TIDMSREI
RNS Number : 0376G
Schroder Real Estate Inv Trst Ld
24 May 2017
For release 24 May 2017
Schroder Real Estate Investment Trust Limited
("SREIT"/ the "Company" / "Group")
FULL YEAR RESULTS FOR THE YEARED 31 MARCH 2017
SREIT CONTINUES TO DELIVER INCOME AND CAPITAL GROWTH FROM ASSET
MANAGEMENT AND HIGHER QUALITY PORTFOLIO
Schroder Real Estate Investment Trust, the actively managed UK
focussed REIT, today announces its audited full year results for
the 12 months ended 31 March 2017.
Financial highlights for the 12 months ending 31 March 2017
-- Net Asset Value ('NAV') total return of 7.2% (31 March 2016: 12.3%)
-- 3% increase in NAV per share for the year to 64.1 pence per
share (pps), principally due to a 3% increase in the capital value
of the underlying portfolio
-- Continued outperformance of underlying property portfolio
with a total return of 8.5% versus the MSCI Benchmark Index of
3.7%
-- 5.3% increase in underlying EPRA earnings to GBP13.8 million (31 March 2016: GBP13.1 million)
-- Dividend of 2.48 pps paid reflecting sustainable dividend cover of 107%
-- Profit for the year of GBP22.8 million (31 March 2016:
GBP36.3 million), reflecting moderating capital growth across the
UK real estate market
-- Loan to value ('LTV') adjusting for transactions that have
completed since the year end, net of all cash, of 26.0% (31 March
2016: 30.0%)
Operational highlights
-- Winning Cities philosophy contributing positively to returns
resulting in a fully covered dividend, lower leverage and a higher
quality, income-focused portfolio
-- 93% of the portfolio now located in Winning Cities expected
to generate higher levels of economic growth
-- Improvement in the portfolio's defensive qualities with a
reduction in the portfolio void rate to 6% (31 March 2016: 9%) and
an increase in the average unexpired lease term, assuming all
tenant breaks are exercised, to 7.4 years (31 March 2016: seven
years)
-- Completed seven vacant or low yielding disposals totalling
GBP26.5 million at an average yield of 2.2% and a GBP4.4 million or
21% premium above the aggregate valuation at the start of the
year
-- Disposal proceeds enable the company to complete its asset
management initiatives and make selective new acquisitions to
increase net income
Commenting, Lorraine Baldry, Chairman of the Board, said:
"Despite the uncertain political and economic backdrop, investor
demand for good quality UK real estate has proved resilient, while
loose monetary policy and low levels of new development in many
markets should continue to support valuations. We believe that our
disciplined strategy to invest in Winning Cities in order to reduce
risk means that the Company is well positioned to deliver
sustainable longer term returns for its shareholders.
Against this mixed backdrop, we will continue our strategy of
improving future returns to shareholders by investing in Winning
Cities, growing income, identifying new and completing asset
management plans and improving the defensive qualities of the
portfolio."
Duncan Owen, Global Head of Schroder Real Estate Investment
Management Limited, said:
"The Company's focus of investing in Winning Cities, adding
value through asset management and reducing portfolio risk
alongside low borrowing levels, means it is well placed to continue
to deliver its strategic objectives in this more uncertain
environment. The growth strategy executed during 2014 and 2015
together with subsequent investments has increased exposure to
Winning Cities and sectors that are expected to generate relative
outperformance. This, coupled with a high level of asset management
activity, has improved the quality of the portfolio's income as
well as its defensive positioning. We will continue to adopt a
selective and disciplined approach to new investments which could
include single assets or portfolios."
-Ends-
For further information:
Schroder Real Estate Investment
Management
Duncan Owen / Nick Montgomery 020 7658 6000
--------------------------------- --------------
Northern Trust
David Sauvarin 01481 745529
--------------------------------- --------------
FTI Consulting
Dido Laurimore / Ellie Sweeney
/ Richard Gotla 020 3727 1000
--------------------------------- --------------
A presentation for analysts and investors will be held at 11am
today at the offices of Schroders plc, 31 Gresham Street, London
EC2V 7QA. If you would like to attend, please contact Jenni Nkomo
at FTI on +44 (0)20 3727 1015 or jenni.nkomo@fticonsulting.com
Alternatively, the dial-in details are as follows: +44 (0)330 336 9411
Participants, Local - London, United
Kingdom: 1169559
Schroder Real Estate Investment Trust Limited
Annual Report and Consolidated Financial Statements
for the year ended 31 March 2017
Contents Page
OVERVIEW
Company Summary 1
Highlights 2
Property Performance 2
Investment Approach 2
Performance Summary 3
STRATEGIC REPORT
Chairman's Statement 5
Investment Manager's Report 7
Business Model and Strategy 17
GOVERNANCE
Board of Directors 24
Report of the Directors 25
Remuneration Report 34
Corporate Governance 36
Sustainability Report 41
Report of the Audit Committee 46
FINANCIAL STATEMENTS
Independent Auditor's Report 50
Consolidated Statement of Comprehensive
Income 54
Consolidated Statement of Financial
Position 55
Consolidated Statement of Changes in
Equity 56
Consolidated Statement of Cash Flows 57
Notes to the Financial Statements 58
EPRA Performance Measures 78
EPRA Sustainability Reporting Performance
Measures 81
Report of the Depositary to the Shareholders 87
Glossary 89
Notice of Annual General Meeting 90
OVERVIEW
Schroder Real Estate Investment Trust Limited
aims to provide shareholders with an attractive
level of income together with the potential for
income and capital growth through investing in
UK commercial property.
Company Summary
Schroder Real Estate Investment Trust Limited
(the 'Company' and together with its subsidiaries
the 'Group') is a real estate investment company
with a premium listing on the Official List of
the UK Listing Authority and whose shares are
traded on the Main Market of the London Stock
Exchange (ticker: SREI).
On 1 May 2015 the Company converted to a real
estate investment trust ('REIT') in order to
benefit from the various tax advantages offered
by the UK REIT regime as well as the potential
for improved liquidity as a result of being able
to access a wider shareholder base. The Company
continues to be declared as an authorised closed-ended
investment scheme by the Guernsey Financial Services
Commission under section 8 of the Protection
of Investors (Bailiwick of Guernsey) Law, 1987,
as amended and the Authorised Closed-ended Collective
Investment Schemes Rules 2008.
Objective
The Company aims to provide shareholders with
an attractive level of income and the potential
for income and capital growth as a result of
its investments in, and active management of,
a diversified portfolio of UK commercial real
estate.
The Company's dividend policy is to pay a sustainable
level of quarterly dividends to shareholders.
It is intended that successful execution of the
Company's strategy will enable a progressive
dividend policy to be adopted. The current annualised
level of dividend is 2.48 pence per share ('pps').
The portfolio is principally invested in the
three main UK commercial real estate sectors
of office, industrial and retail, and may also
invest in other sectors including, but not limited
to, residential, leisure, healthcare and student
accommodation. Over the property market cycle
the portfolio aims to generate an above average
income return with a diverse spread of lease
expiries.
Relatively low level gearing is used to enhance
income and total returns for shareholders with
the level dependent on the property cycle and
the outlook for future returns. The current target
gearing level reflects a net loan-to-value ('LTV')
ratio of between 25% and 35%.
Investment strategy
The current investment strategy is to grow income
and enhance shareholder returns through selective
acquisitions, pro-active asset management and
selling smaller, lower yielding properties on
completion of asset business plans. The issuance
of new shares will also be considered if it is
consistent with the strategy.
Our objective is to own a portfolio of larger
properties in Winning Cities, being locations
experiencing higher levels of GDP, employment
and population growth, with diversified local
economies, sustainable occupational demand and
favourable supply and demand characteristics.
These properties should offer good long-term
fundamentals in terms of location and specification
and be let at affordable rents with the potential
for income and capital growth from good stock
selection and asset management.
Highlights
* Net asset value ('NAV') total return of 7.2%
* Underlying property portfolio total return of 8.5%
compared with 3.7% for the MSCI Benchmark Index
* 3% increase in NAV per share for the year to 64.1
pence per share (pps), principally due to a 3%
increase in the capital value of the underlying
portfolio
* Declared and paid dividends amounting to 2.5 pps
* Dividend cover of 107%
* Loan to value, net of all cash, of 26%
Property Performance 31 March 31 March
2017 2016
Value of Property Assets and
Joint Ventures (GBP'000)* 467,670 462,573
Annualised rental income (GBP'000)* 27,228 28,235
Estimated open market rental
value (GBP'000)* 34,425 34,669
Underlying portfolio total
return 8.5% 12.8%
MSCI Benchmark total return** 3.7% 11.1%
Underlying portfolio income
return 6.1% 6.5%
MSCI Benchmark income return 4.9% 4.9%
------------------------------------- --------- --------
* Includes transactions which unconditionally
exchanged, but did not complete prior to year
end.
** Source: MSCI Quarterly Version of Balanced
Monthly Index Funds including joint venture investments
on a like-for-like basis as at 31 March 2017.
Investment Approach
1. Core income
Through the cycle approximately 50% of the portfolio
will be invested in property offering secure
income characteristics by having an above average
lease length and tenant credit quality. The core
portfolio will comprise property offering strong
fundamentals in locations where rental growth
is expected to be realised at rent review, or
have contracted rental increases throughout the
lease term. Properties offering these characteristics
are likely to be where asset business plans have
been completed but where the forecast future
returns remain attractive. These core properties
balance portfolio risk and support the Company's
long term financing arrangements.
2. Asset management
Up to 50% of the portfolio will be invested in
properties offering enhanced potential returns
from more comprehensive asset management initiatives.
These properties will generally be acquired with
an above average income return, a diverse spread
of lease expiries and where an attractive return
can be generated by delivering specific initiatives.
Examples of this will include lease extensions
with tenants, repositioning assets through refurbishment
or partial redevelopment and securing change
of planning use.
3. Research led approach
Research is used to inform strategy and identify
areas of mis-pricing across the market. Cities
and towns are analysed to identify differentiated
factors that could support growth. These include
factors such as the local economy benefiting
from being globally facing; a wealth effect from
higher value businesses, industries or housing;
population and jobs growth; regeneration, infrastructural
investment or tourism and amenities such as a
Russell Group university. The acquisition strategy
then focuses on complementary property-types
in locations that have all, or a blend of, these
characteristics.
Performance Summary
Financial summary 31 March 31 March
2017 2016
-------------------------------- ---------- ----------
NAV GBP332.6m GBP322.6m
NAV per Ordinary Share (pence) 64.1 62.2
EPRA(1) NAV GBP332.6m GBP322.6m
Profit for the year GBP22.8m GBP36.3m
EPRA(1) earnings GBP13.8m GBP13.1m
Dividend cover 107% 106%
-------------------------------- ---------- ----------
(1) EPRA calculations are included in the EPRA
Performance measures section on page 78.
Capital values 31 March 31 March
2017 2016
-------------------------------- --------- ---------
Share price (pence) 61.8 60.8
Share price (discount)/premium
to NAV (3.7%) (2.3%)
NAV total return(1) 7.2% 12.3%
FTSE All Share Index 3,990.90 3,408.90
FTSE EPRA/NAREIT UK Real
Estate Index 1,724.59 1,788.52
-------------------------------- --------- ---------
(1) Net Asset Value total return calculated by
Schroder Real Estate Investment Management Limited.
Earnings and dividends 31 March 31 March
2017 2016
--------------------------- --------- ---------
Earnings (pps) 4.4 7.0
EPRA earnings (pps) 2.7 2.5
Dividends paid (pps) 2.48 2.48
Annualised dividend yield
on 31 March share price 4.0% 4.1%
--------------------------- --------- ---------
Bank borrowings 31 March 31 March
2017 2016
----------------------------- ---------- ----------
On-balance sheet borrowings GBP150.1m GBP150.1m
(2)
Loan to value ratio (LTV),
net of all cash (3) 28.9% 30.0%
----------------------------- ---------- ----------
(2) On balance sheet borrowings reflects the
loan facility with Canada Life and RBS, without
deduction of
finance costs.
(3) Cash excludes rent deposits and floats held
with managing agents. 2017 LTV adjusted for
transactions that have completed since the year
end is 26%.
Ongoing charges 31 March 31 March
2017 2016
-------------------------------- --------- ---------
Ongoing charges (including
fund and property expenses(4)
) 2.5% 2.6%
Ongoing charges (including
fund only expenses(4,5) ) 1.3% 1.2%
-------------------------------- --------- ---------
(4) Ongoing charges calculated in accordance
with AIC recommended methodology, as a percentage
of average NAV during the year.
(5) Fund only expenses excludes all property
operating expenses, valuers' and professional
fees in relation to properties.
STRATEGIC REPORT
Chairman's Statement
Overview
I am pleased to report that progress has been made executing the
strategy to grow net income, increase exposure to assets in higher
growth locations and reduce risk. This strategy has delivered
continued growth in net asset value and an improvement in the share
price rating.
Dividend cover over the year was 107%, which includes the
dilutive impact of seven disposals that crystallised a GBP4.4
million or 21% premium above the aggregate valuation at the start
of the year. These disposals will increase cash holdings to
approximately GBP30 million which will be used to fund asset
management initiatives and selective acquisitions. The disposals
led to a reduction in the level of net income and dividend cover
during the year, ahead of the proceeds being reinvested.
A clear and disciplined investment strategy has resulted in over
90% of the portfolio being located in cities and towns expected to
generate higher levels of economic growth through stronger
occupational demand (source: Oxford Economics). An increasing
proportion of the portfolio is also invested in larger assets in
prime locations where there is potential to add value from asset
management. The portfolio remains diversified by geography and
sector, as well as benefiting from a broad tenant base.
Expectations of a cyclical slowdown in the UK real estate market
meant a key objective for the year was reducing portfolio risk.
This has been achieved through a focus on asset management that has
materially reduced the portfolio void rate and increased the
duration and quality of underlying rental income streams.
Strategy
The strategic priorities for the current financial year remain
unchanged with a focus on managing risk together with the need to
provide shareholders with visibility on the potential for future
increases in net income.
The UK economy has performed relatively well since the vote to
leave the European Union, with real estate values recovering after
an initial decline. Continued loose monetary policy and Sterling
weakness have also supported economic activity and occupier demand
for good quality assets in cities and towns that are
prospering.
Whilst market conditions are expected to remain stable, rising
inflation expectations and political uncertainty may slow economic
growth. As a result the strategy will continue to prioritise
improving the portfolio's defensive qualities in terms of asset
quality, longer length leases and strong tenants.
Asset management activity is also supporting earnings. For
example, conditional lease agreements have been exchanged that
will, if completed, generate additional recurring rental income of
approximately GBP750,000 per annum. This will increase further as
cash is reinvested into selective new acquisitions that are
consistent with the Company's strategy.
Whilst this activity could represent an increase in the level of
dividend cover, we remain cautious because of other potential lease
expiries across the portfolio. As a result, the Board and Manager
will continue to explore a number of strategies for accelerating
growth in net income.
Debt
The Company has two loan facilities totalling GBP150.1 million
with an average duration of nine years and an average interest cost
of 4.4%, hedged against any movement in interest rates. Adjusting
for disposals completed since the year end, the loan to value
ratio, net of cash, is 26%, which is within the long term target
range of 25% to 35%.
Board composition
Board composition has been reviewed over the year with the aim
of identifying a successor for two Board members who had served
since the Company's inception in 2004. I am pleased to confirm that
following this process Alastair Hughes was appointed as a
non-executive Director on 26 April 2017. Alastair has over 25 years
of experience in UK and international real estate markets, most
recently as an executive of Jones Lang LaSalle, a USA-listed real
estate services company.
At the same time John Frederiksen, who joined the Board in 2004,
has retired with effect from 25 April 2017. The Directors and
Investment Manager are very grateful to John for his wise counsel,
deep experience and significant contribution to the Board over the
last 13 years. Following a hand over period Keith Goulborn will
also be retiring during the coming year.
Outlook
The UK real estate market has weathered considerable political
and economic uncertainty during the financial year with healthy
levels of investor demand for good quality assets. Whilst upcoming
elections and Brexit negotiations could impact confidence and lead
to weaker economic growth, loose monetary policy and low levels of
new development in many markets should provide support to real
estate values.
Against this mixed backdrop we will continue our strategy of
improving future returns to shareholders. This will be achieved by
investing in Winning Cities, growing income, identifying new and
completing asset management plans, in addition to improving the
defensive qualities of the portfolio.
Lorraine Baldry
Chairman
Schroder Real Estate Investment Trust Limited
23 May 2017
Investment Manager's Report
The Company's Net Asset Value ('NAV') as at 31 March 2017 was
GBP332.6 million or 64.1 pence per share ('pps') compared with
GBP322.6 million or 62.2 pps as at 31 March 2016. This reflected an
increase of 1.9 pps or 3.1%, with the underlying movement in NAV
set out in the table below:
Pence per
share ('pps')
--------------------------------------- ---------------
NAV as at 31 March 2016 62.2
--------------------------------------- ---------------
Unrealised change in valuation of
direct investment property portfolio 3.0
--------------------------------------- ---------------
Capital expenditure (1.6)
--------------------------------------- ---------------
Realised gains on disposals 0.7
--------------------------------------- ---------------
Unrealised loss on joint ventures* (0.3)
--------------------------------------- ---------------
Net revenue 2.7
--------------------------------------- ---------------
Dividends paid (2.5)
--------------------------------------- ---------------
Others (0.1)
--------------------------------------- ---------------
NAV as at 31 March 2017 64.1
--------------------------------------- ---------------
* Unrealised loss due to capital expenditure at City Tower in
Manchester
Performance was driven by a 3% increase in the value of the
underlying portfolio which, adjusting for capital expenditure,
contributed 2.1 pps to the NAV.
Net revenue over the year was 2.7 pps which, based on dividends
paid of 2.5 pps, reflected dividend cover of 107%. This resulted in
a NAV total return for the year of 7.2%.
Market overview
The MSCI (formerly IPD) Benchmark produced a total return for
commercial real estate of 3.7% over the year to 31 March 2017,
which compared with the Company's underlying portfolio total return
of 8.5%, generating relative outperformance of 4.8%. This compares
to 2016, when our total return outperformed the benchmark by
1.7%.
A slowdown in total returns had been expected due to parts of
the real estate market being late in the cycle, compounded by
uncertainties arising from the vote to leave the European Union.
This led to falling capital values immediately after the referendum
decision and the suspension of daily traded real estate funds open
to retail investors. The initial market shock was however mitigated
by swift policy measures from the Bank of England Monetary Policy
Committee. These measures supported consumer spending and
maintained momentum in the economy. This in turn led to real estate
values stabilising and a recovery in investment volumes and values
post the third quarter of 2016.
Whilst domestic institutional activity levels remain relatively
low, private investors are active alongside other new investors
such as UK Local Authorities. A sharp fall in sterling has also
maintained demand from international investors, notably from Asia
targeting Central London.
This activity and stable investment volumes contributed to
yields remaining flat over the year, with an average net initial
income yield for UK real estate of 5.2% at 31 March 2017. This
compares with the long term average of 5.9%. However, the sector
still offers an above average premium of approximately 3% above 10
year Sterling Gilt yields.
In terms of sectors, industrial property outperformed other
sectors over the year with a total return of 8.7% compared with
offices and retail which were both 1.7%. This was due to an above
average income return of 5.2% and stronger rental growth. For
example, South East industrial rents grew by 6% compared with the
market average of 1.7%. Occupational demand is expected to remain
robust as a result of online retail and a low supply of multi-let
industrial estates in higher growth South East and stronger
regional locations. The Company's industrial estates in Milton
Keynes and Leeds, acquired as part of the growth strategy between
2014 and 2015, performed strongly over the year, contributing 1.3%
to the 4.7% relative outperformance.
The weaker performance of the office sector was driven by the
City of London and the rest of UK, where values fell by -2.0% and
-5.8% respectively. The City of London and Docklands office markets
are vulnerable to the loss of 'passporting' rights for financial
services, compounded by the volume of new development compared with
other London sub-markets. Gross take-up of office space may fall in
London during 2017 but the changing profile of occupier demand
should benefit those submarkets which are attractive to higher
growth creative industries. These made up 24% of total Central
London take up during 2016. We expect locations such as Bloomsbury,
where the Company owns its sole Central London asset, to benefit
from this trend, evidenced by recent nearby lettings to Facebook
and Skyscanner.
Office markets outside of London should be stable due to a more
domestically focussed occupier base. We also expect government
plans to consolidate the civil service into 13 regional hubs to
benefit larger regional cities, particularly those with diversified
economies and strong universities such as Bristol, Leeds and
Manchester. Furthermore, new development has remained muted and the
introduction of permitted development rights legislation in 2013
(enabling automatic change of use from office to residential) has
reduced the supply of obsolete offices.
The retail sector continues to be the worst performing due to
structural and cyclical factors, with retailer margins being
squeezed by higher costs and lower prices. Factors including weaker
sales growth, investment in online strategies, a higher national
living wage and rising import prices are pressurising the
traditional retail format. Against this challenging backdrop we
will continue to sell weaker high street assets and focus on
convenience retail and out-of-town retail, such as the Arndale
Centre in Leeds and St. John's Retail Park in Bedford, where rents
are relatively affordable and demand remains resilient.
Strategy
The strategy has focused on the following key objectives:
-- Increasing net income through transactions and asset management.
-- Increasing exposure to assets with strong fundamentals.
-- Increasing exposure to Winning Cities, being locations
experiencing higher levels of GDP, employment and population
growth.
-- Managing portfolio risk in order to enhance the portfolio's defensive qualities.
An intensive and disciplined approach to asset management and
transactions during the year and since year end has delivered the
following progress against the strategic objectives:
1. Sustainable dividend cover of 107%.
2. 93% of the portfolio by value is located in first and second
quartile growth cities and towns (source: Oxford Economics).
3. Reduction in the portfolio void rate to 6% compared with 9% at the start of the year.
4. An increase in the average unexpired lease term to 7.4 years,
assuming all tenant breaks are exercised at the earliest
opportunity, compared with 7 years at the start of the year.
5. A portfolio level income return of 6.1% over the year
compared with 4.9% for the MSCI Benchmark, with a higher
reversionary income yield of 7.4% compared with 6% for the
Benchmark.
6. Seven vacant or low yielding disposals completed, totalling
GBP26.5 million at an average yield of 2.2%. Further disposal
unconditionally exchanged for GBP2.5 million.
7. Reduction in the net loan to value to 26%, at the lower end of the 25% to 35% target range.
The level of occupational demand driving this activity has been
encouraging, with 39 new lease agreements completed across the
portfolio. These lease agreements were completed at headline rental
levels reflecting an average uplift of 2.4% above the independent
valuers' assessment of rental value at the start of the year.
In addition to driving income growth, asset management has
focussed on extending leases to better quality tenants. For
example, since the year end the lease to Wickes Building Supplies
Limited at a retail warehouse in Chester has been extended from
four to 16 years in return for a premium equating to two years
rent. The tenant will use this premium to modernise the unit which
enhances the asset's defensive qualities and creates a more
valuable investment.
During the year GBP9.3 million was invested into eight separate
capital expenditure initiatives across the portfolio and JV's, of
which approximately half was linked to pre-let initiatives such as
the new long leases to Premier Inn at the Arndale Centre in Leeds
and TK Maxx Homesense at St. John's Retail Park in Bedford. The
speculative capital expenditure over the year such as City Tower in
Manchester, where there is now 46,000 sq ft of newly refurbished
office accommodation, should improve letting prospects as well as
the quality of the occupier and the commercial terms achieved.
The success of this approach is illustrated by the disposal of
the office in central Bristol. The asset had represented the
largest portfolio void at the start of the year. Due to the
strength of the Bristol occupational market and an undersupply of
new office space, a major refurbishment was undertaken. Prior to
completion of the works, terms were agreed to sell the property to
the University of Bristol for GBP11.8 million. This compared to the
valuation as at 31 March 2016 of GBP4.7 million and, adjusting for
capital expenditure of GBP2.8 million, contributed GBP3.9 million
to profits. The other disposals were of small high street retail
assets where letting or other activity enabled proceeds to be
maximised. Further disposals of smaller, more secondary assets are
also planned.
Following these disposals the Company will have approximately
GBP30 million of cash, which, after retaining GBP10 million for
operational flexibility, provides funding for both ongoing asset
management activity as well as selective new acquisitions. Swift
redeployment of this cash in line with the Winning Cities
philosophy and continued letting activity is key to driving further
net income growth.
Property portfolio
As at 31 March 2017 the property portfolio comprised 47
properties independently valued at GBP467.7 million. This includes
our share of joint venture properties at City Tower in Manchester
and Store Street in Bloomsbury, London. Prior to year end,
unconditional contracts were exchanged to sell a small leisure
asset in Watford for GBP2.5 million and a larger office asset in
Bristol for GBP11.8m. Since the year end, and as referred to above,
the disposal in Bristol completed.
Excluding the Bristol and Watford assets, the portfolio produced
a rent of GBP27.1 million per annum, reflecting a net initial
income yield of 5.6%. The portfolio also benefits from fixed
contractual rental uplifts of GBP3.1 million per annum by March
2019. The Company's independent valuers estimate that the current
rental value of the portfolio is GBP33.6 million per annum,
reflecting a reversionary income yield of 7.4%, which compares with
the Benchmark at 6%.
The data below summarises the portfolio information as at 31
March 2017, adjusted for the post year end transactions:
Weighting (%)
---------------------------- -----------------------
Sector weightings by value SREIT MSCI Benchmark
---------------------------- ------ ---------------
Retail 30.9 36.6
---------------------------- ------ ---------------
Offices 39.1 31.3
---------------------------- ------ ---------------
Industrial 24.4 21.9
---------------------------- ------ ---------------
Other 5.6 10.2
---------------------------- ------ ---------------
Weighting (%)
------------------------------ -----------------------
Regional weightings by SREIT MSCI Benchmark
value
------------------------------ ------ ---------------
Central London 6.9 14.8
------------------------------ ------ ---------------
South East excluding Central
London 28.6 38.0
------------------------------ ------ ---------------
Rest of the South 7.8 15.6
------------------------------ ------ ---------------
Midlands and Wales 27.6 14.1
------------------------------ ------ ---------------
North and Scotland 29.1 17.5
------------------------------ ------ ---------------
The top ten assets set out below comprise 57.6% of the portfolio
value:
Top ten properties Value (GBPm) (%)
-------------------------------- ------------- -----
Manchester, City Tower
1 (25% share) 41.6 9.2
--- --------------------------- ------------- -----
London, Store Street,
2 Bloomsbury (50% share) 35.3 7.8
--- --------------------------- ------------- -----
Bedford, St. John's
3 Retail Park 35.2 7.8
--- --------------------------- ------------- -----
4 Brighton, Victory House 31.0 6.8
--- --------------------------- ------------- -----
Leeds, Millshaw Industrial
5 Estate 26.3 5.8
--- --------------------------- ------------- -----
Milton Keynes, Stacey
6 Bushes Industrial Estate 22.9 5.0
--- --------------------------- ------------- -----
Leeds, Headingley,
7 The Arndale Centre 22.4 4.9
--- --------------------------- ------------- -----
Uxbridge, 106 Oxford
8 Road 18.3 4.0
--- --------------------------- ------------- -----
Salisbury, Churchill
9 Way West 14.5 3.2
--- --------------------------- ------------- -----
10 Luton, The Galaxy 14.2 3.1
--- --------------------------- ------------- -----
Total as at 31 March
2017 261.7 57.6
--- --------------------------- ------------- -----
The table below sets out the top ten tenants that generally
comprise large businesses and represent 34.7% of the portfolio:
Top ten tenants Rent p.a. % of portfolio
(GBP000)
------------------------------- ---------- ---------------
1 University of Law Limited 1,583 5.9
--- -------------------------- ---------- ---------------
Wickes Building Supplies
2 Limited 1,092 4.1
--- -------------------------- ---------- ---------------
Norwich Union Life
3 and Pensions Limited 1,039 3.9
--- -------------------------- ---------- ---------------
The Buckinghamshire
4 New University 1,018 3.8
--- -------------------------- ---------- ---------------
BUPA Insurance Services
5 Limited 961 3.6
--- -------------------------- ---------- ---------------
6 Mott MacDonald Limited 790 2.9
--- -------------------------- ---------- ---------------
7 Recticel SA 731 2.7
--- -------------------------- ---------- ---------------
8 Secretary of State 717 2.7
--- -------------------------- ---------- ---------------
9 Booker Limited 700 2.6
--- -------------------------- ---------- ---------------
10 Matalan Retail Limited 676 2.5
--- -------------------------- ---------- ---------------
Total as at 31 March
2017 9,307 34.7
--- -------------------------- ---------- ---------------
Portfolio performance
The performance of the underlying property portfolio compared
with the MSCI Benchmark to 31 March 2017 is shown below. The
portfolio is ranked on the 2(nd) percentile of the Benchmark peer
group over 12 months and on the 12(th) percentile since
inception:
SREIT total MSCI Benchmark Relative p.a.
return p.a. total return (%)
(%) p.a. (%)
------------ ------------------------------- ------------------------------- -------------------------------
Period 12 Three Since 12 Three Since 12 Three Since
months years inception* months years inception* months years inception*
------------ -------- ------- ------------ -------- ------- ------------ -------- ------- ------------
Retail 4.0 9.4 5.8 1.7 6.9 4.5 2.3 2.3 1.3
------------ -------- ------- ------------ -------- ------- ------------ -------- ------- ------------
Office 8.9 15.2 8.3 1.7 12.0 6.9 7.0 2.8 1.3
------------ -------- ------- ------------ -------- ------- ------------ -------- ------- ------------
Industrial 13.7 16.8 8.0 8.7 14.7 7.3 4.6 1.8 0.6
------------ -------- ------- ------------ -------- ------- ------------ -------- ------- ------------
Other 11.6 16.5 4.0 7.6 10.5 7.1 3.6 5.4 -2.9
------------ -------- ------- ------------ -------- ------- ------------ -------- ------- ------------
Total 8.5 13.9 7.5 3.7 10.5 5.9 4.7 3.1 1.4
------------ -------- ------- ------------ -------- ------- ------------ -------- ------- ------------
* Inception was July 2004
Disposals
During the year and since the year end seven assets have been
sold with a further asset exchanged and due to complete in June.
Details of the disposals are set out in the table below:
During the Date Price Net initial Value Premium
year (GBPm) Yield 31/03/2016 (discount)
(%) (GBPm) to valuation
(%)
----------------- ------------ -------- ------------ ------------ --------------
Nottingham,
Clumber Street 01/04/2016 2.0 - 2.0 -
----------------- ------------ -------- ------------ ------------ --------------
New Malden,
St. George's
Court (mixed
retail and
office)* 04/04/2016 4.0 5.6 4.0 -
----------------- ------------ -------- ------------ ------------ --------------
Bath, Abbeygate
Street 10/05/2016 4.7 4.7 4.7 -
----------------- ------------ -------- ------------ ------------ --------------
Bournemouth,
Commercial
Road 27/10/2016 1.7 5.1 1.6 6.3
----------------- ------------ -------- ------------ ------------ --------------
Bromley, 102
High Street 02/11/2016 1.3 - 1.1 18.2
----------------- ------------ -------- ------------ ------------ --------------
Ipswich, Tavern
Street 09/12/2016 1.0 6.7 1.2 (16.7)
----------------- ------------ -------- ------------ ------------ --------------
Bristol, St.
Augustine's
Courtyard** 07/04/2017 11.8 - 4.7*** 57.3
----------------- ------------ -------- ------------ ------------ --------------
Watford, High
Street** 30/06/2017 2.5 4.6 2.5 -
----------------- ------------ -------- ------------ ------------ --------------
Total 29.0 2.5 21.8 17.9
------------------------------- -------- ------------ ------------ --------------
*Included in the 31 March 2016 financial statements as a
disposal, as contracts unconditionally exchanged during the prior
year.
**Included in the 31 March 2017 financial statements as a
disposal, as contracts unconditionally exchanged during the
year.
***Values as at 31 March 2016 before adjusting for the GBP2.8
million of capital expenditure invested during the year.
Asset management case studies
Milton Keynes, Stacey Bushes Industrial Estate
Stacey Bushes is a 317,000 sq ft multi-let industrial estate
comprising 42 units in a good location west of Milton Keynes. The
asset was acquired for GBP14.3 million in 2014. As at 31 March 2017
the asset was valued at GBP22.9 million reflecting a net initial
income yield on contracted rents of 6% and a reversionary income
yield of 7.4%. The strategy over the year was to refurbish units as
leases expire in order to achieve higher rents. The following
progress has been made over the year:
-- 18 units refurbished at a total cost of GBP200,000, net of dilapidations payments.
-- Completed 11 new lettings that increase the annual contracted
rent by 13.1% to GBP1.5 million p.a.
-- Rental value increased by 8% to GBP1.8 million per annum.
-- Planning consent secured on the additional land for 17,000 sq
ft of new warehouse accommodation comprising six units. The
estimated cost of development is GBP1.8 million with potential to
generate additional rent of GBP170,000 per annum.
This activity has delivered strong performance with a total
return for the year of 21.8% compared with the Benchmark average
for South East industrial of 10.7%.
Leeds, Millshaw Industrial Estate
Millshaw is a 463,400 sq ft multi-let industrial estate
comprising 27 units strategically located south of Leeds city
centre close to the M62 and M621 motorways. The asset was acquired
for GBP22.7 million in 2015. As at 31 March 2017 the asset was
valued at GBP26.3 million reflecting a net initial income yield of
5.6% and a reversionary income yield of 7.9%. The strategy over the
year was to refurbish units to drive rents and explore higher value
uses for the units fronting the Leeds ring road. The following
progress has been made over the year:
-- Five units refurbished at a total cost of GBP0.5 million, net of dilapidations payments.
-- Completed 6 new letting agreements that increase the annual
contracted rent by 7.8% to GBP1.6 million p.a.
-- Rental value increased by 7% to GBP2.2 million per annum.
-- Exchanged an agreement for lease with JD Sports Gyms to let a
unit at the front of the estate at a rent of GBP189,000 per annum
or GBP6 per sq ft, compared with a rental value at the start of the
year of GBP4.50 per sq ft.
-- Exploring longer term redevelopment options.
This activity has delivered strong performance with a total
return for the year of 14.6% compared with the Benchmark average
for rest of UK industrial of 6.1%.
Manchester, City Tower (25% interest reflected in value and
rents below)
City Tower is a landmark 615,429 sq ft office, retail, leisure
and hotel investment on a three acre island site in Manchester city
centre. The asset was acquired for GBP33 million in 2014. As at 31
March 2017 the asset was valued at GBP41.6 million reflecting a net
initial income yield of 5.1% and a reversionary income yield of
7.2%. The strategy over the year was to complete the first phase of
a major repositioning of the offices and retail in order to
increase rents and use transactional evidence for rent reviews and
lease renewals. The following progress has been made:
-- Office reception refurbishment extension has completed at a
cost of GBP500,000 with positive feedback from existing and
prospective tenants
-- Refurbished four office floors to a high specification at a
cost of GBP425,000 that are currently being marketed
-- Completed five new lettings, lease extensions and renewals
totalling 80,800 sq ft at an average headline rent that is 7.2%
above the rental value at the start of the year. Examples
include:
o Lease to the National Institute of Clinical Excellence
('NICE') of 46,350 sq ft extended by seven years from the
contracted lease expiry in December 2017 at GBP243,000 per annum,
which reflects a 15% uplift on the previous rent.
o Lease to Hays Recruitment on 18,000 sq ft of space extended by
ten years at GBP89,420 per annum or GBP20 per sq ft, reflecting a
23% uplift on the previous rent.
o 9,200 sq ft let to iHub, a serviced office provider, as
expansion space at GBP58,000 per annum or GBP25 per sq ft, an
uplift of 9% on the rental value at the start of the year.
Despite the high level of activity the valuation was negatively
impacted by the vacant floors and fell from GBP42.2 million to
GBP41.6 million over the year, resulting in a total return of 2.0%.
Further progress letting vacant space will have a positive impact
on the valuation in the future.
Chester, Sealand Road, Wickes
The Sealand Road asset is a 26,059 sq ft retail warehouse wholly
let to Wickes Building Supplies Limited, part of Travis Perkins
plc. Sealand Road is an established retail warehouse location on
the edge of Chester. As at 31 March 2017 the asset was valued at
GBP5.0 million reflecting a net initial yield of 7.5% based on the
rent of GBP400,000 per annum or GBP15.35 per sq ft. The strategy
during the year was to extend the lease beyond the 2020 expiry and
since the year end an agreement for lease has exchanged on the
following basis:
-- The Company will carry out consented highways improvements
works to improve accessibility to the Wickes car park at a cost of
GBP200,000.
-- On completion of the highways works, Wickes has agreed to
enter into a new 15 year lease without tenant break options at the
current rent of GBP400,000 per annum.
-- In return for entering into the new lease Wickes will receive
a capital contribution of GBP800,000 from the Company which will be
used to upgrade the unit to the new Wickes format.
The lease extension will enhance the defensive qualities of the
asset and the portfolio as well as creating a more valuable
investment.
Finance
Adjusting for transactions that have completed since the year
end the Company has an overall loan to value, net of cash, of 26%,
within the long term strategic range of 25% to 35%. Details of the
two loans and compliance with principal covenants are set out
below:
Lender Loan Maturity Interest Loan LTV Interest ICR Forward Forward
(GBPm) rate to ratio cover ratio looking looking
(%) Value covenant ratio covenant ICR ICR
('LTV') (%)* (%)** (%)** ratio ratio
ratio* (%)*** covenant
(%) (%)***
-------- -------- ----------- -------------- --------- ---------- --------- ---------- --------- ----------
Canada
Life 103.7 15/04/2028 4.77($) 38.6 65 311 185 300 185
-------- -------- ----------- -------------- --------- ---------- --------- ---------- --------- ----------
25.9 15/04/2023
-------- -------- ----------- -------------- --------- ---------- --------- ---------- --------- ----------
RBS 20.5 17/07/2019 2.00(ALPHA>) 50.1 65 N/A N/A 463 250
-------- -------- ----------- -------------- --------- ---------- --------- ---------- --------- ----------
* Loan balance divided by property value as at 31 March 2017.
** For the quarter preceding the Interest Payment Date ('IPD'),
((rental income received - void rates, void service charge and void
insurance) / interest paid).
*** For the quarter following the IPD, ((rental income received
- void rates, void service charge and void insurance) / interest
paid).
$ Fixed total interest rate for the loan term.
<ALPHA> Total interest rate as at 31 March 2017 comprising
3 months LIBOR of 0.40% and the margin of 1.6% at an LTV below 60%
and a margin of 1.85% above 60% LTV.
The fixed rate on the Canada Life facility of 4.77% provides
long term certainty of interest rate cost but is above rates
currently available. The facility allows voluntary prepayments but
fixed rate break costs are payable on any prepayment. No break
costs are payable on maturity of the smaller loan in 2023. In
addition to the secured properties, the joint venture properties
City Tower in Manchester and Store Street in London are uncharged
with a combined value of GBP76.9 million.
The Company has significant headroom against its loan covenants
and could, on a consolidated basis, withstand a 49% decline in
property values before reaching 65% LTV.
Outlook
Whilst the UK economy has remained relatively robust since the
EU referendum, uncertainties around the exit terms from the
European Union persist. We expect the level of economic growth to
therefore be uncertain and lower levels of consumer spending could
follow if inflation rises. Whilst lower levels of GDP growth would
impact UK real estate markets, we expect a divergence in returns
between successful Winning Cities and less productive centres which
do not see high levels of economic activity.
The Company's focus of investing in Winning Cities, adding value
through asset management and reducing portfolio risk alongside low
borrowing levels, means it is well placed to continue to deliver
its strategic objectives in this more uncertain environment. The
growth strategy executed during 2014 and 2015 together with
subsequent investments has increased exposure to Winning Cities and
sectors that are expected to generate relative outperformance such
as multi-let industrial estates and regional offices. A high level
of asset management activity has also improved the quality of the
portfolio's income as well as reducing vacancy levels. . This
process has resulted in sustained outperformance of the portfolio
over the last year and since the Company's IPO in 2004.
Ongoing asset management activity and redeploying disposal
proceeds will continue to support further sustainable growth in net
income. Whilst we expect some of this income growth to be diluted
in the short term by the normal pattern of other lease expiries,
the portfolio's higher reversionary rental value mitigates the risk
to income..
We will continue to adopt a selective and disciplined approach
to new investments which could include single assets or portfolios.
We will also seek to both enhance the portfolio's defensive
qualities and increase the prospects for future income growth by
active management. Value enhancing opportunities within the
portfolio are capable of being funded from a variety of sources
such as existing cash, flexible and cost efficient debt and the
possibility of new equity issuance which is accretive to earnings
per share.
Duncan Owen
Schroder Real Estate Investment Management Limited
23 May 2017
Business Model and Strategy
Company's Business
The Company is a real estate investment company with a premium
listing on the Official List of the UK Listing Authority and is
traded on the London Stock Exchange's main market for listed
securities. On 1 May 2015, the Company converted to a Real Estate
Investment Trust ('REIT') which means that it is able to benefit
from exemptions from UK tax on profits and gains in respect of
certain qualifying property rental business activities. The Company
continues to be an authorised closed-ended investment scheme
registered in Guernsey.
The Board
The Board of Directors is responsible for the overall
stewardship of the Company, including investment and dividend
policies, corporate strategy, gearing, corporate governance and
risk management.
The Company has no executive Directors or employees.
Investment Objective
The investment objective of the Company is to provide
shareholders with an attractive level of income together with the
potential for income and capital growth from owning and actively
managing a diversified portfolio of real estate.
The portfolio is principally invested in the three main UK
commercial real estate sectors of office, industrial and retail,
and may also invest in other sectors including, but not limited to,
residential, leisure, healthcare and student accommodation. Over
the real estate market cycle the portfolio aims to generate an
above income return with a diverse spread of lease expiries.
Relatively low levels of debt are used to enhance returns for
shareholders with the level of debt dependent on the real estate
cycle and the outlook for future returns. The current target
borrowing level reflects a net loan to value ('LTV') ratio of
between 25% and 35%.
Investment Strategy
The current investment strategy is to grow income and enhance
shareholder returns through selective acquisitions, pro-active
asset management and selling smaller, lower yielding properties on
completion of the asset business plan. The issuance of new shares
will also be considered if this is consistent with the
strategy.
Our objective is to own a portfolio of larger properties in
cities and towns with diversified local economies, sustainable
occupational demand and favourable supply and demand
characteristics. These properties should offer good long-term
fundamentals in terms of location and specification and be let at
affordable rents with the potential for income and capital growth
from good stock selection and asset management.
The Board has delegated investment management and accounting
services to the Investment Manager with the aim of helping the
Company to achieve its investment objective and strategy. Details
of the Investment Manager's investment approach, along with other
factors that have affected performance during the year, are set out
in the Investment Manager's Report.
Diversification and asset allocation
The Board believes that in order to maximise the stability of
the Group's income, the optimal strategy for the Group is to invest
in a portfolio of assets diversified by location, sector, asset
size and tenant exposure with low vacancy rates and creditworthy
tenants. The value of any individual asset at the date of its
acquisition may not exceed 15% of gross assets and the proportion
of rental income deriving from a single tenant may not exceed 10%.
From time to time the Board may also impose limits on sector,
location and tenant types together with other activity such as
development.
The Company's portfolio will be invested and managed in
accordance with the Listing Rules of the Financial Conduct
Authority ('Listing Rules' and 'FCA' respectively) taking into
account the Company's investment objectives, policies and
restrictions.
Borrowings
The Board has established a gearing guideline for the Investment
Manager, which seeks to limit on-balance-sheet debt, net of cash,
to 35% of on-balance-sheet assets while recognising that this may
be exceeded in the short term from time to time. It should be noted
that the Company's Articles limit borrowings to 65% of the Group's
gross assets, calculated as at the time of borrowing. The Board
keeps this guideline under review and the Directors may require the
Investment Manager to manage the Group's assets with the objective
of bringing borrowings within the appropriate limit while taking
due account of the interests of shareholders. Accordingly,
corrective measures may not have to be taken immediately if this
would be detrimental to shareholder interests.
Interest Rate Exposure
It is the Board's policy to minimise interest rate risk, either
by ensuring that borrowings are on a fixed rate basis, or through
the use of interest rate swaps / derivatives used solely for
hedging purposes.
Investment Restrictions
As the Company is a closed-ended investment fund for the
purposes of the Listing Rules, the Group will adhere to the Listing
Rules applicable to closed-ended investment funds. The Company and,
where relevant, its subsidiaries will observe the following
restrictions applicable to closed-ended investment funds in
compliance with the current Listing Rules:
-- neither the Company nor any subsidiary will conduct a trading
activity which is significant in the context of the Group as a
whole and the Group will not invest in other listed investment
companies; and
-- where amendments are made to the Listing Rules, the
restrictions applying to the Company will be amended so as to
reflect the new Listing Rules.
In addition, the Company will ensure compliance with the UK REIT
regime requirements.
Performance
The Board uses principal financial Key Performance Indicators
('KPIs') to monitor and assess the performance of the Company being
the net asset value ('NAV') total return, the performance of the
Company's underlying property portfolio relative to its MSCI
Benchmark Index and the share price:
1. NAV total return
For the year to 31 March 2017 the Company produced a NAV total
return of 7.2% (12.3% for the year to 31 March 2016).
2. Underlying property portfolio performance relative to peer group Benchmark
The performance of the Company's property portfolio is measured
against a specific benchmark defined as the MSCI (formerly
Investment Property Databank) Quarterly Version of Balanced Monthly
Index Funds (the 'Index'). As at 31 March 2017 the Benchmark Index
comprised 46 member funds.
Total return for 12 Total return for 12 months
months to 31 March 2017 to 31 March 2016
--------------------------- -----------------------------
SREIT (%) MSCI Index SREIT (%) MSCI Index
(%) (%)
------------ ------------- ------------- --------------
8.5 3.7 12.8 11.1
------------ ------------- ------------- --------------
The analysis above prepared by MSCI and takes account of all
direct property related transaction costs.
3. Share price performance
The Board monitors the level of the share price compared to the
NAV. As at 31 March 2017, the NAV of 64.1 pps reflects a discount
to the share price of 3.7%. Where appropriate on investment
grounds, the Company may from time to time repurchase its own
shares, but the Board recognises that movements in the share price
premium or discount are driven by numerous factors, including
investment performance, gearing and market sentiment. Accordingly
we focus our efforts principally on addressing sources of risk and
return as the most effective way of producing long term value for
shareholders.
Investment Manager Performance
The Board reviews the Investment Manager's performance at its
quarterly Board meetings. In addition, the Board made its annual
visit to the Investment Manager in April 2017 to review portfolio
strategy and the Investment Manager's capabilities in more depth.
Subsequently, the Directors formally discussed the performance of
the Investment Manager and its fees at a private session. On the
basis of this review, and the extensive selection process
undertaken prior to appointing the Investment Manager, the Board
remains satisfied that the Investment Manager has the appropriate
capabilities required to support the Company, and believes that the
continuing appointment of the Investment Manager is in the interest
of shareholders.
Principal Risks and Uncertainties
The Board is responsible for the Company's system of risk
management and internal control and for reviewing its
effectiveness. The Board has carried out a robust assessment of the
principal risks facing the Company including those that would
threaten its business model, future performance, solvency or
liquidity. A framework of internal controls has been designed and
established to monitor and manage those risks. This internal
control framework provides a system to enable the Directors to
mitigate these risks as far as possible, which assists in
determining the nature and extent of the significant risks the
Board is willing to take in achieving its strategic objectives. A
description of the Company's system of internal control is set out
further below in the Corporate Governance statement.
Although the Board believes that it has a robust framework of
internal controls in place this can provide only reasonable, and
not absolute, assurance against material financial misstatement or
loss and is designed to manage, not eliminate, risk.
A summary of the principal risks which the Company faces are
considered to be as follows:
Investment Policy and Strategy: An inappropriate investment
strategy, or failure to implement the strategy, could lead to
underperformance and the share price being at a larger discount, or
smaller premium, to NAV than the property market generally. This
under performance could be caused by incorrect sector and
geographic weightings or a loss of income through tenant failure,
both of which could lead to a fall in the value of the underlying
portfolio. This fall in values would be amplified by the Company's
external borrowings. The Board seeks to mitigate these risks by
diversification of its property portfolio through its investment
restrictions and guidelines which are monitored and reported on by
the Investment Manager. The Board determines borrowing policy and
the Investment Manager operates within borrowing restrictions and
guidelines. The Investment Manager provides the Directors with
timely and accurate management information including performance
data, attribution analysis, property level business plans and
financial projections. The Board monitors the implementation and
results of the investment process with the Investment Manager with
a separate meeting devoted to strategy each year.
Economic and property market risk: The performance of the
Company could be affected by economic and property market risk. In
the wider economy this could include inflation or deflation,
economic recessions, movements in interest rates or other external
shocks. The performance of the underlying property portfolio could
also be affected by structural or cyclical factors impacting
particular sectors or regions of the property market. A referendum
was held on 23 June 2016 to decide whether the UK should remain in
the European Union and a vote was given in favour of the UK leaving
the European Union ("Brexit"). The extent of the impact of Brexit
on the Company and the wider economy will depend in part on the
nature of the arrangements that are put in place between the UK and
the European Union following the eventual Brexit and the extent to
which the UK continues to apply laws that are based on European
Union legislation. The Company may be subject to a period of
uncertainty in the period leading up to eventual Brexit including,
inter alia, uncertainty in relation to any potential regulatory or
tax changes. Further, the macroeconomic effect of an eventual
Brexit on the value of investments in the UK real estate sector
and, by extension, the value of the investments in the Company's
portfolio, is unknown.
Valuation risk: Property valuations are inherently subjective
and uncertain. All of the Company's property assets are
independently valued quarterly by Knight Frank LLP, a specialist
property valuation firm who are provided with regular updates on
portfolio activity by the Investment Manager. The Company's two
joint venture assets are independently valued quarterly by BNP
Paribas Real Estate UK. Members of the Audit Committee meet with
the external valuers to discuss the basis of their valuations and
their quality control processes.
Accounting, Legal and Regulatory: The risk that the NAV and
financial statements could be inaccurate. The Investment Manager
has robust processes in place to ensure that accurate accounting
records are maintained and that evidence to support the financial
statements is available to the Board and the auditors. The
Investment Manager operates established property accounting systems
and has procedures in place to ensure that the quarterly NAV and
Gross Asset Value are calculated accurately. The Company has
appointed the Investment Manager as Alternative Investment Fund
Manager (AIFM) in accordance with the Alternative Investment Fund
Managers Directive (AIFMD).
The Administrator monitors legal requirements to ensure that
adequate procedures and reminders are in place to meet the
Company's legal requirements and obligations. The Investment
Manager undertakes full legal due diligence with advisors when
transacting and managing the Company's assets. All contracts
entered into by the Company are reviewed by the Company's legal and
other advisors.
Processes are in place to ensure that the Company complies with
the conditions applicable to property investment companies set out
in the Listing Rules. The Administrator attends all Board meetings
to be aware of all announcements that need to be made and the
Company's advisors are aware of their obligations to advise the
Administrator and, where relevant, the Board of any notifiable
events. Finally, the Board is satisfied that the Investment Manager
and Administrator have adequate procedures in place to ensure
continued compliance with the regulatory requirements of the FCA
and the Guernsey Financial Services Commission.
Financial: Note 19 to the financial statements includes a
description of risks relating to financial risk, market price risk,
credit risk, liquidity risk and interest rate risk. Cashflow is
actively managed to ensure sufficient liquidity is available for
day to day use. As described earlier under Investment Policy, the
Board establishes gearing guidelines, and ensures that the
Investment Manager operates within the defined guidelines.
Hedging: The floating rate debt with RBS has been economically
hedged with an interest rate cap. The main debt facility with
Canada Life has a fixed interest rate.
Alternative Investment Fund Managers Directive ("AIFMD")
In accordance with the AIFMD, the Company is an Alternative
Investment Fund ('AIF') and has appointed the Investment Manager,
which has AIFMD regulatory permissions, as its Alternative
Investment Fund Manager (the 'Manager' or 'AIFM').
In addition, also in accordance with the requirements of the
AIFMD, the Company has appointed Northern Trust (Guernsey) Limited
as depositary.
In complying with this regulatory obligation, the Board takes
this opportunity to reassure shareholders that it continues to act
independently of the Manager and the management fees payable to the
Manager remain unchanged.
Leverage
Leverage is any method by which the Company increases its
exposure to the market by borrowing or through transactions in
other financial instruments such as derivatives.
The "Leverage Ratio" represents the leverage generated through
its debt facility, as calculated in accordance with the detailed
requirements of the AIFMD, divided by the Company's net asset
value. Details on how the amount of leverage is calculated may be
found by referring to the AIFMD. The AIFMD requires that ratios are
calculated in accordance with two methodologies, the "Gross Method"
and the "Commitment Method".
The Manager has set a maximum limit of 1.95 for the Gross Method
and 2.20 for the Commitment Method. As at 31 March 2017, the
Company's Gross ratio and its Commitment ratio were 1.41 and 1.47
respectively.
The Manager may change the maximum limits from time to time. Any
changes will be disclosed to shareholders in accordance with the
AIFMD.
Remuneration
The following disclosures are required under the Alternative
Investment Fund Managers Directive, as transposed in the UK into
chapter Senior Management Arrangements, Systems and Controls
Sourcebook ('SYSC') 19B of the Financial Conduct Authority
Handbook.
Alternative Investment Fund Managers (AIFM) Remuneration
Disclosures as at 31 December 2016
The following disclosures are required under the AIFMD for
Schroder Real Estate Investment Management (SREIM) as the
Investment Manager to the Company, which is an Alternative
Investment Fund (AIF).
These disclosures should be read in conjunction with the
Schroders Plc Remuneration Report on pages 68 to 96 of the 2016
Annual Report & Accounts (available on the Group's website -
www.schroders.com/ir), which provides more information on the
activities of our Remuneration Committee and our remuneration
principles and policies.
SREIM's AIFMD Material Risk Takers (MRTs) are individuals in
roles which can materially affect the risk of SREIM or any
Alternative Investment Funds (AIFs) it manages., which includes the
Company.
The Remuneration Committee of Schroders plc has established a
Remuneration Policy to ensure the requirements of AIFMD are met
proportionately for all AIFMD MRTs. The directors of SREIM are
responsible for the adoption of the Remuneration Policy, for
reviewing it at least annually, for overseeing its implementation
and for ensuring compliance with relevant local legislation and
regulation. You can get details of the latest remuneration policy
at www.schroders.com/remuneration-disclosures.
The remuneration data that follows reflects amounts paid in
respect of performance during 2016. At 31 December 2016, SREIM
managed a total of GBP7.9 billion assets under management, of which
GBP0.7 billion were in AIFs.
-- The total amount of remuneration paid by SREIM to its staff
is nil as SREIM has no employees. AIFMD MRTs of SREIM are employed
and paid by other Schroders Group companies. Employees who serve as
Directors of SREIM receive no additional fees in respect of their
role on the Board of SREIM.
-- The following disclosures relate to AIFMD MRTs of SREIM. Some
of these individuals are employed by and provide services to other
companies in, and clients of, the Schroders group. As a result,
only a portion of remuneration for those individuals is included in
the aggregate remuneration figures that follow, based on an
objective apportionment to reflect the balance of each role. The
aggregate total remuneration paid to the 35 AIFMD MRTs of SREIM in
respect of the financial year ending 31 December 2016, and
attributed to SREIM and the AIFs it manages, was GBP353,199 of
which GBP109,736 was paid to Senior Management and GBP243,464 was
paid to other AIFM Remuneration code Staff.
GOVERNANCE
Board of Directors
Lorraine Baldry (Chairman) - appointed on 13 January 2014
Aged 68, is Chairman of London & Continental Railways,
Inventa Partners Ltd, and Hydroxyl Technologies Limited and is also
an independent Director of Circle Holdings plc and Thames Water
Utilities Limited. She was Chief Executive of Chesterton
International plc and prior to that held various senior positions
at Prudential Corporation, Morgan Stanley and Regus. She is also an
Honorary Member of the Royal Institution of Chartered Surveyors and
a Past President of the British Property Federation.
Graham Basham - appointed on 11 September 2015
Aged 59, is a director of U.S. Bancorp Fund Services (Guernsey),
Limited, Computershare Investor Services (Guernsey) Limited and a
number of Fiduciary companies in Guernsey. He sits on the majority
of the boards of the SREIT subsidiaries, a position he has held for
the last 9 years. He has 40 years' experience in fiduciary and fund
work, 33 of these spent in several offshore locations. He is
currently Deputy Managing Director of the Active Group Ltd, holds a
Trustee Diploma as an Associate of Chartered Institute of Banks and
is a member of the Society of Trust & Estate Practioners and
Institute of Directors.
Stephen Bligh - appointed on 28 April 2015
Aged 60, Stephen was previously with KPMG for 34 years,
specialising in the audit of FTSE 350 companies in property and
construction. He is a fellow of the Institute of Chartered
Accountants in England & Wales and was previously a
non-executive Board Member of the Department of Business,
Innovation & Skills.
Keith Goulborn - appointed on 27 May 2004
Aged 72, was head of Unilever's UK Property Department for 17
years. In this capacity he was responsible for the property
investment activities of the Unilever Pension Fund in the UK and
operational property advice to the UK group and its implementation.
Prior to that, he was a partner in Debenham, Nightingale
Chancellors. He is a Fellow of the Royal Institution of Chartered
Surveyors.
Alastair Hughes - appointed on 26 April 2017
Aged 51, Alastair Hughes has over 25 years of experience in real
estate markets. He was previously the Managing Director of Jones
Lang LaSalle (JLL) in the UK before becoming the CEO for Europe,
Middle East and Africa and then most recently becoming the CEO for
Asia Pacific. Alastair is a Chartered Surveyor and sat on the
Global Executive Board of JLL.
The appointment and replacement of Directors is governed by the
Company's Articles, the Companies Law, related legislation and the
Listing Rules. The Articles may only be amended by a special
resolution of the shareholders.
Report of the Directors
The Directors of the Company and its subsidiaries (together, the
'Group') present their report and the audited financial statements
of the Group for the year ended 31 March 2017. The Company is
incorporated in Guernsey, Channel Islands under The Companies
(Guernsey) Law, 2008 ('Companies Law').
Results and Dividends
The results for the year under review are set out in the
attached financial statements.
During the year the Company has declared and paid the following
interim dividends to its ordinary shareholders in accordance with
the solvency test (contained in the Companies Law):
Dividend For Date Paid Rate
Quarter
----------------- ----------------- ---------------
31 March 2016 31 May 2016 0.62 pence per
share
30 June 2016 31 August 2016 0.62 pence per
share
30 September 2 December 2016 0.62 pence per
2016 share
31 December 2016 28 February 2017 0.62 pence per
share
----------------- ----------------- ---------------
Subject to the solvency test provided for in the Companies Law
being satisfied, all dividends are declared and paid as interim
dividends. The Directors do not therefore recommend a final
dividend. A dividend for the quarter ended 31 March 2017 of 0.62
pence per share ('pps') was declared on 26 April 2017 and paid on
31 May 2017.
The split of dividend between Property Income Distribution (PID)
and Ordinary dividend for the year ending 31 March 2017 is 1.52pps
and 0.96pps respectively.
Share Capital
As at 31 March 2017 and the date of this Report, the Company has
565,664,749 (2016: 565,664,749) Ordinary Shares in issue of which
47,151,340 Ordinary Shares (representing 8.3% of the Company's
total issued share capital) are held in treasury (2016:
47,151,340). The total number of voting rights of the Company is
518,513,409 (2016: 518,513,409) and this figure may be used by
shareholders as the denominator for the calculations by which they
will determine if they are required to notify their interest in, or
a change in their interest in the Company, under the Disclosure
Guidance and Transparency Rules.
Investment Manager
During the year under review, the Board considered the services
provided by the Investment Manager. The Board continues to consider
that the Investment Manager provides the Company with considerable
investment management resource and experience, thereby enhancing
the ability of the Company to achieve its investment objective. The
Board therefore considers that the Investment Manager's continued
appointment under the terms of the current investment management
agreement, further details are set out below, is in the interest of
shareholders.
The Investment Manager receives a fee of 1.1% per annum of the
Company's NAV for providing investment management and accounting
services. The fee is payable monthly in arrears. There is no
performance fee. The investment management agreement can be
terminated by either party on not less than nine months' written
notice or on immediate notice in the event of certain breaches of
its terms or the insolvency of either party.
The Company has appointed the Investment Manager as the AIFM
under the AIFMD. There is no additional fee paid to the Investment
Manager for this service.
Administration
The Board appointed Northern Trust International Fund
Administration Services (Guernsey) Limited as the administrator to
the Company (the 'Administrator'). The Administrator is entitled to
an annual fee equal to GBP120,000.
Northern Trust (Guernsey) Limited has been appointed by the
Board to provide depositary services, as required under the AIFMD
at an annual fee of GBP40,000.
Going Concern and Viability
Going concern
The Directors have examined significant areas of possible
financial risk and have reviewed cash flow forecasts and compliance
with the debt covenants, in particular the loan to value covenant
and interest cover ratio. They have not identified any material
uncertainties which would cast significant doubt on the Group's
ability to continue as a going concern for a period of not less
than twelve months from the date of the approval of the financial
statements. The Directors have satisfied themselves that the Group
has adequate resources to continue in operational existence for the
foreseeable future.
After due consideration, the Board believes it is appropriate to
adopt the going concern basis in preparing the financial
statements.
Viability statement
The 2014 UK Corporate Governance Code requires the Board to make
a Viability Statement which considers the Company's current
position and principal risks and uncertainties together with an
assessment of future prospects.
The Board conducted this review over a five year time horizon
which is selected to match the period over which the Board monitors
and reviews its financial performance and forecasting. The Manager
prepares five year total return forecasts for the UK commercial
real estate market. The Manager uses these forecasts as part of
analysing acquisition opportunities as well as for its annual asset
level business planning process. At the annual Manager Visit the
Board receives an overview of the asset level business plans which
the Manager uses to assess the performance of the underlying
portfolio and therefore make investment decisions such a disposals
and investing capital expenditure. The Company's principal
borrowings are for a weighted duration of nine years and the
average unexpired lease term, assuming all tenants vacate at the
earliest opportunity, is seven years.
The Board's assessment of viability considers the principal
risks and uncertainties faced by the Company, as detailed on pages
20 to 21 of the Strategic Report, which could negatively impact its
ability to deliver the investment objective, strategy, liquidity
and solvency of the Company. This includes considering a cash flow
model prepared by the Manager that analyses the sustainability of
the Company's cash flows, dividend cover, compliance with bank
covenants, REIT compliance and general liquidity requirements for a
five year period. These metrics are subject to a sensitivity
analysis which involves flexing a number of the main assumptions
including macro economic scenarios, delivery of specific asset
management initiatives, rental growth and void/reletting
assumptions. The Board also review assumptions regarding capital
recycling and the Company's ability to refinance or extend
financing facilities.
Based on the assessment, the Board has a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the five year period of its
assessment.
Anti-Bribery Policy
The Board notes the implementation of the Bribery Act 2010
('Bribery Act') in the United Kingdom. The Company continues to be
committed to carrying out its business fairly, honestly and openly.
To this end, it has undertaken a risk assessment of its internal
procedures and the policies of the Company's main service providers
which aim to prevent bribery being committed by Directors and
persons associated with the Company on the Company's behalf and to
ensure compliance with the Bribery Act.
Directors
The Directors of the Company together with their beneficial
interest in the Company's ordinary share capital as at the date of
this report are given below:
Director Number of Ordinary Percentage (%)
Shares
---------------- ------------------- ---------------
Lorraine Baldry - -
Graham Basham - -
Stephen Bligh 25,000 Less than 0.1
Keith Goulborn 34,880 Less than 0.1
Alastair Hughes - -
---------------- ------------------- ---------------
Substantial Shareholdings
As at 31 March 2017 the Directors were aware that the following
shareholders each owned 3% or more of the issued Ordinary Shares of
the Company.
Number of Ordinary Percentage
Shares (%)
------------------------ ------------------- -----------
Investec Wealth and
Investment 96,238,379 18.6
------------------------ ------------------- -----------
Schroder Investment
Management Limited 82,172,461 15.9
------------------------ ------------------- -----------
Alliance Trust Savings
Limited 34,432,982 6.6
------------------------ ------------------- -----------
Premier Fund Managers
Limited 27,138,418 5.2
------------------------ ------------------- -----------
Transact (UK) 22,879,702 4.4
------------------------ ------------------- -----------
BlackRock Inc 22,500,906 4.3
------------------------ ------------------- -----------
Brooks Macdonald Asset
Management 15,791,722 3.1
------------------------ ------------------- -----------
Independent Auditors
KPMG Channel Islands Limited ('KPMG') have expressed their
willingness to continue as auditors to the Company (the 'Auditors')
and resolutions proposing their reappointment and authorising the
Directors to determine their remuneration for the coming year will
be put to shareholders at the annual general meeting ('AGM') of the
Company.
The Audit Committee's evaluation of the Auditors is described in
the Report of the Audit Committee on page 46.
Disclosure of Information to Auditors
The Directors who held office at the date of approval of this
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
Auditors are unaware and each Director has taken all the steps that
he/she ought to have taken as a Director to make himself/herself
aware of any relevant audit information and to establish that the
Company's Auditors are aware of that information.
Status for Taxation
The Director of Income Tax in Guernsey has granted the Company
exemption from Guernsey income tax under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance, 1989 and the income of the Company
may be distributed or accumulated without deduction of Guernsey
Income Tax. Exemption under the above mentioned Ordinance entails
the payment by the Company of an annual fee of GBP1,200.
During the year, the Company's properties have been held in
various subsidiaries and associates, the majority of which are
subject to UK Income Tax. In each instance any tax due is computed
after deduction of debt financing costs and other allowances as
appropriate.
Following 96.5% of shareholders voting in favour of the special
resolution to convert to a Real Estate Investment Trust ('REIT'),
the Company entered the UK REIT regime on 1 May 2015.
Shareholders who are in any doubt concerning the taxation
implications of a REIT should consult their own tax advisers.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Directors'
Report and the financial statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the financial statements in accordance with
International Financial Reporting Standards as issued by the IASB
and applicable law.
The financial statements are required by law to give a true and
fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period.
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Law. They have
general responsibility for taking such steps as are reasonably open
to them to safeguard the assets of the Company and to prevent and
detect fraud and other irregularities.
Responsibility Statement of the Directors in respect of the
Consolidated Annual Report
We confirm to the best of our knowledge:
-- The financial statements, prepared in accordance with
International Financial Reporting Standards as issued by the IASB,
give a true and fair view of the assets, liabilities, financial
position and profit of the Group and the undertakings included in
the consolidation taken as a whole and comply with the Companies
Law;
-- The Strategic Report on pages 5 to 23 and Governance Report
on pages 24 to 45 include a fair review of the development and
performance of the business and the position of the Group and the
undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and
uncertainties it faces: and
-- The Annual Report and Consolidated Financial Statements,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
Responsibility for electronic publication
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website, and for the preparation and dissemination of
financial statements. Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
THIS SECTION IS IMPORTANT AND REQUIRES YOUR IMMEDIATE
ATTENTION.
If you are in any doubt about the contents of this section of
the document or the action you should take, you are recommended to
seek immediately your own personal financial advice from an
appropriately qualified independent adviser authorised pursuant to
the Financial Services and Markets Act 2000.
If you have sold or otherwise transferred all your shares in the
Company, please send this document (including the Notice of AGM)
and the accompanying documents at once to the purchaser,
transferee, or to the stockbroker, bank or other person through
whom the sale or transfer was effected for onward transmission to
the purchaser or transferee. However, such documents should not be
distributed, forwarded or transmitted in or into the United States,
Canada, Australia or Japan or into any other jurisdiction if to do
so would constitute a violation of applicable laws and regulations
in such other jurisdiction.
The Notice of the Annual General Meeting of Shareholders is set
out on pages 90 to 92. The following paragraphs explain the
resolutions to be put to the AGM.
Ordinary Resolutions 1 - 9
Ordinary Resolutions 1-9 are being proposed to approve the
ordinary business of the Company to: (i) consider and approve the
consolidated annual report and the remuneration report of the
Company for the year ended 31 March 2017; (ii) re-elect the
Directors; and (iii) re-appoint the Auditors and to authorise the
Directors to determine the Auditor's remuneration.
Ordinary Resolution 10 Approval of the Company's Dividend
Policy
The Company's dividend policy is to pay a sustainable level of
quarterly dividends to shareholders (in arrears). It is intended
that successful execution of the Company's strategy will enable a
progressive dividend policy.
The Company's objective and strategy, outlined in the Chairman's
Statement and Investment Manager's Report, is to deliver
sustainable net income growth in due course through active
management of the underlying portfolio. Any future decision to
increase the dividend will be determined by factors including
whether it is sustainable over the long term, current and
anticipated future market conditions, rental values and the
potential impact of any future debt refinancing.
As the Company is a REIT, the Board must also ensure that
dividends are paid in accordance with the requirements of the UK
REIT regime (pursuant to part 12 of the UK Corporation Tax Act
2010) in order to maintain the Company's REIT status. Shareholders
should note that the dividend policy is not a profit forecast and
dividends will only be paid to the extent permitted in accordance
with the Companies Law and the UK REIT regime.
The Board acknowledges that the dividend policy is fundamental
to shareholders income requirements as well as the Company's
investment and financial planning. Therefore, in accordance with
the principles of good corporate governance and best practice
relating to the payment of interim dividends without the approval
of a final dividend by a company's shareholders, a resolution to
approve the Company's dividend policy will be proposed annually for
approval.
Special Resolution 1 Authority to repurchase shares
The Company did not buy back any ordinary shares during the year
ended 31 March 2017. The Directors currently have authority to
repurchase up to 14.99% of the Company's ordinary shares and will
seek annual renewal of this authority from shareholders at the AGM.
The Board monitors the level of the ordinary share price compared
to the NAV per ordinary share. Where appropriate on investment
grounds, the Company may from time to time repurchase its ordinary
shares, but the Board recognises that movements in the ordinary
share price, premium or discount, are driven by numerous factors,
including investment performance, gearing and market sentiment.
Accordingly, it focuses its efforts principally on addressing
sources of risk and return as the most effective way of producing
long term value for Shareholders. Any repurchase of ordinary shares
will be made subject to Guernsey law and within any guidelines
established from time to time by the Board. The making and timing
of any repurchases will be at the absolute discretion of the Board,
although the Board will have regard to the effects of any such
repurchase on long-term shareholders in exercising its
discretion.
Purchases of ordinary shares will only be made through the
market for cash at prices below the prevailing NAV of the ordinary
shares (as last calculated) where the Directors believe such
purchases will enhance shareholder value. Such purchases will also
only be made in accordance with the Listing Rules and the
Disclosure Guidance and Transparency Rules which provide that the
maximum price to be paid for each ordinary share must not be more
than the higher of: (i) 5 per cent. above the average mid-market
value of the ordinary shares for the five business days before the
purchase is made; and (ii) that stipulated by the regulatory
technical standards adopted by the European Union pursuant to the
Market Abuse Regulation from time to time. Any ordinary shares
purchased under this authority may be cancelled or held in
treasury.
This authority will expire at the conclusion of the annual
general meeting of the Company to be held in 2018 unless varied,
revoked or renewed prior to such date by ordinary resolution of the
Company.
Special Resolution 2 Authority to disapply pre-emption
rights
The Directors require specific authority from shareholders
before allotting new ordinary shares for cash (or selling shares
out of treasury for cash) without first offering them to existing
shareholders in proportion to their holdings. Special Resolution 2
empowers the Directors to allot new ordinary shares for cash or to
sell ordinary shares held by the Company in treasury for cash,
otherwise than to existing shareholders on a pro-rata basis, up to
such number of ordinary shares as is equal to 10% of the ordinary
shares in issue (including treasury shares) on the date the
resolution is passed. No ordinary shares will be issued without
pre-emption rights for cash (or sold out of treasury for cash) at a
price less than the prevailing net asset value per ordinary share
at the time of issue or sale from treasury.
The Directors do not intend to allot or sell ordinary shares
other than to take advantage of opportunities in the market as they
arise and will only do so if they believe it to be advantageous to
the Company's existing shareholders and when it would not result in
any dilution of the net asset value per ordinary share (owing to
the fact that no ordinary shares will be issued or sold out of
treasury for a price less than the prevailing net asset value per
ordinary share).
This authority will expire on the earlier of the conclusion of
the annual general meeting of the Company to be held in 2018 or on
the expiry of 15 months from the passing of this Special Resolution
2.
The Board considers that the resolutions to be proposed at the
AGM are in the best interests of the Company's shareholders as a
whole. The Board therefore recommends unanimously to shareholders
that they vote in favour of each of the resolutions, as they intend
to do in respect of their own beneficial holdings.
Lorraine Baldry, Chairman
23 May 2017
Stephen Bligh, Director
23 May 2017
Remuneration Report
The Company's Articles currently limit the aggregate fees
payable to the Board of Directors to a total of GBP250,000 per
annum. Subject to this overall limit, it is the Board's policy to
determine the level of Directors' fees having regard to the fees
payable to non-executive directors in the industry generally, the
role that individual Directors fulfil in respect of Board and
Committee responsibilities, and time committed to the Company's
affairs.
Directors receive a base fee of GBP30,000 per annum, and the
Chairman receives GBP50,000 per annum. The Chairman of the Audit
Committee and the Senior Independent Director receive an additional
fee of GBP5,000 respectively. The fees were reviewed by an external
consultant during 2015, which led to the recommendation adopted and
current level of fees taking effect from 1 October 2015.
No Director past or present has any entitlement to pensions, and
the Company has not awarded any share options or long-term
performance incentives to any of them. No element of Directors'
remuneration is performance-related. There were no payments to
former directors for loss of office.
The Board believes that the principles of Section D of the UK
Corporate Governance Code relating to remuneration do not apply to
the Company, except as outlined above, as the Company has no
executive Directors.
No Director has a service contract with the Company, however,
each of the Directors has a letter of appointment with the Company.
The Directors' letters of appointment, which set out the terms of
their appointment, are available for inspection at the Company's
registered office address during normal business hours and will be
available for inspection at the AGM.
All Directors are appointed for an initial term covering the
period from the date of their appointment until the first AGM
thereafter, at which they are required to stand for re-election in
accordance with the Articles. When recommending whether an
individual Director should seek re-election, the Board will take
into account the provisions of the UK Corporate Governance Code,
including the merits of refreshing the Board and its
Committees.
The Board has approved a policy that all Directors will stand
for re-election annually.
Performance
The performance of the Company is described on page 19 in the
Business Model and Strategy Report.
The following amounts were paid by the Company for services as
non-executive Directors:
Director 31 March 2017 31 March 2016
------------------------ -------------- -------------
Lorraine Baldry
(Chairman) 50,000 48,000
Keith Goulborn** 35,000 33,000
John Frederiksen* 30,000 30,500
Stephen Bligh(#) 35,000 28,186
Graham Basham(##) 30,000 16,370
Alison Ozanne* - 5,500
Harry Dick-Cleland*(#) - 18,795
David Warr* - 16,538
Alastair Hughes* - -
------------------------ -------------- -------------
Total 180,000 196,889
------------------------- -------------- -------------
(*) Member of the Transaction Committee. Following the UK REIT
conversion on 1 May 2015, the Transaction Committee was dissolved.
Alison Ozanne retired on 28 April 2015. John Frederiksen retired on
25 April 2017. Alastair Hughes was appointed on 26 April 2017.
**Senior Independent Director.
(#) Chairman of the Audit Committee (Harry Dick-Cleland retired
11 September 2015 and Stephen Bligh was appointed).
(##) Graham Basham was a director on a majority of the
subsidiary companies, for which an additional GBP21,000 was paid to
his employer, Active Group, during the year for his service. Mr
Basham owns 15% of Active Group.
Lorraine Baldry, Chairman
23 May 2017
Stephen Bligh, Director
23 May 2017
Corporate Governance
The Directors are committed to maintaining high standards of
corporate governance. Insofar as the Directors believe it to be
appropriate and relevant to the Company, it is their intention that
the Company should comply with best practice standards for the
business carried on by the Company.
The Guernsey Financial Services Commission (the 'GFSC') states
in the Finance Sector Code of Corporate Governance (the 'Code')
that companies which report against the UK Corporate Governance
Code or the Association of Investment Companies Code of Corporate
Governance (the 'AIC Code') are deemed to meet the Code, and need
take no further action.
The Board has considered the principles and recommendations of
the AIC Code by reference to the AIC Corporate Governance Guide for
investment companies (the 'AIC Guide'). The AIC Code, as explained
by the AIC Guide, addresses all the principles set out in the UK
Corporate Governance Code, as well as setting out additional
principles and recommendations on issues that are of specific
relevance.
The Board considers that reporting against the principles and
recommendations of the AIC Code, and by reference to the AIC Guide
(which incorporates the UK Corporate Governance Code), will provide
better information to shareholders. Copies of the AIC Code and the
AIC Guide can be found at www.theaic.co.uk
It is the Board's intention to continue to comply with the AIC
Code.
Statement of Compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the UK Corporate Governance
Code, except as set out below.
The UK Corporate Governance Code includes provisions relating
to:
-- the role of the chief executive;
-- executive directors' remuneration; and
-- internal audit function.
For the reasons set out above the Board considers that these
provisions are not relevant to the Company, being an externally
managed investment company. The provision in relation to the
internal audit function is referred to in the Audit Committee
report. The Company has therefore not reported further in respect
of these provisions.
Role of the Board
The Board has determined that its role is to consider and
determine the following principal matters which it considers are of
strategic importance to the Company:
-- The overall objectives of the Company as described under the
paragraph above headed 'Investment Policy and Strategy' and the
strategy for fulfilling those objectives within an appropriate risk
framework in light of market conditions prevailing from time to
time.
-- The capital structure of the Company including consideration
of an appropriate policy for the use of borrowings both for the
Company and in any joint ventures in which the Company may invest
from time to time.
-- The appointment of the Investment Manager, Administrator and
other appropriately skilled service providers and to monitor their
effectiveness through regular reports and meetings; and
-- The key elements of the Company's performance including NAV
growth and the payment of dividends.
Board Decisions
The Board makes decisions on, among other things, the principal
matters set out under the paragraph above headed 'Role of the
Board'. Issues associated with implementing the Company's strategy
are generally considered by the Board to be non-strategic in nature
and are delegated either to the Investment Manager or the
Administrator, unless the Board considers there will be
implementation matters significant enough to be of strategic
importance to the Company and should be reserved to the Board.
Generally these are defined as:
-- large property decisions affecting 10% or more of the Company's assets;
-- large property decisions affecting 5% or more of the Company's rental income; and
-- decisions affecting the Company's financial borrowings.
Board performance evaluation
As in prior years, the Board has undertaken a review of its
performance. The review concluded that the Board was operating
effectively and that the Directors had the breadth of skills
required to fulfil their roles.
Non-Executive Directors, rotation of Directors and Directors'
tenure
The UK Corporate Governance Code recommends that Directors
should be appointed for a specified period. The Board has resolved
in this instance that Directors' appointments need not comply with
this requirement as all Directors are non-executive and their
respective appointments can be terminated at any time without
penalty. The Board has approved a policy that all Directors will
stand for re-election annually.
The Board considers that independence is not compromised by
length of tenure and that it has the appropriate balance of skills,
experience and length of service. Independent non-executive
Directors who have served for nine years will only be asked to
stand for re-election if the Board remains satisfied both with the
Director's performance and that nine years' continuous service does
not compromise the Director's continuing independence.
The Board has determined that all the Directors are independent
of the Investment Manager. Keith Goulborn is the Senior Independent
Director.
Board composition, changes and diversity
The Board currently consists of five non-executive Directors.
The Chairman is Lorraine Baldry. The biography of each of these
Directors is set out on page 24 of the report. The Board considers
each of the Directors to be independent notwithstanding that Keith
Goulborn has served for 13 years. It is expected that Mr Goulborn
will retire from the Board after a period of handover to Alastair
Hughes. The independence of each Director is considered on a
continuing basis.
The Board is satisfied that it is of sufficient size with an
appropriate balance of skills and experience, independence and
knowledge of both the Company and the wider investment company
sector, to enable it to discharge its respective duties and
responsibilities effectively and that no individual or group of
individuals is, or has been, in a position to dominate decision
making. When a vacancy arises the board selects the best candidate
taking into account the skills and experience required, while
taking into consideration board diversity as part of a good
corporate governance culture.
Board Committees
The Board has delegated certain of its responsibilities to its
Audit and Nomination Committees. Each of these committees has
formal terms of reference established by the Board, which are
available on the Company's website.
Audit Committee
Details of the Audit Committee are set out in the Report of the
Audit Committee.
Nomination Committee
The role of the Nomination Committee, chaired by Keith Goulborn,
is to consider and make recommendations to the Board on its
composition so as to maintain an appropriate balance of skills,
experience and diversity, including gender, and to ensure
progressive refreshing of the Board. On individual appointments,
the Nomination Committee leads the process and makes
recommendations to the Board.
Before the appointment of a new director, the Nomination
Committee prepares a description of the role and capabilities
required for a particular appointment. While the Nomination
Committee is dedicated to selecting the best person for the role,
it aims to promote diversification and the Board recognises the
importance of diversity. The Board agrees that its members should
possess a range of experience, knowledge, professional skills and
personal qualities as well as the independence necessary to provide
effective oversight of the affairs of the Company.
The Nomination Committee considered the appointment of a new
non-executive director during the year under review. The Nomination
Committee was able to produce a very good shortlist of candidates
which obviated the need to advertise.
To discharge its duties, the members of the Nomination Committee
met on one occasion to consider the composition and balance of the
Board, Board succession planning and the selection of suitable
candidates as Directors, subsequent to which the appointment of Mr
Alastair Hughes was recommended to the Board for approval.
Remuneration Committee
As all the Directors are non-executives, the Board has resolved
that it is not necessary to have a Remuneration Committee.
Board Meetings and Attendance
The Board meets at least four times each year. Additional
meetings are also arranged as required and regular contact between
Directors, the Investment Manager and the Administrator is
maintained throughout the year. Representatives of the Investment
Manager and Company Secretary attend each Board meeting and other
advisers also attend when requested to do so by the Board. At least
once a year the Board carries out a site visit to properties owned
by the Company.
Attendance records for the four quarterly Board meetings and two
six-monthly Audit Committee meetings during the year under review
are set out in the table below.
Board Audit Committee
---------------------------- ------ ----------------
Lorraine Baldry (Chairman) 4/4 2/2
---------------------------- ------ ----------------
Keith Goulborn 4/4 2/2
---------------------------- ------ ----------------
John Frederiksen 3/4 1/2
---------------------------- ------ ----------------
Graham Basham 4/4 2/2
---------------------------- ------ ----------------
Stephen Bligh 4/4 2/2
---------------------------- ------ ----------------
No. of meetings during
the year 4 2
---------------------------- ------ ----------------
In addition to its regular quarterly meetings, the Board met on
five other occasions during the year, although it was not possible
for all Directors to attend all such additional meetings.
Information Flows
All Directors receive, in a timely manner, relevant management,
regulatory and financial information and are provided, on a regular
basis, with key information on the Company's policies, regulatory
requirements and internal controls. The Board receives and
considers reports regularly from the Investment Manager and other
key advisers and ad hoc reports and information are supplied to the
Board as required.
Data protection and security
The Board requires its Investment Manager and Administrator to
have robust information security and data protection environment in
place. This is reviewed with the Investment Manager at the annual
Manager visit day. All Board communication of a confidential nature
is managed via a secure Board application.
Directors' and Officers' Liability Insurance
During the year, the Company has maintained insurance cover for
its Directors under a liability insurance policy.
Relations with Shareholders
The Board believes that the maintenance of good relations with
both institutional and retail shareholders is important for the
long-term prospects of the Company. The Board receives feedback on
the views of shareholders from its corporate broker, the Investment
Manager and from the Chairman. Through this process the Board seeks
to monitor the views of shareholders and to ensure an effective
communication programme.
The Board believes that the Annual General Meeting provides an
appropriate forum for investors to communicate with the Board, and
encourages participation. The Notice of Annual General Meeting on
page 90 sets out the business of the Annual General Meeting to be
held on 8 September 2017.
Sustainability Report
The Board and the Investment Manager believe that corporate
social responsibility is key to long term future business
success.
The Investment Manager states in its Responsible Real Estate
Investment Report:
'The changes in markets as a consequence of environmental and
social issues are simply investment risks that Schroders must
understand to protect our clients' assets from depreciation.
Offering occupiers resource-efficient and flexible space is
critical to ensure our investments are fit for purpose and sustain
their value over the long term. As a landlord, we have the
opportunity to help reduce running costs for our occupiers,
increase employee productivity and well-being, and contribute to
the prosperity of a location through building design and
management. Ignoring these issues when considering asset management
and investments would risk the erosion of income and value as well
as missing opportunities to enhance investment returns.
Through its construction, use and demolition, the built
environment accounts for more than one-third of global energy use
and is the single largest source of greenhouse gas emissions in
many countries.
The industry's potential to cost-efficiently reduce emissions
and the consumption of depleting resources, combined with the
political imperative to tackle issues such as climate change, means
the property sector will remain a prime target for policy action.
This presents new challenges and opportunities for the real estate
industry with profound implications for both owners and
occupiers.
A good investment strategy must incorporate environmental and
social issues alongside traditional economic considerations. At
Schroders we believe a complete approach should be rewarded by
improved investment decisions and performance.'
Environmental Management System
This year Schroder Real Estate, led by its Head of
Sustainability, has continued to work with sustainability and
energy management consultancy Evora Global to develop its
Environmental Management System ("EMS"). The EMS is aligned with
the internationally recognised standard ISO 14001. The EMS provides
the framework for how sustainability principles (environmental and
social) are managed throughout all stages of its investment process
including acquisition due diligence, asset management, property
management provided by third parties, refurbishments and
developments. Schroder Real Estate reviews its Sustainability
Policy annually which is approved by the Investment Committee. Key
aspects of the Policy and its objectives are set out below.
Property Manager Sustainability Requirements
Property managers play an integral role in supporting the
sustainability program. Schroder Real Estate has established a set
of Sustainability Requirements for Property Managers to adhere to
in the course of delivering their property management services.
This includes a set of key performance indicators to help improve
the property managers sustainability related services to the
Company and which are assessed on a six-monthly and annual basis at
December and June respectively. Schroder Real Estate is pleased to
report that MJ Mapp, its principal property manager, has met the
target set for the six month reporting period to December 2016. The
first annual assessment will be for the year to June 2017.
Energy
Energy is an important element of the landlord's
responsibilities for buildings where the landlord has operational
control. Schroder Real Estate has continued to develop the
monitoring of the Company's energy usage and efficiency as well as
water and waste with analysis and reporting on a quarterly and
annual basis.
In the first quarter of 2016 Schroder Real Estate introduced an
energy reduction target of 6% across its UK managed assets over a
two year period to March 2018 from a baseline of 2015/16 reporting
years. Alongside this Schroder Real Estate continues to work with
Evora Global and MJ Mapp to achieve further reductions on a cost
effective basis. As part of this all managed assets within the
Company have been reviewed and sustainability objectives identified
for 2016/2017. Improving energy efficiency and reducing energy
consumption will benefit tenants' occupational costs and should
help tenant retention and attracting new tenants. Schroder Real
Estate can report for the 2016 calendar year that the managed
assets within the Company saw an energy reduction for landlord
procured energy of 1% on a like for like basis. Progress against
this target will be reported on an annual basis.
Energy Performance Certificates ("EPC") for the portfolio are
regularly reviewed in light of the 2015 Minimum Energy Efficiency
Standards (England and Wales) legislation. Schroder Real Estate is
actively managing the potential risk of this legislation to the
portfolio. This legislation brings in a minimum EPC standard of "E"
for new leases and renewals for non domestic buildings from 1 April
2018; this minimum standard applies to all leases from 1 April
2023.
The EPC profile for the portfolio is set out within the EPRA
Sustainability Reporting Performance Measures.
Refurbishments and green building certifications
Schroder Real Estate seeks to deliver developments and
refurbishments to sustainable standards and deliver good
performance against building certifications, including EPCs and
BREEAM (the Building Research Establishment Environmental
Assessment Methodology an environmental assessment method and
rating system for buildings). Standards required are set for each
project in context for the asset and Schroder Real Estate's guiding
principles for projects of minimum D rated EPCs and BREEAM Very
Good.
Water
Schroder Real Estate monitors water consumption where the
landlord has supply responsibilities and encourages asset-level
improvements. Where the Company had supply responsibilities, a 10%
reduction in like for like water consumption was achieved between
the calendar years 2015 and 2016.
Waste
Waste management and disposal activities are responsible for
considerable negative environmental and societal impact. As a
result, waste should be minimised and disposal should be as
sustainable as possible. To this end, Schroder Real Estate has set
an objective to send zero waste to landfill and to achieve optimal
recycling. During 2016 the Company had over 99% diversion from
landfill.
EPRA Sustainability Reporting Performance Measures
This year the Company Report includes a Sustainability Report
setting out environmental performance indicator data for the
portfolio. The report is aligned with EPRA Best Practices
Recommendations on Sustainability Reporting 2014. The report is
included in the Company EPRA Performance Measures report.
Global Real Estate Sustainability Benchmark
The Company participated in the annual Global Real Estate
Sustainability Benchmark ("GRESB") survey for the Company for the
first time in 2016. GRESB is the dominant global standard for
assessing Environmental Social and Governance performance for real
estate funds and companies.
Schroder Real Estate intends to participate in the survey for
the Company in 2017 with the objective of achieving a Green Star
rating: this rating is achieved where scores for the two dimensions
of Management and Policy and Implementation and Measurement are at
least 50 out of 100 points.
Carbon Reduction Commitment
The Company's portfolio did not require registration for Phase
II of the CRC Scheme and the purchase of allowances. It was
announced in the March 2016 Budget that the CRC Scheme will not
continue beyond Phase II.
Energy Savings Opportunity Scheme
The Company did not qualify for participation in the Energy
Savings Opportunity Scheme.
Greenhouse Gas Emissions
The Company is not incorporated in the UK and therefore does not
fall within the requirements for mandatory reporting of greenhouse
gas emissions for UK quoted companies which came into effect from 1
October 2013. However greenhouse gas emissions are reviewed
annually and the Company includes a report on a voluntary basis (as
recommended by DEFRA guidance) within this financial year report.
The Company's report on greenhouse gas emissions can be found in
the EPRA Sustainability Reporting Performance Measures report:
greenhouse gas emissions reporting is a requirement for EPRA Best
Practices Recommendations on Sustainability Reporting 2014.
The Board and its advisors will continue to monitor requirements
and guidance in relation to managing and reporting environmental
matters and developments in legislation.
Health, wellbeing and productivity
The real estate industry is beginning to gain a new perspective
on the importance of the built environment on health, wellbeing and
productivity. A number of schemes have emerged which seek to
identify the impacts of spaces and places on people and provide new
ways of certifying buildings. Case studies demonstrate the benefit
of reflecting wellbeing in good design. Schroder Real Estate is
working to embed this aspect into its investment process.
Stakeholder Engagement and Community
Schroder Real Estate seeks active engagement with tenants to
ensure a good occupational experience to help retain and attract
tenants. As the day to day relationship is with the property
manager, the Property Manager Sustainability Requirements include a
key performance indicator on tenant engagement.
Schroder Real Estate believes in the importance of understanding
a building's relationship with the community and its contribution
to the wellbeing of society. Positively impacting on local
communities helps create successful places that foster community
relationships, contribute to local prosperity, attract building
users and ultimately, lead to better, more resilient investments.
Schroder Real Estate looks to understand and develop the community
relationship to ensure investments provide sustainable social
solutions for the long term.
Industry Participation
Schroder Real Estate is a member of a number of industry bodies
including the European Public Real Estate Association (EPRA), INREV
(European Association for Investors in Non-Listed Real Estate
Vehicles), British Council for Offices and the British Property
Federation. It was a founding member of the UK Green Building
Council in 2007 and in 2017 became a member of the Better Buildings
Partnership and an Investor Member of GRESB.
Employees
The Company is an externally managed real estate investment
trust and has no direct employees. Schroder Real Estate is part of
Schroders plc which has responsibility for the employees that
support the Company. Schroders believes diversity of thought and an
inclusive workplace are key to creating a positive environment for
their people. Schroder Real Estate's real estate team have a
sustainability objective within their annual objectives.
Further information on Schroders' principles in relation to
people including diversity, gender pay gap, values, employee
satisfaction survey, wellbeing and retention can be found at
http://www.schroders.com/annualreport2016/strategy-business-review/our-people.html
Corporate Responsibility
Schroders' commitment to corporate responsibility is to ensure
that its commitment to act responsibly, support clients, deliver
value to shareholders and make a wider contribution to society is
embedded across its business in all that it does.
Full information on Schroders Corporate Responsibility approach
including its economic contribution, environmental impacts and
community involvement, can be found at
http://www.schroders.com/annualreport2016/strategy-business-review/our-impact/corporate-responsibility.html
Slavery and Human Trafficking Statement
The Company is not required to produce a statement on slavery
and human trafficking pursuant to the Modern Slavery Act 2015 as it
does not satisfy all the relevant triggers under that Act that
required such a statement.
Schroder Real Estate the Investment Manager to the Company is
part of Schroders plc and whose statement on Slavery and Human
Trafficking has been published in accordance with the Modern
Slavery Act 2015 (the 'Act'). It sets out the steps that Schroders
plc and other relevant group companies ('Schroders' or the 'Group')
have taken during 2016 and will be taking in 2017 to prevent
slavery and human trafficking from taking place in its supply
chains or any part of its business. Schroder Real Estate is part of
the Schroders Group.
Schroders' statement can be found at
www.schroders.com/slavery
Report of the Audit Committee
Composition
The Audit Committee is chaired by Stephen Bligh with Lorraine
Baldry, Keith Goulborn, Graham Basham and Alastair Hughes (who
replaced John Frederiksen) as members. The Board considers that
Stephen Bligh's professional experience makes him suitably
qualified to chair the Audit Committee.
Responsibilities
The Audit Committee ensures that the Company maintains the
highest standards of integrity in financial reporting and internal
control. This includes responsibility for reviewing the half-year
and annual financial statements before their submission to the
Board. In addition, the Audit Committee is specifically charged
under its terms of reference to advise the Board, inter alia, on
the terms and scope of the appointment of the Auditors, including
their remuneration, independence, objectivity and reviewing with
the Auditors the results and effectiveness of the audit and the
interim review.
Work of the Audit Committee
The Audit Committee meets no less than twice a year and, if
required, meetings are also attended by the Investment Manager, the
Administrator and the Auditor. During the year under review, the
Audit Committee met on two occasions to consider:
-- The contents of the interim and annual financial statements
and to consider whether, taken as a whole, they were fair, balanced
and understandable and provided the information necessary for
shareholders to assess the Company's performance, business model
and strategy;
-- The effectiveness of the Company's system of internal control;
-- The external Auditor's terms of appointment, audit plan, half
year review findings and year-end report;
-- The management representation letter to the Auditors;
-- The effectiveness of the audit process;
-- The independence, effectiveness and objectivity of the external Auditor;
-- The risk assessment of the Company; and
-- Compliance with the UK REIT regime.
Significant matters considered by the Audit Committee in
relation to the financial statements
Matter Action
------------------------------- ---------------------------------
Property Valuation
Property valuation is The Audit Committee reviewed
central to the business the outcomes of the valuation
and is a significant process throughout the
area of judgement. Although year and discussed the
valued by an independent detail of each quarterly
firm of valuers, Knight valuation with the Investment
Frank LLP and BNP Paribas Manager at the Board
Real Estate UK for the meetings.
joint ventures, the valuation
is inherently subjective. The chair of the Audit
Committee together with
Errors in valuation could Keith Goulborn, met with
have a material impact Knight Frank LLP and
on the Company's net BNP Paribas Real Estate
asset value. UK outside the formal
meeting to discuss the
process, assumptions,
independence and communication
with the Investment Manager.
The valuers also gave
a presentation on their
valuations at the year
end to the full Audit
Committee.
Furthermore, as this
is the main area of audit
focus, the Auditors contact
the valuers directly
and independently of
the Investment Manager.
The Audit Committee receives
detailed verbal and written
reports from KPMG on
this matter as part of
their interim and year
end reporting to the
Audit Committee.
On the basis of the above,
the Audit Committee concluded
that the valuations were
suitable for
inclusion in the financial
statements.
------------------------------- ---------------------------------
Internal Control
The UK Corporate Governance Code requires the Board to conduct,
at least annually, a review of the adequacy of the Company's
systems of internal control, and to report to shareholders that it
has done so. The Audit Committee, on behalf of the Board, regularly
reviews a detailed 'Risk Map' identifying significant strategic,
investment-related, operational and service provider related risks
and ensures that risk management and all aspects of internal
control are reviewed at least annually.
The Company's system of internal controls is substantially
reliant on the Investment Manager's and the Administrator's own
internal controls and internal audit processes due to the
relationships in place.
Although the Board believes that it has a robust framework of
internal controls in place, this can provide only reasonable and
not absolute assurance against material financial misstatement or
loss and is designed to manage, not eliminate, risk. No significant
issues were identified from the internal controls review.
Internal Audit
The Audit Committee considered the need for an internal audit
function and concluded that this function is provided by Schroder's
Group Internal Audit reviews, which cover the functions provided by
the Investment Manager, Schroder Real Estate Investment Management
Limited.
In addition, the Investment Manager prepares an ISAE 3402 / AAF
01/06 Internal Controls Report which includes the Company within
the scope of the review. This report is reviewed by
PricewaterhouseCoopers LLP (PWC) which issued an unqualified
opinion for the year ended December 2016. The Audit Committee has
considered both the Investment Manager's internal controls report
and the review by PWC.
External Auditor remuneration, independence and
effectiveness
Annually, the Audit Committee considers the remuneration and
independence of the external auditor. The Committee recommends the
remuneration of the external auditor to the Board and keeps under
review the ratio of audit to non-audit fees to ensure that the
independence and objectivity of the external auditor are
safeguarded.
Effectiveness of the independent audit process
The Audit Committee evaluated the effectiveness of the
independent audit firm and process prior to making a recommendation
on its re-appointment at the forthcoming Annual General Meeting. As
part of the evaluation, the Committee considered feedback from the
Investment Manager on the audit process and the half year and year
end report from the Auditor, which details the auditor's compliance
with regulatory requirements, on safeguards that have been
established and their own internal quality control procedures. The
Audit Committee had discussions with the audit partner on audit
planning, accounting policies and audit findings, and met the audit
partner both with and without representatives of the Investment
Manager present. The Chairman of the Audit Committee also had
informal discussions with the audit partner during the course of
the year. The Committee is satisfied with the effectiveness of the
audit.
The effective performance by the Investment Manager's finance
team and by the Auditors has enabled the Company to bring forward
the announcement of its audited results by nearly two months over
the past two years.
The Audit Quality Review Team of the Financial Reporting Council
performed a review of the audit of the Company for the year ended
31 March 2015 and in the opinion of the Audit Committee the outcome
was satisfactory, which provides further comfort on the
effectiveness of KPMG.
The current audit partner has now come to the end of her five
year term and her successor has been considered and approved by the
Audit Committee.
Review of auditor appointment
KPMG has been the Group's Auditor since inception in 2004. In
order to benchmark KPMG's service quality, effectiveness and value
for money, together with adopting the UK Corporate Governance code
on audit tendering and rotation, the Audit Committee conducted a
formal tender process during May/June 2014. Three firms, including
KPMG, were asked to participate in this process. Following this, a
recommendation was made to the Audit Committee to retain KPMG as
the Group's auditor.
The Company aims to review its external auditors in accordance
with the EU Directive and Regulation on Audit Reform although this
does not apply to a non-EU Company. The aim is for the next audit
tender to take place before 2024 when a change in auditor would be
required under current rules.
Non-audit services
In order to help safeguard the independence and objectivity of
the auditor, the Audit Committee maintains a policy on the
engagement of the external auditor to provide non-audit services.
The Audit Committee's policy for the use of the external auditor
for non-audit services recognises that there are certain
circumstances where, due to KPMG's expertise and knowledge of the
Company, it will often be in the best position to perform non audit
services. Under the policy, the use of the external auditor for
non-audit services is subject to pre-clearance by the Audit
Committee. Clearance will not be granted if it is believed it would
impair the external auditor's independence or where provision of
such services by the Company's auditor is prohibited. Prior to
undertaking any non-audit service, KPMG also completes its own
independence confirmation processes which are approved by the Audit
Partner.
During the year, the non-audit services fees paid to KPMG was
GBP13,000. (2016: GBP96,000 in relation to the interim review and
transaction due diligence performed on a property acquisition).
KPMG
Independent
auditor's report
to the members of Schroders Real
Estate Investment Trust Limited
Opinions and conclusions
arising from our audit
1. Our opinion on the Overview
Group financial statements ----------------- ---------------------
is unmodified Materiality: GBP3.7m (2016:
We have audited the Group financial GBP3.7m)
Group financial statements statements 0.8% (2016:
("the financial statements") as a whole 0.8%) of Gross
of Schroders Real Estate Assets
Investment Trust Limited ----------------- ---------------------
for the year ended 31 Coverage 100% (2016:
March 2017 which comprise 100%) of Gross
the consolidated statement Assets
of comprehensive income, ----------------- ---------------------
the consolidated statement Risk of material misstatement
of financial position, vs 2016
the consolidated statement ----------------------------------------
of changes in equity, Recurring Valuation of
the consolidated statement risks investment property
of cash flows and the held directly
related notes. In our and indirectly
opinion the financial ----------------- ---------------------
statements:
* give a true and fair view of the state of the Group's
affairs as at 31 March 2017 and of its profit for the
year then ended;
* have been properly prepared in accordance with
International Financial Reporting Standards as issued
by the International Accounting Standards Board; and
* comply with the Companies (Guernsey) Law, 2008.
2. Our assessment of risks of material misstatement
The risks of material misstatement detailed in this section of
this report are those risks that we have deemed, in our
professional judgment, to have had the greatest effect on: the
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team. Our audit
procedures relating to these risks were designed in the context of
our audit of the financial statements as a whole. Our opinion on
the financial statements is not modified with respect to any of
these risks, and we do not express an opinion on these individual
risks.
In arriving at our audit opinion above on the financial
statements, the risk of material misstatement that had the greatest
effect on our audit, was as follows:
The risk Our response
------------------ ------------------------ --------------------------------
Valuation The Group's direct Procedures to address
of investment property portfolio this audit risk included
property accounted for those listed below:
held directly 74.8% of the Controls evaluation
by the Group Group's total We tested the design,
and indirectly assets as at implementation and
through 31 March 2017 operating effectiveness
investment and the investment of the relevant controls
in joint in joint ventures over the valuation
ventures accounted for including the information
Investment a further 15.7% contained in the lease
property of total assets. database for investment
GBP366 million; The fair value properties.
2016: GBP371 of the direct Evaluating property
million and indirect valuation specialist
Investment investment properties We assessed the competence,
in joint at 31 March 2017 capabilities and objectivity
ventures was assessed of the valuers for
GBP77 million; by the Board both the directly and
2016: GBP78 of Directors indirectly held properties.
million based on independent We also assessed the
Refer to valuations prepared independence of the
page 46 by the Group's valuers by considering
(Audit Committee and joint ventures' the scope of their
Report), external property work and the terms
page 58 valuers. of their engagement.
(accounting As highlighted Evaluating inputs used
policy) in the Report in the valuations
and page of the Audit We critically assessed
67 (financial Committee the the valuations prepared
disclosures). valuation of by the external property
the combined valuers by evaluating
property portfolio the appropriateness
is a significant of the valuation methodologies
area of judgement and assumptions used,
and requires including undertaking
subjective assumptions discussions on key
to be made. findings with the external
Determination valuers and challenging
of the fair value the assumptions used
of the direct based on market information,
and indirect with the assistance
investment properties of our own real estate
is considered specialist.
a significant We compared a sample
audit risk due of key inputs to the
to the magnitude valuation such as yields,
of the balance occupancy and tenancy
and the subjective contracts for consistency
nature of the with other audit findings
valuation. and observable market
evidence.
Consideration of accounting
policies
We also considered
the Group's investment
property valuation
policies and their
application as described
in the notes to the
financial statements
for compliance with
International Financial
Reporting Standards
as issued by the IASB
in addition to the
adequacy of disclosures
in Notes 1, 11 and
12 in relation to the
fair value of the investment
properties and investment
in joint ventures.
------------------ ------------------------ --------------------------------
3. Our application of 5. We have nothing to
materiality and an overview report in respect of the
of the scope of our matters on which we are
audit required to report by
Materiality for the exception
financial statements Under International Standards
as a whole was set at on Auditing ('ISAs') (UK
GBP3.7 million determined and Ireland) we are required
with reference to a to report to you if, based
benchmark of Group Gross on the knowledge we acquired
Assets of GBP490 million, during our audit, we have
of which it represents identified other information
approximately 0.8% (2016: in the annual report that
approximately 0.8%). contains a material inconsistency
with either that knowledge
We reported to the audit or the financial statements,
committee any corrected a material misstatement
or uncorrected identified of fact, or that is otherwise
misstatements exceeding misleading.
GBP185,000, in addition
to other identified In particular, we are
misstatements that warranted required to report to
reporting on qualitative you if:
grounds.
* we have identified material inconsistencies between
Our assessment of materiality the knowledge we acquired during our audit and the
has informed our identification directors' statement that they consider that the
of significant risks annual report and financial statements taken as a
of material misstatement whole is fair, balanced and understandable and
and the associated audit provides the information necessary for shareholders
procedures performed to assess the Group's position and performance,
in those areas as detailed business model and strategy; or
above.
The Group team performed * the Report of the Audit Committee does not
the audit of the Group appropriately address matters communicated by us to
as if it was a single the audit committee.
operating entity based
on the aggregated set
of financial information Under the Companies (Guernsey)
for the Group. The audit Law, 2008, we are required
was performed using to report to you if, in
the materiality level our opinion:
set out above and covered
100% of total Group * The Company has not kept proper accounting records;
rental income, Group or
profit before taxation,
total Group assets and
total Group liabilities. * The financial statements are not in agreement with
the accounting records; or
Whilst the audit process
is designed to provide
reasonable assurance * We have not received all the information and
of identifying material explanations, which to the best of our knowledge an
misstatements or omissions d
it is not guaranteed beliefs are necessary for the purposes of our audit
to do so. Rather we .
plan the audit to determine
the extent of testing
needed to reduce to
an appropriately low Under the Listing Rules
level the probability we are required to review
that the aggregate of the part of the Corporate
uncorrected and undetected Governance Statement on
misstatements does not page 36 relating to the
exceed materiality for company's compliance with
the financial statements the eleven provisions
as a whole. This testing of the 2014 UK Corporate
requires us to conduct Governance Code specified
significant depth of for our review.
work on a broad range
of assets, liabilities, We have nothing to report
income and expense as in respect of the above
well as devoting significant responsibilities.
time of the most experienced
members of the audit Scope and responsibilities
team, in particular 6. The purpose of this
the Responsible Individual, report and restrictions
to subjective areas on its use by persons
of the accounting and other than the Company's
reporting process. members as a body
This report is made solely
4. We have nothing to to the Company's members,
report on the disclosures as a body, in accordance
of principal risks with section 262 of the
Based on the knowledge Companies (Guernsey) Law,
we acquired during our 2008 and, in respect of
audit, we have nothing any further matters on
material to add or draw which we have agreed to
attention to in relation report, on terms we have
to: agreed with the
* the directors' viability statement on pages 26 and
27, concerning the principal risks, their management,
and, based on that, the directors' assessment and
expectations of the Group's continuing in operation
over the 5 years to 31 March 2022; or
* the disclosures in note 1 of the financial statements
concerning the use of the going concern basis of
accounting.
Company. Our audit work
has been undertaken
so that we might state
to the Company's members
those matters we are
required to state to
them in an auditor's
report and for no other
purpose. To the fullest
extent permitted by
law, we do not accept
or assume responsibility
to anyone other than
the Company and the
Company's members, as
a body, for our audit
work, for this report,
or for the opinions
we have formed.
7. Respective responsibilities
of directors and auditor
As explained more fully
in the Directors' Responsibilities
Statement set out on
page 29, the directors
are responsible for
the preparation of the
financial statements
and for being satisfied
that they give a true
and fair view. Our responsibility
is to audit, and express
an opinion on, the financial
statements in accordance
with applicable law
and ISAs (UK and Ireland).
Those standards require
us to comply with the
UK Ethical Standards
for Auditors.
A description of the
scope of an audit of
financial statements
is provided on the Financial
Reporting Council's
website at www.frc.org.uk/auditscopeukprivate.
Deborah J Smith
for and on behalf of
KPMG Channel Islands
Limited
Chartered Accountants
and Recognised Auditors
Glategny Court, Glategny
Esplanade, St Peter
Port, Guernsey, GY1
1WR
FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
31/03/2017 31/03/2016
Notes GBP000 GBP000
Rental income 24,079 24,740
Other income 4 1,283 383
Property operating expenses 5 (2,561) (2,952)
Net rental and related income,
excluding joint ventures 22,801 22,171
----------------------------------- ------ ----------- -----------
Share of net rental income
in joint ventures 3,273 3,257
Net rental and related income,
including joint ventures 26,074 25,428
----------------------------------- ------ ----------- -----------
Profit on disposal of investment
property 11 3,709 1,295
Net valuation gain on investment
property 11 6,987 17,375
Expenses
Investment management fee 3 (3,391) (3,227)
Valuers' and other professional
fees (1,256) (1,247)
Administrators and accounting
fee 3 (120) (120)
Auditor's remuneration 6 (127) (119)
Directors' fees 7 (180) (197)
Other expenses 7 (356) (594)
Total expenses (5,430) (5,504)
----------------------------------- ------ ----------- -----------
Net operating profit before
net finance costs 28,067 35,337
Finance costs payable (6,893) (7,045)
Net finance costs (6,893) (7,045)
Share of net rental income
in joint ventures 12 3,273 3,257
Share of valuation (loss)/gain
in joint ventures 12 (1,603) 4,777
Profit before taxation 22,844 36,326
Taxation 8 - (74)
----------------------------------- ------ ----------- -----------
Total profit and comprehensive
income for the year attributable
to the equity holders of
the parent 22,844 36,252
----------------------------------- ------ ----------- -----------
Basic and diluted earnings
per share 9 4.4p 7.0p
----------------------------------- ------ ----------- -----------
All items in the above statement are derived from continuing
operations. The accompanying notes 1 to 24 form an integral part of
the financial statements.
Consolidated Statement of Financial Position
31/03/2017 31/03/2016
Notes GBP000 GBP000
--------------------------------------- ------ ----------- -----------
Investment property 11 366,227 371,224
Investment in joint ventures 12 76,900 77,959
Non-current assets 443,127 449,183
--------------------------------------- ------ ----------- -----------
Trade and other receivables 13 26,502 17,700
Cash and cash equivalents 14 20,127 12,763
--------------------------------------- ------ ----------- -----------
Current assets 46,629 30,463
--------------------------------------- ------ ----------- -----------
Total assets 489,756 479,646
======================================= ====== =========== ===========
Issued capital and reserves 15 359,042 349,058
Treasury shares 15 (26,452) (26,452)
--------------------------------------- ------ ----------- -----------
Equity 332,590 322,606
--------------------------------------- ------ ----------- -----------
Interest-bearing loans and borrowings 16 148,266 147,994
--------------------------------------- ------ ----------- -----------
Non-current liabilities 148,266 147,994
--------------------------------------- ------ ----------- -----------
Trade and other payables 17 8,900 9,013
Taxation payable - 33
Current liabilities 8,900 9,046
--------------------------------------- ------ ----------- -----------
Total liabilities 157,166 157,040
--------------------------------------- ------ ----------- -----------
Total equity and liabilities 489,756 479,646
======================================= ====== =========== ===========
Net Asset Value per Ordinary
Share 18 64.1p 62.2p
--------------------------------------- ------ ----------- -----------
The financial statements on pages 54 to 77 were approved at a
meeting of the Board of Directors held on 23 May 2017 and signed on
its behalf by:
Lorraine Baldry, Chairman
Stephen Bligh, Director
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Consolidated Statement of Changes in Equity
Notes Share Treasury Revenue Total
premium share reserve
reserve
GBP000 GBP000 GBP000 GBP000
---------------------- ---------- ----------- ---------- --------- ---------
Balance as at 31
March 2015 219,090 (26,452) 106,576 299,214
Total comprehensive
income for the year - - 36,252 36,252
Dividends paid 10 - - (12,860) (12,860)
----------------------- ---------- ----------- ---------- --------- ---------
Balance as at 31
March 2016 219,090 (26,452) 129,968 322,606
----------------------- ---------- ----------- ---------- --------- ---------
Total comprehensive
income for the year - - 22,844 22,844
Dividends paid 10 - - (12,860) (12,860)
----------------------- ---------- ----------- ---------- --------- ---------
Balance as at 31
March 2017 219,090 (26,452) 139,952 332,590
----------------------- ---------- ----------- ---------- --------- ---------
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Consolidated Statement of Cash Flows
31/03/2017 31/03/2016
GBP000 GBP000
-------------------------------------- ----------- -----------
Operating activities
Profit for the year 22,844 36,252
Adjustments for:
Profit on disposal of investment
property (3,709) (1,295)
Net valuation gain on investment
property (6,987) (17,375)
Share of profit of joint ventures (1,670) (8,034)
Net finance cost 6,893 7,045
Taxation - 74
--------------------------------------- ----------- -----------
Operating cash generated before
changes in working capital 17,371 16,667
(Increase)/decrease in trade
and other receivables (172) 2,487
(Decrease)/increase in trade
and other payables (113) 1,747
--------------------------------------- ----------- -----------
Cash generated from operations 17,086 20,901
Finance costs paid (6,622) (6,826)
Tax paid (33) (253)
--------------------------------------- ----------- -----------
Cash flows from operating activities 10,431 13,822
--------------------------------------- ----------- -----------
Investing Activities
Proceeds from sale of investment
property 15,485 2,200
Acquisition of investment property - (55,613)
Additions to investment property (8,421) (4,457)
Addition/acquisition of joint
ventures (544) (390)
Net income distributed from
joint ventures 3,273 3,257
--------------------------------------- ----------- -----------
Cash flows from/(used in) investing
activities 9,793 (55,003)
--------------------------------------- ----------- -----------
Financing Activities
Loan drawdown - 20,500
Loan arrangement fees - (287)
Dividends paid (12,860) (12,860)
--------------------------------------- ----------- -----------
Cash flows (used in)/from financing
activities (12,860) 7,353
--------------------------------------- ----------- -----------
Net increase/(decrease) in cash
and cash equivalents for the
year 7,364 (33,828)
Opening cash and cash equivalents 12,763 46,591
--------------------------------------- ----------- -----------
Closing cash and cash equivalents 20,127 12,763
--------------------------------------- ----------- -----------
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Notes to the Financial Statements
1. Significant accounting policies
Schroder Real Estate Investment Trust Limited ("the Company") is
a closed-ended investment company registered in Guernsey. The
consolidated financial statements of the Company for the year ended
31 March 2017 comprise the Company, its subsidiaries and its
interests in joint ventures (together referred to as the
"Group").
Statement of compliance
The financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") issued by the
International Accounting Standards Board (the "IASB"), and
interpretations issued by the International Financial Reporting
Interpretations Committee.
The financial statements give a true and fair view and are in
compliance with The Companies (Guernsey) Law, 2008, applicable
legal and regulatory requirements and the Listing Rules of the UK
Listing Authority.
Basis of preparation
The financial statements are presented in sterling, which is the
Company's functional currency, rounded to the nearest thousand.
They are prepared on the historical cost basis except that
investment property and derivative financial instruments are stated
at their fair value.
The accounting policies have been consistently applied to the
results, assets, liabilities and cash flows of the entities
included in the consolidated financial statements and are
consistent with those of the previous year.
Going concern
The Directors have examined significant areas of possible
financial risk including cash and cash requirements and the debt
covenants, in particular the loan to value covenants and interest
cover ratios on the loans with Canada Life and Royal Bank of
Scotland. 80% of the Canada Life loan matures on 15 April 2028 and
20% matures on 15 April 2023. The Royal Bank of Scotland loan
matures on 17 July 2019. The Directors have not identified any
material uncertainties which would cast significant doubt on the
Group's ability to continue as a going concern for a period of not
less than twelve months from the date of the approval of the
financial statements. The Directors have satisfied themselves that
the Group has adequate resources to continue in operational
existence for the foreseeable future.
After due consideration, the Board believes it is appropriate to
adopt the going concern basis in preparing the consolidated
financial statements.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities, income and expenses. These estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The most significant estimates made in preparing these financial
statements relate to the carrying value of investment properties,
including those within joint ventures, which are stated at fair
value. The Group uses external professional valuers to determine
the relevant amounts. Judgements made by management in the
application of IFRS that have a significant effect on the financial
statements and estimates with a significant risk of material
adjustment in the next year are disclosed in note 19.
Basis of consolidation
Subsidiaries
The consolidated financial statements comprise the financial
statements of the Company and all of its subsidiaries drawn up to
31 March each year. Subsidiaries are those entities, including
special purpose entities, controlled by the Company. Control exists
when the Company has the power, directly or indirectly, to govern
the financial and operating policies of an entity so as to obtain
benefits from its activities. In assessing control, potential
voting rights that presently are exercisable are taken into
account. The financial statements of subsidiaries are included in
the consolidated financial statements from the date that control
commences until the date that control ceases. Where properties are
acquired by the Group through corporate acquisitions but the
acquisition does not meet the definition of a business combination,
the acquisition has been treated as an asset acquisition.
Joint ventures
Joint ventures are those entities over whose activities the
Group has joint control, established by contractual agreement. The
consolidated financial statements include the Group's share of
profit or loss of jointly controlled entities on an equity
accounted basis. When the Group's share of losses exceeds its
interest in an entity, the Group's carrying amount is reduced to
nil and recognition of further losses is discontinued except to the
extent that the Group has incurred legal or constructive
obligations or is making payments on behalf of an entity.
Transactions eliminated on consolidation
Intra-group balances and any gains and losses arising from
intra-group transactions are eliminated in preparing the
consolidated financial statements. Gains arising from transactions
with joint ventures are eliminated to the extent of the Group's
interest in the entity. Losses are eliminated in the same way as
gains but only to the extent that there is no evidence of
impairment.
Investment Property
Investment property is land and buildings held to earn rental
income together with the potential for capital growth.
Acquisitions and disposals are recognised on unconditional
exchange of contracts. Acquisitions are initially recognised at
cost, being the fair value of the consideration given, including
transaction costs associated with the investment property.
After initial recognition, investment properties are measured at
fair value, with unrealised gains and losses recognised in profit
and loss. Realised gains and losses on the disposal of properties
are recognised in profit and loss in relation to carrying value.
Fair value is based on the market valuations of the properties as
provided by a firm of independent chartered surveyors, at the
reporting date. Market valuations are carried out on a quarterly
basis.
As disclosed in note 20, the Group leases out all owned
properties on operating leases. A property held under an operating
lease is classified and accounted for as an investment property
where the Group holds it to earn rentals, capital appreciation, or
both. Any such property leased under an operating lease is
classified as an investment property and carried at fair value.
Financial instruments
Non-derivative financial instruments
Assets
Non-derivative financial instruments comprise trade and other
receivables and cash and cash equivalents. These are recognised
initially at fair value plus any directly attributable transaction
costs. Subsequent to initial recognition they are measured at
amortised cost using the effective interest rate method less any
impairment losses.
Cash and cash equivalents
Cash at bank and short-term deposits that are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash
in hand, demand deposits and short-term, highly liquid investments
readily convertible to known amounts of cash and subject to
insignificant risk of changes in value. For the purposes of the
Consolidated Statement of Cash Flows, cash and cash equivalents
consist of cash in hand and short-term deposits at banks with a
term of no more than three months.
Liabilities
Non-derivative financial instruments comprise loans and
borrowings and trade and other payables.
Loans and borrowings
Borrowings are recognised initially at fair value of the
consideration received, less attributable transaction costs.
Subsequent to initial recognition, interest bearing borrowings are
stated at amortised cost with any difference between cost and
redemption value being recognised in the profit and loss over the
period of the borrowings on an effective interest basis.
Trade and other payables
Trade and other payables are stated at amortised cost.
Share capital
Ordinary shares including treasury shares are classified as
equity.
Dividends
Dividends are recognised in the period in which they are
payable.
Impairment
Financial assets
A financial asset, other than those at fair value through profit
and loss, is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial
asset is considered to be impaired if objective evidence indicates
that one or more events have had a negative effect on the estimated
future cash flows of that asset.
An impairment loss in respect of a financial asset measured at
amortised cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows
discounted at the original effective interest rate.
Significant financial assets are tested for impairment on an
individual basis. The remaining financial assets are assessed
collectively in groups that share similar credit risk
characteristics. All impairment losses are recognised in the profit
and loss.
An impairment loss is reversed if the reversal can be related
objectively to an event occurring after the impairment loss was
recognised. For financial assets measured at amortised cost, the
reversal is recognised in the profit and loss.
Non-financial assets
The carrying amounts of the Group's non-financial assets, other
than investment property but including joint ventures, are reviewed
at each reporting date to determine whether there is any indication
of impairment. If any such indication exists, then the asset's
recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is
the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to that asset.
For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (the
"cash-generating unit").
An impairment loss is recognised if the carrying amount of an
asset or its cash-generating unit exceeds its estimated recoverable
amount. Impairment losses are recognised in the profit and
loss.
Provisions
A provision is recognised in the Consolidated Statement of
Financial Position when the Group has a legal or constructive
obligation as a result of a past event and it is probable that an
outflow of economic benefits will be required to settle the
obligation.
Rental income
Rental income from investment properties is recognised on a
straight-line basis over the term of ongoing leases and is shown
gross of any UK income tax. Lease incentives are spread evenly over
the lease term.
Surrender premiums and dilapidations are recognised in line with
individual lease agreements when cash inflows are certain.
Finance expenses
Finance expenses comprise interest expense on borrowings that
are recognised in profit and loss. Attributable transaction costs
incurred in establishing the Group's credit facilities are deducted
from the fair value of borrowings on initial recognition and are
amortised over the lifetime of the facilities through profit and
loss. Finance expenses are accounted for on an effective interest
basis.
Expenses
All expenses are accounted for on an accruals basis. The costs
recharged to occupiers of the properties are presented net of the
service charge income as management consider that the property
agent acts as principal in this respect.
Taxation
The Group elected to be treated as a UK REIT with effect from 1
May 2015. The UK REIT rules exempt the profits of the Group's UK
property rental business from UK corporation and income tax. Gains
on UK properties are also exempt from tax, provided they are not
held for trading. The Group is otherwise subject to UK corporation
tax.
As a REIT, the Company is required to pay Property Income
Distributions equal to at least 90% of the Group's exempted net
income. To remain a UK REIT there are a number of conditions to be
met in respect of the principal company of the Group, the Group's
qualifying activity and its balance of business. The Group
continues to meet these conditions.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a
single segment of business, being property investment and in one
geographical area, the United Kingdom. There is no one tenant that
represents more than 10% of group revenues. SREIM acts as advisor
to the board, who then make management decisions following their
recommendations. As such the Board of Directors are considered to
be the chief operating decision maker. A set of consolidated IFRS
information is provided on a quarterly basis.
2. New standards and interpretations
Standards, interpretations and amendments to published standards
that are effective for the first time
The following new standards, interpretations or amendments,
which are relevant to the company's operations, became effective
during the year:
-- Annual improvements to IFRSs 2012-2014 Cycle (effective for
accounting periods beginning on or after 1 January 2016)
-- Amendments to IAS 16 and IAS 38 - Acceptable Methods of
Depreciation and Amortisation (effective 1 January 2016)
-- Amendments to IAS 1 Presentation of Financial Statements -
Disclosure Initiative (effective for accounting periods beginning
on or after 1 January 2016)
-- Amendments to IFRS 10, IFRS 11, IFRS 12 and IAS 28 -
Investment Entities (effective for accounting periods beginning on
or after 1 January 2016)
-- Amendments to IAS 27 Consolidated and Separate Financial
Statements - Equity Method in Separate Financial Statements
(effective for accounting periods beginning on or after 1 January
2016)
These amendments to the standards did not have a material impact
on the financial statements.
Standards, interpretations and amendments to published standards
that are not yet effective.
The following new standards, interpretations and amendments have
been published and are mandatory for the company's accounting
periods beginning on or after 1 April 2017 or later periods and
have not been early adopted by the company:
-- Amendment to IAS 7 - Cash Flow Statements (effective for
accounting periods beginning on or after 1 January 2017)
-- IFRS 15 Revenue from Contracts with Customers (effective for
accounting periods beginning on or after 1 January 2018)
-- IFRS 9 Financial Instruments (effective for accounting
periods beginning on or after 1 January 2018)
-- IFRS 16 - Leases (effective for accounting periods beginning on or after 1 January 2019)
There is an ongoing assessment and it is management's
expectation that the amendments will have no material impact on the
financial statements of the Group.
3. Material agreements
Schroder Real Estate Investment Management Limited is the
Investment Manager to the Company. The Investment Manager is
entitled to a fee together with reasonable expenses incurred in the
performance of its duties. The fee is payable monthly in arrears
and shall be an amount equal to one twelfth of the aggregate of
1.1% of the NAV of the Company. The Investment Management Agreement
can be terminated by either party on not less than nine months
written notice or on immediate notice in the event of certain
breaches of its terms or the insolvency of either party. The total
charge to profit and loss during the year was GBP3,391,000 (2016:
GBP3,227,000). At the year end GBP216,000 (2016: GBP619,000) was
outstanding.
During the year ended 31 March 2016, Schroder Real Estate
Investment Management Limited was paid GBP200,000 for additional
services in relation to the Company's conversion to a REIT in May
2015.
Northern Trust International Fund Administration Services
(Guernsey) Limited is the Administrator to the Company. The
Administrator is entitled to an annual fee equal to GBP120,000
(2016: GBP120,000) of which GBP30,000 (2016: GBP30,000) was
outstanding at the year end. In addition to this GBP40,000 (2016:
GBP40,000) was paid for depository fees of which GBP3,334 (2016:
3,334) was outstanding at year end.
4. Other income
31/03/2017 31/03/2016
GBP000 GBP000
---------------------- ----------- -----------
Dilapidations 847 413
Surrender premium 419 (38)
Miscellaneous income 17 8
----------------------- ----------- -----------
1,283 383
---------------------- ----------- -----------
5. Property operating expenses
31/03/2017 31/03/2016
GBP000 GBP000
--------------------------- ----------- -----------
Agents' fees 129 174
Repairs and maintenance 116 145
Advertising 166 31
Rates - vacant 1,062 1,075
Security 58 39
Service charge, insurance
and utilities on vacant
units 978 1,355
Ground rent 122 108
Bad debt (78) 21
Other 8 4
---------------------------- ----------- -----------
2,561 2,952
--------------------------- ----------- -----------
6. Auditor's remuneration
The total expected audit fees for the year are GBP114,000 (2016:
GBP106,000) and GBP13,000 (2016: GBP13,000) for the half year
review of the financial statements. There were no additional fees
paid to the auditors during the year. (2016: GBP83,000 for
transaction services work in relation to the Group's acquisition of
St John's Centre (Bedford) Limited).
7. Other expenses
31/03/2017 31/03/2016
GBP000 GBP000
-------------------------- ----------- -----------
Directors' and officers'
insurance premium 11 13
Regulatory costs 22 22
Professional fees 166 99
Other expenses 157 460
356 594
-------------------------- ----------- -----------
One off REIT conversion costs of GBP413,000 were incurred during
the year ended 31 March 2016, which are included within other
expenses in the note above.
Directors' fees
Directors are the only officers of the Company and there are no
other key personnel.
The Directors' annual remuneration for services to the Group was
GBP180,000 (2016: GBP197,000), as set out in the Remuneration
Report on page 34.
8. Taxation
31/03/2017 31/03/2016
GBP000 GBP000
Tax expense in year - 74
---------------------------------------- ----------- -----------
Reconciliation of effective
tax rate
Profit before tax 22,844 36,326
------------------------------------ ----------- -----------
Effect of:
Income tax using UK income
tax rate of 20% 4,569 7,265
Revaluation gain not taxable (1,397) (3,475)
Share of profit of associates
and joint ventures not taxable (334) (1,607)
Profit on disposal of investment
property not taxable - (259)
UK REIT exemption (2,838) -
Utilisation of capital allowance,
effect of different tax rates
in subsidiaries and other
adjustments - (1,850)
Current tax expense in the
year - 74
------------------------------------ ----------- -----------
The Company and its Guernsey registered subsidiaries have
obtained exempt company status in Guernsey under the terms of the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 so that they
are exempt from Guernsey taxation on income arising outside
Guernsey and on bank interest receivable in Guernsey. Each company
is, therefore, only liable for a fixed fee of GBP1,200 per annum.
The Directors intend to conduct the Group's affairs such that they
continue to remain eligible for exemption.
9. Basic and diluted earnings per share
Earnings per share
The basic and diluted earnings per share for the Group is based
on the net profit for the year of GBP22,844,000 (2016:
GBP36,252,000) and the weighted average number of Ordinary Shares
in issue during the year of 518,513,409 (2016: 518,513,409).
10. Dividends paid
In respect of Ordinary Rate 31/03/2017
Shares (pence) GBP000
-------------------------------- ---------- -------- -----------
Quarter 31 March 2016 dividend 518.51
paid 31 May 2016 million 0.62 3,215
Quarter 30 June 2016 dividend 518.51
paid 31 August 2016 million 0.62 3,215
Quarter 30 September 2016
dividend paid 02 December 518.51
2016 million 0.62 3,215
Quarter 31 December 2016
dividend paid 28 February 518.51
2017 million 0.62 3,215
--------------------------------- --------- -------- -----------
2.48 12,860
--------------------------------- --------- -------- -----------
In respect of Ordinary Rate 31/03/2016
Shares (pence) GBP000
--------------------------------- --------- -------- -----------
Quarter 31 March 2015 dividend 518.51
paid 28 May 2015 million 0.62 3,215
Quarter 30 June 2015 dividend 518.51
paid 28 August 2015 million 0.62 3,215
Quarter 30 September 2015
dividend paid 30 November 518.51
2015 million 0.62 3,215
Quarter 31 December 2015
dividend paid 29 February 518.51
2016 million 0.62 3,215
--------------------------------- --------- -------- -----------
2.48 12,860
--------------------------------- --------- -------- -----------
A dividend for the quarter ended 31 March 2017 of 0.62 pence
(GBP3.2 million) was declared on 26 April 2017 and will be paid on
31 May 2017.
11. Investment property
Leasehold Freehold Total
----------------------------------
GBP000 GBP000 GBP000
---------------------------------- ---------- --------- ---------
Fair value as at 31 March
2015 39,227 259,457 298,684
Additions 256 59,814 60,070
Gross proceeds on disposals - (6,200) (6,200)
Realised gain on disposals - 1,295 1,295
Net valuation gain on investment
property 2,582 14,793 17,375
---------------------------------- ---------- --------- ---------
Fair value as at 31 March
2016 42,065 329,159 371,224
---------------------------------- ---------- --------- ---------
Additions 3,031 5,390 8,421
Gross proceeds on disposals (11,358) (12,756) (24,114)
Realised (loss)/gain on
disposals 3,942 (233) 3,709
Net valuation (loss)/gain
on investment property (277) 7,264 6,987
Fair value as at 31 March
2017 37,403 328,824 366,227
---------------------------------- ---------- --------- ---------
Fair value of investment properties as determined by the valuer
totals GBP390,745,000 (2016: GBP385,085,000). Of this amount
GBP14,200,000 is in relation to the unconditional exchange of
contracts for the sales of Bristol and Watford (2016: GBP4,000,000
New Malden). In addition to this GBP10,318,000 (2016: GBP9,861,000)
is in connection with lease incentives is included within trade and
other receivables.
The net valuation gain on investment property consists of
unrealised gains of GBP12,418,000 (2016: GBP20,548,000) net of
unrealised losses of GBP5,431,000 (2016: GBP3,173,000).
The fair value of investment property has been determined by
Knight Frank LLP, a firm of independent chartered surveyors, who
are registered independent appraisers. The valuation has been
undertaken in accordance with the RICS Valuation - Professional
Standards global January 2014 (revised April 2015), issued by the
Royal Institution of Chartered Surveyors (the "Red Book") including
the International Valuation Standards.
The properties have been valued on the basis of "Fair Value" in
accordance with the RICS Valuation - Professional Standards
VPS4(1.5) Fair Value and VPGA1 Valuations for Inclusion in
Financial Statements which adopt the definition of Fair Value used
by the International Accounting Standards Board.
The valuation has been undertaken using appropriate valuation
methodology and the Valuer's professional judgement. The Valuer's
opinion of Fair Value was primarily derived using recent comparable
market transactions on arm's length terms, where available, and
appropriate valuation techniques (The Investment Method).
The properties have been valued individually and not as part of
a portfolio.
All investment properties are categorised as Level 3 fair values
as they use significant unobservable inputs. There have not been
any transfers between Levels during the year. Investment properties
have been classed according to their real estate sector.
Information on these significant unobservable inputs per class of
investment property is disclosed below:
Quantitative information about fair value measurement using
unobservable inputs (Level 3) as at 31 March 2017
31 March Industrial Retail Office Other Total
2017 (1) (incl
retail
warehouse)
------------- ----------- ------------ ------------ ------------- -------- -----------------
Fair
value
(GBP000) 110,700 140,100 125,800 14,150 390,750
-------------------------- ------------ ------------ ------------- -------- -----------------
Area
('000
sq ft) 1,711 603 619 145 3,078
-------------------------- ------------ ------------ ------------- -------- -----------------
Net passing Range GBP0 - GBP8.40 GBP0 - GBP9.88 GBP0 -
rent Weighted GBP8.82 - GBP38.50 GBP25.72 N/A GBP38.50
per sq average GBP4.12 GBP13.98 GBP10.76 GBP7.66
ft per
annum
------------- ----------- ------------ ------------ ------------- -------- -----------------
Gross Range GBP3.50 GBP7.40 GBP9.50 GBP9.60 GBP3.50-GBP38.50
ERV per Weighted - GBP10.83 - GBP38.50 - GBP27.50 N/A GBP9.52
sq ft average GBP5.06 GBP16.22 GBP15.28
per annum
------------- ----------- ------------ ------------ ------------- -------- -----------------
Net initial Range 0% - 7.70% 3.38% 0.00%-15.35% 9.49% 0% - 15.35%
yield Weighted 5.88% - 8.99% 4.27% N/A 5.25%
(1) average 5.32%
------------- ----------- ------------ ------------ ------------- -------- -----------------
Equivalent Range 5.25% 4.37%-9.75% 5.04%-10.27% 8.61% 4.37%-10.27%
yield Weighted - 8.65% 6.14% 6.81% N/A 6.69%
average 7.02%
------------- ----------- ------------ ------------ ------------- -------- -----------------
Quantitative information about fair value measurement using
unobservable inputs (Level 3) as at 31 March 2016
31 March Industrial Retail Office Leisure Total
2016 (incl
retail
warehouse)
------------- ----------- ------------ ----------------- ------------- -------- -----------------
Fair
value
(GBP000) 103,120 150,750 117,355 13,860 385,085
-------------------------- ------------ ----------------- ------------- -------- -----------------
Area
('000
sq ft) 1,711 626 637 145 3,119
-------------------------- ------------ ----------------- ------------- -------- -----------------
Net passing Range GBP0 - GBP0 - GBP0 - GBP7.64 GBP0-GBP38.50
rent Weighted GBP8.82 GBP38.50 GBP25.72 N/A GBP7.85
per sq average GBP3.85 GBP14.65 GBP11.95
ft per
annum
------------- ----------- ------------ ----------------- ------------- -------- -----------------
Gross Range GBP3.50 GBP7.40-GBP49.50 GBP9.00 GBP9.64 GBP3.50-GBP49.50
ERV per Weighted - GBP10.00 GBP16.66 - GBP27.50 N/A GBP9.55
sq ft average GBP4.94 GBP14.96
per annum
------------- ----------- ------------ ----------------- ------------- -------- -----------------
Net initial Range 0% - 7.51% 0% - 8.04% 0.00%-15.89% 7.49% 0% - 15.89%
yield Weighted 5.99% 5.70% 6.08% N/A 5.96%
(1) average
------------- ----------- ------------ ----------------- ------------- -------- -----------------
Equivalent Range 5.65% 4.35%-9.79% 5.49%-9.68% 8.68% 4.35%-9.68%
yield Weighted - 8.57% 6.03% 6.99% N/A 6.75%
average 7.29%
------------- ----------- ------------ ----------------- ------------- -------- -----------------
Notes:
(1) Yields based on rents receivable after deduction of head
rents, but gross of non-recoverables
Sensitivity of measurement to variations in the significant
unobservable inputs
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of the Group's property portfolio, together with the impact of
significant movements in these inputs on the fair value
measurement, are shown below:
Unobservable Impact on fair Impact on fair
input value measurement value measurement
of significant of significant
increase in input decrease in input
------------------ ------------------- -------------------
Passing rent Increase Decrease
------------------ ------------------- -------------------
Gross ERV Increase Decrease
------------------ ------------------- -------------------
Net initial yield Decrease Increase
------------------ ------------------- -------------------
Equivalent yield Decrease Increase
------------------ ------------------- -------------------
There are interrelationships between the yields and rental
values as they are partially determined by market rate
conditions.
The sensitivity of the valuation to changes in the most
significant inputs per class of investment property are shown
below:
Estimated movement Industrial Retail Office Other Total
in fair value of GBP'000, GBP'000 GBP'000 GBP'000 GBP'000
investment properties
at 31 March 2017
------------------------- ----------- --------- --------- --------- ---------
Increase in ERV by
5% 5,002 6,405 5765 271 17,442
------------------------- ----------- --------- --------- --------- ---------
Decrease in ERV by
5% (4,832) (5,882) (5,009) (198) (15,921)
------------------------- ----------- --------- --------- --------- ---------
Increase in net initial
yield by 0.25% (4,454) (5,952) (6,032) (363) (16,553)
------------------------- ----------- --------- --------- --------- ---------
Decrease in net initial
yield by 0.25% 4,844 6,505 6,672 383 18,086
------------------------- ----------- --------- --------- --------- ---------
Estimated movement Industrial Retail Office Other Total
in fair value of GBP000 GBP000 GBP000 GBP000 GBP000
investment properties
at 31 March 2016
------------------------- ----------- -------- -------- -------- ---------
Increase in ERV by
5% 4,330 6,617 4,126 240 15,313
------------------------- ----------- -------- -------- -------- ---------
Decrease in ERV by
5% (4,265) (5,880) (3,830) (190) (14,165)
------------------------- ----------- -------- -------- -------- ---------
Increase in net initial
yield by 0.25% (4,134) (6,336) (4,636) (448) (15,554)
------------------------- ----------- -------- -------- -------- ---------
Decrease in net initial
yield by 0.25% 4,494 6,918 5,033 479 16,924
------------------------- ----------- -------- -------- -------- ---------
12. Investment in joint ventures
GBP000
Closing balance as at 31 March 2015 72,792
Purchase of interest in City Tower Unit
Trust 390
Share of profit for the year 8,034
Distribution received (3,257)
-------------------------------------------- -----------
Closing balance as at 31 March 2016 77,959
Purchase of interest in City Tower Unit
Trust 544
Share of profit for the year 1,670
Distribution received (3,273)
Closing balance as at 31 March 2017 76,900
-------------------------------------------- -----------
Summarised joint venture
financial information not
adjusted for the Group's 31/03/2017 31/03/2016
share GBP000 GBP000
------------------------------ ----------- -----------
Total assets 238,171 241,757
Total liabilities(1) 1,749 1,135
Revenues for year 10,550 10,726
Total comprehensive income 20,688 27,062
Net asset value attributable
to Group 76,900 77,959
Total comprehensive income
attributable to the Group 1,670 8,034
------------------------------- ----------- -----------
(1) Liabilities that are non-recourse to the Group
13. Trade and other receivables
31/03/2017 31/03/2016
GBP000 GBP000
------------------- ----------- -----------
Rent receivable 933 1,699
Other debtors and
prepayments 25,569 16,001
--------------------
26,502 17,700
------------------- ----------- -----------
Other debtors and prepayments includes GBP10,318,000 (2016:
GBP9,861,000) in respect of lease incentives. A further
GBP12,629,000 relates to Bristol and Watford (2016: GBP4,000,000
relating to New Malden), that had both unconditionally exchanged
but had not completed prior to the year end.
14. Cash and cash equivalents
As at 31 March 2017, the group had GBP20.1 million (2016:
GBP12.8 million) in cash of which GBP0.2 million is proceeds from
dilapidations held within the Canada Life security pool. GBP1.0
million (2016: GBP0.9 million) is held in respect of tenant
deposits (see note 17).
15. Issued capital and reserves
Share capital
The share capital of the Company is represented by an unlimited
number of Ordinary Shares of no par value. As at the date of this
Report, the Company has 565,664,749 ordinary shares in issue of
which 47,151,340 ordinary shares are held in treasury. The total
number of voting rights of the Company is 518,513,409.
Treasury capital
47,151,340 Ordinary Shares which represent 8.3% of the Company's
total issued share capital are held in treasury.
Revenue Reserve
This reserve represents an accumulated amount of the Group's
prior earnings, net of dividends.
16. Interest-bearing loans and borrowings
This note provides information about the contractual terms of
the Group's interest-bearing loans and borrowings. For more
information about the Group's exposure to interest rate risk, see
note 19.
31/03/2017 31/03/2016
GBP000 GBP000 GBP000 GBP000
------------------------- --------------- -------------- ---------- ----------
Non-current liabilities
Loan facility 150,085 150,085
Less: Finance costs
incurred (2,091) (2,311)
Add: Amortised finance
costs 272 (1,819) 220 (2,091)
--------------------------
148,266 147,994
------------------------- --------------- -------------- ---------- ----------
The Group entered into a GBP129.6 million loan facility with
Canada Life on 16 April 2013 that has 20% of the loan maturing on
15 April 2023 and with the balance of 80% maturing on 15 April
2028, with a fixed interest rate of 4.77%.
On 17 July 2015 the Company entered into a four year, GBP20.5
million revolving credit facility with the Royal Bank of Scotland
("RBS") for the purpose of acquiring, Millshaw Park Industrial
Estate. The interest rate is based on the loan to value ratio as
below:
-- LIBOR + 1.60% if loan to value is less than or equal to 60%
-- LIBOR + 1.85% if loan to value is greater than 60%
During both the current and prior year the loan to value has
remained less than 60%. Since this loan has variable interest, an
interest rate cap for 100% of the loan was entered into, which
comes into effect if GPB 3 month LIBOR reaches 1.5%.
As at 31 March 2017 the group has a loan balance of GBP150.1
million and GBP1.8 million of unamortised arrangement fees. (31
March 2016: GBP150.1 million and GBP2.1 million of unamortised
arrangement fees).
The Canada Life facility has a first charge security over all
the property assets in the ring fenced Security Pool (the 'Security
Pool') which at 31 March 2017 contained properties valued at
GBP349.8 million (this includes Bristol and Watford) together with
GBP0.2 million cash. Various restraints apply during the term of
the loan although the facility has been designed to provide
significant operational flexibility. The RBS facility has a first
charge security over all the property assets held in SREIT No.2
Limited, which at 31 March 2017 contained properties valued at
GBP41.0 million (2016: GBP38.8 million).
The principal covenants for Canada Life and RBS are that the
loan should not comprise more than 65% of the value of the assets
in the Security Pool nor should estimated rental and other income
arising from assets in the Security Pool, calculated on any
interest payment date and one year projected from any interest
payment date, comprise less than 185% of the interest payments. For
the RBS facility, the forward looking interest cover covenant is
250%.
As at the Interest Payment Date, the Canada Life interest cover
calculated in accordance with the ICR covenant was 311% (2016:
327%) and the forward looking interest cover was 300% (2016: 297%),
with the Loan to value ratio of 38.6% (33.2% net of all cash)
(2016: 38.1%, 33.0% net of all cash). The RBS interest cover
calculated in accordance with the ICR covenant was 463% (2016:
591%) with the Loan to value ratio of 50.1% (2016: 52.8%).
17. Trade and other payables
31/03/2017 31/03/2016
GBP000 GBP000
-------------------------- ----------- -----------
Rent received in advance 4,854 5,035
Rental deposits 982 861
Interest payable 1,391 1,391
Other trade payables and
accruals 1,673 1,726
--------------------------- ----------- -----------
8,900 9,013
-------------------------- ----------- -----------
18. NAV per Ordinary Share
The NAV per Ordinary Share is based on the net assets of
GBP332,590,000 (2016: GBP322,606,000) and 518,513,409 (2016:
518,513,409) Ordinary Shares in issue at the reporting date.
19. Financial instruments, properties and associated risks
Financial risk factors
The Group holds cash and liquid resources as well as having
debtors and creditors that arise directly from its operations. The
Group uses interest rate contracts when required to limit exposure
to interest rate risks, but does not have any other derivative
instruments.
The main risks arising from the Group's financial instruments
and properties are market price risk, credit risk, liquidity risk
and interest rate risk. The Group is only directly exposed to
sterling and hence is not exposed to currency risks. The Board
regularly reviews and agrees policies for managing each of these
risks and these are summarised below:
Market price risk
Rental income and the market value for properties are generally
affected by overall conditions in the economy, such as changes in
gross domestic product, employment trends, inflation and changes in
interest rates. Changes in gross domestic product may also impact
employment levels, which in turn may impact the demand for
premises. Furthermore, movements in interest rates may also affect
the cost of financing for real estate companies.
Both rental income and property values may also be affected by
other factors specific to the real estate market, such as
competition from other property owners, the perceptions of
prospective tenants of the attractiveness, convenience and safety
of properties, the inability to collect rents because of bankruptcy
or the insolvency of tenants, the periodic need to renovate, repair
and release space and the costs thereof, the costs of maintenance
and insurance, and increased operating costs.
The Directors monitor the market value of investment properties
by having independent valuations carried out quarterly by a firm of
independent chartered surveyors. Note 11 sets out the sensitivity
analysis on the market price risk. Concentration risk based on
industry and geography, is set out in the tables on page 10.
Included in market price risk is interest rate risk which is
discussed further below.
Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group. In the event of default by an occupational tenant,
the Group will suffer a rental income shortfall and incur
additional costs, including legal expenses, in maintaining,
insuring and re-letting the property. The Investment Manager
reviews reports prepared by Dun & Bradstreet, or other sources
to assess the credit quality of the Group's tenants and aims to
ensure there is no excessive concentration of risk and that the
impact of any default by a tenant is minimised.
In respect of credit risk arising from other financial assets,
which comprise cash and cash equivalents, exposure to credit risk
arises from default of the counterparty with a maximum exposure
equal to the carrying amounts of these instruments. In order to
mitigate such risks, cash is maintained with major international
financial institutions with high quality credit ratings. During the
year and at the reporting date the Group maintained relationships
with branches and subsidiaries of HSBC. HSBC Credit Rating is AA
negative (provided by Standard and Poor).
The maximum exposure to credit risk for rent receivables at the
reporting date by type of sector was:
31 March 31 March
2017 2016
Carrying Carrying
amount amount
GBP000 GBP000
------------ ---------- ----------
Office 193 358
Industrial 448 1,085
Retail 292 256
------------ ---------- ----------
933 1,699
------------ ---------- ----------
Rent receivables which are past their due date, but which were
not impaired at the reporting date were:
31 March 31 March
2017 2016
Carrying Carrying
amount amount
GBP000 GBP000
-------------- ---------- ----------
0-30 days 569 1,245
31-60 days 6 21
61-90 days 50 2
91 days plus 308 431
-------------- ---------- ----------
933* 1,699*
-------------- ---------- ----------
*Net of bad debt provisions of GBPnil (2016: GBP124,000).
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulties in meeting obligations associated with its financial
obligations.
The Group's investments comprise UK commercial property.
Property and property related assets are inherently difficult to
value due to the individual nature of each property. As a result,
valuations are subject to substantial uncertainty. There is no
assurance that the estimates resulting from the valuation process
will reflect the actual sales price even where such sales occur
shortly after the valuation date. Investments in property are
relatively illiquid; however the Group has tried to mitigate this
risk by investing in properties that it considers to be good
quality.
In certain circumstances, the terms of the Group's debt
facilities entitle the lender to require early repayment and in
such circumstances the Group's ability to maintain dividend levels
and the net asset value could be adversely affected. The Investment
Manager prepares cash flows on a rolling basis to ensure the Group
can meet future liabilities as and when they fall due.
The following table indicates the maturity analysis of the
financial liabilities.
As at 31 March Carrying Expected 6 mths 6 mths 2-5 More
2017 amount Cash or - 2 years than
flows less years 5 years
GBP000 GBP000 GBP000
GBP000 GBP000 GBP000
----------------------- --------- --------- --------- --------- -------- ---------
Financial liabilities
Interest-bearing
loans and borrowings
and interest 149,657 219,008 3,297 9,892 39,147 166,672
Trade and other
payables 2,655 2,655 1,673 - - 982
Total financial
liabilities 152,312 221,663 4,970 9,892 39,147 167,654
----------------------- --------- --------- --------- --------- -------- ---------
As at 31 March Carrying Expected 6 mths 6 mths-2 2-5 More
2016 amount Cash or less years years than
flows 5 years
GBP000 GBP000 GBP000 GBP000 GBP000
GBP000
----------------------- --------- --------- --------- --------- -------- ---------
Financial liabilities
Interest-bearing
loans and borrowings
and interest 149,385 225,724 3,316 9,947 39,607 172,854
Trade and other
payables 2,587 2,587 2,587 - - -
----------------------- --------- --------- --------- --------- -------- ---------
Total financial
liabilities 151,972 228,311 5,903 9,947 39,607 172,854
----------------------- --------- --------- --------- --------- -------- ---------
Interest rate risk
Exposure to market risk for changes in interest rates relates
primarily to the Group's long-term debt obligations and to interest
earned on cash balances. As interest on the Group's long-term debt
obligations is payable on a fixed-rate basis the Group is not
exposed to interest rate risk, but is exposed to changes in fair
value of long-term debt obligations driven by interest rate
movements. As at 31 March 2017 the fair value of the Group's
GBP129.6 million loan with Canada Life was GBP143.9 million (2016:
GBP140.2 million). The RBS revolving credit facility is a low
margin flexible source of funding with a margin of 1.6% above 3
month LIBOR and it is considered by management that the carrying
value is equal to fair value.
A 1% increase or decrease in short-term interest rates would
increase or decrease the annual income and equity by GBP201,300
based on the cash balance as at 31 March 2017.
Fair values
The fair values of financial assets and liabilities are not
materially different from their carrying values, unless disclosed
below, in the financial statements.
The fair value hierarchy levels are as follows:
-- Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities
-- Level 2 - inputs other than quoted prices included within
level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
-- Level 3 - inputs for the assets or liability that are not
based on observable market data (unobservable inputs).
There have been no transfers between Levels 1, 2 and 3 during
the year (2016: none).
The following summarises the main methods and assumptions used
in estimating the fair values of financial instruments and
investment property.
Investment property- level 3
Fair value is based on valuations provided by an independent
firm of chartered surveyors and registered appraisers. These values
were determined after having taken into consideration recent market
transactions for similar properties in similar locations to the
investment properties held by the Group. The fair value hierarchy
of investment property is level 3. See Note 11 for further
details.
Interest bearing loans and borrowings - level 2
Fair values are based on the present value of future cash flows
discounted at a market rate of interest. Issue costs are amortised
over the period of the borrowings. As at 31 March 2017 the fair
value of the Group's GBP129.6 million loan with Canada Life was
GBP143.9 million.
Trade and other receivables/payables- level 2
All receivables and payables are deemed to be due within one
year and as such the notional amount is considered to reflect the
fair value.
Capital management
The Board's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the business. The objective is to ensure that
it will continue as a going concern and to maximise return to its
equity shareholders through appropriate level of gearing.
The Company's debt and capital structure comprises the
following:
31/03/2017 31/03/2016
GBP000 GBP000
-------------------------- ----------- -----------
Debt
Fixed rate loan facility 150,085 150,085
Equity
Called-up share capital 192,638 192,638
Reserves 139,952 129,968
--------------------------- ----------- -----------
332,590 322,606
-------------------------- ----------- -----------
Total debt and equity 482,675 472,691
--------------------------- ----------- -----------
There were no changes in the Group's approach to capital
management during the year.
20. Operating leases
The Group leases out its investment property under operating
leases. At 31 March 2017 the future minimum lease receipts under
non-cancellable leases are as follows:
31/03/2017 31/03/2016
GBP000 GBP000
---------------------------- ----------- -----------
Less than one year 24,155 23,531
Between one and five years 78,401 80,483
More than five years 79,626 91,136
---------------------------- ----------- -----------
182,182 195,150
---------------------------- ----------- -----------
The total above comprises the total contracted rent receivable
as at 31 March 2017.
The Group has entered into leases on its property portfolio. The
commercial property leases typically have lease terms between 5 and
15 years and include clauses to enable periodic upward revision of
the rental charge according to prevailing market conditions. Some
leases contain options to break before the end of the lease
term.
21. List of Subsidiary and Joint Venture Undertakings
The companies listed below are those which were part of the
group at 31 March 2017 and 31 March 2016:
Undertaking Category Country Ultimate
of Incorporation Ownership
------------------------------- ------------ ------------------- -----------
SREIT No.2 Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT Holdings No.2 Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT Holdings Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT Property Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT (Portergate) Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT (Victory) Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT (Uxbridge) Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT (City Tower) Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT (Store) Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
SREIT (Bedford) Ltd Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
St John's Centre (Bedford)
Ltd Subsidiary UK 100%
------------------------------- ------------ ------------------- -----------
Lunar Partnership (Brentford)
Ltd* Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
LP (Brentford) Ltd* Subsidiary Guernsey 100%
------------------------------- ------------ ------------------- -----------
Joint
City Tower Unit Trust Venture Jersey 25%
------------------------------- ------------ ------------------- -----------
Joint
Store Unit Trust Venture Jersey 50%
------------------------------- ------------ ------------------- -----------
*Companies put into liquidation post year ended 31 March
2017.
22. Related party transactions
Material agreements are disclosed in note 3. Transactions with
Directors and the Investment Manager are disclosed in note 7.
Transactions with joint ventures are disclosed in note 12.
23. Capital commitments
As at 31 March 2017 the Group had capital commitments of GBP4.9
million (2016: GBPnil).
24. Post balance sheet events
Since the year end, the Group has completed on the sale of one
property Augustine's Courtyard, Bristol on the 7 April 2017 for
GBP11,750,000.
EPRA Performance Measures (unaudited)
As recommended by EPRA (European Public Real Estate
Association), EPRA performance measures are disclosed in the
section below.
EPRA performance measures: Summary Table
31/03/2017 31/03/2016
------------------------------ -------------------- --------------------
Total Total
GBP000 GBP000
------------------------------ -------------------- --------------------
EPRA earnings 13,751 13,130
EPRA earnings per share 2.7 2.5
------------------------------- -------------------- --------------------
EPRA NAV 322,590 322,606
EPRA NAV per share 64.1 62.2
------------------------------- -------------------- --------------------
EPRA NNNAV 316,486 313,600
EPRA NNNAV per share 61.0 60.5
------------------------------- -------------------- --------------------
EPRA Net Initial Yield 5.2% 5.2%
EPRA topped-up Net Initial
Yield 5.3% 5.3%
------------------------------- -------------------- --------------------
EPRA Vacancy Rate 6.2% 8.9%
EPRA Cost Ratios - including
direct vacancy costs 31.3% 31.9%
EPRA Cost Ratios - excluding
direct vacancy costs 25.6% 25.3%
------------------------------- -------------------- --------------------
a. EPRA earnings and EPS
Total comprehensive income excluding realised and unrealised
gains/ losses on investment property, share of profit on joint
venture investments and changes in fair value of financial
instruments, divided by the weighted average number of shares.
31/03/2017 31/03/2016
GBP000 GBP000
-------------------------------- ------------ ------------
IFRS profit after tax 22,844 36,252
Adjustments to calculate
EPRA Earnings:
Profit on disposal of
investment property (3,709) (1,295)
Net valuation gain on
investment property (6,987) (17,375)
Finance costs: interest
rate cap - 325
Share of valuation (loss)/gain
in associates and joint
ventures 1,603 (4,777)
EPRA earnings 13,751 13,130
--------------------------------- ------------ ------------
Weighted average number
of Ordinary shares 518,513,409 518,513,409
--------------------------------- ------------ ------------
IFRS earnings per share
(pence per share) 4.4 7.0
--------------------------------- ------------ ------------
EPRA earnings per share
(pence per share) 2.7 2.5
--------------------------------- ------------ ------------
b. EPRA NAV per share
The Net Asset Value adjusted to exclude assets or liabilities
not expected to crystallise in a long-term investment property
model, divided by the number of shares in issue.
31/03/2017 31/03/2016
GBP000 GBP000
------------------------ ------------ ------------
IFRS NAV per financial
statements 332,590 322,606
EPRA NAV 332,590 322,606
Shares in issue at end
of year 518,513,409 518,513,409
------------------------- ------------ ------------
IFRS NAV per share 64.1 62.2
------------------------- ------------ ------------
EPRA NAV per share 64.1 62.2
------------------------- ------------ ------------
c. EPRA NNNAV per share
The EPRA NAV adjusted to include the fair value of debt, divided
by the number of shares in issue.
31/03/2017 31/03/2016
GBP000 GBP000
---------------------------- ----------- -----------
EPRA NAV 332,590 322,606
Adjustments to calculate
EPRA NNNAV:
Fair value of debt (16,104) (12,706)
EPRA NNNAV 316,486 309,900
----------------------------- ----------- -----------
EPRA NNNAV per share 61.0 59.8
----------------------------- ----------- -----------
d. EPRA Net Initial Yield
Annualised rental income based on the cash rents passing at the
balance sheet date, less non-recoverable property operating
expenses, divided by the grossed up market value of the complete
property portfolio. The EPRA "topped up" NIY is the EPRA NIY
adjusted for unexpired lease incentives.
31/03/2017 31/03/2016
GBP000 GBP000
------------------------------ -------------- ---------------
Investment property - wholly
owned 376,545 385,085
Investment property - share
of joint ventures and funds 76,925 77,488
------------------------------- -------------- ---------------
Complete property portfolio 453,470 462,573
Allowance for estimated
purchasers' costs 26,301 26,829
------------------------------- -------------- ---------------
Gross up completed property
portfolio valuation 479,771 489,402
Annualised cash passing
rental income 27,227 28,235
Property outgoings (2,561) (2,952)
------------------------------- -------------- ---------------
Annualised net rents 24,666 25,283
Notional rent expiration
of rent free periods (1) 1,188 812
------------------------------- -------------- ---------------
Topped-up net annualised
rent 25,854 26,095
------------------------------- -------------- ---------------
EPRA NIY 5.1% 5.2%
------------------------------- -------------- ---------------
EPRA "topped-up" NIY 5.4% 5.3%
------------------------------- -------------- ---------------
(1) The period over which rent free periods expire is 2 years
(2016: 1 year)
e. EPRA cost ratios
Administrative and operating costs as a percentage of gross
rental income calculated including and excluding direct vacancy
costs.
31/03/2017 31/03/2016
GBP000 GBP000
--------------------------------- ----------- -----------
Administrative/property
operating expense line per
IFRS income statement 7,991 8,456
Share of joint venture expenses 653 552
Ground rent costs (122) (108)
---------------------------------- ----------- -----------
EPRA Costs (including direct
vacancy costs) 8,522 8,900
Direct vacancy costs (1,539) (1,843)
---------------------------------- ----------- -----------
EPRA Costs (excluding direct
vacancy costs) 6,983 7,057
Gross Rental Income less
ground rent costs 23,957 24,632
Share of Joint Ventures
income less ground rent
costs 3,273 3,257
---------------------------------- ----------- -----------
Gross Rental Income 27,230 27,889
EPRA Cost Ratio (including
direct vacancy costs) 31.3% 31.9%
---------------------------------- ----------- -----------
EPRA Cost Ratio (excluding
direct vacancy costs) 25.6% 25.3%
---------------------------------- ----------- -----------
EPRA Vacancy Rate 6.2% 8.9%
---------------------------------- ----------- -----------
EPRA Sustainability Reporting Performance Measures
(unaudited)
The Company reports environmental data in accordance with EPRA
Best Practice Recommendations on Sustainability Reporting 2014, 2nd
Edition for the 2016 calendar year presented with comparison
against 2015.
The reporting boundary has been defined to where the Company has
operational control: managed properties where the Company is
responsible for payment of utility invoices and / or arrangement of
waste disposal contracts. In 2015 there were 29 such managed assets
within the portfolio. In 2016, this dropped to 23 managed assets,
reflecting four sales and two assets where operational
responsibility was transferred to the tenant.
The data provided in these tables has been collated on the
Company's behalf by appointed third parties and has not been
subject to formal assurance.
Total Energy Consumption
The table below sets out total landlord obtained energy
consumption from the Company's managed portfolio by sector.
Total electricity Total fuel Building
consumption consumption energy
(kWh) (kWh) intensity
(kWh/m2)
------------------- ----------------------- ---------------------- -------------
Sector 2015 2016 2015 2016 2015 2016
------------------- ----------- ---------- ---------- ---------- ------ -----
Retail High
Street 4,082 1,135
Coverage 3/3 1/1
Retail Warehouse 14,999 22,254
Scope 1/1 1/1
Retail Shopping
Centre 298,080 255,822 21,119 788
Coverage 2/2 2/2 1/1 1/1
Office 3,887,841 3,816,961 2,434,621 2,014,435 152 141
Coverage 16/16 12/12 15/15 12/12 11/16 7/12
Industrial
Distribution
Warehouse 180,131 166,821 6,074 24,747
Scope 5/5 5/5 4/4 3/3
Leisure 301,858 294,961 269,964 187,936 200 173
Coverage 1/1 1/1 1/1 1/1 1/1 1/1
Mixed use 2,823,224 2,715,630 196 188
Coverage 1/1 1/1 1/1 1/1
------------------- ----------- ---------- ---------- ---------- ------ -----
Total 7,510,215 7,273,582 2,731,778 2,227,906
Total Electricity
and Fuel 10,241,993 9,501,488
------------------- ----------- ---------- ---------- ---------- ------ -----
Coverage 29/29 23/23 21/21 17/17
------------------- ----------- ---------- ---------- ---------- ------ -----
-- Consumption data relates to the managed portfolio only:
o Retail High Street, Warehouses & Shopping Centres;
Industrial Distribution Warehouses; Leisure: common parts and/or
outdoor areas
o Offices and Mixed use: Whole building.
-- Mixed Use relates to 25% of energy consumption at City Tower
-- 13% of Electricity and 42% of Gas data has been estimated
through pro-rating or invoice estimates.
-- Coverage relates to number of managed assets for which data is reported.
Like for like energy consumption
The table below sets out the like for like landlord obtained
energy consumption from the Company's managed portfolio by
sector.
Total like Total like
for like electricity Change for like fuel Change
consumption consumption
(kWh) (kWh)
Sector 2015 2016 2015 2016
------------------- ----------- ----------- --------- ---------- ---------- ---------
Retail High
Street
Coverage
Retail Warehouse
Coverage
Retail Shopping
Centre 20,304 16,997 -16%
Coverage 1/1 1/1
Office 1,330,085 1,521,610 14% 1,079,570 1,017,118 -6%
Coverage 7/7 7/7 7/7 7/7
Industrial
Distribution
Warehouse 175,144 160,487 -8% 5,924 5,124 -14%
Coverage 3/3 3/3 1/1 1/1
Leisure 301,858 294,961 -2% 269,964 187,936 -30%
Coverage 1/1 1/1 1/1 1/1
Mixed use 2,823,224 2,715,630 -4%
Coverage 1/1 1/1
------------------- ----------- ----------- --------- ---------- ---------- ---------
Total 4,650,615 4,709,685 -1% 1,355,459 1,210,177 -11%
Total Electricity
and Fuel 6,006,074 5,919,862 -1%
------------------- ----------- ----------- --------- ---------- ---------- ---------
Coverage 13/13 13/13 9/9 9/9
------------------- ----------- ----------- --------- ---------- ---------- ---------
-- Like for like excludes assets that were purchased, sold or
under refurbishment during the two years reported.
o Consumption data relates to the managed portfolio only:
o Retail High Street, Warehouse & Shopping Centres;
Industrial Distribution Warehouses; Leisure: common parts and/or
outdoor areas
o Offices and Mixed use: Whole building.
-- Mixed Use reflects 25% of energy consumption at City Tower, Manchester.
-- 13% of Electricity and 42% of Gas data has been estimated
through pro-rating or invoice estimates.
-- Coverage relates to number of managed assets for which data is reported.
Greenhouse gas emission
The table below sets out the Company's green house gas emissions
by sector.
Absolute Like for like Intensity
emissions emissions (kg CO2e/m2)
(tonnes (tonnes CO2e)
CO2e)
------------------ -------------- ----------------------- ----------------
Sector 2015 2016 2015 2016 Change 2015 2016
------------------ ------ ------ ------ ------ ------- -------- ------
Retail High
Street
Scope 1
Scope 2 1.9 0.5
Coverage 3/3 1/1
Retail Warehouse
Scope 1
Scope 2 7 9
Coverage 1/1 1/1
Retail Shopping Centre
Scope 1 55 47
Scope 2 138 105 9 7 -25%
Coverage 2/2 2/2 1/1 1/1
Office 53 47
Scope 1 449 371 199 187
Scope 2 1,797 1,573 615 627 2%
Coverage 16/16 12/12 7/7 7/7 11/16 7/12
Industrial Distribution Warehouse
Scope 1 1.1 4.6 1.1 0.9 -14%
Scope 2 83 69 81 66 -18%
Coverage 5/5 5/5 3/3 3/3
Leisure 69 60
Scope 1 50 35 50 35 -31%
Scope 2 140 122 140 122 -13%
Coverage 1/1 1/1 1/1 1/1 1/1 1/1
Mixed use 98 85
Scope 1
Scope 2 1,305 1,119 1,305 1,119 -14%
Coverage 1/1 1/1 1/1 1/1 1/1 1/1
------------------ ------ ------ ------ ------ ------- -------- ------
Total Scope
1 504 410 250 223 -11%
Total Scope
2 3,471 2,997 2,150 1,941 -10%
Total Scope
1 & 2 3,975 3,407 2,400 2,163 -10%
------------------ ------ ------ ------ ------ ------- -------- ------
Coverage 29/29 23/23 13/13 13/13
------------------ ------ ------ ------ ------ ------- -------- ------
Methodology: The Company's greenhouse gas inventory has been
developed using the GHG Protocol Corporate Accounting and Reporting
Standard and GHG emission factors from the UK Government's GHG
Conversion Factors for Company Reporting 2016. Emissions from
electricity (Scope 2) are reported according to the
'location-based' approach.
Mixed Use reflects 25% emissions of City Tower, Manchester
Water
The table below sets out water consumption for assets managed by
the Company.
Total water Like for like Intensity
consumption water consumption
(m(3) ) (m(3) /m(2)
(m(3) ) )
----------------- ---------------- ------------------------- ---------------
Sector 2015 2016 2015 2016 Change 2015 2016
----------------- ------- ------- ------- ------- ------- ------- ------
Retail Shopping
Centre 5283 788
Coverage 2/2 2/2
Office 12,844 14,355 5,620 5,012 -11% 0.4 0.4
Coverage 10/10 8/8 4/4 4/4 9/10 4/8
Leisure 286 315 286 315 10% 0.1 0.1
Coverage 1/1 1/1 1/1 1/1 1/1 1/1
Mixed use 6,243 5,629 6,243 5,629 -10% 0.4 0.4
Coverage 1/1 1/1 1/1 1/1
----------------- ------- ------- ------- ------- ------- ------- ------
Total 24,657 21,087 12,150 10,956 -10%
Coverage 14/14 12/12 6/6 6/6
----------------- ------- ------- ------- ------- ------- ------- ------
Consumption data relates to the managed portfolio only:
Retail Shopping Centres and Leisure: Common parts
Offices and Mixed use: Whole building.
Mixed Use reflects 25% of water at City Tower, Manchester.
Energy and water consumption data is reported according to
automatic meter reads, manual meter reads or invoice estimates.
Where required consumption has been estimated by pro-rating data
from other periods.
Coverage relates to number of managed assets for which data is
reported.
Waste
The table below sets out waste managed by the Company by
disposal route and sector.
Absolute weight Like for like Change
(tonnes) weight (tonnes)
----------------- -------------------------------- -------------------------------- -------
Sector 2015 % 2016 % 2015 % 2016 %
----------------- -------- ----- -------- ----- -------- ----- -------- ----- -------
Retail Shopping
Centre
Direct to
MRF 144.9 69 80.0 63
Incineration
(with energy
recovery) 52.7 25 46.4 37 36.2 100 37.0 100 2%
Landfill 11.6 6 0.2 0
Coverage 2/2 2/2 1/1 1/1
Office
Direct to
MRF 62.1 47 79.5 39 51.1 44 38.9 36 -24%
Incineration
(with energy
recovery) 63.3 48 122.6 61 57.3 50 69.1 64 20%
Landfill 6.6 5 6.6 6 -100%
Coverage 9/9 10/10 7/7 7/7
Leisure
Direct to
MRF 224.6 61 246.6 59 224.6 61 246.7 59 10%
Incineration
(with energy
recovery
and anaerobic
digestion) 145.4 39 174.2 41 145.4 39 174.2 41 20%
Landfill
Coverage 1/1 1/1 1/1 1/1
Mixed use
Direct to
MRF 6.8 11 7.4 13 6.8 11 7.4 13 9%
Incineration
(with energy
recovery) 56.8 89 49.8 87 56.8 89 49.8 87 -12%
Landfill
Coverage 1/1 1/1 1/1 1/1
----------------- -------- ----- -------- ----- -------- ----- -------- ----- -------
Totals
Direct to
MRF 438.3 57 413.5 51 282.4 48 293.0 47 4%
Incineration
(with energy
recovery
and anaerobic
digestion) 318.3 41 393.1 49 295.7 51 330.1 53 12%
Landfill 18.3 2 0.2 0 6.6 1 0 -100%
----------------- -------- ----- -------- ----- -------- ----- -------- ----- -------
Coverage 13/13 14/14 10/10 10/10
----------------- -------- ----- -------- ----- -------- ----- -------- ----- -------
MRF is a Materials Recovery Facility
The Company has no waste management responsibilities for Retail
High Street, Retail Warehouse and Industrial Distribution Warehouse
sectors.
Mixed Use reflects 25% waste of City Tower, Manchester.
Coverage relates to number of managed assets for which data is
reported.
Sustainability Certification: Energy Performance
Certificates
Energy Performance Portfolio
Certificate by floor
Rating area (%)
-------------------- -----------
A 0%
B 4%
C 29%
D 25%
E 11%
F 7%
G 3%
Exempt 3%
--------------------- ----------
Coverage 82%
--------------------- ----------
Energy Performance Certificate records for the Company are
provided as at May 2017 against portfolio floor area, including all
of City Tower, Manchester, as at 31 March 2017.
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as
Depositary to Schroder Real Estate Investment Trust Limited (the
"Company") in accordance with the requirements of Article 36 and
Articles 21(7), (8) and (9) of the Directive 2011/61/EU of the
European Parliament and of the Council of 8 June 2011 on
Alternative Investment Fund Managers and amending Directives
2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and
(EU) No 1095/2010 (the "AIFM Directive").
We have enquired into the conduct of Schroder Real Estate
Investment Management Limited (the "AIFM") for the year ending 31
March 2017, in our capacity as Depositary to the Company.
This report including the review provided below has been
prepared for and solely for the Shareholders in the Company. We do
not, in giving this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is
shown.
Our obligations as Depositary are stipulated in the relevant
provisions of the AIFM Directive and the relevant sections of
Commission Delegated Regulation (EU) No 231/2013 (collectively the
"AIFMD legislation").
Amongst these obligations is the requirement to enquire into the
conduct of the AIFM and the Company and their delegates in each
annual accounting period.
Our report shall state whether, in our view, the Company has
been managed in that period in accordance with the AIFMD
legislation. It is the overall responsibility of the AIFM to comply
with these provisions. If the AIFM or their delegates have not so
complied, we as the Depositary will state why this is the case and
outline the steps which we have taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other
financial and professional activities which may on occasion cause a
conflict of interest with its roles with respect to the Company.
The Depositary will take reasonable care to ensure that the
performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved
fairly and any transactions between the Depositary and its
affiliates and the Company shall be carried out as if effected on
normal commercial terms negotiated at arm's length and in the best
interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable
discretion, considers necessary in order to comply with its
obligations and to ensure that, in all material respects, the
Company has been managed (i) in accordance with the limitations
imposed on its investment and borrowing powers by the provisions of
its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional
documentation and the appropriate regulations. Such reviews vary
based on the type of Company, the assets in which a Company invests
and the processes used, or experts required, in order to value such
assets.
Review
In our view, the Company has been managed during the year, in
all material respects:
(i) in accordance with the limitations imposed on the investment
and borrowing powers of the Company by the constitutional document;
and by the AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the
constitutional document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
Glossary
Articles means the Company's articles of incorporation, as
amended from time to time.
Companies Law means The Companies (Guernsey) Law, 2008.
Company is Schroder Real Estate Investment Trust Limited.
Directors means the directors of the Company as at the date of
this document whose names are set out on page 24 of this document
and "Director" means any one of them.
Disclosure Guidance and Transparency Rules means the disclosure
guidance and transparency rules contained within the FCA's Handbook
of Rules and Guidance.
Earnings per share ("EPS") is the profit after taxation divided
by the weighted average number of shares in issue during the
period. Diluted and Adjusted EPS per share are derived as set out
under NAV.
Estimated rental value ("ERV") is the Group's external valuers'
reasonable opinion as to the open market rent which, on the date of
valuation, could reasonably be expected to be obtained on a new
letting or rent review of a property.
EPRA is European Public Real Estate Association.
EPRA NNNAV is EPRA Triple Net Asset Value, being the NAV
calculated under IFRS adjusted to reflect the fair value of
financial instruments, debt and deferred taxation. .
FCA is the UK Financial Conduct Authority.
Gearing is the Group's net debt as a percentage of adjusted net
assets.
Group is the Company and its subsidiaries.
Initial yield is the annualised net rents generated by the
portfolio expressed as a percentage of the portfolio valuation.
Interest cover is the number of times Group net interest payable
is covered by Group net rental income.
Listing Rules means the listing rules made by the FCA under Part
VII of the UK Financial Services and Markets Act 2000, as
amended.
Market Abuse Regulation means regulation (EU) No.596/2014 of the
European Parliament and of the Council of 16 April 2014 on market
abuse.
MSCI (formerly Investment Property Databank or 'IPD') is a
Company that produces an independent benchmark of property
returns.
Net Asset Value or NAV is shareholders' funds divided by the
number of shares in issue at the period end.
NAV total return is calculated on a daily basis taking into
account the timing of dividends, share buy backs and issuance.
Net rental income is the rental income receivable in the period
after payment of ground rents and net property outgoings.
REIT is Real Estate Investment Trust.
Reversionary yield is the anticipated yield, which the initial
yield will rise to once the rent reaches the estimated rental
value.
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the Annual General Meeting of the
Company will be held at
31 Gresham Street, London, EC2V 7QA on 8 September 2017 at 10
am.
Resolution on Agenda
Form of Proxy
1. To elect a Chairman of the Meeting.
To consider and, if thought fit,
pass the following Ordinary Resolutions:
Ordinary Resolution 2. To receive, consider and approve
1 the Consolidated Annual Report
and Financial Statements of the
Company for the year ended 31 March
2017.
Ordinary Resolution 3. To approve the Remuneration
2 Report for the year ended 31 March
2017.
Ordinary Resolution 4. To re-elect Ms Lorraine Baldry
3 as a Director of the Company.
Ordinary Resolution 5. To re-elect Mr Stephen Bligh
4 as a Director of the Company.
Ordinary Resolution 6. To re-elect Mr Alastair Hughes
5 as a Director of the Company.
Ordinary Resolution 7. To re-elect Mr Keith Goulborn
6 as a Director of the Company.
Ordinary Resolution 8. To re-elect Mr Graham Basham
7 as a Director of the Company.
Ordinary Resolution 9. To re-appoint KPMG Channel Islands
8 Limited as Auditor of the Company
until the conclusion of the next
Annual General Meeting.
Ordinary Resolution 10. To authorise the Board of Directors
9 to determine the Auditor's remuneration.
Ordinary Resolution 11. To receive and approve the
10 Company's Dividend Policy which
appears on page 31 of the Annual
Report.
To consider and, if thought fit,
pass the following Special Resolutions:
Special Resolution 11. That the Company be authorised,
1 in accordance with section 315
of The Companies (Guernsey) Law,
2008, as amended (the "Companies
Law"), to make market acquisitions
(within the meaning of section
316 of the Companies Law) of ordinary
shares in the capital of the Company
("ordinary shares"), provided that:
a) the maximum number of ordinary
shares hereby authorised to be
purchased shall be 14.99% of the
issued ordinary shares on the date
on which this resolution is passed;
b) the minimum price which may
be paid for an ordinary share shall
be GBP0.01;
c) the maximum price (exclusive
of expenses) which may be paid
for an ordinary share shall be
the higher of (i) 105% of the average
of the mid-market value of the
ordinary shares for the five business
days immediately preceding the
date of the purchase; and (ii)
that stipulated by the regulatory
technical standards adopted by
the European Union pursuant to
the Market Abuse Regulation;
d) such authority shall expire
at the conclusion of the annual
general meeting of the Company
to be held in 2018 unless such
authority is varied, revoked or
renewed prior to such date by ordinary
resolution of the Company in general
meeting; and
e) the Company may make a contract
to purchase ordinary shares under
such authority prior to its expiry
which will or may be executed wholly
or partly after its expiration
and the Company may make a purchase
of ordinary shares pursuant to
any such contract.
Special Resolution 12. That the Directors of the Company
2 be and are hereby empowered to
allot ordinary shares of the Company
for cash as if the pre-emption
provisions contained under Article
13 of the Articles of Incorporation
did not apply to any such allotments
and to sell ordinary shares which
are held by the Company in treasury
for cash on a non-pre-emptive basis
provided that this power shall
be limited to the allotment and
sales of ordinary shares:
a) up to such number of ordinary
shares as is equal to 10% of the
ordinary shares in issue (including
treasury shares) on the date on
which this resolution is passed;
b) at a price of not less than
the net asset value per share as
close as practicable to the allotment
or sale;
provided that such power shall
expire on the earlier of the conclusion
of the annual general meeting of
the Company to be held in 2018
or on the expiry of 15 months from
the passing of this Special Resolution,
except that the Company may before
such expiry make offers or agreements
which would or might require ordinary
shares to be allotted or sold after
such expiry and notwithstanding
such expiry the Directors may allot
or sell ordinary shares in pursuance
of such offers or agreements as
if the power conferred hereby had
not expired.
Close of Meeting.
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration
Services (Guernsey) Limited
Secretary
23 May 2017
Notes
1. To be passed, an ordinary resolution requires a simple
majority of the votes cast by those shareholders voting in person
or by proxy at the AGM (excluding any votes which are withheld) to
be voted in favour of the resolution.
2. To be passed, a special resolution requires a majority of at
least 75% of the votes cast by those shareholders voting in person
or by proxy at the AGM (excluding any votes which are withheld) to
be voted in favour of the resolution.
3. A member who is entitled to attend and vote at the meeting is
entitled to appoint one or more proxies to exercise all or any of
their rights to attend and, on a poll, speak or vote instead of him
or her. A proxy need not be a member of the Company. More than one
proxy may be appointed provided that each proxy is appointed to
exercise the rights attached to different shares held by the
member.
4. A form of proxy is enclosed for use at the meeting. The form
of proxy should be completed and sent, together with the power of
attorney or other authority (if any) under which it is signed, or a
notarially certified copy of such power or authority, so as to
reach the Company's Registrars, Computershare Investor Services
(Guernsey) Limited, at The Pavilions, Bridgwater Road, Bristol,
BS99 6ZY at least 48 hours before the time of the AGM.
5. Completing and returning a form of proxy will not prevent a
member from attending in person at the meeting and voting should he
or she so wish.
6. To have the right to attend and vote at the meeting (and also
for the purpose of calculating how many votes a member may cast on
a poll) a member must have his or her name entered on the register
of members not later than 48 hours before the time of the AGM.
7. Changes to entries in the register after that time shall be
disregarded in determining the rights of any member to attend and
vote at such meeting.
Corporate information
Registered Address Independent Auditor
PO Box 255 KPMG Channel Islands
Trafalgar Court Limited
Les Banques Glategny Court
St. Peter Port Glategny Esplanade
Guernsey GY1 3QL St. Peter Port
Guernsey GY1 1WR
Directors (all Non-executive)
Lorraine Baldry (Chairman) Property Valuer
Keith Goulborn Knight Frank LLP
Stephen Bligh 55 Baker Street
Alastair Hughes London
Graham Basham W1U 8AN
Investment Manager and Accounting
Agent Joint Sponsor and
Schroder Real Estate Investment Brokers
Management Limited J.P. Morgan Securities
31, Gresham Street plc
London 25 Bank Street
EC2V 7QA Canary Wharf
London E14 5JP
Numis Securities
Limited
10 Paternoster Square
London EC4M 7LT
Secretary and Administrator
Northern Trust International Tax Advisers
Fund Administration Services Deloitte LLP
(Guernsey) Limited 2 New Street Square
PO Box 255 London EC4A 3BZ
Trafalgar Court
Les Banques Receiving Agent and
St Peter Port UK Transfer/Paying
Guernsey GY1 3QL Agent
Computershare Investor
Depository Services (Guernsey)
Northern Trust (Guernsey) Limited
Limited Queensway House
PO Box 255 Hilgrove Street
Trafalgar Court St Helier
Les Banques Jersey
St Peter Port JE1 1ES
Guernsey GY1 3QL
Solicitors to
the Company as to Guernsey
as to English Law:
Law: Mourant Ozannes
Stephenson Harwood 1 Le Marchant
LLP Street
1 Finsbury Circus St. Peter Port
London EC2M Guernsey GY1
7SH 4HP
FATCA GIIN
5BM7YG.99999.SL.831
This information is provided by RNS
The company news service from the London Stock Exchange
END
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