700 (16,015) - 309,787
Shares to be issued - - 4,872 - 4,872
Interim dividends of 13.9
pence per share - - - (41,429) (41,429)
At 31 December 2018 32,156 513,675 9,977 725,780 1,281,588
---------------------------- --------------- --------------- ---------------- ----------- ---------
The notes form part of this financial information.
Group Balance Sheet
31 December 31 December
2019 2018
Notes GBP000 GBP000
------------------------------------------- ------ ------------- -------------
Non-current assets
Investment properties 3 , 12 2,111,297 2,335,220
Headlease rent deposits 2,742 2,766
Interest rate derivatives 14 43 306
2,114,082 2,338,292
Current assets
Cash and cash equivalents 15 267,119 101,745
Trade and other receivables 16 3,798 3,436
Current tax receivable - 40
270,917 105,221
Total assets 2,384,999 2,443,513
------------------------------------------- ------ ------------- -------------
Current liabilities
Trade and other payables 17 (38,290) (41,727)
Secured debt 18 (1,170) (1,771)
Interest rate derivatives 14 (246) -
Current tax liability (129) -
(39,835) (43,498)
------------------------------------------- ------ ------------- -------------
Non-current liabilities
Secured debt 18 (920,408) (1,078,495)
Head rent obligations under finance leases 19 (28,190) (28,511)
Deferred tax liability 20 (11,267) (11,110)
Interest rate derivatives 14 (757) (311)
------------------------------------------- ------ ------------- -------------
(960,622) (1,118,427)
Total liabilities (1,000,457) (1,161,925)
------------------------------------------- ------ ------------- -------------
Net assets 1,384,542 1,281,588
------------------------------------------- ------ ------------- -------------
Equity
Share capital 21 32,285 32,156
Share premium reserve 22 518,415 513,675
Other reserves 22 7,164 9,977
Retained earnings 22 826,678 725,780
Total equity 1,384,542 1,281,588
------------------------------------------- ------ ------------- -------------
Pence per Pence
share per share
------------------------------------------- ------ ------------- -------------
Basic NAV per share 24 428.8 398.5
Diluted NAV per share 24 427.3 397.0
EPRA NAV per share 24 431.1 400.5
------------------------------------------- ------ ------------- -------------
The notes form part of this financial information.
Group Cash Flow Statement
Year to Year to
31 December 31 December
2019 2018
Notes GBP000 GBP000
-------------------------------------------- ------ ------------- -------------
Operating activities
Profit before tax 154,500 148,594
Adjustments for non-cash items:
Investment property revaluation 12 (86,727) (102,466)
Administrative expenses payable in shares 26 4,907 4,872
Profit on disposal of investment properties 7 (53,074) (183)
Finance income 9 (730) (371)
Finance costs 9 84,234 54,878
-------------------------------------------- ------ ------------- -------------
Cash flows from operating activities
before changes in working capital 103,110 105,324
Changes in working capital:
Trade and other receivables (265) (507)
Trade and other payables (2,144) 6,111
Headlease rent deposits 24 -
Cash generated from operations 100,725 110,928
Tax paid (233) (234)
-------------------------------------------- ------ ------------- -------------
Cash flows from operating activities 100,492 110,694
-------------------------------------------- ------ ------------- -------------
Investing activities
Net proceeds on disposal of investment
properties 357,744 443
Interest received 695 371
Acquisition of investment properties (307) (435,536)
Headlease rent deposits acquired - (1,225)
Cash flows from investing activities 358,132 (435,947)
-------------------------------------------- ------ ------------- -------------
Financing activities
Repayment of secured debt from proceeds
of disposal of investment properties 25 (154,519) -
Dividends paid 25 (52,461) (41,429)
Fees on accelerated prepayment of secured
loans 9 , 25 (27,868) -
Interest and finance costs paid 25 (53,638) (51,998)
Scheduled amortisation of secured debt 25 (3,988) (4,156)
Loan arrangement costs paid 25 (670) (2,462)
Proceeds of share issue - 315,500
Costs of share issue - (5,713)
Drawdown of new secured debt - 128,700
Purchase of interest rate caps - (220)
Cash flows from financing activities (293,144) 338,222
-------------------------------------------- ------ ------------- -------------
Increase in cash and cash equivalents 165,480 12,969
Cash and cash equivalents at the beginning
of the year 101,745 88,755
Currency translation movements (106) 21
-------------------------------------------- ------ ------------- -------------
Cash and cash equivalents at the end
of the year 15 267,119 101,745
-------------------------------------------- ------ ------------- -------------
The notes form part of this financial information.
Notes to the Group Financial Information
1. General information about the Group
The financial information set out in this report covers the year
to 31 December 2019, with comparative figures relating to the year
to 31 December 2018, and includes the results and net assets of the
Company and its subsidiaries, together referred to as the
Group.
The Company is incorporated in England and Wales. The address of
the registered office and principal place of business is Cavendish
House, 18 Cavendish Square, London W1G 0PJ. The nature and scope of
the Group's operations and principal activities are described in
the Strategic Report.
The Company is listed on the AIM market of the London Stock
Exchange. Further information about the Group can be found on its
website, www.SecureIncomeREIT.co.uk.
2. Basis of preparation and accounting policies
a) Statement of compliance
The consolidated financial information has been prepared in
accordance with International Financial Reporting Standards adopted
for use in the European Union ("IFRS").
The financial information contained in this announcement has
been prepared on the basis of the accounting policies set out in
the financial statements for the year ended 31 December 2019.
Whilst the financial information included in this announcement has
been computed in accordance with IFRS, as adopted by the European
Union, this announcement does not itself contain sufficient
information to comply with IFRS. The financial information does not
constitute the Group's financial statements for the years ended 31
December 2019 or 31 December 2018, but is derived from those
financial statements. Those financial statements give a true and
fair view of the assets, liabilities, financial position and
results of the Group. Financial statements for the year ended 31
December 2018 have been delivered to the Registrar of Companies and
those for the year ended 31 December 2019 will be delivered
following the Company's AGM. The auditors' reports on both the 31
December 2019 and 31 December 2018 financial statements were
unqualified; did not draw attention to any matters by way of
emphasis; and did not contain statements under section 498 (2) or
(3) of the Companies Act 2006.
b) Basis of preparation
The Group financial information is presented in Sterling as this
is the currency of the primary economic environment in which the
Group operates. Amounts are rounded to the nearest thousand pounds,
unless otherwise stated.
Euro denominated results for the German assets have been
converted to Sterling at the average exchange rate for the year of
EUR1:GBP0.8769 (2018: EUR1:GBP0.8846), which is not considered to
produce materially different results from using the actual rates at
the time of the transactions. Year end balances have been converted
to Sterling at the 31 December 2019 exchange rate of EUR1:GBP0.8500
(2018: EUR1:GBP0.8969).
The Directors have, at the time of preparing the financial
information, a reasonable expectation that the Company and the
Group have adequate resources to continue in operational existence
for the foreseeable future and therefore continue to adopt the
going concern basis of accounting in preparing the financial
information. Further details are given in the Strategic Review.
The financial information has been prepared on the historical
cost basis, except for investment properties and derivatives which
are stated at fair value. The accounting policies have been applied
consistently in all material respects.
The preparation of financial information requires the Directors
to make judgements, estimates and assumptions that may affect the
application of accounting policies and reported amounts of assets
and liabilities as at each balance sheet date and the reported
amounts of revenue and expenses during any financial year. Any
estimates and assumptions are based on experience and any other
factors that are believed to be relevant under the circumstances
and which the Board considers reasonable. Actual outcomes may
differ from these estimates.
The principal area of estimation uncertainty is the investment
property valuation where, as described in note 12 , the opinion of
independent external valuers has been obtained at each reporting
date using recognised valuation techniques and the principles of
IFRS 13 "Fair Value Measurement".
The principal area of judgement is the recognition of any
additional revenue in the year as a result of an outstanding May
2018 open market rent review on the Ramsay hospitals. The review is
under arbitration and the nature of the assets mean that there is
little comparative information on which to base an assessment. The
directors consider that it is not possible at present to make a
reasonably certain estimate of any uplift that might result, and
the financial information therefore does not reflect any additional
revenue arising as a result of this rent review.
The Group's accounting policies for property valuation, revenue
recognition and the recognition of disposals are set out in
paragraph 2d. Other policies material to the Group are set out in
paragraphs 2c to 2j.
Adoption of new and revised standards
During the year, the Group has adopted IFRS 16 "Leases" which
has not had a material impact on the Group's accounting policies
and financial information. As part of the transition, the Group
reassessed the classification of all subleases by reference to the
requirements of IFRS 16 but this resulted in no
reclassifications.
None of the other new or amended standards or interpretations
issued by the International Accounting Standards Board ("IASB") or
the IFRS Interpretations Committee ("IFRIC") have led to any
material changes in the Group's accounting policies or disclosures
during the year.
Standards and interpretations in issue not yet adopted
The IASB and IFRIC have issued or revised IFRS 3, IFRS 7, IFRS
9, IFRS 17, IAS 1, IAS 8 and IAS 39 but these are not expected to
have a material effect on the operations of the Group.
c) Basis of consolidation
Subsidiaries are those entities controlled by the Group. The
Group has control within the meaning of this policy when it has
power over an entity, is exposed to or has rights to variable
returns from its involvement with the entity, and has the ability
to use its power over the entity to affect those returns.
The consolidated financial information includes the financial
information of the Group's subsidiaries prepared to 31 December
under the same accounting policies as the Group as a whole, using
the acquisition method. All intra-group balances and transactions
are eliminated on consolidation.
All Group entities at 31 December 2019 and 31 December 2018 were
wholly owned.
d) Property portfolio
Investment properties
Investment properties are properties owned by the Group which
are held for capital appreciation, rental income or both. They are
initially recorded at cost and subsequently valued at each balance
sheet date at fair value as determined by professionally qualified
independent external valuers.
Valuations are calculated, in accordance with "RICS Valuation -
Global Standards 2018" by applying market capitalisation rates to
future rental cash flows with reference to data from comparable
market transactions, together with an assessment of the security of
income. Gains or losses arising from changes in the fair value of
investment properties are recognised in the income statement in the
period in which they arise. Depreciation is not charged in respect
of investment properties.
Acquisitions of investment properties are recognised on
unconditional exchange of contracts where it is reasonable to
assume at the balance sheet date that completion of the acquisition
will occur. Disposals of investment properties are recognised when
the buyer obtains control of the property, taking into account the
points at which the Group has a right to payment and the buyer has
obtained legal title or possession of the property, or has taken on
the significant risks and rewards of ownership.
Gains or losses on disposal are determined as the difference
between the net disposal proceeds and the carrying value of the
asset in the previous balance sheet, adjusted for any subsequent
capital expenditure or capital receipts.
Occupational leases
The Directors exercise judgement in considering the potential
transfer of the risks and rewards of ownership in accordance with
IFRS 16 "Leases" for all occupational leases and headleases to
determine whether or not such leases are operating leases. A lease
is classified as a finance lease if substantially all of the risks
and rewards of ownership transfer to the lessee. In the case of
properties where the Group has a leasehold interest, this
assessment is made by reference to the Group's right of use asset
arising under the headlease rather than by reference to the
underlying asset. If the Group substantially retains those risks, a
lease is classified as an operating lease. All occupational leases
reflected in this financial information are classified as operating
leases.
Headleases
Where an investment property is held under a leasehold interest,
the headlease is initially recognised as an asset at cost plus the
present value of minimum ground rent payments. The corresponding
rental liability to the head leaseholder is included in the balance
sheet as a finance lease obligation. Cash deposits held by head
leaseholders as guarantees of headlease obligations are included as
non-current assets.
Rental income
Revenue comprises rental income exclusive of VAT, recognised in
the income statement on an accruals basis. Future anticipated
rental income is spread over the term of a lease on a straight line
basis, giving rise to a Rent Smoothing Adjustment in cases where
future rental uplifts can be determined with sufficient certainty.
Where income is recognised in advance of the contractual right to
receive that income, such as from leases with fixed rent uplifts,
an adjustment is made to ensure that the carrying value of the
relevant investment property including accrued rent does not exceed
the fair value of the property as assessed by the externa valuers.
Income arising from contractual rights that are subject to external
factors, such as RPI-linked or open market rent reviews, is
recognised in the income statement in the period in which it is
determinable and reasonably certain.
e) Financial assets and liabilities
Financial assets and liabilities are initially recognised at
their fair value when a Group entity becomes a party to the
unconditional contractual terms of an instrument. Unless otherwise
indicated, the carrying amounts of financial assets and liabilities
are considered by the Directors to be reasonable estimates of their
fair values.
Trade and other receivables
Trade and other receivables are measured at amortised cost using
the effective interest method, less any impairment. Impairment is
calculated using an expected credit loss model.
Trade and other payables
Trade and other payables are measured at amortised cost using
the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and deposits
with maturities of three months or less held with banks or
financial institutions.
Borrowings and finance costs
Secured debt is initially recognised at its fair value, net of
any arrangement fees and other transaction costs directly
attributable to its issue. Subsequently, secured debt is carried at
amortised cost. Transaction costs are amortised over the life of
the loan and charged to the income statement as part of the Group's
finance costs.
Derecognition of financial liabilities
The Group derecognises financial liabilities when its
obligations are discharged, cancelled or they expire. The
difference between the carrying amount of those financial
liabilities and the consideration paid, including any non-cash
assets transferred and any new liabilities assumed, is recognised
in profit or loss on derecognition.
Interest rate derivatives
The Group has used interest rate derivatives to hedge its
exposure to cash flow interest rate risk. Derivatives are initially
recognised at fair value on the date on which the derivative
contract is entered into and subsequently measured at fair
value.
Derivatives are classified either as derivatives in effective
hedges or derivatives held for trading. It is anticipated that any
hedging arrangements will generally be "highly effective" within
the meaning of IFRS 9 "Financial Instruments" and that the criteria
necessary for applying hedge accounting will therefore be met.
Hedges are assessed upon inception and on an ongoing basis to
ensure they continue to be effective. The gain or loss on the
revaluation of the portion of an instrument that qualifies as an
effective hedge of cash flow interest rate risk is recognised
directly in other comprehensive income. Amounts accumulated in
equity will be reclassified to the income statement in the period
when the hedged items affect the income statement. The gain or loss
on the revaluation of any derivative that is not an effective hedge
is recognised directly in the income statement.
The Group ceases to use hedge accounting if a forecast
transaction being hedged against is no longer expected to occur. In
such circumstances, the cumulative amounts in other comprehensive
income are then reclassified from equity to profit or loss.
f) Tax
Tax is included in the income statement except to the extent
that it relates to income or expense items recognised through
reserves, in which case the related tax is recognised either in
other comprehensive income or directly in reserves.
Current tax is the expected tax payable on taxable income for a
reporting period at the blended tax rate for the period, using tax
rates enacted or substantively enacted at the balance sheet date,
together with any adjustment in respect of previous periods.
Deferred tax is provided using the balance sheet liability method,
providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for tax purposes.
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. A deferred tax asset is
recognised only to the extent that it is probable that future
taxable profits will be available against which the asset can be
utilised.
g) Foreign currency translation
The results of Group undertakings with a functional currency
other than Sterling are translated into Sterling at the actual
exchange rates prevailing at the time of the transaction, unless
the average rate for the reporting period is not materially
different from the actual rate, in which case that average rate is
used.
The gains or losses arising on the end of year translation of
the net assets of such Group undertakings at closing rates and the
difference between translating the results at average rates
compared to the closing rates are taken to Other reserves. Monetary
assets and liabilities denominated in foreign currencies are
translated into Sterling at the rates of exchange ruling at the
balance sheet date with any gains or losses arising on translation
recognised in the income statement.
h) Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of directly attributable issue costs. Costs
not directly attributable to the issue are disclosed within
administrative expenses in the income statement.
i) Share based payments
The fair value of payments to non-employees that are to be
settled by the issue of shares is determined on the basis of an
estimate of the value of the services provided over the relevant
accounting period. The estimated number of shares to be issued in
satisfaction of the services provided is calculated using the
average daily closing share price of the Company for that
period.
j) Fair value measurements
Fair value is the price that would be received on the sale of an
asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction takes
place either in the principal market for the asset or liability or,
in the absence of a principal market, in the most advantageous
market. It is based on the assumptions that market participants
would use when pricing the asset or liability, assuming they act in
their economic best interest. A fair value measurement of a
non-financial asset takes into account the best and highest value
use for that asset.
3. Operating segments
IFRS 8 "Operating Segments" requires operating segments to be
identified on a basis consistent with internal reports about
components of the Group that are reviewed by the chief operating
decision maker when allocating resources between segments and
assessing their performance. The Group's chief operating decision
maker is the Board.
The Group owns 161 properties, originally acquired in five
portfolios. Although certain information about these portfolios is
described on a portfolio basis or grouped by property type
(Healthcare, Leisure and Budget Hotels) within the Investment
Adviser's Report, when considering resource allocation and
performance the Board reviews quarterly management accounts
prepared on a basis which aggregates the performance of the
portfolios and focuses on the Group's Total Accounting Return. The
Board has therefore concluded that the Group has operated in and
was managed as one business segment of property investment in both
the current and prior year.
The geographical split of revenue and applicable non-current
assets was as follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
-------------------- ----------- -----------
Revenue
UK 124,348 117,470
Germany 8,329 8,404
-------------------- ----------- -----------
132,677 125,874
-------------------- ----------- -----------
31 December 31 December
2019 2018
GBP000 GBP000
-------------------- ----------- -----------
Non-current assets
UK 2,001,047 2,222,670
Germany 110,250 112,550
-------------------- ----------- -----------
2,111,297 2,335,220
-------------------- ----------- -----------
Year to Year to
31 December 31 December
2019 2018
Revenue including Rent Smoothing Adjustments
comprises: GBP000 GBP000
----------------------------------------------- ----------- -----------
Largest tenant 48,072 55,045
Second largest tenant 30,400 25,398
Third largest tenant 27,654 26,804
Other tenants (each less than 10% of revenue) 26,551 18,627
Reported revenue 132,677 125,874
----------------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2019 2018
Revenue excluding Rent Smoothing Adjustments
comprises: GBP000 GBP000
----------------------------------------------- ----------- -----------
Largest tenant 43,317 48,385
Second largest tenant 30,400 25,398
Third largest tenant 27,654 26,804
Other tenants (each less than 10% of revenue) 20,742 14,337
Revenue on Adjusted EPRA Earnings basis 122,113 114,924
----------------------------------------------- ----------- -----------
4. Revenue
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------- ----------- -----------
Rental income 120,533 113,540
Rent Smoothing Adjustments 10,564 10,950
Recovery of head rent and other costs from
occupational tenants (note 5 ) 1,580 1,384
132,677 125,874
-------------------------------------------- ----------- -----------
The Rent Smoothing Adjustments arise through the Group's
accounting policy in respect of leases, which requires the
recognition of rental income on a straight line basis over the
lease term in certain circumstances, including for the 38% of
passing rent as at 31 December 2019 (2018: 48%) that increases by a
fixed percentage each year and the 5% of passing rent at 31
December 2019 (2018: 5%) that is subject to minimum fixed uplifts
on RPI-linked review. At this stage in the lease terms, results in
an increase in revenue and an offsetting entry is recognised in the
income statement as a reduction in the gains on investment property
revaluation.
The Group's accounting policy for revenue recognition is
disclosed in note 2d. Further information about Rent Smoothing
Adjustments and their impact on future reporting periods is given
in the unaudited supplementary information following this financial
information.
5. Property outgoings
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------------- ----------- -----------
Property outgoings in the income statement 1,327 548
Finance element of head rent included in finance
costs (note 9 ) 1,702 1,191
Movement in headlease liabilities included
in property revaluations (note 12 ) 100 72
-------------------------------------------------- ----------- -----------
Property outgoings 3,129 1,811
Recovery of head rents and other costs from
occupational tenants, included in revenue
(note 4 ) (1,580) (1,384)
Net property outgoings 1,549 427
-------------------------------------------------- ----------- -----------
The Group's accounting policy for headleases is disclosed in
note 2d.
6. Administrative expenses
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------- ----------- -----------
Advisory fees (note 26 ) 14,732 13,295
Incentive fee (note 26 ) 5,256 5,278
Other administrative expenses 1,546 1,485
Corporate costs 594 517
22,128 20,575
------------------------------- ----------- -----------
Amounts shown above include any irrecoverable VAT. The incentive
fee comprises GBP4.9 million (2018: GBP4.9 million) satisfied by
way of the issue of shares and GBP0.3 million (2018: GBP0.4
million) of VAT payable in cash.
The Group's accounting policy for share based payments is
disclosed in note 2i.
7. Profit on disposal of investment properties
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------- ----------- -----------
Disposal proceeds 360,250 2,975
Property disposal costs (2,526) (61)
Book value of sold properties (304,650) (2,731)
53,074 183
------------------------------- ----------- -----------
The Group's accounting policy for investment property disposals
is disclosed in note 2d.
8. Operating profit
Audit fees included within administrative expenses relate
to:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
---------------------------------------------------- ----------- -----------
Audit of the Company's consolidated and individual
financial statements 47 46
Audit of subsidiaries, pursuant to legislation 173 184
---------------------------------------------------- ----------- -----------
Total audit services 220 230
Audit related services: half year review 33 32
Audit related services: FCA reporting 3 3
---------------------------------------------------- ----------- -----------
Total audit and audit related services 256 265
Other non-audit services 3 7
---------------------------------------------------- ----------- -----------
Total fees before VAT 259 272
---------------------------------------------------- ----------- -----------
The total charge for the fees above, including irrecoverable
VAT, was GBP268,000 (2018: GBP283,000).
The Group had no employees in either the current or prior year.
The Directors, the key management personnel of the Company, are
appointed under letters of appointment for services. Directors'
remuneration, all of which represents fees for services provided
and which is included within administrative expenses, was as
follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
--------------- ----------- -----------
Martin Moore 75 75
Leslie Ferrar 45 44
Jonathan Lane 40 39
Ian Marcus 40 39
--------------- ----------- -----------
200 197
--------------- ----------- -----------
Mike Brown, Sandy Gumm and Nick Leslau received no Directors'
fees from the Group in either the current or prior year.
9. Finance income and costs
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
----------------------------------------------------- ----------- -----------
Recognised in the income statement:
Finance income
Interest on cash deposits 730 371
----------------------------------------------------- ----------- -----------
Finance costs
Interest on secured debt (49,920) (51,075)
Fees on accelerated loan repayments on property
disposals (27,868) -
Amortisation of loan arrangement costs (non-cash) (2,382) (2,225)
Interest charge on headlease liabilities (note
5 ) (1,702) (1,191)
Amortisation of loan arrangement costs on
accelerated debt repayment (non-cash) (1,443) -
Loan agency fees and other lender costs (546) (213)
Amortisation of interest rate derivatives,
transferred from other reserves (non-cash) (269) (149)
Fair value adjustment of interest rate derivatives
(note 14 ) (104) (25)
Total finance costs (84,234) (54,878)
----------------------------------------------------- ----------- -----------
Net finance costs recognised in the income
statement (83,504) (54,507)
----------------------------------------------------- ----------- -----------
Recognised in other comprehensive income:
Fair value adjustment of interest rate derivatives (1,120) (349)
Amortisation of interest rate derivatives,
transferred to the income statement 269 149
----------------------------------------------------- ----------- -----------
Net finance costs recognised in other comprehensive
income (note 14 ) (851) (200)
----------------------------------------------------- ----------- -----------
Net finance costs analysed by the categories of financial asset
and liability shown in note 18 are as follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------- ----------- -----------
Financial assets at amortised cost 730 371
Financial liabilities at amortised cost (84,130) (54,853)
Derivatives in effective hedges (104) (25)
Net finance costs recognised in the income
statement (83,504) (54,507)
-------------------------------------------- ----------- -----------
The Group's sensitivity to changes in interest rates on the
basis of a ten basis point change in LIBOR, was as follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------------------------- ----------- -----------
Effect on profit for the year 242 114
Effect on other comprehensive income and equity 181 217
------------------------------------------------- ----------- -----------
The Group receives interest on its cash and cash equivalents so
an increase in interest rates would increase finance income. An
increase in LIBOR up to the maximum capped rate of 1.65% would also
increase finance costs relating to the GBP24.8 million (2018:
GBP26.5 million) of the secured debt that is hedged by interest
rate caps. A further GBP50.0 million (2018: GBP50.0 million) of the
secured debt is hedged with interest rate swaps, and movements in
LIBOR would only have an impact on the fair value of those interest
rate swaps, which would be reflected in other comprehensive income.
There would be no effect from a change of LIBOR on the remaining
GBP855.9 million (2018: GBP1,106.0 million) of the secured debt
which is at fixed rates. The Group's sensitivity to interest rates
has increased in the year as a result of the higher cash balances
that it is holding as a result of the hospitals portfolio
disposal.
The Group's accounting policy for finance charges is disclosed
in note 2e.
10. Tax
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
--------------------------------------- ----------- -----------
Current tax - Germany
Corporation tax charge 341 282
Adjustments in respect of prior years 41 52
Deferred tax - Germany
Deferred tax charge (note 20 ) 759 747
--------------------------------------- ----------- -----------
1,141 1,081
--------------------------------------- ----------- -----------
The tax assessed for the year varies from the standard rate of
corporation tax in the UK applied to the profit before tax. The
differences are explained below:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
--------------------------------------------------- ----------- -----------
Profit before tax 154,500 148,594
Profit before tax at the standard rate of
corporation tax in the UK for the financial
year of 19% (2018: 19%) 29,355 28,233
Effects of:
Investment property revaluation not taxable (15,652) (20,001)
Profit on disposal of investment properties
not taxable (10,084) (35)
Qualifying property rental business not taxable (4,001) (8,585)
Recognition of tax losses 721 733
Finance costs disallowed under corporate interest
restriction rules 420 401
German current tax charge for the year 341 282
Adjustments in respect of prior years 41 52
Amounts not deductible for tax - 1
Tax charge for the year 1,141 1,081
--------------------------------------------------- ----------- -----------
The Company and its subsidiaries operate as a UK Group REIT.
Subject to continuing compliance with certain rules, the UK REIT
rules exempt the profits of the Group's UK and German property
rental business from UK corporation tax. Capital gains on the
Group's UK and German properties are also generally exempt from UK
corporation tax, provided they are not held for trading or in
certain circumstances sold in the three years after completion of a
development. None of the Group's properties were developed in the
last three years.
To remain a UK REIT, a number of conditions must be met in
respect of the Company, the Group's qualifying activity and the
Group's balance of business. Since entering the UK REIT regime the
Group has met all applicable conditions.
The Group is subject to German corporation tax on its German
property rental business at an effective rate of 15% (2018: 15%),
resulting in a current tax charge of GBP0.3 million (2018: GBP0.3
million) and a deferred tax charge of GBP0.8 million (2018: GBP0.7
million). A deferred tax liability of GBP11.3 million (2018:
GBP11.1 million) is recognised for the German capital gains tax
that would potentially be payable on the sale of the relevant
investment properties. There are no current plans to sell the
German assets.
The Group's accounting policy for tax is disclosed in note
2f.
11. Earnings per share
Basic EPS
Earnings per share ("EPS") is calculated as profit attributable
to ordinary shareholders of the Company for each year divided by
the weighted average number of ordinary shares in issue throughout
the relevant year. In calculating the weighted average number of
shares in issue:
-- where shares have been issued during the year in settlement
of an incentive fee relating to the results of the prior year, they
are treated as having been issued on the first day of the year
rather than their actual date of issue, which is typically in
March; and
-- shares still to be issued at the balance sheet date in
settlement of an incentive fee relating to the results of that year
are not taken into account.
Diluted EPS
The weighted average number of shares used in the calculation of
diluted EPS is required to include any shares to be issued in
respect of an incentive fee as if those shares had been in issue
throughout the whole of the year over which the fee was earned. In
fact they will not be issued until the following year.
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
--------------------- ----------- -----------
Profit for the year 153,359 147,513
--------------------- ----------- -----------
Weighted average number of shares in issue Number Number
-------------------------------------------------- ----------- -----------
Basic EPS calculation 322,850,595 301,549,670
Shares to be issued in satisfaction of incentive
fee (note 26 ) 1,184,551 1,287,242
-------------------------------------------------- ----------- -----------
Diluted EPS calculation 324,035,146 302,836,912
-------------------------------------------------- ----------- -----------
Pence per Pence per
share share
------------- --------- ---------
Basic EPS 47.5 48.9
Diluted EPS 47.3 48.7
------------- --------- ---------
EPRA EPS
EPRA, the European Public Real Estate Association, publishes
guidelines for calculating adjusted earnings designed to represent
core operational activities. These guidelines have been applied and
the calculation of EPRA EPS is set out below.
An Adjusted EPRA earnings calculation is also presented. This
removes the effect of the Rent Smoothing Adjustments (in order not
to artificially flatter Dividend Cover calculations) and any
non-recurring costs such as those for share placings. The adjusted
measure also excludes any incentive fees which are paid in shares,
as they are considered to be linked to revaluation movements and
are therefore best treated consistently with revaluations.
In calculating Adjusted EPRA EPS, the weighted average number of
shares is 322,540,246 (2018: 299,730,383), calculated using the
actual date on which any shares are issued during the year so as
not to create a mismatch between the basis of calculation of
Adjusted EPRA EPS and dividends paid in the year. In this way the
Group's measure of Dividend Cover is considered to be more
precisely calculated.
The weighted average number of shares applied in calculating
Adjusted EPRA EPS has been derived as follows:
Year to Year to
31 December 31 December
2019 2018
Number Number
--------------------------------------------- ----------- -----------
Shares in issue throughout the period 321,563,353 230,536,874
Adjustment for:
Shares issued in March 2019 in settlement
of 2018 incentive fee 976,893 -
Shares issued in March 2018 in settlement
of 2017 incentive fee - 3,595,356
Shares issued in March 2018 share placing - 65,598,153
Shares in issue for calculation of Adjusted
EPRA earnings 322,540,246 299,730,383
--------------------------------------------- ----------- -----------
EPRA and Adjusted EPRA earnings are calculated as:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
---------------------------------------------------- ----------- -----------
Basic earnings attributable to shareholders 153,359 147,513
EPRA adjustments:
Investment property revaluation (note 12 ) (75,708) (98,167)
Profit on disposal of investment properties
(note 7 ) (53,074) (183)
Cost of early repayment of debt on disposal
of properties (note 9 ) 27,868 -
Other early debt repayment costs (non-cash)
(note 9 ) 1,443 -
Deferred tax on German investment property
revaluations (note 10 ) 759 747
Fair value adjustment of interest rate derivatives 36 25
EPRA earnings 54,683 49,935
Other adjustments :
Rent Smoothing Adjustments (note 4 ) (10,564) (10,950)
Incentive fee (note 6 ) 5,256 5,278
Adjusted EPRA earnings 49,375 44,263
---------------------------------------------------- ----------- -----------
Pence per Pence per
share share
------------------- ----------- ---------
EPRA EPS 16.9 16.6
Adjusted EPRA EPS 15.3 14.7
------------------- ----------- ---------
12. Investment properties
Year to Year to
31 December 31 December
2019 2018
Freehold investment properties GBP000 GBP000
----------------------------------------------- ----------- -----------
At the start of the year 2,018,115 1,693,956
Additions 38 228,642
Reclassification on acquisition of freehold
interest in leasehold property 2,595 -
Acquisition of freehold interest in leasehold
property 262 -
Revaluation movement 88,901 97,015
Disposals (301,535) (2,731)
Currency translation movement (5,986) 1,233
At the end of the year 1,802,390 2,018,115
----------------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2019 2018
Leasehold investment properties GBP000 GBP000
----------------------------------------------------- ----------- -----------
At the start of the year 317,105 87,928
Additions 7 206,936
Reclassification on acquisition of freehold
interest in leasehold property (2,595) -
Headlease liabilities on (disposals) / acquisitions (221) 16,862
Revaluation movement (2,174) 5,451
Disposals (3,115) -
Movement in headlease liabilities (100) (72)
At the end of the year 308,907 317,105
----------------------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2019 2018
Total investment properties GBP000 GBP000
----------------------------------------------------- ----------- -----------
At the start of the year 2,335,220 1,781,884
Additions 45 435,578
Net cost of acquisition of freehold interest
in leasehold property 262 -
Headlease liabilities on (disposals) / acquisitions (221) 16,862
Revaluation movement 86,727 102,466
Disposals (304,650) (2,731)
Currency translation movement (5,986) 1,233
Movement in headlease liabilities (100) (72)
At the end of the year 2,111,297 2,335,220
----------------------------------------------------- ----------- -----------
As at 31 December 2019 the properties were valued at GBP2,083.1
million (2018: GBP2,306.7 million) by CBRE Limited or Christie
& Co in their capacity as independent external valuers. The
valuations were prepared on a fixed fee basis, independent of the
portfolio value, and were undertaken in accordance with RICS
Valuation - Global Standards 2018 on the basis of fair value,
supported by reference to market evidence of transaction prices for
similar properties.
The historic cost of the Group's investment properties as at 31
December 2019 was GBP1,479.6 million (2018: GBP1,690.9 million).
Other than the future minimum headlease payments disclosed in note
19 , the majority of which are recoverable from tenants, the Group
did not have any contractual investment property obligations at
either balance sheet date and all responsibility for property
liabilities, including repairs and maintenance, resides with the
tenants.
Of the total fair value, GBP110.3 million (2018: GBP112.6
million) relates to the Group's German investment properties, the
valuations of which are translated into Sterling at the year end
exchange rate.
Under the Group's accounting policy, in line with International
Financial Reporting Standards, the carrying value of leasehold
property is grossed up by the present value of minimum headlease
payments. The corresponding liability to the head leaseholder is
included in the balance sheet as a finance lease obligation. The
reconciliation between the carrying value of the investment
properties and their independent external valuation is as
follows:
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------- ----------- -----------
Carrying value 2,111,297 2,335,220
Gross-up of headlease liabilities (note 19
) (28,190) (28,511)
-------------------------------------------- ----------- -----------
Independent external valuation 2,083,107 2,306,709
-------------------------------------------- ----------- -----------
Included within the carrying value of investment properties at
31 December 2019 is GBP155.7 million (2018: GBP197.1 million) in
respect of Rent Smoothing Adjustments described in note 4 ,
representing the amount of rent included in the income statement
ahead of actual cash receipt. This receivable increases over
broadly the first half of each lease term and then unwinds,
reducing to zero by the end of the lease term.
The difference between rents on a straight line basis and rents
actually receivable is included within, but does not increase over
fair value, the carrying value of investment properties. The effect
of these Rent Smoothing Adjustments on the revaluation movement,
together with the impact of back rent received during the prior
year from a May 2017 rent review on the healthcare portfolio but
yet not fully recognised in revenue, and movements on the headlease
liabilities is as follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
---------------------------------------------- ----------- -----------
Investment property revaluation 86,727 102,466
Rent Smoothing Adjustments (10,564) (10,950)
Adjustment for back rent received (355) 6,723
Movement in headlease liabilities (note 5
) (100) (72)
Revaluation movement in the income statement 75,708 98,167
---------------------------------------------- ----------- -----------
Further information about the Rent Smoothing Adjustments is
given in the unaudited supplementary information following this
financial information.
All of the investment properties are held within six (2018: six)
ring-fenced security pools as security under fixed charges in
respect of separate secured debt facilities.
All of the Group's revenue reflected in the income statement is
derived either from rental income or the recovery of head rent and
other leasehold costs on investment properties. As shown in note 5
, property outgoings arising on investment properties, all of which
generated rental income in each year, were GBP3,129,000 (2018:
GBP1,181,000) of which GBP1,549,000 (2018: GBP427,000) was not
recoverable from occupational tenants.
The Board determines the Group's valuation policies and
procedures and is responsible for overseeing the valuations.
Valuations performed by the Group's independent external valuers
are based on information extracted from the Group's financial and
property reporting systems, such as current rents and the terms and
conditions of lease agreements, together with assumptions used by
the valuers (based on market observation and their professional
judgement) in their valuation models.
At each reporting date, certain directors of the Investment
Adviser who have recognised professional qualifications and are
experienced in valuing the types of property owned by the Group
initially analyse the independent external valuers' assessments of
movements in the property valuations from the prior reporting date
or, if later, the date of acquisition. Positive or negative fair
value changes over a certain materiality threshold are considered
and are also compared to external sources such as the MSCI indices
and other relevant benchmarks for reasonableness. Once the
Investment Adviser has considered the valuations, the results are
discussed with the independent external valuers, focusing on
properties with unexpected fair value changes or any with unusual
characteristics. The Audit Committee considers the valuation
process as part of its overall responsibilities, including meetings
with the independent external valuers, and reports on its
assessment of the procedures to the Board.
The fair value of the investment property portfolio has been
determined using an income capitalisation technique whereby
contracted and market rental values are capitalised with a market
capitalisation rate. This technique is consistent with the
principles in IFRS 13 and uses significant unobservable inputs,
such that the fair value measurement of each property within the
portfolio has been classified as level 3 in the fair value
hierarchy as defined in IFRS 13. There have been no transfers to or
from other levels of the fair value hierarchy during the year.
Fair value Inputs
----------------------------
Portfolio GBP000 Key unobservable input Range Blended yield
------------------- ----------- -------------------------- ------------- -------------
At 31 December
2019:
Leisure - UK 751,008 Net Initial Yield 3.7% - 6.2% 5.0%
Running Yield by December
2020 4.2% - 6.9% 5.1%
RPI assumption per annum 2.5% - 3.1%
Healthcare 748,385 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by December
2020 4.0% - 4.6% 4.6%
Budget hotels 501,654 Net Initial Yield 4.3% - 10.5% 5.5%
Running Yield by December
2020 4.5% - 10.5% 5.7%
RPI assumption per annum 2.5%
Leisure - Germany 110,250 Net Initial Yield 5.5% 5.5%
Running Yield by December
2020 5.7% 5.7%
2,111,297
------------------- ----------- -------------------------- ------------- -------------
At 31 December
2018:
Healthcare 984,845 Net Initial Yield 3.9% - 5.5% 4.8%
Running Yield by December
2019 4.0% - 5.6% 4.9%
Leisure - UK 723,503 Net Initial Yield 4.7% - 5.9% 5.1%
Running Yield by December
2019 4.2% - 6.3% 5.2%
RPI assumption per annum 2.6%
Budget hotels 514,322 Net Initial Yield 4.5% - 10.1% 5.5%
Running Yield by December
2019 4.5% - 10.1% 5.5%
RPI assumption per annum 2.5%
Leisure - Germany 112,550 Net Initial Yield 5.5% 5.5%
Running Yield by December
2019 5.7% 5.7%
2,335,220
------------------- ----------- -------------------------- ------------- -------------
The principal sensitivity of measurement to variations in the
significant unobservable outputs is that decreases in Net Initial
Yield, decreases in Running Yield and increases in RPI will
increase the fair value (and vice versa).
The Group's accounting policy for investment properties is
disclosed in note 2d.
13. Subsidiaries
The companies listed below are the subsidiary undertakings of
the Company at 31 December 2019, all of which are wholly owned.
Save where indicated all subsidiary undertakings are incorporated
in England with their registered office at Cavendish House, 18
Cavendish Square, London W1G 0PJ.
Nature of business
------------------------- --------------------------------------------------
SIR Theme Park Subholdco Intermediate parent company and borrower under
Limited * mezzanine secured debt facility
Charcoal Midco 2 Limited Intermediate parent company
SIR Theme Parks Limited Intermediate parent company and borrower under
senior secured debt facility
SIR ATH Limited Property investment - leisure
SIR ATP Limited Property investment - leisure
SIR HP Limited Property investment - leisure and borrower under
senior secured debt facility (incorporated in
England, operating in Germany)
SIR TP Limited Property investment - leisure
SIR WC Limited Property investment - leisure
SIR Hospital Holdings Intermediate parent company
Limited *
SIR Umbrella Limited Intermediate parent company
SIR Hospitals Propco Intermediate parent company and borrower under
Limited secured debt facility
SIR Duchy Limited Property investment - healthcare
SIR Springfield Limited Property investment - healthcare
SIR Healthcare 1 Limited Intermediate parent company
SIR Healthcare 2 Limited Intermediate parent company and borrower under
secured debt facility
SIR Fitzwilliam Limited Property investment - healthcare
SIR Fulwood Limited Property investment - healthcare
SIR Lisson Limited Property investment - healthcare
SIR Midlands Limited Property investment - healthcare
SIR Oaklands Limited Property investment - healthcare
SIR Oaks Limited Property investment - healthcare
SIR Pinehill Limited Property investment - healthcare
SIR Rivers Limited Property investment - healthcare
SIR Woodland Limited Property investment - healthcare
SIR Yorkshire Limited Property investment - healthcare
Thomas Rivers Limited Property investment - healthcare
SIR Hotels 1 Limited Intermediate parent company
*
SIR Hotels Jersey Intermediate parent company
Limited
SIR Unitholder 1 Limited Intermediate parent company
SIR Unitholder 2 Limited Intermediate parent company
Grove Property Unit Property investment - budget hotels and borrower
Trust 6 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 7 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 9 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 11 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 12 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 16 under secured debt facility
SIR Hotels 2 Limited Intermediate parent company
*
SIR Hotels Jersey Intermediate parent company
2 Limited
SIR Unitholder 3 Limited Intermediate parent company
SIR Unitholder 4 Limited Intermediate parent company
Grove Property Unit Property investment - budget hotels and borrower
Trust 2 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 5 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 13 under secured debt facility
------------------------- --------------------------------------------------
* directly owned by the Company; all other entities are
indirectly owned
incorporated in Jersey with their registered office at 26 New
Street, St Helier, Jersey JE2 3RA
Nature of business
------------------------- --------------------------------------------------
Grove Property Unit Property investment - budget hotels and borrower
Trust 14 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 15 under secured debt facility
SIR Maple 4 Limited Property investment - budget hotels and borrower
under secured debt facility
SIR Maple Holdco Limited Intermediate parent company
*
SIR Maple 1 Limited Intermediate parent company
SIR Unitholder 5 Limited Intermediate parent company
MIF I Unit Trust (x) Property investment - leisure and borrower under
secured debt facility
SIR Maple 2 Limited Property investment - leisure and borrower under
secured debt facility
SIR Maple 3 Limited Property investment - leisure and borrower under
secured debt facility
SIR New Hall Limited Dormant
*
SIR MTL Limited * Dormant
Charcoal Bidco Limited Dormant
*
SIR Hotels 2 Holdco Dormant
Limited
SIR Hotels 2 GP Limited Dormant
SIR Hotels 2 Nominee Non trading
Limited
SIR Newco Limited Dormant
*
SIR Newco 2 Limited Dormant
*
------------------------- --------------------------------------------------
* directly owned by the Company; all other entities are
indirectly owned
incorporated in Jersey with the registered office at 26 New
Street, St Helier, Jersey JE2 3RA
(X) incorporated in Jersey with the registered office at 44
Esplanade, St Helier, Jersey JE4 9WG
The terms of the secured debt facilities may, in the event of a
covenant breach, restrict the ability of certain subsidiaries to
transfer distributable reserves or assets including cash to the
Company, which is itself outside all security groups.
14. Interest rate derivatives
Notional amount Fair value
------------------------ ------------------------
31 December 31 December 31 December 31 December
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
------------------------------ ----------- ----------- ----------- -----------
Interest rate swaps (average
rate 1.3%): 50,000 50,000
Falling due within one
year (246) -
Falling due in more than
one year (757) (311)
------------------------------ ----------- ----------- ----------- -----------
50,000 50,000 (1,003) (311)
Interest rate caps (average
rate 1.5%): 24,766 26,528
Falling due in more than
one year 43 306
74,766 76,528 (960) (5)
------------------------------ ----------- ----------- ----------- -----------
The movements in the fair value of interest rate derivatives
were as follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------- ----------- -----------
At the start of the year (5) -
Charge to the income statement (note 9 ) (104) (25)
Charge to other comprehensive income (note
9 ) (851) (200)
Premium paid for interest rate caps - 220
At the end of the year (960) (5)
-------------------------------------------- ----------- -----------
The Group utilises interest rate derivatives in risk management
as cash flow hedges to protect against movements in future interest
costs on secured loans which bear interest at variable rates. The
derivatives have been valued in accordance with IFRS 13 by
reference to interbank bid market rates as at the close of business
on the last working day prior to each balance sheet date by Chatham
Financial Europe Limited (2018: by J.C. Rathbone Associates
Limited). The fair values are calculated using present values of
future cash flows based on market forecasts of interest rates and
adjusted for the credit risk of the counterparties. The amounts and
timing of future cash flows are projected on the basis of the
contractual terms of the derivatives. All interest rate derivatives
are classified as level 2 in the fair value hierarchy as defined in
IFRS 13 and there were no transfers to or from other levels of the
fair value hierarchy during the year.
The entire GBP50.0 million notional amount of the interest rate
swaps and GBP10.0 million of the notional amount of the interest
rate caps are used to hedge cash flow interest rate risk on GBP60.0
million of the floating rate loans described in note 18 . The
notional amounts of the interest rate derivatives equal the loan
principal balance, and their maturity dates also match. GBP3.3
million of the notional amount of the interest rate caps has not
been designated for hedge accounting to allow for any future loan
prepayments and as a result, although the entire cash flow interest
rate is hedged, the hedges as measured for the purposes of IFRS 9
are expected to be 94.5% effective throughout their lives.
The remaining GBP16.5 million notional amount of the interest
rate caps is used to hedge cash flow interest rate risk on the
remaining GBP14.8 million of the floating rate loans described in
note 18 . Following a rebalancing of the hedging arrangements on
GBP1.7 million of the notional amount of the interest rate caps
during the year, matching the loan principal that was repaid from
the proceeds of investment property sales, the notional amounts of
the interest rate caps designated for hedge accounting equal the
loan principal balance and their maturity dates also match. As a
result, the hedges, which have a fair value of GBP40,000 (2018:
GBP306,000), are expected to be 100% effective throughout their
lives. The remaining interest rate caps, which have a fair value of
GBP3,000 (2018: GBPnil), have been classified as held for
trading.
The Group's accounting policy for interest rate derivatives is
disclosed in note 2e.
15. Cash and cash equivalents
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------- ----------- -----------
Free cash and cash equivalents 240,254 71,133
Secured cash 26,261 29,972
Regulatory capital 604 640
267,119 101,745
-------------------------------- ----------- -----------
Secured cash is held in accounts over which the providers of
secured debt have fixed security. The Group is unable to access
this cash unless and until it is released to free cash each
quarter, which takes place after quarterly interest and loan
repayments have been made as long as the terms of the associated
secured facility are complied with.
As the Company is classified as an internally managed
Alternative Investment Fund, it is required by the Financial
Conduct Authority to hold a balance of regulatory capital in liquid
funds. The Company maintains its regulatory capital in cash.
The Group's accounting policy for cash and cash equivalents is
disclosed in note 2e.
16. Trade and other receivables
31 December 31 December
2019 2018
GBP000 GBP000
--------------------------------------------- ----------- -----------
Trade receivables 359 267
Amounts receivable from investment property
disposals 2,565 2,503
Prepayments and accrued income 874 666
3,798 3,436
--------------------------------------------- ----------- -----------
The Group's accounting policy for trade and other receivables is
disclosed in note 2e.
17. Trade and other payables
31 December 31 December
2019 2018
GBP000 GBP000
--------------------------------------------- ----------- -----------
Trade payables 1,172 135
Rent received in advance and other deferred
income 24,402 27,696
Interest payable 8,019 9,248
Tax and social security 3,192 3,526
Accruals and other payables 1,505 1,122
38,290 41,727
--------------------------------------------- ----------- -----------
The Group's accounting policy for trade and other payables is
disclosed in note 2e.
18. Financial assets and liabilities
Borrowings
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------------------- ----------- -----------
Amounts falling due within one year
Fixed rate secured debt 3,480 4,156
Unamortised finance costs (2,310) (2,385)
------------------------------------------- ----------- -----------
1,170 1,771
------------------------------------------- ----------- -----------
Amounts falling due in more than one year
Fixed rate secured debt 852,411 1,011,846
Floating rate secured debt 74,766 76,528
Unamortised finance costs (6,769) (9,879)
------------------------------------------- ----------- -----------
920,408 1,078,495
------------------------------------------- ----------- -----------
The Group had no undrawn committed borrowing facilities at
either balance sheet date.
The debt is secured by charges over the Group's investment
properties and by fixed and floating charges over the other assets
of certain Group companies, not including the Company itself save
for a limited share charge over the parent company of one of the
ring-fenced subgroups. There were no defaults or breaches of any
loan covenants during the current or any prior year.
The analysis of borrowings by currency is as follows:
31 December 31 December
2019 2018
GBP000 GBP000
--------------------------- ----------- -----------
Sterling denominated
Secured debt 869,645 1,028,151
Unamortised finance costs (8,677) (11,691)
860,968 1,016,460
--------------------------- ----------- -----------
Euro denominated
Secured debt 61,012 64,379
Unamortised finance costs (402) (573)
--------------------------- ----------- -----------
60,610 63,806
--------------------------- ----------- -----------
The Group's accounting policy for borrowings is disclosed in
note 2e.
Categories of financial instruments
31 December 31 December
2019 2018
GBP000 GBP000
---------------------------------------------- ----------- -----------
Financial assets
Financial assets at amortised cost:
Cash and cash equivalents (note 15 ) 267,119 101,745
Amounts receivable from investment property
disposals (note 16 ) 2,565 2,503
Trade receivables (note 16 ) 359 267
Derivatives in effective hedges:
Interest rate caps (note 14 ) 40 306
Derivatives classified as held for trading:
Interest rate caps (note 14 ) 3 -
270,086 104,821
---------------------------------------------- ----------- -----------
Financial liabilities
Financial liabilities at amortised cost:
Secured debt (921,578) (1,080,266)
Headlease liabilities (note 19 ) (28,190) (28,511)
Interest payable (note 17 ) (8,019) (9,248)
Trade payables (note 17 ) (1,172) (135)
Accruals (1,504) (1,098)
Derivatives in effective hedges:
Interest rate swaps (note 14 ) (1,003) (311)
(961,466) (1,119,569)
---------------------------------------------- ----------- -----------
At each balance sheet date, all financial assets and liabilities
other than derivatives in effective hedges and derivatives
classified as held for trading were measured at amortised cost.
As at 31 December 2019 the fair value of the Group's secured
debt was GBP961.0 million (2018: GBP1,117.7 million) and the fair
value of the other financial liabilities was the same as the book
values shown above.
The secured debt was valued in accordance with IFRS 13 by
reference to interbank bid market rates as at the close of business
on the balance sheet date by Chatham Financial Europe Limited
(2018: by J.C. Rathbone Associates Limited). All secured debt was
classified as level 2 in the fair value hierarchy as defined in
IFRS 13 and its fair value was calculated using the present values
of future cash flows, based on market benchmark rates (interest
rate swaps) and the estimated credit risk of the Group for similar
financings. There were no transfers to or from other levels of the
fair value hierarchy during the current or prior year.
Fair value is not the same as a liquidation valuation, the
amount required to prepay the loans at the balance sheet date, and
therefore does not represent an estimate of the cost to the Group
of repaying the debt before the scheduled maturity date, which
would be materially higher.
The Group's accounting policy for financial assets and
liabilities is disclosed in note 2e.
Financial risk management
Through the Group's operations and use of debt financing it is
exposed to certain risks. The Group's financial risk management
objective is to manage the effect of these risks, for example by
using fixed rate debt and interest rate derivatives to manage
exposure to fluctuations in interest rates.
The exposure to each financial risk considered potentially
material to the Group, how it would arise and the policy for
managing it is summarised below.
Market risk
Market risk in financial assets and liabilities is the risk that
the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market prices. The Group's market
risk arises from open positions in interest bearing assets and
liabilities and foreign currencies, to the extent that these are
exposed to general and specific market movements.
(a) Market risk - interest rate risk
The Group's interest bearing assets comprise only cash and cash
equivalents. Changes in market interest rates therefore affect the
Group's finance income.
The Group's policy is to mitigate interest rate risk by entering
into interest rate derivatives, which at the balance sheet date
included interest rate swaps on GBP50.0 million (2018: GBP50.0
million) of floating rate loans and interest rate caps on the
remaining GBP24.8 million (2018: GBP26.5 million). Under the
interest rate swaps, the Group agrees to exchange with an
institutional counterparty, at specified intervals, the difference
between fixed and variable rate interest amounts calculated by
reference to an agreed schedule of notional principal amounts.
Under interest rate caps, the Group agrees a similar exchange if
the variable interest rate exceeds the contractual strike rate of
the derivative. The Group's fixed rate loans and loans where the
interest rate risk is hedged by way of interest rate swaps,
together totalling GBP905.9 million (2018: GBP1,066.0 million), are
therefore not subject to interest rate risk. The Group is exposed
to limited cash flow interest rate risk on its GBP24.8 million
(2018: GBP26.5 million) of floating rate loans where the interest
rate risk is hedged by way of interest rate caps. Interest on these
loans is payable at variable rates up to the maximum established by
the cap strike rate.
The Group's sensitivity to changes in interest rates is
disclosed in note 9 .
Trade and other payables are interest free as long as they are
paid in accordance with their terms, and have payment terms of less
than one year, so it is assumed that there is no material interest
rate risk associated with these financial liabilities.
(b) Market risk - currency risk
The Group prepares its financial information in Sterling. On an
IFRS basis, 2.7% (2018: 2.9%) by value of the Group's net assets
are Euro denominated and as a result the Group is subject to
foreign currency exchange risk. On an EPRA basis, the Euro net
assets exposure is 3.5% (2018: 3.7%). This risk is partially hedged
because within the Group's German operations, rental income,
interest costs and the majority of both assets and liabilities are
Euro denominated. An unhedged currency risk remains on the value of
the Group's net investment in, and net returns from, its German
operations.
The Group's sensitivity to changes in foreign currency exchange
rates, calculated on the basis of a 10% increase or decrease in
average and closing Sterling rates against the Euro, was as
follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------------------------- ----------- -----------
Effect on profit 517 460
Effect on other comprehensive income and equity 3,805 3,572
------------------------------------------------- ----------- -----------
Credit risk
Credit risk is the risk of financial loss to the Group if a
counterparty fails to meet its contractual obligations as a result
of financial stress. The principal counterparties are the Group's
tenants (in respect of trade receivables arising under operating
leases), banks and financial institutions (as holders of the
Group's cash deposits) and the counterparties to the Group's
investment property disposals.
The credit risk of trade receivables is considered low because
the counterparties to the operating leases are believed by the
Board to be high quality tenants capable of discharging their lease
obligations and any lease guarantors are also of appropriate
financial strength. On the 67% of the portfolio (at 31 December
2019 valuations) that has been owned by Group entities since 2007,
over the last 12 years the rent has always been paid by the due
date. Rent collection dates and statistics are benchmarked in
internal reports to identify any problems at any early stage, and
if necessary rigorous credit control procedures will be applied to
facilitate the recovery of trade receivables. The Group does not
hold any financial assets which are either past due or impaired.
The credit risk on cash deposits is limited because the
counterparties are banks and financial institutions with credit
ratings which are acceptable to the Board and which are kept under
review at least each quarter and more often if required.
Inflation risk
Inflation risk arises from the impact of inflation on the
Group's income and expenditure. 59% (2018: 52%) of the Group's
passing rent at 31 December 2019 is subject to RPI-linked rent
reviews, and those rents are subject to nil or upwards review,
never downwards. The remaining 41% of passing rent is subject to
fixed rental uplifts and is not exposed to fluctuations in the
inflation rate. As a result, the Group is not exposed to a fall in
rent in deflationary conditions. The Group is exposed to inflation
risk on its running costs, which (with the exception of any
advisory and incentive fees, the calculation of which is based on
EPRA NAV) could increase in inflationary conditions. These costs
totalled GBP2.4 million (2018: GBP2.2 million) in the current year
(11% (2018: 10%) of total administrative expenses) and therefore
the impact of any significant percentage increase in inflation
would be minimal.
In September 2019 the UK Chancellor responded to the enquiry by
the Economic Affairs Committee into the Retail Prices Index (RPI).
In that response it was confirmed that RPI would continue to be
published. However, the basis of calculation of RPI is widely
accepted as being mathematically flawed and it is likely that the
way that it is measured may change to make it a more accurate
representation of the actual UK rate of inflation. Public
consultation will commence in 2020 with any change in the
calculation not occurring until 2025 at the earliest. It is
therefore possible that there may be changes to the Group's
RPI-linked income from such future date as the basis of calculation
is changed. However, rents subject to RPI reviews should still
track UK inflation, albeit without a mathematical flaw.
Liquidity risk
Liquidity risk arises from the Group's management of working
capital and its ability to meet the finance costs and principal
repayments on its secured debt. It is the risk that the Group will
not be able to meet its financial obligations as they fall due.
The Group seeks to manage its liquidity risk by ensuring that
sufficient cash is available to meet its foreseeable needs. The
Group's more material financial obligations are the payment of
financing costs and any scheduled amortisation or repayments of its
secured debt. Financing costs and scheduled amortisation are met
out of rental income which, in all cases, provides ample headroom
over the relevant amounts payable. Before entering into any
financing arrangements, the Board assesses the resources that are
expected to be available to the Group to meet its liabilities when
they fall due including repayments at loan maturity. These
assessments are made on the basis of both base case and stress
tested scenarios.
Other liquidity needs are relatively modest and are managed
principally through the deduction of much of the operating costs
from rental receipts before any surplus is applied in payment of
interest and loan amortisation as required by the credit agreements
relating to the Group's secured debt.
The Group prepares budgets and working capital forecasts which
are reviewed by the Board at least quarterly to assess liquidity
requirements and compliance with loan covenants. The Board also
keeps under review the maturity profile of the Group's cash
deposits in order to have reasonable assurance that cash will be
available for the settlement of liabilities when they fall due.
The following tables show the maturity analysis for financial
assets and liabilities. The tables have been drawn up based on the
undiscounted cash flows of financial liabilities, including future
interest payments, based on the earliest date on which the Group
can be required to pay. During the year, 69% (2018: 75%) of the
Group's headlease liabilities were recoverable from tenants and are
not included in this analysis to the extent that they were
recoverable.
Effective
interest Less than One to two Two to five More than
rate one year years years five years Total
31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents 0.6% 267,119 - - - 267,119
Trade and other
receivables 2,924 - - - 2,924
Interest rate derivatives - 3 40 - 43
--------------------------- --------- --------- ---------- ----------- ----------- -----------
270,043 3 40 - 270,086
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial liabilities:
Fixed rate secured
debt 5.1% (47,968) (50,442) (576,096) (363,559) (1,038,065)
Floating rate secured
debt 2.9% (2,134) (2,083) (77,922) - (82,139)
Headlease liabilities (502) (502) (1,507) (6,871) (9,382)
Accrued interest (8,019) - - - (8,019)
Trade payables and
accrued expenses (2,676) - - - (2,676)
Interest rate derivatives 1.3% (246) (316) (441) - (1,003)
(61,545) (53,343) (655,966) (370,430) (1,141,284)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Effective
interest Less than One to two Two to five More than
rate one year years years five years Total
31 December 2018 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents 0.3% 101,745 - - - 101,745
Trade and other
receivables 2,770 - - - 2,770
Interest rate derivatives 1 27 278 - 306
104,516 27 278 - 104,821
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial liabilities:
Fixed rate secured
debt 5.0% (54,639) (55,332) (631,277) (546,633) (1,287,881)
Floating rate secured
debt 2.7% (2,291) (2,361) (82,666) - (87,318)
Headlease liabilities (502) (502) (1,507) (6,871) (9,382)
Accrued interest (9,248) - - - (9,248)
Trade payables and
accrued expenses (1,233) - - - (1,233)
Interest rate derivatives 1.3% (158) (111) (42) - (311)
(68,071) (58,306) (715,492) (553,504) (1,395,374)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Capital risk management in respect of the financial year
The Board's primary risk management objective when monitoring
capital is to preserve the Group's ability to continue as a going
concern, while ensuring it remains within its debt covenants to
safeguard shareholders' equity and avoid financial penalties.
Borrowings are secured on each of six (2018: six) property
portfolios by way of fixed charges over property assets, over the
shares in the parent company of each ring-fenced borrower subgroup,
and also by floating charges on the assets of the relevant
subsidiary companies. The suitability of the extent of asset cover
in the secured facilities forms a key part of debt negotiations and
ongoing monitoring.
The Group is subject to externally imposed capital requirements
under AIFMD as disclosed in note 15 . Those capital requirements
were complied with at all times during the current and prior years,
and up to the date of this report.
At 31 December 2019 and 31 December 2018, the capital structure
of the Group consisted of debt (note 18 ), cash and cash
equivalents (note 15 ), and equity attributable to the shareholders
of the Company (comprising share capital, retained earnings and the
other reserves described in notes 21 and 22 ).
In managing the Group's capital structure, the Board considers
the Group's cost of capital. In order to maintain or adjust the
capital structure, the Group keeps under review the amount of any
dividends or other returns to shareholders and monitors the extent
to which the issue of new shares or the realisation of assets may
be advisable or required.
Details of the significant accounting policies adopted are
disclosed in the accounting policies in note 2 . This includes the
criteria for recognition, the basis of measurement and the basis on
which income and expenses are recognised, in respect of each class
of financial asset, financial liability and equity instrument.
19. Headlease liabilities
Headlease obligations in respect of amounts payable on leasehold
properties are as follows:
31 December 31 December
2019 2018
Minimum headlease payments GBP000 GBP000
Within one year 1,786 1,801
Between one year and five years 7,166 7,219
More than five years 154,489 157,138
163,441 166,158
Less future finance charges (135,251) (137,647)
--------------------------------- ----------- -----------
28,190 28,511
--------------------------------- ----------- -----------
The earliest expiry date of all the lease obligations is in more
than five years. All but GBP0.5 million (2018: GBP0.5 million) of
the minimum headlease payments due within one year are recoverable
from the occupational tenants.
The Group's accounting policy for leases is disclosed in note 2
d.
20. Deferred tax liability
The movements in the deferred tax liability relate to unrealised
gains on the Group's German investment properties.
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
----------------------------------------------- ----------- -----------
At the start of the year 11,110 10,238
Charge to the income statement (note 10 ) 759 747
(Credit)/charge to other comprehensive income (602) 125
At the end of the year 11,267 11,110
----------------------------------------------- ----------- -----------
The Group's accounting policy for deferred tax is disclosed in
note 2f.
21. Share capital
Share capital represents the aggregate nominal value of shares
issued. The movement in the number of fully paid ordinary shares of
10 pence each in issue was as follows:
Year to Year to
31 December 31 December
2019 2018
Number Number
-------------------------------------- ----------- -----------
At the start of the year 321,563,353 230,536,874
Issue of ordinary shares:
in settlement of 2018 incentive fee 1,287,242 -
in respect of March 2018 placing - 86,438,000
in settlement of 2017 incentive fee - 4,588,479
At the end of the year 322,850,595 321,563,353
-------------------------------------- ----------- -----------
Under the incentive fee arrangements described in note 26 , a
fee of GBP4.9 million (2018: GBP4.9 million) will become due in
March 2020, assuming completion of the process of service of
notice, acceptance of the calculation and independent valuation of
the shares, by the issue of 1,184,551 (2018: 1,287,242) new
ordinary shares following which there will be 324,035,146 (2018:
322,850,595) ordinary shares in issue. The cost of the incentive
fee to the Group including irrecoverable VAT is GBP5.3 million
(2018: GBP5.3 million), which has been charged to administrative
expenses in the year.
22. Reserves
The share premium reserve represents the surplus of the gross
proceeds of share issues over the nominal value of the shares, net
of the direct costs of those equity issues.
Retained earnings represent the cumulative profits and losses
recognised in the income statement, together with any amounts
transferred or reclassified from the Group's share premium reserve
and other reserves, less dividends paid.
Other reserves represent:
-- the cumulative exchange gains and losses on foreign currency translation;
-- the cumulative gains or losses, net of tax, on effective cash flow hedging instruments; and
-- the impact on equity of any shares to be issued after the
balance sheet date, as described in note 26 , under the terms of
the incentive fee arrangements.
Movements in other reserves comprise:
Currency Cash flow
Shares to
translation be hedging
differences issued instruments Total
GBP000 GBP000 GBP000 GBP000
--------------------------- ----------- --------- ----------- -------
Year to 31 December 2019
At the start of the year 5,305 4,872 (200) 9,977
Currency translation
movements (2,000) - - (2,000)
Fair value of derivatives
(note 14 ) - - (851) (851)
--------------------------- ----------- --------- ----------- -------
Other comprehensive loss (2,000) - (851) (2,851)
Shares issued in the
year - (4,869) - (4,869)
Shares to be issued - 4,907 - 4,907
At the end of the year 3,305 4,910 (1,051) 7,164
--------------------------- ----------- --------- ----------- -------
Year to 31 December 2018
At the start of the year 4,837 16,015 - 20,852
Currency translation
movements 468 - - 468
Fair value of derivatives
(note 14 ) - - (200) (200)
Other comprehensive income 468 - (200) 268
Shares issued in the
year - (16,015) - (16,015)
Shares to be issued - 4,872 - 4,872
At the end of the year 5,305 4,872 (200) 9,977
---------------------------- ----- -------- ----- --------
23. Operating leases
The majority of the Group's assets are investment properties
leased to third parties under non-cancellable operating leases. The
weighted average remaining lease term at 31 December 2019 is 21.0
years (2018: 20.9 years) and there are no tenant break options. The
leases contain either fixed uplifts or upwards only RPI-linked
uplifts, alongside periodic open market reviews on 11 of the 12
healthcare portfolio assets.
Contingent rental income arises as a result of RPI-linked
uplifts on 41% of the Group's passing rent as at 31 December 2019.
GBP0.9 million (2018: GBP1.0 million) of contingent rental income
on RPI leases was recognised in the income statement in the
year.
Future minimum rents receivable, translated at the relevant year
end exchange rates, are as follows:
31 December 31 December
2019 2018
GBP000 GBP000
--------------------------------- ----------- -----------
Within one year 110,697 126,076
Between one year and five years 456,783 519,432
More than five years 2,129,296 2,376,858
--------------------------------- ----------- -----------
2,696,776 3,022,366
--------------------------------- ----------- -----------
The Group's accounting policy for leases is disclosed in note
2d.
24. Net asset value per share
Net asset value ("NAV") per share is calculated as the net
assets of the Group attributable to shareholders divided by the
number of shares in issue.
Diluted NAV per share includes within the denominator any shares
that will be issued in future at the balance sheet date, including
those in settlement of any incentive fee that may become payable as
explained in note 26 .
EPRA, the European Public Real Estate Association, publishes
guidelines aimed at providing a measure of NAV on the basis of long
term fair values. EPRA NAV excludes items that are considered to
have no impact in the long term, such as the deferred tax on
investment properties held for long term benefit. The calculation
of EPRA NAV per share uses as its denominator the same number of
shares in issue as is used in calculating Diluted NAV per
share.
The Group's basic NAV, diluted NAV and EPRA NAV is as
follows:
31 December 2019 31 December 2018
----------------------------------- -------------------- --------------------
Pence per Pence per
GBP000 share GBP000 share
----------------------------------- --------- --------- --------- ---------
Basic NAV 1,384,542 428.8 1,281,588 398.5
EPRA adjustments :
Dilution from shares
to be issued for incentive
fee - (1.5) - (1.5)
----------------------------------- --------- --------- --------- ---------
Diluted NAV 1,384,542 427.3 1,281,588 397.0
Deferred tax on German
investment property revaluations 11,267 3.5 11,110 3.4
Fair value of interest
rate derivatives 1,084 0.3 197 0.1
EPRA NAV 1,396,893 431.1 1,292,895 400.5
----------------------------------- --------- --------- --------- ---------
The number of shares used in the NAV per share calculations are
as follows:
31 December 31 December
2019 2018
Number Number
-------------------------- ----------- -----------
Basic NAV 322,850,595 321,563,353
Diluted NAV and EPRA NAV 324,035,146 322,850,595
-------------------------- ----------- -----------
25. Reconciliation of changes in financial liabilities arising
from financing activities
Secured
Secured debt
debt due due in more
within than one Headlease Interest
one year year liabilities payable Derivatives
(note 18 (note 18 (note 19 (note 17 (note 14
Year to 31 ) ) ) ) ) Total
December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------- --------- ------------ ------------ --------- ----------- ---------
At the start of
the year 1,771 1,078,495 28,511 9,248 5 1,118,030
Cash flows:
Repayment of secured
debt from property
sales - (154,519) - - - (154,519)
Interest and finance
costs paid - - (1,702) (51,833) (103) (53,638)
Loan break costs - (27,868) - - - (27,868)
Scheduled amortisation
of secured debt (3,988) - - - - (3,988)
Loan arrangement
costs paid - (670) - - - (670)
Non-cash movements:
Finance costs
in the income
statement 2,385 29,308 1,702 50,586 253 84,234
Finance costs
in other comprehensive
income - - - - 851 851
Derecognition
of headlease liabilities
on sold properties - - (221) - - (221)
Movement in headlease
liabilities - - (100) - - (100)
Currency translation
movements 8 (3,344) - (28) - (3,364)
Reclassifications 994 (994) - 46 (46) -
At the end of
the year 1,170 920,408 28,190 8,019 960 958,747
---------------------------- --------- ------------ ------------ --------- ----------- ---------
Year to 31
December 2018
-------------------------- ------- --------- ------- -------- ----- ---------
At the start of
the year 2,227 953,086 11,721 8,613 - 975,647
Cash flows:
Drawdown of secured
debt - 128,700 - - - 128,700
Interest and finance
costs paid - - (1,191) (50,704) (103) (51,998)
Scheduled amortisation
of secured debt (4,156) - - - - (4,156)
Loan arrangement
costs paid (454) (2,007) - - - (2,461)
Purchase of interest
rate caps - - - - (220) (220)
Non-cash movements:
Finance costs
in the income
statement - 2,225 1,191 51,288 174 54,878
Finance costs
in other comprehensive
income - - - - 200 200
Recognition of
headlease liabilities
acquired - - 16,862 - - 16,862
Movement in headlease
liabilities - - (72) - - (72)
Currency translation
movements (2) 647 - 5 - 650
Reclassifications 4,156 (4,156) - 46 (46) -
At the end of
the year 1,771 1,078,495 28,511 9,248 5 1,118,030
-------------------------- ------- --------- ------- -------- ----- ---------
26. Related party transactions and balances
Relationship between Company and Investment Adviser
The Investment Advisory Agreement sets out the terms of the
relationship between the Company and the Investment Adviser
including the calculation of the advisory fee and the incentive
fee. The agreement has a termination date in December 2025. Neither
party to the agreement has any contractual renewal right. The
agreement may be terminated in certain circumstances which are
summarised on page 59 of the March 2016 Secondary Placing
Disclosure Document which is available in the Investor Centre of
the Company's website. It includes a right for the Company to
terminate the agreement without compensation in the event of an
unremedied breach by the Investment Adviser and a right for the
Investment Adviser to terminate in the event of a change of control
of the Company. The maximum termination fee is four times the
previous quarter's advisory fee, with any such termination payment
designed to cover the cost of redundancies and office wind down
costs that may be required following the Investment Adviser's loss
of the management of the Group.
Until 10 December 2019, the Investment Adviser was Prestbury
Investments LLP ("PILLP"). From that date, the Investment Adviser
is Prestbury Investment Partners Limited ("PIPL") following the
novation of the Investment Advisory Agreement from PILLP to PIPL,
following which the terms of the agreement remained unchanged. The
ownership of PILLP and PIPL is identical and PIPL has the same
resources available to it to perform the services required as PILLP
had.
Advisory fees payable
Nick Leslau, Mike Brown and Sandy Gumm are Directors of the
Company and are respectively Chairman, Chief Executive and Chief
Operating Officer of the Investment Adviser. They are also
directors of and shareholders in PIPL.
Advisory fees payable to the Investment Adviser are calculated
at:
-- 1.25% per annum on EPRA NAV up to GBP500 million, plus
-- 1.0% per annum on EPRA NAV between GBP500 million and GBP1 billion, plus
-- 0.75% per annum on EPRA NAV between GBP1 billion and GBP1.5 billion, plus
-- 0.5% per annum on EPRA NAV over GBP1.5 billion.
Following a proposal made by the Investment Adviser, the
Independent Directors have agreed that, with effect from 1 April
2020, EPRA NAV for the purposes of calculation of the advisory fee
will be reduced to the extent that the surplus realised on the
disposal of a portfolio of hospitals in August 2019 remains
available for deployment. The balance of the surplus cash at 31
December 2019 is GBP160.5 million and if, as anticipated, no funds
are invested in acquisitions, liability management or special
shareholder returns prior to 1 April 2020, the balance of the
surplus is expected to be GBP158.3 million at that time.
During the year, advisory fees of GBP12.9 million (2018: GBP12.3
million) plus VAT were payable in cash to PILLP , of which GBPnil
(2018: GBP0.1 million) was outstanding as at the balance sheet
date, and advisory fees of GBP0.8 million (2018: GBPnil) plus VAT
were payable in cash to PIPL, of which GBP0.8 million (2018:
GBPnil) was outstanding as at the balance sheet date and is
included in trade and other payables (note 17 ).
Incentive fee
The Investment Adviser may become entitled to an incentive fee
intended to reward growth in Total Accounting Return ("TAR") above
an agreed benchmark and to maintain strong alignment of the
Investment Adviser's interests with those of shareholders. TAR is
measured as growth in EPRA NAV per share plus dividends paid in the
year. The fee entitlement is calculated annually on the basis of
the Group's audited financial statements, with any fee payable
settled in shares in the Company (subject to certain limited
exceptions). Sales of these shares are restricted (save for certain
limited exceptions), with the restriction lifted on a phased basis
over a period from 18 to 42 months from the date of issue. Shares
may be released from the sale restriction in the event that shares
need to be sold to settle the tax liability on the receipt of those
shares, but this exemption has never been requested.
The incentive fee is calculated by reference to growth in TAR:
if that growth exceeds a hurdle rate of 10% over a given financial
year, an incentive fee equal to 20% of this excess is payable in
shares to the Investment Adviser. In the event of an incentive fee
being payable, a "high water mark" is established, represented by
the EPRA NAV per share at the end of the relevant financial year,
after the impact of the incentive fee, which is then the starting
point for the cumulative hurdle calculations for future periods.
The hurdle is set at the higher of the EPRA NAV at the start of the
year plus 10% or the high water mark EPRA NAV plus 10% per annum
for the period since the high water mark was established. Dividends
or other distributions paid in any period are treated as payments
on account against achievement of the hurdle rate of return.
A high water mark EPRA NAV per share of 400.5 pence per share
was established at 31 December 2018, when a fee was last earned,
therefore TAR had to exceed 40.1 pence per share in the year for
the 2019 year before any incentive fee would be earned. Dividends
of 16.3 pence per share were paid in the year, so any excess of
EPRA NAV per share over and above 421.5 pence per share at 31
December 2019 represents above target TAR, of which the Investment
Adviser earns 20% under the incentive fee arrangements. Since EPRA
NAV is 431.1 pence per share (after accounting for the impact of
the 2019 incentive fee), this fee amounts to GBP4.9 million,
payable in shares following publication of these results and
satisfactory completion of the service of notices and acceptance of
the calculation.
Irrecoverable VAT arises on any element of the Group's costs,
including incentive fees, that relate to the healthcare portfolio.
For the year to 31 December 2019, the irrecoverable element
amounted to 35% (2018: 42%) of the VAT liability so GBP0.4 million
(2018: GBP0.4 million) of the VAT on the incentive fee will not be
recoverable. The total expense in the income statement for the
incentive fee therefore amounts to GBP5.3 million (2018: GBP5.3
million): GBP4.9 million (2018: GBP4.9 million) satisfied by way of
the issue of 1,184,551 shares to PIPL (2018: 1,287,242 shares to
PILLP) plus GBP0.4 million (2018: GBP0.4 million) of irrecoverable
VAT. Since new ordinary shares are issued in satisfaction of any
incentive fee, the cost of that fee in the financial information
only impacts the net asset value of the Group to the extent of the
irrecoverable VAT but does reduce the Group's net asset value per
share. The issue of the incentive shares in respect of the 2019 fee
to PIPL will result in dilution of shareholder returns of under
0.4% and this dilution is reflected in the 31 December 2019 EPRA
NAV per share.
Assuming no changes in the Company's capital structure,
dividends plus EPRA NAV per share growth will have to exceed 474.2
pence per share for the year ending 31 December 2020 before an
incentive fee is earned for that year.
Dividends paid to related parties and key management
personnel
Dividends were paid to related parties and key management
personnel as follows:
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------ ----------- -----------
Nick Leslau * 3,668 3,303
Prestbury Incentives Limited 3,049 2,305
Mike Brown 193 155
Sandy Gumm 31 26
Martin Moore 19 15
Ian Marcus 14 12
Jonathan Lane 9 8
Leslie Ferrar 4 3
6,987 5,827
------------------------------ ----------- -----------
* comprising ordinary shares held by an LLP in which he has a
95% indirect interest and another company which he wholly owns.
Nick Leslau, Mike Brown and Sandy Gumm are shareholders in and
directors of Prestbury Incentives Limited, together with other key
management personnel, Tim Evans and Ben Walford.
27. Events after the balance sheet date
On 21 February 2020, the Company paid a dividend of 4.2 pence
per share amounting to GBP13.6 million. Of the amount paid, GBP2.2
million was a top-up dividend from the surplus disposal proceeds
described in note 26.
On 11 March 2020 the terms of the Investment Advisory Agreement
were varied in order to effect the reduction in the advisory fee
explained in note 26 and announced to the stock exchange on 25
February 2020.
Unaudited Supplementary Information
Shareholder returns
Total Shareholder Return
Shareholder return is one of the Group's principal measures of
performance. Total Shareholder Return ("TSR") is measured as the
movement in the Company's share price plus dividends per share paid
over a period expressed as a percentage of the share price at the
start of the period. Total Accounting Return is a shareholder
return measure calculated as the movement in EPRA NAV per share
plus dividends per share over the period expressed as a percentage
over the EPRA NAV at the start of the period.
When providing illustrations of future performance, the Company
measures shareholder return by reference to illustrative EPRA
NAV.
TAR - EPRA NAV performance
Year to Year to
31 December 31 December
2019 2018
Pence per Pence per
share share
---------------------------------------------- ----------- -----------
EPRA NAV per share:
at the start of the year 400.5 370.4
at the end of the year 431.1 400.5
----------------------------------------------- ----------- -----------
Increase in EPRA NAV per share 30.6 30.1
Dividends per share 16.3 13.9
----------------------------------------------- ----------- -----------
Increase in EPRA NAV per share plus dividends
per share 46.9 44.0
----------------------------------------------- ----------- -----------
TAR 11.7% 11.9%
----------------------------------------------- ----------- -----------
TSR - share price performance
Year to Year to
31 December 31 December
2019 2018
Pence per Pence per
share share
--------------------------------------- ----------- -----------
Mid market closing share price:
at the start of the year 377.0 360.8
at the end of the year 434.0 377.0
---------------------------------------- ----------- -----------
Increase in share price 57.0 16.2
Dividends per share 16.3 13.9
---------------------------------------- ----------- -----------
Increase in share price plus dividends
per share 73.3 30.1
---------------------------------------- ----------- -----------
TSR 19.4% 8.3%
---------------------------------------- ----------- -----------
Unaudited Supplementary Information
EPRA measures (EPRA Guidelines 2016)
EPRA measures
31 December 31 December
2019 2018
EPRA NAV per share 431.1p 400.5p
EPRA Triple Net Asset Value per share 417.9p 389.2p
EPRA Net Initial Yield 4.94% 5.04%
EPRA Topped Up Net Initial Yield 4.94% 5.05%
EPRA Vacancy Rate 0% 0%
--------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2019 2018
EPRA EPS 16.9p 16.6p
Adjusted EPRA EPS 15.3p 14.7p
EPRA Capital Expenditure GBP0.3m GBP435.5m
EPRA Cost Ratio excluding direct vacancy
costs 17.5% 16.8%
EPRA Cost Ratio including direct vacancy
costs 17.6% 16.9%
Adjusted EPRA Cost Ratio excluding direct
vacancy costs 14.9% 14.1%
Adjusted EPRA Cost Ratio including direct
vacancy costs 15.0% 14.2%
-------------------------------------------- ----------- -----------
EPRA NAV per share
31 December 2019 31 December 2018
----------------------------------- -------------------- --------------------
Pence per Pence per
GBP000 share GBP000 share
----------------------------------- --------- --------- --------- ---------
Basic NAV (note 24 ) 1,384,542 428.8 1,281,588 398.5
EPRA adjustments :
Dilution from shares to
be issued for incentive
fee - (1.5) - (1.5)
----------------------------------- --------- --------- --------- ---------
Diluted NAV 1,384,542 427.3 1,281,588 397.0
Deferred tax on German
investment property revaluations 11,267 3.5 11,110 3.4
Fair value of derivatives 1,084 0.3 197 0.1
EPRA NAV 1,396,893 431.1 1,292,895 400.5
----------------------------------- --------- --------- --------- ---------
Basic NAV, diluted NAV and EPRA NAV are calculated on the number
of shares in issue at each balance sheet date as follows:
31 December 31 December
2019 2018
Number Number
-------------------------------------------------- ----------- -----------
Basic NAV 322,850,595 321,563,353
Shares to be issued in satisfaction of incentive
fee (note 26 ) 1,184,551 1,287,242
-------------------------------------------------- ----------- -----------
Diluted and EPRA NAV 324,035,146 322,850,595
-------------------------------------------------- ----------- -----------
EPRA Triple Net Asset Value per share
The EPRA Triple NAV is adjusted to reflect the fair values of
any debt and hedging instruments and any inherent tax liabilities.
This is calculated as follows:
31 December 2019 31 December 2018
---------------------- ----------------------
Pence per Pence per
GBP000 share GBP000 share
----------- --------- ----------- ---------
EPRA NAV (note 24 ) 1,396,893 431.1 1,292,895 400.5
Fair value of fixed rate
debt (30,343) (9.4) (25,176) (7.8)
Deferred tax on German
investment property revaluations (11,267) (3.5) (11,110) (3.4)
Fair value of derivatives (1,084) (0.3) (197) (0.1)
EPRA Triple NAV 1,354,199 417.9 1,256,412 389.2
----------------------------------- ----------- --------- ----------- ---------
The fair value of the fixed rate debt is defined by EPRA as a
mark to market adjustment measured in accordance with
IFRS 9 in respect of all debt not held at fair value in the
balance sheet. The fair value of debt is not the same as a
liquidation valuation, so the fair value adjustment above does not
reflect the liability that would crystallise if the debt was repaid
early on the balance sheet date, which would be materially
higher.
EPRA Net Initial Yield and EPRA Topped Up Net Initial Yield
31 December 31 December
2019 2018
GBP000 GBP000
------------------------------------------------------ ----------- -----------
Investment property, all of which is completed
and wholly owned, at independent external valuation
(note 12 ) 2,083,107 2,306,709
Allowance for estimated purchasers' costs 140,826 155,628
------------------------------------------------------ ----------- -----------
Grossed up completed property portfolio valuation 2,223,933 2,462,337
------------------------------------------------------ ----------- -----------
Annualised cash passing rental income 110,726 124,989
Annualised non-recoverable property outgoings (866) (815)
------------------------------------------------------ ----------- -----------
Annualised net rents 109,860 124,174
Notional rent increase on expiry of rent free
periods and other lease incentives 48 187
------------------------------------------------------ ----------- -----------
109,908 124,361
------------------------------------------------------ ----------- -----------
EPRA Net Initial Yield 4.94% 5.04%
EPRA Topped Up Net Initial Yield 4.94% 5.05%
------------------------------------------------------ ----------- -----------
EPRA Vacancy Rate
31 December 31 December
2019 2018
EPRA Vacancy Rate 0% 0%
------------------- ----------- -----------
There was only negligible vacant space as at both 31 December
2019 and 31 December 2018.
EPRA EPS
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
---------------------------------------------------- ----------- -----------
Basic earnings attributable to shareholders
(note 11 ) 153,359 147,513
EPRA adjustments:
Investment property revaluation (note 12 ) (75,708) (98,167)
Profit on disposal of investment properties
(note 7 ) (53,074) (183)
Cost of early repayment of debt on property
sales (note 9 ) 27,868 -
Other early debt repayment costs (non-cash)
(note 9 ) 1,443 -
German deferred tax on investment property
revaluation (note 10 ) 759 747
Fair value adjustment of interest rate derivatives 36 25
EPRA earnings 54,683 49,935
Other adjustments :
Rent Smoothing Adjustments (note 4 ) (10,564) (10,950)
Incentive fee (note 6 ) 5,256 5,278
Adjusted EPRA earnings 49,375 44,263
---------------------------------------------------- ----------- -----------
Weighted average number of shares in issue Number Number
-------------------------------------------------- ----------- -----------
Adjusted EPRA EPS 322,540,246 300,553,819
Adjustment for time weighting of shares issued
in the year * 1,494,900 995,851
EPRA EPS 324,035,146 301,549,670
Shares to be issued in satisfaction of incentive
fee (note 26 ) 1,184,551 1,287,242
-------------------------------------------------- ----------- -----------
Diluted EPRA EPS 325,219,697 302,836,912
-------------------------------------------------- ----------- -----------
* Adjusted EPRA EPS is calculated using the weighted average
number of shares reflecting the actual date on which shares are
issued in settlement of any incentive fee. EPRA EPS and Diluted
EPRA EPS are calculated on the assumption that those shares were in
issue throughout the year.
Pence per Pence per
share share
------------------- ----------- ---------
EPRA EPS 16.9 16.6
Diluted EPRA EPS 16.8 16.5
Adjusted EPRA EPS 15.3 14.7
------------------- ----------- ---------
EPRA Capital Expenditure
Year to Year to
31 December 31 December
2019 2018
Wholly owned property: GBP000 GBP000
---------------------------------------------- ----------- -----------
Acquisitions 307 435,540
Development - -
Expenditure on completed investment property
held throughout the year:
Creation of additional lettable area - -
Enhancing existing space - -
EPRA Capital Expenditure 307 435,540
---------------------------------------------- ----------- -----------
The Group does not have any joint ventures so any EPRA capital
expenditure relates to wholly owned properties. The GBP0.3 million
expenditure on acquisitions in the year largely represents the
purchase of the freehold of an existing leasehold property, while
the GBP435.5 million expenditure on acquisitions in the prior year
represents the purchase of two investment property portfolios
including costs. The Group does not capitalise any overheads or
interest into its property portfolio and it does not develop
properties. The Group's properties are let on full repairing and
insuring leases, so the Group incurs no routine ongoing capital
expenditure on its property portfolio except at Manchester Arena,
where such costs relating to the structure and common areas are
liabilities of the Group but are generally recoverable from tenants
via service charges.
EPRA Cost Ratio
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------------- ----------- -----------
Revenue (note 4 ) 132,677 125,874
Tenant contributions to property outgoings
(note 4 ) (1,580) (1,384)
-------------------------------------------------- ----------- -----------
EPRA gross rental income 131,097 124,490
Non-recoverable property operating expenses
(note 5 ) * 1,549 427
Less headlease costs included in non-recoverable
property operating expenses (662) (315)
Administrative expenses (note 6 ) 22,128 20,575
EPRA costs including direct vacancy costs 23,015 20,687
Direct vacancy costs (95) (90)
EPRA costs 22,920 20,597
-------------------------------------------------- ----------- -----------
EPRA Cost Ratio including direct vacancy costs 17.6% 16.9%
EPRA Cost Ratio excluding direct vacancy costs 17.5% 16.8%
-------------------------------------------------- ----------- -----------
* included within the GBP1.3 million (2018: GBP0.5 million) of
property costs charged to the income statement is GBP0.2 million
(2018: GBP0.1 million) of headlease costs and other costs that are
recoverable from the tenant.
The Group capitalises the incremental costs of negotiating and
arranging new leases, which are then charged to the income
statement over the term of the relevant lease. During the year,
GBPnil (2018: GBP0.4 million) of these costs were capitalised, and
GBP19,000 (2018: GBP36,000) was released from capitalised costs and
charged to the income statement. With effect from the
implementation of IFRS16 on 1 January 2019, rent review costs are
charged to the income statement when they are incurred and
non-recoverable property operating expenses include GBP0.4 million
in respect of these costs in the year (2018: GBPnil).
Non recoverable property operating expenses for the year ended
31 December 2019 also include non-recurring costs of GBP0.2 million
relating to a feasibility study for a capital project which has not
commenced (and might not commence).
The Group has no capitalised overheads or other operating
expenses and does not capitalise interest.
Adjusted EPRA Cost Ratio excluding non-cash items
The Group also calculates an Adjusted EPRA Cost Ratio excluding
the following non-cash items to present a measure of cost
efficiency that the Board considers more directly relevant to its
business model. The adjusted EPRA Cost Ratio excludes:
-- revenue recognised ahead of cash receipt as a result of Rent
Smoothing Adjustments (note 4 ); and
-- any incentive fee, included in administrative expenses, which
is settled in shares (note 26 ).
Year to Year to
31 December 31 December
2019 2018
GBP000 GBP000
---------------------------------------------- ----------- -----------
EPRA gross rental income 131,097 124,490
Rent Smoothing Adjustments (note 4 ) (10,564) (10,950)
---------------------------------------------- ----------- -----------
Adjusted EPRA gross rental income excluding
non-cash items 120,533 113,540
EPRA costs 23,015 21,002
Incentive fee settled in shares (note 26 ) (4,907) (4,872)
Adjusted EPRA costs including direct vacancy
costs 18,108 16,130
Direct vacancy costs (95) (90)
---------------------------------------------- ----------- -----------
Adjusted EPRA costs excluding direct vacancy
costs 18,013 16,040
---------------------------------------------- ----------- -----------
Adjusted EPRA Cost Ratio including direct
vacancy costs 15.0% 14.2%
Adjusted EPRA Cost Ratio excluding direct
vacancy costs 14.9% 14.1%
---------------------------------------------- ----------- -----------
Like for like rental growth by portfolio
Leisure Healthcare Budget hotel Total
portfolio portfolio portfolio portfolio
Passing rent GBP000 GBP000 GBP000 GBP000
---------- ---------- ------------ -----------
At 1 January 2019 45,723 50,217 29,049 124,989
Disposals - (15,569) (874) (16,443)
Movement in Euro exchange
rate (346) - - (346)
----------------------------- ---------- ---------- ------------ -----------
Like for like passing
rent 45,377 34,648 28,175 108,200
Rental uplifts 1,408 959 159 2,526
At 31 December 2019 46,785 35,607 28,334 110,726
----------------------------- ---------- ---------- ------------ -----------
Increase in like for like
passing rent 3.1% 2.8% 0.6% 2.3%
Portfolio valuation at
31 December 2019 851,875 748,385 482,847 2,083,107
----------------------------- ---------- ---------- ------------ -----------
Leisure Healthcare Budget hotel Total
portfolio portfolio portfolio portfolio
Passing rent GBP000 GBP000 GBP000 GBP000
---------- ---------- ------------ -----------
At 1 January 2018 32,685 48,868 14,169 95,722
Disposals - - (89) (89)
Movement in Euro exchange
rate 69 - - 69
----------------------------- ---------- ---------- ------------ -----------
Like for like passing
rent 32,754 48,868 14,080 95,702
Acquisitions 11,869 - 14,969 26,838
Rental uplifts 1,100 1,349 - 2,449
At 31 December 2018 45,723 50,217 29,049 124,989
----------------------------- ---------- ---------- ------------ -----------
Increase in like for like
passing rent 3.4% 2.8% - 2.6%
Portfolio valuation at
31 December 2018 826,670 984,845 495,194 2,306,709
----------------------------- ---------- ---------- ------------ -----------
Like for like rental growth by country
Total
UK Germany portfolio
Passing rent GBP000 GBP000 GBP000
----------- --------- -----------
At 1 January 2019 118,365 6,624 124,989
Disposals (16,443) - (16,443)
Movement in Euro exchange
rate - (346) (346)
------------------------------ ----------- --------- -----------
Like for like passing
rent 101,922 6,278 108,200
Rental uplifts 2,317 209 2,526
At 31 December 2019 104,239 6,487 110,726
------------------------------ ----------- --------- -----------
Increase in like for like
passing rent 2.3% 3.3% 2.3%
Portfolio valuation at
31 December 2019 1,972,857 110,250 2,083,107
------------------------------ ----------- --------- -----------
Total
UK Germany portfolio
Passing rent GBP000 GBP000 GBP000
----------- --------- -----------
At 1 January 2018 89,381 6,341 95,722
Disposals (89) - (89)
Movement in Euro exchange
rate - 69 69
------------------------------ ----------- --------- -----------
Like for like passing
rent 89,292 6,410 95,702
Acquisitions 26,838 - 26,838
Rental uplifts 2,235 214 2,449
At 31 December 2018 118,365 6,624 124,989
------------------------------ ----------- --------- -----------
Increase in like for like
passing rent 2.5% 3.3% 2.6%
Portfolio valuation at
31 December 2018 2,194,159 112,550 2,306,709
------------------------------ ----------- --------- -----------
Unaudited Supplementary Information
New EPRA measures (EPRA Guidelines October 2019)
New EPRA NAV best practice guidelines
The EPRA measures set out on the preceding pages have been
prepared in accordance with the guidelines currently in force, the
EPRA Best Practice Recommendations Guidelines November 2016. With
effect from the financial year which commenced on 1 January 2020,
new EPRA guidelines published in October 2019 establishing three
new EPRA NAV measures will apply.
To aid comparison between the existing and new measures, and
also between the results of the Company and others companies
reporting under the new guidelines, the calculation of the new EPRA
NAV measures and their reconciliation to the financial information
is provided here. These calculations are based on our current
understanding of how market practice in these new disclosures will
develop.
31 December 31 December
2019 2018
Pence per Pence per
New EPRA NAV measures share share
EPRA Net Reinstatement Value per share 474.6 448.7
EPRA Net Tangible Assets per share 429.4 398.8
EPRA Net Disposal Value per share 417.9 389.2
EPRA measures calculated on existing basis
EPRA NAV per share 431.1 400.5
EPRA Triple NAV per share 417.9 389.2
-------------------------------------------- ----------- -----------
EPRA NAV in GBP000
EPRA Net EPRA Net Tangible EPRA Net Disposal
Reinstatement Value Assets Value
------------------------ ---------------------- ---------------------- ----------------------
31 December 31 31 December 31 31 December 31
2019 December 2019 December 2019 December
GBP000 2018 GBP000 2018 GBP000 2018
GBP000 GBP000 GBP000
------------------------ ----------- --------- ----------- --------- ----------- ---------
Basic NAV (note
24 ) 1,384,542 1,281,588 1,384,542 1,281,588 1,384,542 1,281,588
EPRA adjustments
:
Dilution from
shares to be
issued for incentive
fee - - - - - -
------------------------ ----------- --------- ----------- --------- ----------- ---------
Diluted NAV 1,384,542 1,281,588 1,384,542 1,281,588 1,384,542 1,281,588
Deferred tax
on German investment
property revaluations
(1) 11,267 11,110 5,634 5,555 - -
Fair value of
derivatives 1,084 197 1,084 197 - -
Adjustment for
real estate transfer
tax (2) 140,826 155,628 - - - -
Fair value of
fixed rate debt
(3) - - - - (30,343) (25,176)
------------------------ ----------- --------- ----------- --------- ----------- ---------
EPRA NAV 1,537,719 1,448,523 1,391,260 1,287,340 1,354,199 1,256,412
------------------------ ----------- --------- ----------- --------- ----------- ---------
EPRA NAV per share
EPRA Net EPRA Net Tangible EPRA Net Disposal
Reinstatement Value Assets Value
--------------------------- ---------------------- ---------------------- ----------------------
31 December 31 31 December 31 31 December 31
2019 December 2019 December 2019 December
Pence 2018 Pence 2018 Pence 2018
Pence Pence Pence
--------------------------- ----------- --------- ----------- --------- ----------- ---------
Basic NAV (note
24 ) 428.8 398.5 428.8 398.5 428.8 398.5
EPRA adjustments
:
Dilution from shares
to be issued for
incentive fee (1.5) (1.5) (1.5) (1.5) (1.5) (1.5)
--------------------------- ----------- --------- ----------- --------- ----------- ---------
Diluted NAV 427.3 397.0 427.3 397.0 427.3 397.0
Deferred tax on
German investment
property revaluations
(1) 3.5 3.4 1.7 1.7 - -
Fair value of derivatives 0.3 0.1 0.3 0.1 - -
Adjustment for
real estate transfer
taxes (2) 43.5 48.2 - - - -
Fair value of fixed
rate debt (3) - - - - (9.4) (7.8)
--------------------------- ----------- --------- ----------- --------- ----------- ---------
474.6 448.7 429.3 398.8 417.9 389.2
--------------------------- ----------- --------- ----------- --------- ----------- ---------
Notes:
1 Deferred tax arises only on the Group's German properties.
There is no current intention to sell these assets. However the
EPRA Guidance requires that, if the full deferred tax liability is
to be added back to ERA Net Tangible Assets, the Group must have
"clearly and specifically identified in its reporting that it
intends to hold and does not in the long run intend to sell" such
assets. A company may also look to its track record to demonstrate
the extent to which deferred tax is likely to be crystallised. As
crystallisation of deferred tax is only relevant to the German
assets and as no non-UK assets have been sold, there is no track
record to refer to. As neither of these tests is met, the EPRA
Guidelines require that half of the deferred tax liability is added
back in the adjustments to calculate EPRA Net Tangible Assets. The
full extent of the liability is shown under the adjustments to
calculate EPRA Net Reinstatement Value.
2 The EPRA Guidance includes the option to state EPRA Net
Tangible Assets on the basis that 'optimisation' of transfer taxes
is a likely outcome based on the experience of transactions in
prior periods. The majority of the Group's purchases have not
attracted full costs as they have been structured by sellers as
corporate transactions and 47% of sales by value have not attracted
full purchaser's costs. However, transactions are in main
opportunistic and their structure depends to a large extent on what
the counterparty wants, therefore the Company does not wholly
control whether a given transaction will be a corporate or an asset
deal. On that basis, full costs have been assumed in EPRA Net
Tangible Assets, in order to avoid the need to speculate on likely
structures. The full extent of the real estate transfer taxes
assumption in the independent external valuations is disclosed
within the EPRA Net Reinstatement Value calculation.
3 The EPRA guidance defines fair value of fixed rate debt
consistently with the IFRS 13 definition applied in drawing up the
financial information. As described in note 18 to the financial
information, fair value is a lower number than the liquidation
value of the Group's debt - that is the cost of early repayment of
all of the Group's debt including fixed rate debt.
As described in note 26 to the financial information, EPRA NAV
is the basis for calculating both the advisory and incentive fees
payable to the Investment Adviser. The terms of calculation of
these fees are set out in the Investment Advisory Agreement put in
place at the time of the Company's listing in 2014. Under the terms
of that contract, EPRA NAV is defined specifically as the measure
drawn up in accordance with the 2011 EPRA Best Practice Guidelines
(which were those in place when the agreement was entered into).
The Remuneration Committee, the Board and the Investment Adviser
have considered the impact of the new EPRA guidelines on the
calculation of fees and have determined that the terms of the
contract should remain unchanged. Consequently, EPRA NAV as it has
been calculated from the Company's listing up to and including the
2019 financial statements will continue to form the basis of the
fee calculations. The EPRA measure used for fee calculations will
be published in the notes to the interim and annual reports for
that purpose.
Unaudited Supplementary Information
Rent Smoothing Adjustments
The Group's accounting policy, in line with IFRS, requires the
impact of any fixed or minimum rental uplifts to be spread evenly
over the term of a lease and as a result there is a material
mismatch between the rental cash flows and rental revenues shown in
the income statement. The adjustments relate to the 41% of
portfolio rents that are subject to fixed uplifts and the 6% of
rents with minimum uplifts on RPI-linked reviews.
A receivable is included in the book value of investment
property for the amount of rent included in the income statement
ahead of actual cash receipts. The receivable increases over
broadly the first half of the later of the lease commencement or
the date of acquisition term then unwinds to zero over the
remainder of each lease term. If a lease is extended, the
receivable at the date of modification is not adjusted but the
smoothing is recalculated over the new term from that date.
So as not to overstate the portfolio value, any movement in the
receivable is offset against property revaluation movements and
since this adjustment increases rental income and reduces property
revaluation gains (and vice versa in the second half of each lease
term) it does not change the Group's retained earnings or net
assets. Income in excess of cash flow is also taken out of Adjusted
EPRA EPS so as not to artificially flatter the Group's dividend
cover.
The impact of the Rent Smoothing Adjustments on the Group's
balance sheet for the year ended 31 December 2019 is as
follows:
Receivable
at Maximum
receivable
31 December at Midway point
at midway
2019 point of smoothing
GBPm GBPm
------------------------------------ ----------- ------------ -----------------
Healthcare - Ramsay hospitals 106.4 111.8 March 2023
German leisure * 34.3 39.9 June 2026
Healthcare - Lisson Grove hospital 11.1 20.6 March 2035
Manchester Arena 1.8 8.9 June 2032
The Brewery 1.7 23.5 June 2041
Pubs 0.4 1.3 Dec 2029
------------------------------------ ----------- ------------ -----------------
155.7 206.0
------------------------------------ ----------- ------------ -----------------
* at the year end Euro conversion rate of EUR1:GBP0.8500.
The future impact of this adjustment would change if there were
acquisitions, disposals or lease variations of properties with
fixed or minimum RPI-linked rental uplifts. Assuming no change in
the portfolio, the adjustment that was recognised on the portfolio
during the year and is expected for each of the next three
financial years (with the German adjustment translated at the 2019
average Euro conversion rate of EUR1:GBP0.8769) is as follows:
GBPm
------ ---------
2019 10.5
2020 9.8
2021 7.2
2022 5.6
--------- ---------
Glossary
Adjusted EPRA EPS EPRA EPS adjusted to exclude non-cash and non-recurring
costs, calculated on the basis of the time-weighted
number of shares in issue
AGM Annual General Meeting
AIFMD Alternative Investment Fund Managers Directive
Dividend Cover Adjusted EPRA EPS divided by dividends per share
EPRA European Public Real Estate Association
EPRA EPS A measure of EPS designed by EPRA to present
underlying earnings from core operating activities
EPRA Guidance The EPRA Best Practices Recommendations Guidelines
November 2016
EPRA NAV A measure of NAV designed by EPRA to present
the fair value of a company on a long term basis,
by excluding items such as interest rate derivatives
that are held for long term benefit, net of deferred
tax
EPS Earnings per share, calculated as the profit
for the period after tax attributable to members
of the Company divided by the weighted average
number of shares in issue in the period
IFRS International Financial Reporting Standards adopted
for use in the European Union
Investment Adviser Prestbury Investment Partners Limited
Investment Advisory The agreement between the Company (and its subsidiaries)
Agreement and the Investment Adviser, key terms of which
are set out on pages 204 to 221 of the Secondary
Placing Disclosure Document
Key Operating Asset An asset where the operations conducted from
the property are integral to the tenant's business
LTV Loan to value: the outstanding amount of a loan
as a percentage of property value
Management Team Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm
and Ben Walford, who are directors of the Investment
Adviser
NAV Net asset value
Net Initial Yield Annualised net rents on investment properties
as a percentage of the investment property valuation,
less purchaser's costs
Net Loan To Value LTV calculated on the gross loan amount less
or Net LTV cash balances
REIT Real Estate Investment Trust
Rent Smoothing Adjustments The adjustment required to recognise rent received
in the income statement ahead of cash received
as a result of the requirement to spread rental
income evenly over the lease term
Running Yield The anticipated Net Initial Yield at a future
date, taking account of any rent reviews in the
intervening period
Secondary Placing The Secondary Placing Disclosure Document dated
Disclosure Document 14 March 2016 which is available in the Investor
Centre of the Company's website under "Circulars
to Shareholders/2016"
Total Accounting The movement in EPRA NAV over a period plus dividends
Return paid in the period, expressed as a percentage
of the EPRA NAV at the start of the period
Total Shareholder The movement in share price over a period plus
Return dividends paid in the period, expressed as a
percentage of the share price at the start of
the period
Weighted Average The term to the first break or expiry of the
Unexpired Lease Term leases in the portfolio, weighted by rental value
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR UASWRRSUOAAR
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