Guernsey: 26 April 2019
UK Commercial
Property REIT Limited
(“UKCM” or the “Company”)
LEI: 213800JN4FQ1A9G8EU25
FINAL RESULTS FOR
THE YEAR ENDED 31 DECEMBER 2018
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which
is managed and advised by Aberdeen Standard Investments and owns a
diversified portfolio of high quality income-producing UK
commercial property announces its final results for the year ended
31 December 2018.
Four important initiatives delivered
in 2018 and into 2019 which are expected to strengthen the business
and enhance future returns for shareholders
· Conversion to a REIT on 1 July 2018, safeguarding the Company from future
changes in legislation that would have negatively impacted returns.
UKCM is now one of the largest diversified REITs in the UK.
· In December, the Company completed its
largest acquisition to date through the purchase of an earnings
enhancing portfolio of distribution units in the Midlands for £85.4 million.
· In February
2019, the Company refinanced its debt facilities at a
reduced cost, extending the maturity dates, increasing both the
flexibility and quantum of debt available.
· In April
2019, Shareholders approved the expansion of the Company’s
investment policy allowing the Investment Manager the flexibility
to invest further into alternative property assets such as
healthcare, student housing, hotels, car parks, pubs, petroleum and
automotive and the commercially-managed private rental residential
sector.
Financial Highlights – Positive
returns and attractive dividend yield
· NAV total return of 4.5% (2017: 12.2%)
delivered with continued low net gearing of 14.6% which remains one
of the lowest in the Company’s peer group and the wider REIT
sector.
· Portfolio total return of 5.9% (MSCI
IPD benchmark of 6.7%) as real estate returns continued to prove
resilient. Over three years the portfolio has returned 24.0% (MSCI
IPD benchmark 22.2%).
· Attractive dividend yield of 4.4% in
an environment where interest rates are forecast to stay low.
· Share price total return of -2.0% in
the year comparing favourably to the minus 12.4% on the FTSE
All-Share REIT Index and -9.5% on the FTSE All Share Index.
· £95 million of financial resources
available for investment opportunities following the debt
refinancing in February 2019.
· EPRA earnings per share (excluding
non-recurring tax items) of 3.03p (2017: 3.42p), equating to a
dividend cover of 82% which is expected to grow given acquisition
of Midlands portfolio in
December 2018.
Investment activity continues to drive
valuation and improve long term income returns
· 3.4% increase in portfolio valuation
to £1.45 billion as at 31 December
2018 (2017: £1.40 billion).
· £329 million of investment
transactions during the year, selling retail and low yielding
peak-cycle assets, and buying higher yielding, largely industrial,
stock where we see further value potential is anticipated.
· 16.5% of portfolio income now derived
from leases with fixed or inflation-linked uplifts
Positive leasing momentum with portfolio offering strong
reversionary potential.
· Over £7.7 million of the annual income
was secured after rent free periods and incentives through 19 new
leases and 19 lease renewals / rent reviews.
· Occupancy rate increased to 93.1% in
the year (2017: 92.4%) and compares favourably to the benchmark
occupancy rate of 92.8%. Over half the remaining vacancy is in well
located units in the industrial sector which offer opportunities to
improve future returns. Less than 20% of the vacancy is in the
retail sector.
· 99% of rent collected within 21 days
underlining the continued strength of a tenant base that has an
unexpired lease term of 9.4 years.
· Portfolio yield of 4.5% with
reversionary yield of 5.3% highlighting the reversionary nature of
the portfolio and scope for future earnings growth.
Commenting on the results,
Andrew Wilson, Chair of UKCM,
said:
“During the past year the Company has completed on a number of
strategic initiatives to ensure that UK Commercial Property REIT
remains well positioned for growth despite the current climate of
political uncertainty. This includes the Company’s conversion to
REIT, as well as a debt refinancing which concluded post the year
end and will provide greater flexibility and firepower whilst
reducing borrowing costs. The Company has continued to reduce its
exposure to the retail sector and to sell out of ex-growth assets,
recycling proceeds into opportunities with sustainable income
characteristics whilst maintaining low gearing. As a result, an
increasing percentage of portfolio income is subject to fixed
uplifts, underpinning an attractive dividend yield and the
potential for improving dividend cover.”
Will
Fulton, Lead Manager of UKCM at Aberdeen Standard
Investments added:
“Investment activity during the year saw the percentage of
UKCM’s portfolio weighted towards the favoured industrial sector
increase to 46%, following the Company’s largest acquisition to
date of a distribution portfolio in the Midlands. We have also secured shareholder
approval to expand UKCM’s investment policy, which coupled with a
strong balance sheet, provides us with greater flexibility to
further expand our well-diversified portfolio by deploying capital
into opportunities where we see value for shareholders. Occupancy
across the portfolio remains high at 93.1%, with the majority of
vacancy in well located industrial units, where we have already
secured a significant pre-let at Wembley, and which is the focus of
our ongoing active asset management strategy.”
For further information:
Will Fulton/Graeme McDonald, Aberdeen Standard
Investments
Tel: 0131 245 2799/0131 245 3151
Richard Sunderland /Claire Turvey/Eve Kirmatzis, FTI Consulting
Tel: 020 3727 1000
PERFORMANCE SUMMARY
CAPITAL VALUES AND
GEARING |
31
December 2018 |
31
December 2017 |
%
Change |
Total assets less
current liabilities (excl Bank loan & swap) (£’000) |
1,462,982 |
1,457,262 |
0.4 |
Net asset value
(£’000) |
1,212,619 |
1,206,046 |
0.5 |
Net asset value per
share (p) |
93.3 |
92.8 |
0.5 |
Ordinary Share Price
(p) |
83.2 |
88.6 |
(6.1) |
Discount to net asset
value (%) |
(10.8) |
(4.5) |
n/a |
Gearing
(%): Net*
Gross** |
14.6
17.1 |
12.8
17.2 |
n/a
n/a |
|
|
|
|
TOTAL RETURN |
1
year
% return |
3
year
% return |
5
year
% return |
NAV † |
4.5 |
21.7 |
59.0 |
Share Price † |
(2.0) |
11.3 |
35.1 |
MSCI (IPD) Balanced
Monthly and Quarterly Funds |
6.7 |
22.2 |
61.8 |
FTSE All-Share Real
Estate Investment Trusts Index |
(12.4) |
(8.6) |
25.1 |
FTSE All-Share
Index |
(9.5) |
19.5 |
22.1 |
|
|
|
|
EARNINGS AND
DIVIDENDS |
31
December 2018 |
31
December 2017 |
|
Net profit for the
year (£’000) |
53,005 |
131,562 |
|
EPRA Earnings per
share (p) |
3.03 |
3.42 |
|
IFRS Earnings per
share (p) |
4.08 |
10.12 |
|
Dividends declared per
ordinary share (p) |
3.68 |
3.68 |
|
Dividend Yield (%)
*** |
4.4 |
4.2 |
|
IPD Benchmark Yield
(%) |
4.7 |
4.8 |
|
FTSE All-Share Real
Estate Investment Trusts Index Yield (%) |
4.7 |
3.4 |
|
FTSE All-Share Index
Yield (%) |
4.5 |
3.6 |
|
|
|
|
|
ONGOING CHARGES AND
VOID RATE |
|
|
|
As a % of average net
assets including direct property costs |
1.5 |
1.5 |
|
As a % of average net
assets excluding direct property costs |
0.9 |
0.9 |
|
Vacancy rate (%) |
6.9 |
7.6 |
|
* Calculated as net
borrowings (gross borrowings excluding swap valuation less cash)
divided by total assets less cash and less current liabilities
(excluding any borrowings and swap valuation).
** Calculated as gross borrowings
(excluding swap valuations divided by total assets less current
liabilities (excluding borrowings and swap).
*** Based on an annual dividend of 3.68p and the share
price at 31 December.
† Assumes re-investment of
dividends excluding transaction costs.
Sources: Aberdeen Standard Investments, MSCI Investment Property
Databank (“IPD”)
Chairman’s Statement
In what has been a pivotal period I am pleased to report that
your Company has continued to make good progress at both a
corporate and portfolio level. In 2018 and into 2019 we completed
four important initiatives, all of which were undertaken to
strengthen the business and are expected to enhance future returns
for shareholders.
· The first of these was our conversion
to a REIT, safeguarding the Company from future changes in
legislation that would have negatively impacted returns. Having
also changed our name to UK Commercial Property REIT Limited
(“UKCM”) to reflect this change, we are now one of the largest
diversified REITs in the UK.
· In December, we completed the
Company’s largest acquisition to date through the purchase of an
earnings enhancing portfolio of distribution units in the
Midlands for £85.4 million.
Throughout the year we concluded £329 million of sales and
acquisitions as we continued to rotate our portfolio.
· In February
2019, we refinanced our debt facilities at a reduced cost,
extending the maturity dates, increasing both the flexibility and
quantum of debt available.
· Finally, at the time of our year end
NAV statement in February, we announced that we would seek
shareholder approval to expand the Company’s investment policy to
provide the Investment Manager with the flexibility to invest
across the full spectrum of commercial property including property
assets known as ‘alternatives’.
Over the course of 2018, our portfolio of 43 investments, which
is now valued at £1.45 billion, delivered a total return of 5.9%
compared to the Company’s benchmark total return of
6.7%.Performance was driven mainly by an overweight position to the
strongly performing industrial sector which accounted for 46% of
the portfolio by capital value at the year end and delivered a
total return of 16.0% in 2018. The strong performance of our
industrial assets was partially offset by the ongoing challenges
faced by the retail sector and one off transaction costs in Q4
2018.
Sentiment turned increasingly negative over the year stoked by a
number of well-known company voluntary arrangements and the general
trend towards online retail. Distribution warehousing has been
reaping the benefit of this adjustment, evidenced most recently for
your Company when it announced the pre-letting of its entire
180,000 sq ft industrial unit in Wembley, North London, ahead of the current occupier
moving out in March 2019 upon lease
expiry. The new 10-year index linked lease was signed with an
international business that is due to take occupation in October
after a full refurbishment of the building.
Portfolio Activity
2018 was also a busy year in the continued repositioning of the
UKCM portfolio in reducing its retail weighting and increasing
industrial exposure. A key part of this has been realising gains on
assets where there is limited future return prospects and
re-investing proceeds into higher yielding assets.
The Company sold £173 million of property in 2018 including the
disposal of the Company’s retail holdings in Shrewsbury for £49 million early in the year.
This was followed by the sale of a High Street retail asset in
Exeter for £23.5 million. As a
consequence, the Company’s retail exposure reduced to 27% of the
capital value of the portfolio. Profits were also crystallised in
the office portfolio through the sale of 15 Great Marlborough
Street in London’s West End and 1 Rivergate in Bristol for a combined £100 million, both
being lower yielding assets.
We also acquired over £156 million of properties during the
year, predominantly in the industrial sector. In June, the Company
purchased for around £51 million the White Building in Reading, a
multi let office investment that is well set to benefit from the
opening of Crossrail. This was followed by two acquisitions in the
industrial sector: the M8 industrial estate near Glasgow for £24.6 million, yielding 5.9%; and,
just prior to the year end, a portfolio of five Midlands distribution units for £85.4 million.
The net initial yield of this latter purchase was 5.5% with an
unexpired lease term of 7.4 years to expiry and, as well as being
reversionary in nature, offers attractive asset management
opportunities.
Overall the transactions undertaken in the year have reduced
potential portfolio risk by removing assets where future returns
were limited; most notably in the retail sector. The proceeds have
been re-invested into higher yielding assets that offer greater
security of income in favoured sectors and locations.
Additionally, we invested some £41 million of capital
expenditure into maintaining or enhancing the value of the retained
assets in our portfolio.
The average lease length increased in 2018 and the void rate
reduced while the passing rental income at the year-end was £69
million (contracted rental income £71.9 million after expiry of
rent free periods) with the estimated rental value of the portfolio
being £81.4 million.
Corporate Performance
The Company achieved a net asset value (“NAV”) total return of
4.5% in 2018, accomplished with low net gearing of 14.6%. The share
price total return for the year was lower at -2.0% as the discount
widened in the year to 10.8% at the year end. However, the share
price has risen in 2019 with the discount at 15 April being reduced
to 3.7%. Both the NAV and share price total returns exceeded those
of the FTSE All-Share REIT Index (-12.4%) and FTSE All-Share Index
(-9.5%) over the same period.
Over the longer term the Company has produced stable performance
with NAV and share price total returns of 91.9% and 69.0%,
respectively, since inception compared with a return on the FTSE
All- Share REIT Index of -16.3%.
The Company is now also a member of the Aberdeen Standard
Investments Trust Share Plan, Children’s Plan and ISA which should
increase the Company’s visibility amongst potential new retail
shareholders.
Financial Resources
The Company continues to be in a financially strong position,
having been further bolstered by the debt refinancing undertaken in
February 2019. At the year end the
Company’s net gearing was 14.6% at a blended rate of interest of
2.89% per annum with a revolving credit facility (“RCF”) of £50
million still available for investment. The debt refinancing
enabled the Company to increase the amount of the variable rate RCF
available by £100million. This increased the flexibility of the
overall debt profile and allows the Company to move quickly to take
advantage of attractive opportunities that may well occur in the
present uncertain economic environment. The business also benefited
from the low level of gilt rates taking out £100 million of
additional 12 year fixed interest debt using the proceeds to repay
partially the £150 million Barclays term loan which was due to
mature in March 2020with £50million of the RCF being used to repay
the remaining amount. Overall, the debt refinancing has resulted in
the Company having £95 million of RCF available for investment for
the next 5 years and a reduced blended rate of interest on its
drawn debt of 2.79% per annum with a weighted maturity on its fixed
interest rate debt of 10 years. Importantly, the Company remains
one of the lowest geared companies in the REIT sector, a sensible
defensive
strategy given the current economic situation and the forecast
moderation of capital returns in the real estate sector.
Dividends
The Company declared and paid dividends totalling 3.68p in 2018.
This equated to a yield on the year end share price of 4.4%. In an
environment where interest rates are forecast to stay lower for
longer, this is a healthy return underpinned by a strong tenant
base that pays 99% of its rent within 21 days and a portfolio with
an increased weighted average lease length of 9.4 years and 14% of
its income in fixed or inflation linked leases.
One of the key objectives of the Board is earnings growth to
underpin and drive future dividend policy. The acquisition of the
Midlands distribution portfolio
towards the year end will add £5 million to the annual rent roll
after rent free periods expire. Rental income should also grow as a
result of the lettings completed in Wembley, North London and Radlett in Hertfordshire in the first quarter of 2019,
and the fact that over half the Company’s voids are in the
industrial sector at strong locations, coupled with the
reversionary nature of the portfolio. The previously announced
reduction in the Investment Manager’s fee, and the absence of a
number of non-recurring costs in relation to the REIT conversion,
as incurred in 2018, should combine to increase both our EPRA
earnings per share (3.03p in 2018) and dividend cover towards 100%
in the medium term.
Investment Policy
On 14 February 2019, the Company
announced its intention to amend its investment policy. This
modernisation of the policy, which was approved by shareholders at
a General Meeting on 18 April 2019,
provides the Investment Manager with the flexibility to invest
across a wider spectrum of commercial property which encompasses
what have been termed alternative property assets including
healthcare, student housing, hotels, car parks, pubs, petroleum and
automotive and the commercially-managed private rental residential
sector. Whilst there are no immediate plans to invest in these
assets, the usual research and due diligence will be undertaken
should suitable opportunities arise.
Environmental and Social Governance
(“ESG”)
I would also highlight the positive ESG work that is being
undertaken by the Investment Manager in the portfolio. A particular
highlight was the award of a Green Star ranking from the Global
Real Estate Sustainability Benchmark 2018, with the Company
improving its score by 9% compared with 2017 and receiving a
European Sector Leader award as the top performer in its peer
group.
Board
As reported in the 2016 Annual report, the Board’s succession
plan resulted in Mr John Robertson
retiring in March 2018 and Ms
Margaret Littlejohns and Mr
Robert Fowlds being appointed in
January and April, respectively. As previously announced, my
intention was to step down from the Board at the AGM in 2019.
However, in order to ensure a smooth handover of responsibilities,
I will retire from the Board at the end of 2019. I am pleased to
announce that my successor will be Mr Ken
McCullagh, the current Audit Committee Chair and Senior
Independent Director who has served on the board for six years,
thereby providing valuable continuity. Mr McCullagh’s knowledge of
real estate coupled with his financial expertise makes him an ideal
candidate to lead your Company forward.
Mr Michael Ayre, a Certified
Accountant, will replace Mr McCullagh as Audit Committee Chair. The
Board, through its Nominations Committee, intends to appoint a
further UK based Director during the course of this year. These
changes have and will continue to refresh the Board but without a
sudden loss of invaluable knowledge and collective experience.
Outlook
The ongoing Brexit debate and our future relationship with the
European Union has caused a period of political uncertainty which
has not been seen for a generation. Irrespective of the outcome,
this lack of clarity has impacted the economy with both business
investment and consumer spending muted. Companies triggering Brexit
contingency plans may well result in parts of their businesses
moving outside the UK. GDP growth in 2018 was a below-trend at
1.4%, with our Investment Manager forecasting the same level for
2019. This compares to an average forecast of 2.0% across the
developed economies.
In this environment, real estate, and UKCM in particular, have a
lot to offer. While poorly located retail will continue to
struggle, the underlying fundamentals of the UK commercial property
market remain compelling, particularly in the industrial sector.
Compared to previous cycles, commercial real estate is far more
prudently geared, has high occupancy levels and limited supply risk
due to low levels of development. A further attraction is the
ongoing and significant differential between property yields and
gilts in an environment where interest rates are forecast to remain
lower for longer.
Against this backdrop, UKCM is very well positioned. The
portfolio is of institutional quality and geared towards the
industrial sector, with a declining proportion in retail and now
just 3% in shopping centres. In addition, over half of the
Company’s low void level is in the industrial sector which we see
as an opportunity to deliver increases in capital value and income
through successful asset management initiatives, as demonstrated by
the recent letting at Wembley, North
London. The Company has also enhanced its financial position
with the recent debt refinancing which has delivered additional,
more flexible resources for investment while increasing the
maturity profile, reducing the cost of our debt and allowing us to
remain one of the lowest geared companies in the REIT sector.
Finally, with income forecast to be the main driver of property
performance in the next phase of the property cycle, UKCM generates
a secure and sustainable dividend yield supported by a strong
tenant base with an income profile that is reversionary in
nature.
Overall, I believe that UK Commercial Property REIT, one of the
UK’s largest diversified REITs, with a continued strategy of
producing income led total returns, is very well placed to continue
to deliver value for its shareholders.
Andrew Wilson
Chair of UKCM
25 April 2019
Investment Manager Review
Market Review
2018 UK economic growth was fairly uneven. After a weak,
weather-affected start to the year, third quarter growth was well
above trend at 0.6%, however this appears to have been a temporary
spike rather than a decisive strengthening of the economy with
indicators in the fourth quarter turning down sharply.
The ongoing uncertainty surrounding Brexit negotiations appears
to be restraining business investment and household spending. With
trend growth estimated to be lower, the output gap largely closed,
and a relatively weak global backdrop, it is hard to see a
substantial acceleration in economic growth, which slowed to just
0.2% increase to GDP in the final quarter.
The real estate market has largely followed suit with returns
slowing as each quarter of 2018 passed to reach only 6% for the
calendar year, with no capital growth in the second half of the
year. However the average masks major differences at the sector
level. While industrial real estate had another strong year and
delivered returns of 16.4%, retail’s return for the year was
negative at -0.5%, according to the MSCI IPD Quarterly Index. This
represented the largest spread of returns across the three
traditional commercial sectors in any 12-month rolling period since
Index began in 2000. The FTSE UK REIT index deteriorated
significantly in the second half of the year to record a -12.8%
total return in 2018. This was weaker than the wider stock
market, where the FTSE 100 and the FTSE All-Share returned -8.7%
and -9.5% respectively. The hierarchy of preferred real estate
sectors remains largely unchanged with industrials and
income-focused stocks remaining the top picks, and wide discounts
for the major retail specialists.
Occupational markets continue to behave quite differently across
sectors, with structural forces being the key drivers. The familiar
pattern of falling retail rents, modest upticks in office rents and
robust growth in industrials is little changed. However, the risk
of more serious declines in the retail sector is affecting investor
sentiment. The structural challenges facing the retail sector are
now beginning to be reflected in MSCI IPD data with the majority of
retail experiencing declining rental values. With few retailers
expanding, aside from the value operators, this rental trend is
expected to continue through 2019.
The industrial sector continues to be the stand-out performer in
the UK real estate market, although MSCI IPD data suggests that
rental growth is beginning to moderate. However, with vacancy rates
remaining exceptionally low and interest in available industrial
space healthy, the necessary drivers are still in place to support
further rental growth for the sector.
At £62.1 billion, according to Property Data, UK real estate
investment volumes in 2018 were only down 5% on 2017, itself a very
strong year, and substantially more than 2016’s total of £52
billion. This high level of activity came despite the uncertainty
facing the market and increasing caution and selectivity among
investors towards the end of the year. Notably, 2018 saw the
highest ever volume of transactions in the alternative space, at
nearly 30% of all deals by value. This sector is fast becoming
mainstream and represents the property types falling outside the
traditional ‘Retail’, ‘Office’ or ‘Industrial’ definitions.
Meanwhile, retail volumes were less than 10% of the total and the
£1.3 billion of shopping centre transactions was the lowest annual
sum since Property Data’s records began in 2000.
In contrast with the net disinvestment of the previous two
years, UK institutions were net investors to the tune of £2.3
billion in 2018. This took up some of the slack from a notable drop
in net investment by overseas investors from £12.6 billion in 2017
to just £4.2 billion in 2018, which was the second lowest figure
since 2006 but remains significant with 44% of buyers being
overseas. This was driven by nearly £6 billion of net disinvestment
by US investors and a slowdown in investment from the Far East. It
is likely that Brexit concerns played a part in this trend but the
stronger economy and higher yields in the US may also have been a
factor. Furthermore, some very large disposals, such as Goldman
Sachs’ sale and leaseback of its new European headquarters in
London, skewed the figures
somewhat.
Review by Sector
Retail — Structural change bites
According to MSCI IPD, retail performance lurched into negative
territory in 2018, which is the first time since 2008 that a sector
has delivered a negative total return in the calendar year.
Investor sentiment in the sector has deteriorated as has liquidity.
With the share prices of Intu and Hammerson falling by 55% and 40%
respectively in 2018, the listed market has led the way in
reflecting the structural challenges in the sector. The outlook for
retail tenants has become more challenging as time has gone on and
this is now weighing on performance, with all forms of retail
experiencing declining rental values. With few retailers expanding,
aside from the value operators, and further distress and store
rationalisation in the sector anticipated, it is expected that this
trend will continue through 2019. There are specific concerns
around department stores, which are weighing heavily on the value
of the shopping centres they anchor. Supermarkets have become the
best performing part of the retail market and, with a 6.4% total
return, outperformed the wider UK real estate market average in
2018. There are undoubtedly challenges around store count, store
sizes, over-renting and more intense competition pushing down
margins. However, there remains a strong reliance on physical
stores evidenced by online sales growing notably slower compared to
non-food retail while long leases, often with indexation, and
strong covenants have supported values. While the top-down view of
the retail sector is unfavourable, many retail locations continue
to perform well for retailers and offer robust income for
discerning investors. Forensic stock selection and a focus on
active asset management are ever more important for the delivery of
performance from this evolving sector.
Office — Brexit and structural change
holding London back
For the second successive year, regional offices were the best
performing geographical region in the sector, delivering a total
return of 8%. London’s City and West End/ Mid-Town sub-markets
produced total returns of 6.9% and 4.6% respectively, while assets
in the rest of the South East returned 6.5%. Rental value growth
has slowed markedly in Central
London, turning negative in the West End in 2018 despite low
vacancy rates, even with a reasonable near-term pipeline of
speculative construction. Take-up in 2018 was strong, with nearly
18 million square feet let across Central
London, according to CoStar. In such conditions, slow growth
or even falling rental values are unusual. However, Brexit
uncertainty is likely to be contributing to some occupier caution,
as well as incentivising landlords to secure lettings rather than
push for the highest rent possible. Furthermore, a growing share of
take-up is accounted for by flexible office providers, which
ultimately adds to rather than absorbs supply, as those operators
re-let the space back into the market at higher head count
densities, competing with traditional space. While vacancy is
higher in the regions, the recent trend has been much more positive
in the ‘Big Six’ office markets (Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester), with vacancy falling sharply,
permitted development rights further reducing supply, very strong
net absorption and some modest rental value growth, in addition to
higher income returns than in Central
London. The investment market continues to support pricing
in Central London but remains
heavily reliant on overseas investors, who have a different cost of
capital and a different universe of investment targets compared
with UK investors. But as the year drew to a close there were signs
of greater caution, with investors adopting a ‘wait and see’
approach ahead of the Brexit deadline.
Industrial — Continued rental value
growth supporting strong pricing
The industrial sector outperformed the wider market for the
seventh successive year in 2018 and by its largest ever margin,
delivering a total return more than 10 percentage points greater
than all property. Rents grew by 4.6% at the headline sector level
and yields moved in to a record low. Rental performance was once
again stronger in the South East than the rest of the country, with
rents being 30% higher than five years ago, compared with a 14%
increase in the rest of the UK. Constrained supply remains the key
to this growth, with industrial stock in London shrinking against a backdrop of robust
demand created by the growing requirement for ‘last mile’ logistics
space driven by retail sales transitioning to online. Outside of
the South East, the market is more in balance and supply has
increased in response to the rapid absorption of logistics stock
between 2014 and 2017. Whilst vacancy has stabilised in the core
distribution markets, the absolute level is low and still
supportive of growth. There were signs towards the end of 2018 that
investors were becoming more discerning around industrial
investment. Interest in the strongest occupational markets remains
undimmed but the pricing of some riskier and more compromised
assets, in areas with less demand, may be softening.
Alternatives – Income-focused
investors abound
Alternative property types are fast becoming conventional and
are loosely grouped together as “Other Property” by MSCI IPD. This
sector performed marginally ahead of the market average in 2018,
continuing a pattern of strong relative performance in weaker
return environments. With much of the sample of properties on long
leases, often to secure covenants and with guaranteed but usually
capped uplifts to income, values in the sector tend to be less
volatile than the traditional commercial sectors. This has
historically led to relative outperformance when absolute returns
are lower and underperformance when absolute returns are higher.
However, there are also significant structural drivers at play,
such as demographics and technology, working in favour of many of
these property types. The proportion of real estate investors
prioritising income has increased in recent years, diverting
investor interest into areas of the market offering sustainable
income through either shorter leases where the fundaments of the
sub-sector are strong, or through long secure income streams. While
MSCI IPD includes leisure property within its “Other Property”
sample, some aspects of it, especially the food and beverage
elements, are more similar to retail than other alternatives. Given
its reliance on consumers’ disposable income and the complementary
nature of retail and leisure uses, there are concerns that retail
oversupply will dampen leisure growth. Rapid restaurant expansion
has absorbed some retail vacancy in recent years but this has
largely been fuelled by debt and many locations would appear to be
saturated. Increasingly, highly leveraged, low margin operators
look vulnerable, intensifying the investor’s focus on covenant
strength when investing in buildings with long leases.
Market Outlook
There is significant uncertainty around the near term political
outlook and, by extension, the economic outlook. Sustained
uncertainty implies elevated risk and this is impairing liquidity
in the UK real estate market. The paucity of buyers is affecting
pricing visibility and that may ultimately lead to a lack of
confidence in valuations, with little evidence to base them on.
With the risk that this uncertainty is prolonged the short-term
outlook for UK real estate carries risk to values. However, absent
Brexit risks, fundamentals in the market are generally robust. Low
vacancy and the structural support for demand are set to drive
industrial rents higher, while office vacancy is low in
Central London and has fallen
significantly in the regions, which should support occupational
markets despite caution on the part of tenants. We expect further
declines in value across the retail sector in 2019 and an end to
Brexit uncertainty is unlikely to offset the market’s concerns
around the sector’s structural issues or nervousness around some
key tenants. After a long period of strong total returns, with
10.6% per annum delivered from September
2009 to September 2018, it is
intuitive that value across the market is now hard to unlock. But
with prices now falling in many segments, some investors may be
insufficiently discerning to accurately price assets relative to
their true long-term worth in a turbulent market. While buyers will
always be wary of further post-purchase falls in value in such a
market, strong performance over the medium to long term can still
be achieved, if assets are purchased below their long-term worth.
Fundamentally good quality assets can be swept up in negative
sentiment and may transact at levels that look favourable in the
longer term offering good opportunities for shrewd investors.
Portfolio Performance
During the reporting period the Company’s property portfolio
generated a total return of 5.9% versus 6.7% for its MSCI IPD
Balanced Monthly & Quarterly Funds benchmark. The portfolio
delivered outperformance for the first nine months of the year but
fell behind in Q4 due to one-off transaction costs, the timing of
asset management events in the industrial portfolio and valuation
adjustments across the retail portfolio. At the year end the
portfolio’s net initial yield was 4.5% with a reversionary yield of
5.3%, illustrating the strong potential for earnings growth through
the leasing of void properties and realisation of latent income,
discussed later in the Review.
Over three years the portfolio has outperformed its MSCI IPD
benchmark. The table opposite sets out the components of these
returns for the year to 31 December
2018 with all valuations undertaken by the Company’s valuer,
CBRE Ltd.
|
Total
Return |
Income
Return |
Capital Growth |
|
UKCM |
Benchmark |
UKCM |
Benchmark |
UKCM |
Benchmark |
|
% |
% |
% |
% |
% |
% |
Industrials |
16.0 |
16.3 |
3.1 |
4.4 |
12.5 |
11.4 |
Office |
10.8 |
6.9 |
4.2 |
4.0 |
6.4 |
2.8 |
Retail |
-7.3 |
-0.4 |
5.3 |
5.3 |
-12.1 |
-5.4 |
Alternatives |
4.3 |
7.8 |
4.4 |
4.5 |
-0.1 |
3.2 |
Total |
5.9 |
6.7 |
4.1 |
4.6 |
1.8 |
2.0 |
Source: MSCI/IPD, Aberdeen Standard Investments
Multi-period capital growth and income return may not sum
perfectly to total return due to the cross product that occurs as
income is assumed to be reinvested on a monthly basis and is
subject to capital value change.
The portfolio’s income profile has continued to be the main
driver of total returns, delivering 4.1% compared to a capital
return of 1.8% for the 12 month period. This trend, of a reliance
on income to be the dominant generator of total returns, is
expected to continue. In response, the Company has continued to
align the portfolio to the strongly performing industrial sector,
increasing weighting to 46% with the purchase of a higher yielding
regional portfolio to balance the strong but lower yielding South
East portfolio. It has also decreased exposure to the retail
sector, which carries the greatest level of income risk, to 27%.
This strategic restructuring, combined with a high occupancy rate
of 93% and attractive asset management opportunities, places the
Company in a good position to deliver a sustainable income return
under the prevailing market conditions.
Industrial
The industrial portfolio, which now represents just under half
of the Company’s holdings by capital value, has delivered a total
return for the year of 16.0% against the benchmark return of 16.3%.
This strong performance has been driven by the completion of
significant leasing activity at Ventura Park, Radlett, Newton’s
Court, Dartford and The Dolphin
Estate, Sunbury on Thames. These properties represent the top three
performing assets in the portfolio over the year, each delivering
returns in excess of 20%. Sector level performance has temporarily
been impacted by two assets: XDock 377, Magna Park, Lutterworth and
Wembley180, London. XDock 377 is a
distribution warehouse, located in the logistics ‘Golden Triangle’
of the Midlands in close proximity
to the M1 and M6 Motorways, which has recently been refurbished and
is currently the Company’s largest vacant property, representing
just under half of the portfolio’s 6.9% vacancy position. This
prime property represents an excellent asset management opportunity
to capture the rental growth being delivered in the sector and,
upon letting, is forecast to generate a boost to capital
performance and a robust income profile. Wembley180 is a prime
London distribution warehouse
single let to M&S on a lease which expired in March 2019. The asset’s short income profile
suppressed performance during the year. However, during the first
quarter of 2019 the property has been pre-let to an international
occupier on a 10- year index-linked lease, subject to a
comprehensive refurbishment. This is due to be completed in
October 2019 and is anticipated to
deliver significant value together with strong income.
Office
The Company’s office portfolio has performed strongly during the
course of the year, delivering a total return of 10.8% compared to
the benchmark return of 6.9%. This outperformance has been driven
by the profitable sales of 1 Rivergate, Bristol and 15 Great Marlborough Street,
London, together with the
completion of lettings ahead of estimated rental values at Eldon
House, London and Central Square,
Newcastle. During the year the
Company purchased the White Building in Reading, which provides
robust income and good asset management opportunities to take
advantage of the attractive local market dynamics with the
forthcoming delivery of the Elizabeth Line planned for autumn 2019.
The Company now only holds two Central
London office buildings: Craven House in the West End and
Eldon House in the City. Combined, these assets represent just
under 5% of the portfolio by capital value, placing the Company in
a strong, defensive position towards the uncertain risks presented
by Brexit.
Retail
The Company has sold two retail assets during the year: three
shopping centres assets in Shrewsbury, treated as one sale, and 16–20
High Street Exeter, reducing the exposure to the retail sector to
just 27% by capital value. The retail portfolio delivered a total
return of -7.3% compared to -0.4% for its benchmark. This
performance has been driven by valuation adjustments in response to
established headwinds in the sector. Two assets were particularly
impacted: the Company’s one remaining ‘shopping centre’ in
Swindon and St George’s Retail
Park, Leicester, one of the
Company’s smallest retail parks, which was impacted
disproportionately by CVA (Company Voluntary Arrangement) activity
over the year. However, with the benefit of a focused asset
management agenda, the Company has completed significant leasing
activity at St George’s Retail Park, Leicester, Kew Retail Park, Richmond and The
Parade, Swindon, resulting in a
high occupancy level of 96% across the Company’s retail portfolio
at the year end as discussed in more detail below.
Alternatives
The Company’s leisure assets, which collectively represent 11%
of the portfolio by capital value, delivered a total return of 4.3%
compared to the benchmark return of 7.8%. The Company’s performance
has been impacted by a weakening in the casual dining sector with
two CVAs at Regent Circus, Swindon
and two small vacancies at The Rotunda in Kingston-upon-Thames. Shortly before the year
end the Company’s forward funding of the Maldron Hotel in
Newcastle was completed with the
hotel element now fully income producing. This provides an
attractive 35 year index linked income which further bolsters the
portfolio’s income profile.
Investment Activity – Delivering on
Strategy
As you will read below, we have had an active year manoeuvring
the portfolio in line with our strategy to position for an
attractive and, we anticipate, growing level of income together
with the potential for capital growth. This has taken the form of
£329 million worth of investment transactions – selling retail and
low yielding peak-cycle assets, and buying higher yielding, largely
industrial, stock where we see further potential. We have also
invested £41 million into improving property we already own the
fruits of which we expect to benefit from during 2019 and
beyond.
Sales
One of our key objectives since 2015 has been to reduce retail
exposure. We continued this at the start of the year in January
when we completed on the strategic disposal of the Charles Darwin,
Pride Hill and Riverside shopping centres in Shrewsbury to Shropshire Council for
approximately £51 million, ahead of the 2017 year-end valuation,
leaving us just one relatively small shopping centre. In the final
quarter we also completed the sale of a retail asset at 16–20 High
Street, Exeter, to a UK pension
fund for £23.5 million; let to H&M and Barclays Bank the sale
reflected a net initial yield of 4.75%.
During the summer, having completed our asset management plan to
extend the occupational lease, we sold 1 Rivergate, a single let
office building on Temple Quay, Bristol, to a pension fund for a net price of
£26.6 million (net after a rental top up), which was ahead of the
asset’s latest valuation.
In the final quarter, we completed on our largest sale of the
year at 15 Great Marlborough Street, Soho, London, in an off market transaction to a
major UK Insurance Company for £73.2 million. This met our twin
goal of strong pricing and risk mitigation. We sold ahead of
valuation capturing what we believe to be peak London office pricing, represented by a very
low yield, and removed the risk of our tenant, Sony, exercising an
option to break the lease and so stop paying what was a significant
rent for the Company in November
2019.
Purchases
During the first half of the year we completed the acquisition
of The White Building, Reading, for approximately £51 million,
based upon a topped-up net initial yield of 5.75%. This multi-let
office recently emerged from a £16 million refurbishment by the
vendor and is proving very popular amongst tenants. It is in line
with our strategy to acquire prime assets with an earnings focus
and we expect the property will continue to benefit from the wider
infrastructure investment being undertaken in Reading, most
significantly when the new Elizabeth Line opens linking the town to
Central London. The property is
82% let to nine tenants and at purchase had a weighted average
unexpired lease term of five years to break. It is expected to
deliver an annual rental income of around £3.0 million once fully
let.
In September we acquired the M8 Industrial Estate, near
Glasgow, from a private property
company for a headline price of £24.6 million, based on a topped up
net initial yield of 5.9%. The asset has 92% occupancy and is well
let to tenants including Boots UK and Rentokil with an attractive
average lease term of seven years at purchase. With an affordable
rent of £5.25 per sq ft across the estate, there is an opportunity
to let up the small amount of vacant space and grow income.
Close to the year end we capitalised on the opportunity to
acquire a portfolio of five distribution warehouses in strategic
locations across the Midlands,
close to the M1 and M6 motorways. The portfolio totals 909,030 sq
ft and is 100% let to a diverse mix of tenants with a low average
headline rent of £5.52 per sq ft, as well as an attractive
unexpired lease term of 7.4 years to break and 9.6 years to expiry.
This reversionary portfolio provides secure, diversified income and
attractive asset management opportunities to capture rental growth
and extend lease terms. Bought from Clipstone Logistics REIT for a
headline price of £85.4 million, reflecting a headline net initial
yield of 5.5%, the acquisition increased our exposure to the
strongly performing industrial sector to 46%.
Collectively these transactions represent a recycling of capital
from mature-cycle and expensive markets into higher yielding assets
offering better risk-adjusted and sustainable earnings
potential.
Asset Management Activity
During the year the Company continued its drive to strengthen
income streams, extend lease lengths and add value to the
portfolio, which now has an annual rent roll of £69 million (£71.9
million after expiration of rent free periods). Over £7.7 million
of the annual income was secured after rent free periods and
incentives through 19 new leases and 19 lease renewals / rent
reviews.
The Company is also pleased to report that, on average, 99% of
rent was collected within 21 days of each quarterly payment date
during 2018.
It was good to witness the majority of open market rent reviews
agreed this year generating rental increases, especially within the
South East industrial sector where rents grew significantly, often
ahead of Estimated Rental Value (ERV). Rent review uplifts within
the Company’s strongly performing industrial portfolio totalled
£496,505 p.a., 16% ahead of the previous rents and 12% ahead of
ERVs at the time of review.
During the year, the weighted average unexpired lease term
across the portfolio remained steady at 8.8 years at the end of the
year compared to 8.9 years in December
2017, with 16.5% of portfolio income now derived from leases
with fixed or inflation-linked uplifts.
Thematically we have experienced strong rental growth from the
significant London based element
of our industrial portfolio with good demand across both
London and regional stock. Retail
ERVs, particularly in the single shopping centre and most of the
retail parks, have dropped through the year however our leasing
experience to date has been encouraging with our overall retail
occupancy level at 94% at the year end and a relatively limited
impact from Company Voluntary Arrangements (CVAs) with a reduction
of only 1.5% of rental income from the total portfolio. The leisure
portfolio is predominantly well let on medium to long term leases
and has seen minimal change in ERV although there is leasing
friction on the elements of food and beverage within this
subsector. The office portfolio has experienced good demand for the
limited availability we had in the City
of London and strong regional demand at the start of the
year, waning in the autumn and winter months, but picking up in the
first part of the New Year; ERVs remaining broadly flat.
The following asset management activity, grouped by sector with
percent occupied shown as at 31 December
2018, represents a summary of noteworthy transactions:-
Offices – 93% Occupied
Eldon House, City of London
The Company took its only City of
London property, Eldon House, to 100% let at the year end
with lettings
to Proclinical Ltd, MLM Building Control Ltd and Civilised Bank
secured at rents between 5–10% ahead of ERV. Also at this mixed use
investment a rent review was agreed with William Hill, which occupies an external shop
unit, securing a new rent of £79,000 p.a., 22% ahead of the
previous passing rent.
1 Rivergate, Temple Quay, Bristol
Just before the summer we completed a new eight year lease with
Ovo Energy Ltd at this property, at a new rent of £1.7 million
p.a., facilitating the sale of this investment ahead of
valuation.
Central Square, Newcastle
A new five year lease renewal was completed with Cushman &
Wakefield, at this property. The new rent of £95,400 p.a. reflects
an uplift of 18% ahead of ERV and the lease also improved the
weighted average unexpired lease term at the building.
Retail & Leisure – 95%
Occupied
Cineworld Complex, Glasgow
With completion in Q4 of the rearrangement and restructuring of
the basement, ground and first floor leases of this property
beneath Cineworld our short term asset management programme is now
complete. We have replaced a short term lease at £200,000 p.a. for
all three floors, with a new 25 year lease at a rent of £250,000
p.a. over the ground and first floors only with The Stone Gate Pub
Company, incorporating RPI increases capped and collared at between
1% and 4%. The pub group has also invested its own money in an
extensive refurbishment which further improves the facility. We
then also secured a lease on the returned basement space in The
Glee Club, a national comedy club, for 15 years, with a break after
year three, at a rent of £100,000 p.a. extending the investment’s
lease term and increasing income.
The Parade, Swindon
Following completion of landlord’s works, the new 15 year lease
completed with Wilko on the majority
of the former BHS unit, secured a headline rent of £385,000 p.a.
In addition the Company renewed a Tesco supermarket lease for a 10
year term, with a break option in year five, at a rent of £200,000
p.a., in line with ERV. Finally, following landlord’s works, the
Company completed a new lease with NatWest bank, delivering
£170,000 p.a. on a 10 year lease. Kew Retail Park, Richmond In line
with our asset management plans for this investment we concluded a
lease renewal with GAP at a rent 8.5% ahead of ERV securing
£439,600 p.a. for a ten year term, incorporating some landlord
flexibility, and let our former Mothercare unit to Sports Direct on
a short term basis.
St George’s Retail Park, Leicester
2018 has been a busy year for St George’s with construction work
completed in relation to the creation of three new units that are
prelet to Wren Kitchens, Tapi Carpets and Laura Ashley. Importantly these works also
included
improvements to customer road access and egress from the park.
The three stores opened in Q1 2019 and, with a new Costa Coffee
also financed by the Company and about to open providing a much
needed facility, interest from retailers in leasing the remaining
vacancy has increased. St George’s has been impacted by a
disproportionate number of CVAs over 2018. However, at year end,
two of the three units affected here were relet to Dreams and Card
Factory for a combined £140,000 p.a. in line with ERV. At the year
end St. George’s was 17% vacant and, ahead of the expiry of a large
Wickes’ 25,000 sq ft ‘anchor store’ in January 2019, the Company exchanged an agreement
for a new lease with Home Bargains at ERV on a 15 year term with
fixed rental uplifts, commencing on completion of refurbishment
works in April 2019.
Motor Park, Portsmouth
Testament to the strength of this location we successfully
restructured the occupation of two tenants onto long leases. First
a 20 year term to Harwoods over its 18,800 sq ft unit incorporating
five yearly RPI linked rent reviews capped and collared at 1%–3%
p.a. The rent agreed of £288,000 p.a. (equivalent to £15 per sq ft)
was 8.5% ahead of the ERV at the time of signing and is now in line
with the current ERV. The second, with Snows Business Holdings, was
for a new 25 year lease over its 30,000 sq ft unit at a rent of
£440,000 p.a., equivalent to £15 per sq ft and in line with ERV.
Again this lease incorporates RPI indexation, capped and collared
at 1%–3.25% p.a., compounded
with rent reviews every five years. These lettings increase the
weighted unexpired lease length at Motor Park, where UKCM owns a
total of 160,000 sq ft of commercial space across nine units, from
6.1 years to 12.8 years, as well as maintaining occupancy at
100%.
Industrial/Logistics Distribution –
92% Occupied
XDock 377, Magna Park, Lutterworth
Following the takeover of Argos by Sainsbury’s, the former Argos
logistics distribution unit on Magna Park, Lutterworth, fell vacant
in December 2017 and accounts for
just under half of the Company’s 6.9% void position. During the
year the unit was extensively refurbished at a cost of circa £7
million with completion of the work just after the year end. The
unit is being marketed for let with good early interest and the
Company, as is normal in these circumstances, is pursuing a claim
against the previous tenant for the cost of dilapidations.
Ocado, Distribution Facility,
Hatfield
A rent review was agreed with Ocado over its distribution
facility in Hatfield which secured an annual rent of £3.03 million,
12% ahead of ERV at the review date, an uplift of £322,000 p.a.
After the year end Ocado’s news of a distribution arrangement with
Marks & Spencer appears to have been positively received by
markets, partially offsetting concern over damage to its Andover
facility.
Newton’s Court, Dartford
Whilst lagging a little behind other points of the London industrial/distribution compass, rental
growth arrived in force during the year at the Company’s
Dartford estate. One unit has been
let to Millmoll Group Holdings Ltd, an event furniture business, on
a 10 year term lease with a tenant only break option in year five
at a rent of £240,578 p.a., 8.5% ahead of ERV. Two existing
tenants, Wilhelmsen Ship Services Ltd and Baxi Heating UK Limited,
signed new ten year leases at a combined rent of £244,779 p.a., 3%
ahead of ERV.
Dolphin Trading Estate,
Sunbury-on-Thames
With shrinking supply in the market, particularly West London, we agreed a lease renewal 47%
ahead of the previous passing rent and 15% ahead of ERV at the time
with existing tenant Lubkowski Saunders & Associates Ltd for 10
years with a break at five, securing a new rent of £510,763
p.a.
Emerald Park, Bristol
A new ten year lease renewal took place with Nomenca, a
specialist engineering company, at Emerald Park, Bristol at a new rent of £76,000 p.a., 15%
ahead of the previous passing rent and 3% ahead of ERV.
Ventura Park, Radlett
A number of leasing transactions took place through the year on
this, our largest South East industrial asset and largest asset in
the portfolio. In Q2 the Company signed an agreement to lease the
largest vacancy (26% of ERV) on the estate to an existing global
tenant, at a rent of £1.34 million p.a. with five yearly
inflation-linked and upwards only rent reviews; completion of the
lease itself is subject to completion of certain landlord’s works,
expected in spring 2019. This letting represents an increase of 39%
on the previous passing rent and is in line with ERV. On a smaller
unit occupied by the same tenant the Company regeared the existing
lease providing a 10 year certain term and securing a rent of
£330,750 p.a., 3% ahead of ERV and 15% ahead of the previous rent
passing. In addition a new 10 year reversionary lease was completed
with Rhys Davies & Sons Ltd,
incorporating a new rent of £343,485 p.a. 10% ahead of ERV. The new
contract will commence upon the expiry of their current lease in
2020 and incorporates a tenant break option in 2025. This asset
management activity helped to deliver one of the largest positive
contributions to portfolio total return during the year driven by
both capital growth and ERV improvement.
Environmental, Social and Governance
(ESG)
The Chair has already commented upon the Board’s commitment to
ESG as well as the strong GRESB sustainability rating and EPRA
award. As the Company’s Investment Manager, Aberdeen Standard
Investments views the management of Environmental, Governance and
Social issues as a fundamental part of its business. Whilst real
estate investment provides valuable economic benefits and returns
for investors it has, by its nature, an environmental and societal
impact. We have committed to:
· Identifying, assessing, monitoring and
controlling environmental, societal and regulatory risks at key
stages of the investment, development and asset management
operations;
· Ensuring effective governance and
responding to and complying with regulatory requirements;
· Sharing our knowledge and engaging
with central and local government and with other bodies in order to
encourage best practice in the market and to steer government
policy;
· Working in partnership with our key
stakeholder groups – our investors, occupiers, employees, suppliers
and the communities we serve.
A key element of our policy and approach is the employment of
our ESG Impact Dial – a proprietary research framework – in support
of investment strategies, underwriting decisions and asset
management approach. We have identified a range of major forces for
change – Environment & Climate, Governance & Engagement,
Demographics and Technology & Infrastructure – which together
form the basis of the ESG Impact Dial. These guide the
prioritisation and integration of ESG factors within the Company’s
portfolio and provide a structure for engagement with, and
reporting to, stakeholders. A practical example is our current
investigation of the practicality, financing and returns to be
generated from the installation of solar photo-voltaic energy
generation on select warehouse roofs with clear benefits to both
the environment and leasing prospects.
Portfolio Strategy
Your Company aims to deliver an attractive level of income,
together with the potential for capital and income growth, through
investment in a diversified UK commercial property portfolio. Our
strategy to achieve this combines investment, divestment and asset
management, including disciplined investment in existing stock
where accretive. In order to help meet the Company’s investment
objective, which remains unchanged, the Company has widened its
investment policy to provide greater flexibility to invest in
additional sectors, which have come to be regarded as mainstream
and are commonly referred to as “alternative sectors”, and include
healthcare, student housing, hotels, car parks, pubs, petroleum and
automotive and the commercially-managed private residential rental
sector, amongst others. These represent an increasing share of the
commercial property investment market and have accounted for 25% of
all UK real estate transactions over the last five years. Driven by
a combination of favourable structural drivers which we believe are
set to continue, including demographic, urbanisation and trends in
technology, together with the stability of income returns and
diversification benefits that investing in alternatives sectors
brings, this investment flexibility is to be welcomed.
Net investment during the year utilised all surplus investment
cash which will aid dividend cover going forward but the Company
also took advantage of low yields in the debt markets to refinance,
extend and increase its gearing capability whilst maintaining its
policy of low overall gearing. The result, secured in February 2019, is £100 million of revolving
credit available for investment which, currently, is intended to be
used tactically where a short term sale is expected to rebalance
gearing levels.
When looking at opportunities to deploy these resources our
current strategy focuses on two themes; first, long-term secure
income, often found in funding the construction of new ‘pre let’
buildings, but with caution around competitive pricing; secondly,
sustainable income which exhibits growth potential within the
better yielding sub-sectors of the alternative sector, not
necessarily through long leases. Straddling these strategies we are
alert to investments in vibrant economies with strong demographics
which have opportunistic pricing through potential vendor distress;
with uncertainty continuing in politics as the path to Brexit
evolves, feeding into the economy and property market, we believe
interesting opportunities may be available if, for example, owners
require to increase liquidity quickly.
With income important to the Company, and likely to drive total
return in the current market, we have successfully worked through a
period of spikes in lease expiry profile which are due to enhance
income in 2019. Our portfolio focus remains firmly on leasing
vacant properties to generate income, and with over 50% of our
vacancy in the industrial/ logistics sector the outlook is
positive. Meanwhile we are keeping a close eye on those assets with
a weaker prognosis and strategic opportunities to disinvest. Recent
examples are the sale of our Shrewsbury shopping centres to Shropshire
Council in January 2018 and, as
announced at the start of this year, the re-letting of our Wembley
logistics warehouse for 10 years crystallising growth in rental
values in that location and removing the risk of a future
vacancy.
We enter 2019 ready to meet political uncertainty with a
diversified portfolio biased towards favourable sectors of the
market, a strong opportunity to generate additional income from our
industrial-logistics portfolio, a refreshed investment policy
providing greater flexibility to invest, and a strong balance
sheet.
Will Fulton
Fund Manager
Aberdeen Standard Fund Managers Limited
25 April 2019
Strategic Overview
Investment Strategy
The Group’s investment strategy is set out in its investment
objective and policy below. It should be considered in conjunction
with the Chair’s Statement and the Investment Manager’s Review
which both give a more in depth review of performance and future
strategy.
The Group’s investment objective is to provide ordinary
shareholders with an attractive level of income together with the
potential for capital and income growth from investing in a
diversified UK commercial property portfolio. In order to achieve
this objective the Group has an investment strategy that focuses on
identifying and acquiring institutional grade, secure income
producing assets in favoured sectors as well as identifying assets
that benefit from wider infrastructure improvements delivered by
others where possible. In addition the Group will look to sell
assets that have limited future return prospects or where there are
significant risks to achieving future acceptable returns. As part
of this investment strategy, the Group also recognizes that tenants
are a key stakeholder and aims to foster a culture whereby the
experience of tenants is seen as paramount to the future success of
the Group. The Investment Manager works closely with tenants to
understand their needs through regular communication and visits to
properties. Where required, and in consultation with tenants, the
Group refurbishes and manages the owned assets to improve the
tenants’ experience, including consideration of health and safety
and environmental factors, with the aim being to generate greater
tenant satisfaction and retention and hence lower voids, higher
rental values and stronger returns. In addition to the above,
members of the Board also visit properties and where appropriate
engage with tenants directly which enables the Board to have an
enhanced understanding of each property and the tenants’
requirements.
On 18 April 2019, the Investment
policy was amended to provide the Investment Manager with the
flexibility to invest across a wider spectrum of commercial
property assets such as healthcare, car parks and the
commercially-managed private rental sector. The Investment Policy
now reads as follows: Investment risks to the Group are managed by
investing in a diversified portfolio of freehold and long leasehold
UK commercial properties. The Group invests in income producing
assets across the four commercial property sectors: industrial,
office, retail and other alternative commercial property sector
assets. The Group has not set any maximum geographic
exposures within the UK nor any maximum weighting limits in any of
the principal property sectors. No single property shall, however,
exceed at the time of acquisition 15 per cent of the gross assets
of the Group.
The Group is currently permitted to invest up to 15 per cent of
its total assets in indirect property funds including in other
listed investment companies. The Group is permitted to invest cash,
held by it for working capital purposes and awaiting investment, in
cash deposits, gilts and money market funds.
Although not part of the Company's formal investment policy, the
Board intends to limit the Company's investment into alternative
sectors to 35 per cent of the gross assets of the Group at the time
of acquisition.
At an EGM of the Company on 28 April
2011 the shareholders of the Company approved a revised
gearing policy of the Group amended to read as follows: “Gearing,
calculated as borrowings as a percentage of the Group’s gross
assets, may not exceed 65 per cent. The Board intends that
borrowings of the Group at the time of draw down will not exceed 25
per cent. of the Total Assets of the Group. The Board receives
recommendations on gearing levels from the Investment Manager and
is responsible for setting the gearing range within which the
Investment Manager may operate. As mentioned in the Chair’s
statement the Group restructured its debt facilities in
February 2019 which increased the
weighted average maturity of the Group’s debt profile, lowered the
cost and increased the debt available while still maintaining the
25% debt cap referred to above.
The Group’s performance in meeting its objective is measured
against key performance indicators as set out below. A review of
the Group’s returns during the year, the position of the Group at
the end of the year, and the outlook for the coming year is
contained in the Chair’s Statement and the Investment Manager
Review.
The Board of Directors is responsible for the overall
stewardship of the Company, including investment and dividend
policies, corporate strategy, corporate governance, and risk
management. The Company has no executive Directors or
employees.
Management of Assets and Shareholder
Value
The Board contractually delegated the management of the
investment portfolio and other services to Aberdeen Standard Fund
Managers Limited from 10 December
2018 (prior to this Standard Life (Corporate) Funds
Limited).
The Group invests in properties which the Investment Manager
believes will generate a combination of long-term growth in income
and capital for shareholders. Investment decisions are based on
analysis of, amongst other things, prospects for future capital
growth, sector and geographic prospects, tenant covenant strength,
lease length and initial yield. In the year to 31 December 2018, the Group generated operating
cash flows of £46.9m (2017: £42.4m) and a net profit for the year
of £53.0m (2017: £131.6m). The fall in profits in 2018 was
attributable to the slowing rate of growth in the UK commercial
real estate sector with gains on investments of £18.9 million being
generated in 2018 compared to £90.4 million in 2017.
Investment risks are spread through investing in a range of
geographical areas and sectors, and through letting properties to
low risk tenants. Further analysis can be found in the Investment
Manager Review. At each Board meeting, the Board receives a
detailed portfolio, financial, risk and shareholder presentation
from the Investment Manager together with a comprehensive analysis
of the performance of the portfolio during the reporting
period.
The Board and the Investment Manager recognise the importance of
managing the premium/discount of share price to net asset value in
enhancing shareholder value. One aspect of this involves
appropriate communication to gauge investor sentiment. The
Investment Manager meets with current and potential new
shareholders, and with stockbroking analysts who cover the
investment company sector, on a regular basis. In addition,
communication of quarterly portfolio information is provided
through the Company’s website, www.ukcpreit.co.uk, and the Company
also utilizes a public relations agency to enhance its profile
among investors. In addition the Chair of the Board meets key
shareholders on an annual basis.
Key Performance Indicators /
Alternative Performance Measures
The Company’s benchmark is the MSCI Investment Property Databank
(IPD) Balanced Monthly and Quarterly Index. This benchmark
incorporates all monthly and quarterly valued property funds and
the Board believes this is the most appropriate measure to compare
against the performance of a quarterly valued property investment
company with a balanced portfolio.
The Board uses a number of performance measures to assess the
Company’s success in meeting its objectives. The key performance
indicators/alternative performance measures are as follows:
- Net asset value and share price
total return against a peer group of similar companies.
- Portfolio performance against
the IPD benchmark and other selected comparators.
- Premium/(Discount) of share
price to net asset value.
- Dividend per share and dividend
yield.
- Ongoing charges
Given the structure of the Company and the Company’s knowledge
of its underlying shareholder base, it is believed the above
measures are the most appropriate for shareholders to determine the
performance of the Company. These indicators for the year ended
31 December 2018 are set out above.
In addition the Board considers specific property KPIs such as void
rates, rent collection levels and weighted average lease length on
a regular basis.
Risk management
In accordance with the UK Corporate Governance Code and FRC
Guidance, the Board has established procedures to identify and
manage risk, to oversee the internal control framework and to
determine the nature and extent of the principal risks the company
is willing to take in order to achieve its long-term strategic
objectives.
The Board recognises its responsibility to carry out a robust
assessment of the company’s principal risks and emerging risks.
Principal risks are defined as those that could result in events or
circumstances that might threaten the company’s business model,
future performance, solvency or liquidity and reputation. Emerging
risks are those that have not yet occurred but are at an early
stage of development or are current risks that are expected to
increase in significance and become more fundamental in the
future.
The Board has appointed a Risk Committee to ensure that proper
consideration of risk is undertaken in all aspects of the company’s
business on a regular basis. The Risk Committee meets quarterly and
comprises all members of the Board and is chaired by Margaret Littlejohns (previously by John Robertson until 31
March 2018). Its duties include the assessment of the
Company’s risk appetite and the regular review of principal and
emerging risks, seeking assurance that these risks are
appropriately rated and that effective mitigating controls are in
place, where possible.
Risks are identified and weighted according to their potential
impact on the Company and to their likelihood of occurrence. The
impact is evaluated in terms of the effect on the Company’s
business, finances and reputation, the three of which are usually
interlinked. Each identified risk is assessed twice: first as a
“gross risk” before taking into consideration any mitigating
controls and secondly as a residual or “net risk” after reviewing
the safeguards in place to manage and reduce either the severity of
its impact or the probability of its event. The Risk Committee uses
a detailed Risk Matrix to prioritise the individual risks,
allocating scores of 1 to 5 to each risk for both the likelihood of
its occurrence (ranging from very unlikely to almost certain) and
the severity of its impact (ranging from minimal to highly
significant). The combined scores for both the gross risks and net
risks are then colour coded, applying a traffic light system of
green, amber and red to emphasise those posing the greatest threats
to the Company. Those with the highest gross rating in terms of
impact are highlighted as top risks within the matrix and are
defined here as principal risks.
The Risk Committee, with the help of the Investment Manager’s
extensive research resources and market intelligence, surveys the
full risk landscape of the Company in order to identify increasing
and emerging risks to which the Company may be exposed in the
future. In particular, the Risk Committee questions which parts of
the Company’s business may be vulnerable to disruption, including
but not limited to the business models of its key tenants and its
outsourced third party suppliers. The Risk Committee not only
reviews the existing portfolio of investments but also ensures that
risk is considered in the case of each property acquisition and
disposal.
The Risk Committee works closely with the Audit Committee to
examine the effectiveness of the risk management systems and
internal control systems upon which the Company relies to reduce
risk. This monitoring covers all material controls, including
financial, operational and compliance controls. All risks and
mitigating controls are reviewed by the Risk Committee on a
quarterly basis, and any significant changes to the Risk Matrix are
presented to the Board.
Principal Risks
The Company’s assets consist of direct investments in UK
commercial property. Its risks are therefore principally related to
the commercial property market in general and also to each specific
property in the portfolio. Risks to the Company fall broadly under
the following six categories:
Strategy (Risk
A)
Management may fail to execute a clear corporate strategy
successfully and the strategic objectives and performance of the
fund, both absolute and relative, may become unattractive or
irrelevant to its investors.
Investment and
Asset Management (Risk B & C)
Ill-judged property investment decisions and associated
redevelopment and refurbishment may lead to health and safety
dangers and environmental issues and ultimately to poor investment
returns.
Financial (Risk D,
E & F)
Macro-economic changes (e.g. levels of GDP, employment,
inflation and interest rate movements) political changes (e.g. new
legislation and regulation) and structural changes (e.g. disruptive
technology, demographics) can all impact the commercial property
market, both its capital value and income generation, its access to
finance and the underlying businesses of its tenants. This risk
encompasses real estate market risk, liquidity risk, interest rate
risk and credit risk, all of which are covered in more detail in
note 18 to the accounts.
Operations (Risk G
& H)
Poor service and inadequate control processes at the Company’s
outsourced suppliers may lead to disruption, error and fraud, and
increasingly cyberattacks. The company’s key service providers are
the Investment Manager, the Company Secretary, the Managing Agent
and the Registrar and are assessed annually through the Management
Engagement Committee.
Regulation (Risk
I)
Failure to comply with applicable regulation and legislation
could lead to financial penalties and withdrawal of necessary
permissions by governing authorities. Changes to existing
regulations could also result in suboptimal performance of the
Company.
Stakeholder
Engagement (Risk J)
Failure to communicate effectively and consistently with the
Company’s key stakeholders, in particular shareholders and tenants,
could prevent the Company from understanding and responding to
their needs and concerns.
Emerging Risks
Emerging risks have been identified by the Risk Committee
through a process of evaluating which of the principal risks have
increased materially in the year and/or through market intelligence
are expected to grow significantly. Any such emerging risks are
likely to cause disruption to the business model. If ignored, they
could impact the Company’s financial performance and future
prospects. Alternatively, if recognised, they could provide
opportunities for transformation. In the current year three
significant
emerging risks have been highlighted:
1. The Company’s strategic objectives, linked
to a widening of the discount and a continuation vote (Risk A).
2. Macroeconomic changes particularly
associated with the uncertainty surrounding Brexit and its
political impact on the UK economy and the resultant effect on the
UK commercial property market (Risk D).
3. Credit risk, in particular the weakness in
the retail sector and its impact on the Group’s tenants, affecting
both capital values and income generation of the investment
portfolio (Risk F).
The principal and emerging risks, including their impact and the
actions taken by the Company to mitigate them, are provided in more
detail below:
Risk
A – Strategic Risks: Widening Discount and Continuation
Vote |
Risks &
Impact |
The Company’s strategic
objectives and performance, both absolute and relative, could
become unattractive to investors leading to a widening of the share
price’s discount to net asset value, and potentially a continuation
vote. |
Mitigation |
· The Company’s strategy and objectives are
regularly reviewed by the Board to ensure they remain appropriate
and effective.
· The Board receives regular presentations
from research analysts on both the general economy but also the
property market in particular to identify structural shifts and
threats, so the Board can adapt the Company’s strategy if
necessary.
· The NAV and share price are constantly
monitored and regular analyses of the Company’s performance are
reviewed by the Board and compared with the Company’s benchmark and
its peer group.
· Cash flow projections are prepared by the
Investment Manager and reviewed quarterly by the Board.
· Regular contact is maintained with
shareholders and the Company’s broker. |
Commentary |
· The Company’s discount has increased in
the year from 4.5% at the end of 2017 to 10.8% at the end of 2018.
This compares to the peer group which moved from an average premium
of 0.1% to a discount of 6.4%.
· As at 15 April 2019, the discount
(adjusted for the shares going ex-dividend) was 3.7%.
· The Company is due to hold a periodic
continuation vote in 2020. |
Change |
INCREASED AND EMERGING
RISK - The Company’s rating, like that of the wider peer group, has
fallen to a wider discount during the year. |
|
See the annual report for details of
the current discount control policy. |
Risk
B – Investment and Asset Management Risks: Health &
Safety |
Risks &
Impact |
The Company could fail
to identify, mitigate or manage major Health & Safety issues
potentially leading to injury, loss of life, litigation and the
ensuing financial & reputational damage. |
Mitigation |
· Health and safety checks are included as
a key part of due diligence for any new property acquisition.
· For existing multi-tenancy properties the
Group’s Managing Agent (Jones Lang LaSalle) are responsible for
managing and monitoring health and safety matters of each
building.
· The Investment Manager monitors on an
ongoing basis all identified Health and Safety issues with strict
deadlines for resolution by the Managing Agent.
· The Investment Manager also engages S2
Partnership Limited who provide an independent health & safety
review of all properties.
· The Risk Committee reviews the Company’s
Health & Safety performance quarterly. |
Commentary |
· A wider fire safety review of buildings
with any type of cladding has been conducted. This has resulted in
work being undertaken beyond the minimum legal requirements to
ensure the highest standards of health and safety in the Company’s
portfolio of properties. |
Change |
No significant change
in risk. |
|
See the annual report for further
information on the Group’s Health & Safety policy. |
Risk
C – Investment and Asset Management Risks:
Environmental |
Risks &
Impact |
Properties could be
negatively impacted by an extreme environmental event (e.g.
flooding) or the Company’s own asset management activities could
create environmental damage. Failure to achieve environmental
targets could adversely affect the Company’s reputation and result
in penalties and increased
costs. Legislative changes relating to sustainability could affect
the viability of asset management initiatives. |
Mitigation |
· The Company considers its impact on the
environment and its local communities in all its activities.
· In-depth research is undertaken on each
property at acquisition with a detailed environmental survey.
· Experienced advisers on environmental,
social and governance matters are consulted both internally at the
Investment Manager and externally where required.
· The Investment Manager has adopted a
thorough environmental policy which is applied to all properties
within the portfolio.
· EPC rating benchmarks have been set to
ensure compliance with Minimum Energy Efficiency Standards
(MEES). |
Commentary |
· The Company has achieved Sector Leader
status in the Global Real Estate Sustainability Benchmark (“GRESB”)
as a top performer in ESG (environmental, social and governance).
It was awarded an ‘A’ score for Public Disclosure; EPRA “Gold”
rating for European Sustainability Best Practice Recommendations in
September 2018.
· A full review of EPC ratings across the
Group’s portfolio has been undertaken with now only 2 units rated
as below standard. A strategy has been put in place to improve
these sub-par ratings before any new lease is granted. |
Change |
DECREASED RISK - Given
the work undertaken by the Group across the portfolio, the Board
considers environmental risk has decreased in the year. |
|
See the annual report for further
information on the Groups ESG policy. |
Risk
D – Financial Risks: Macroeconomic |
Risks &
Impact |
Macroeconomic changes
(e.g. levels of GDP, employment, inflation, interest rate & FX
movements), political changes (e.g. Brexit, new legislation) or
structural changes (e.g. new technology, demographics) could
negatively impact commercial property values and the underlying
businesses of tenants (market risk and credit risk). Falls in the
value of investments could result in breaches of loan covenants and
solvency issues. |
Mitigation |
· The Aberdeen Standard Investments
Research team takes into account macroeconomic conditions when
collating property forecasts. This research is fed into the
Investment Manager’s decisions on purchases and sales and sector
allocations.
· The portfolio is UK based and diversified
across a number of different sectors and regions of the UK and also
has a wide and diverse tenant base to minimize any risk
concentration.
· There is a wide range of lease expiry
dates within the portfolio in order to minimise concentrated
re-letting risk.
· The Company is lowly geared with 25%
limit on overall gearing.
· The Company has limited exposure to
speculative development and is only undertaken on a pre-let
basis.
· Rigorous portfolio reviews are undertaken
by the Investment Manager and presented to the Board on a regular
basis.
· Annual asset plans are developed for each
property and every building has comprehensive insurance to cover
both the property itself and injury to associated third
parties.
· Individual investment decisions are
subject to robust risk versus return evaluation and approval. |
Commentary |
· Portfolio continues to be diversified and
balanced with investments across the four main commercial property
sectors and across a number of geographical regions.
· 267 tenancies at the year end with top
ten tenants accounting for only 34.2% of annualised rental
income.
· Net gearing of 14.6% at year end.
· Occupancy rate of 93.1% at year end. |
Change |
INCREASED AND EMERGING
RISK - The ongoing uncertainty surrounding the negotiations of
Great Britain’s withdrawal from the EU and the ensuing political
instability makes economic forecasting difficult. This uncertainty
has undoubtedly impacted business investment, consumer sentiment
and hence GDP growth. This in turn is likely to impact the demand
for commercial property and some tenants’ business prospects and
their financial strength. |
|
See further details on risk in note
18 to the accounts set out below. |
Risk
E – Financial Risks: Gearing |
Risks &
Impact |
An inappropriate level
of gearing, magnifying investment losses in a declining market,
could result in breaches of loan covenants and threaten the
Company’s liquidity and solvency. An inability to secure adequate
borrowing with appropriate tenor and competitive rates could also
negatively impact the Company. |
Mitigation |
· Gearing is restricted to a maximum of 25%
of gross assets. This low gearing limit means that the Company
should, barring unforeseen circumstances, have adequate resources
to service and repay its debt.
· The Company’s diversified, prime UK
commercial property portfolio, underpinned by its strong tenant
base, should provide sufficient value and income in a challenging
market to meet the Company’s future liabilities.
· The Company’s relatively modest level of
gearing attracts competitive terms and interest rates from lenders
for the Company’s loan facilities.
· The Investment Manager has relationships
with multiple funders and wide access to different sources of
funding on both a fixed and variable basis.
· Financial modelling is undertaken and
stress tested annually as part of Company’s viability assessment
and whenever new debt facilities are being considered.
· Loan covenants are continually monitored
and reported to the Board on a quarterly basis and also reviewed as
part of the disposal process of any secured property. |
Commentary |
· The Group increased and extended its loan
facilities in February 2019.
· 57% are fixed rate and 43% are variable
with a spread of repayment dates.
· The increased revolving credit facility
will provide the Company with the flexibility to make timely
acquisitions when opportunities arise.
· Following this refinancing, the weighted
maturity profile of the Group’s fixed rate debt stood at 10.0 years
with an overall blended rate of interest of 2.79% and net gearing
of 14.7%.
· There is considerable headroom before any
loan covenants would be breached. |
Change |
DECREASED RISK
Refinancing completed in February 2019 has reduced this risk. |
|
See further details on risk in note
18 to the accounts set out below. |
Risk
F – Financial Risks: Credit Risk of Tenants |
Risks &
Impact |
Income might be
adversely affected by macroeconomic factors. Financial difficulties
could cause tenants to default on their rents and could lead to
vacant properties. This might result in falling dividend cover for
the Company and potential dividend cuts. |
Mitigation |
· Dividend cover is forecast and considered
at each Board meeting.
· The property portfolio has a balanced mix
of tenants and reflects diversity across business sectors.
· Rigorous due diligence is performed on
all prospective tenants and their financial performance continues
to be monitored during their lease.
· Rent collection from tenants is closely
monitored so that early warning signs can be detected.
· Contingency plans are put in place where
tenants with financial difficulties have been identified.
· Board approval is necessary for any
material lettings. |
Commentary |
· Dividend cover of 82% in 2018 but
annualised rental income has increased to £69.0 per annum as at 31
December.
· Key focus on ongoing voids particularly
at XDock 377 at Lutterworth.
· Retail sector continues to be of a
concern with number of administrations in this sector in the last
12 months which has resulted in lost income of 1.5% of total income
in the Group’s portfolio. |
Change |
INCREASED AND EMERGING
RISK - The continued weakness of the retail sector has increased
this risk in 2018. |
|
See further details on risk in note
18 to the accounts set out below. |
Risk
G – Operational Risks: Service Providers |
Risks &
Impact |
Poor performance and/
or inadequate procedures at key service providers i.e. Investment
Manager, Company Secretary, Managing Agent, Registrar, could lead
to errors, fraud, non-compliance with their contractual agreements
and/or with relevant legislation. Failings in their data management
processes and disaster recovery plans, including cyber security
safeguards, could lead to financial loss and business disruption
for the Company. |
Mitigation |
· UKCM has a strong control culture that is
also reflected in its partnerships with suppliers.
· All investment decisions are subject to a
formal approval process with specified authority limits.
· All third party service providers are
carefully selected for their expertise, reputation and financial
standing. Service level agreements are negotiated with all material
suppliers and regularly monitored to ensure that pre-agreed
standards are met.
· Suppliers’ business continuity and
disaster recovery plans, including safeguards against cyber-crime,
are also regularly examined.
· The Management Engagement Committee
(“MEC”) formally reviews all key service providers once a
year. |
Commentary |
· Key service providers have not changed
during 2018. No material issues noted from the reviews of service
providers in the year. |
Change |
No significant change in risk. |
|
|
Risk
H – Operational Risks: Accounting and Valuation |
Risks &
Impact |
Accounting records and
financial statements could be incorrect or incomplete or fail to
comply with current accounting standards. In particular property
valuations, income and expenses could be calculated and recorded
inaccurately. |
Mitigation |
· All properties within the portfolio are
independently valued by CBRE Ltd on a quarterly basis and their
year-end valuations recorded in the Company’s accounts.
· A rigorous valuation process is
undertaken each quarter by the Company’s Investment Manager to
ensure fair and complete property valuations that are then
reviewed, challenged and verified by CBRE.
· The Property Valuation Committee reviews
thoroughly each quarter this independent valuation process.
· Accounting control and reconciliation
processes are in place at the Investment Manager. These are subject
to regular independent assessment for their suitability and
operating effectiveness by an external auditor.
· Financial statements are subject to a
year-end audit by Deloitte LLP. |
Commentary |
· No material accounting/valuation issues
recorded in the year. |
Change |
No significant change in risk. |
|
|
Risk
I – Regulatory Risks: Compliance |
Risks &
Impact |
The Company could fail
to comply with existing legislation or adapt to new or future
regulation. In particular, the Company could fail to comply with
REIT legislation and ultimately lose its REIT status, thereby
incurring substantial tax penalties. |
Mitigation |
· The Board receives regular updates on
relevant regulatory changes from its professional advisors.
· The highest corporate governance
standards are required from all key service providers and their
reputation and performance are reviewed annually by the Management
Engagement Committee.
· The Board reviews quarterly a REIT
dashboard confirming compliance with REIT regulations. |
Commentary |
· Board has reviewed and taken action to
ensure compliance with new UK Code of Corporate Governance.
· The Management Engagement Committee has
ensured all key suppliers and contracts are GDPR compliant.
· Processes have been put in place to
ensure ongoing compliance with REIT rules following conversion to a
REIT on 1 July 2018. |
Change |
No significant change in risk. |
|
|
Risk
J – Stakeholder Engagement Risks: Communication |
Risks &
Impact |
A communication
breakdown with key stakeholders, particularly shareholders and
tenants, could prevent the Company from understanding and
responding to their needs and concerns. When required to fulfil
certain reporting requirements, the Company could fail to
communicate with regulatory authorities about its major
shareholders. As a result the Company could potentially suffer
financial penalties and reputational damage. |
Mitigation |
· A high degree of engagement is maintained
with both shareholders and tenants.
· The Investment Manager regularly meets
with shareholders and periodically, the Chair of the Board, also
meets shareholders.
· Quarterly Board reports include detailed
shareholder analysis, written and verbal reports from JP Morgan,
the Company’s Corporate Broker and feedback from shareholder and
analyst meetings where appropriate.
· The Investment Manager works closely with
tenants to understand better their needs and to remodel and
refurbish buildings to fit their evolving requirements. This helps
to reduce the risk of vacant properties.
· The Company receives professional advice
on its reporting obligations regarding major shareholders to ensure
that it complies with regulations. |
Commentary |
· The Company has held two shareholder and
analyst presentations in the year and the Investment Manager has
met multiple shareholders.
· Chair of the Board has also met with
several institutional shareholders.
· Investment Managers have visited all
properties held at least once in 2018.
· Board of Directors have continued to
visit properties during the year as part of a rolling programme to
visit all properties over a three year period. |
Change |
No significant change in risk. |
Viability Statement
The Board considers viability as part of its ongoing programme
of monitoring risk. The Board considers five years to be a
reasonable time horizon over which to review the continuing
viability of the Company. The Board also considers viability over
the longer term, in particular to key points outside this time
frame, such as the due dates for the repayment of long-term debt.
In addition, the Board considers viability in relation to
continuation votes. These are held periodically with the next one
scheduled for 2020 and every seven years thereafter. In addition a
continuation vote may be required if the Company’s shares trade at
a discount of over 5% for a continuous period of 90 dealing days or
more.
The Board has considered the nature of the Company’s assets and
liabilities and associated cash flows. The Board has determined
that five years is a reasonable timescale over which the
performance of the Company can be forecast with a material degree
of accuracy and so is an appropriate period over which to consider
the Company’s viability.
The Board has also carried out a robust assessment of the
principal risks faced by the Group, as detailed earlier. The main
risks which the Board considers will affect the business model,
future performance, solvency, and liquidity are ongoing discounts
leading to continuation votes, tenant failure leading to a fall in
dividend cover and macroeconomic uncertainty. The Board takes any
potential risks to the ongoing success of the Group, and its
ability to perform, very seriously and works hard to ensure that
risks are consistent with the Group’s risk appetite at all
times.
In assessing the Group’s viability, the Board has carried out
thorough reviews of the following:
· Detailed NAV, cash resources and
income forecasts, prepared by the Company’s Investment Manager, for
a five year period under both normal and stressed conditions;
· The Group’s ability to pay its
operational expenses, bank interest, tax and dividends over a five
year period;
· Future debt repayment dates and debt
covenants, in particular those in relation to LTV and interest
· Demand for the Company’s shares and
levels of premium or discount at which the shares trade to NAV;
· Views of shareholders on the ongoing
continuation of the Company; and
· The valuation and liquidity of the
Group’s property portfolio, the Investment Manager’s portfolio
strategy for the future and the market outlook.
Despite the uncertainty in the UK regarding Brexit, the Board
has a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due
over the next five years. This assessment is based on the results
of the analysis outlined above and on the assumption that the
periodic continuation vote to be held in 2020 is passed.
Sustainable Real Estate Investment
Policy
The Investment Manager acquires, develops and manages properties
on behalf of the Company. It is recognised that these activities
have both direct and indirect environmental and social impacts. The
Board has adopted the Investment Manager’s own Environmental,
Social and Governance Policy (ESG) and associated operational
procedures and is committed to environmental management in all
phases of the investment process.
The Manager has identified four ESG megatrends that are highly
relevant for real estate investment now and in the future:
Environment & Climate Change, Governance & Engagement,
Population & Urban Living and
Technology & Connectivity. The identification of risks and
opportunities for the Company in relation to each of the megatrends
is embedded throughout the investment process and at all levels,
from Company-level strategic planning to asset underwriting and
individual asset ESG action plans.
To facilitate this, the Manager works in partnership with
contractors, suppliers, occupiers and consultants, seeking
continuous improvements in ESG performance and conducting regular
reviews.
The Company was awarded a Green Star ranking from the Global
Real Estate Sustainability Benchmark 2018 and improved its score by
9% compared with 2017. A Green Star is awarded to entities that
perform well in both categories of the GRESB assessment: Management
& Policies and Implementation & Measurement. The Company
also received a European Sector Leader award as the top performer
in its peer group.
Following the disclosure of ESG performance against the EPRA
Sustainability Best Practice Reporting guidelines in the 2018
report, the Company received both Gold and Most Improved awards
from EPRA. These awards recognise the Company’s strong commitment
to ESG and transparency.
The full ESG disclosures for the Company, including energy,
water and emissions performance for 2018 are included in the annual
report.
Health & Safety Policy
Alongside these environmental principles the Company has a
health and safety policy which demonstrates commitment to providing
safe and secure buildings that promote a healthy working
environment and a customer experience that supports a healthy
lifestyle. The Company, through the Investment Manager, manages and
controls health and safety risks systematically as any other
critical business activity using technologically advanced systems
and environmentally protective materials and equipment. By
achieving a high standard of health and safety performance, the
Company aims to earn the confidence and trust of tenants,
customers, employees, shareholders and society at large.
Bribery & Ethical Policy
It is the Company’s Policy to prohibit and expressly forbid the
offering, giving or receiving of a bribe in any circumstances. This
includes those instances where it may be perceived that a payment,
given or received, may be a bribe. The Company has adopted this
Anti-Bribery and Corruption Policy to ensure robust compliance with
The UK Bribery Act 2010. The Company has made relevant enquiries of
its Investment Manager and has received assurances that appropriate
anti-bribery and corruption policies have been formulated and
communicated to its employees. In addition the Board has adopted an
ethical policy which highlights the need for ethical considerations
to be considered in the acquisition and management of both new and
existing properties.
Approval of Strategic Report
The Strategic Report of the Company comprises the Financial and
Property Highlights, Performance Summary, Chair’s Statement,
Investment Manager Review, Portfolio Information and Strategic
Overview incorporating the risk management section.
The Strategic Report was approved by the Board on 25 April 2019.
Andrew
Wilson
Ken McCullagh
Director
Director
Extract from Report of Directors
Annual General Meeting
Among the resolutions being put at the Annual General Meeting of
the Company to be held on 17 June
2019, the following resolutions will be proposed.
Dividend policy
It is the Directors’ intention in line with the Company’s
investment objective to pay an attractive level of dividend income
to shareholders on a quarterly basis. The Directors intend to set
the level of dividend after taking into account the long term
income return of the Property Portfolio, the diversity and covenant
strength of the tenants and the length of the leases of the
Properties.
Dividends on the ordinary shares are expected to be paid in four
instalments quarterly in respect of each financial year in
February, May, August and November. All dividends will be in the
form of property income distribution, ordinary dividends or a
mixture of both and paid as interim dividends.
As a result of the timing of the payment of the Company’s
quarterly dividends, the Company’s shareholders are unable to
approve a final dividend each year. As an alternative the Board
will put the Company’s dividend policy to Shareholders for
approval on an annual basis.
Resolution 2, which is an ordinary resolution, relates to the
approval of the Company’s dividend policy to continue to pay four
interim dividends quarterly.
Directors Fees
At the December 2018 Board
Meeting, the Board carried out a review of the level of directors’
fees. The resulting increases, which took effect from 1 January 2019, are detailed in the Directors’
Remuneration Report.
As a result of these increases in fees, and in order to ensure
that the Board has ongoing flexibility to be able to appoint
additional directors, Resolution 5, an ordinary resolution, will be
put to shareholders at the 2019 AGM seeking approval to increase,
the maximum aggregate limit of remuneration of the directors each
year in respect of their ordinary services as directors from
£300,000 to £400,000. Since the maximum fee level was last
increased in 2010 the number of Directors has increased from 5 to
6.
Disapplication of Pre-emption
Rights
Resolution 14 gives the Directors, for the period until the
conclusion of the Annual General Meeting in 2020 or, if earlier, on
the expiry of 15 months from the passing of resolution 14, the
necessary authority either to allot securities or sell shares held
in treasury, otherwise than to existing shareholders on a pro-rata
basis, up to an aggregate nominal amount of £32,485,312. This is
equivalent to approximately 10 per cent of the issued ordinary
share capital of the Company as at 25 April
2019. There are no shares currently held in treasury. The
Directors will allot new shares pursuant to this authority only if
they believe it is advantageous to the Company’s shareholders to do
so and the issue price of new shares will be at a premium to the
latest published net asset value per share.
Directors’ Authority to Buy Back
Shares
The current authority of the Board granted to it by shareholders
at the 2018 AGM to buy back shares in the Company expires at the
end of AGM to be held in 2019. The Board intends to renew such
authority to buy back shares up to 14.99 per cent of the number of
ordinary shares in issue. This special resolution (resolution 15),
if approved, will enable the Company to buy back up to 194,781,928
shares based on the current number of shares in issue (excluding
any treasury shares). Any buy back of ordinary shares will be made
subject to Guernsey law and within guidelines established from time
to time by the Board, which will take into account the income and
cashflow requirements of the Company, and the making and timing of
any buy backs will be at the absolute discretion of the Board.
Purchases of ordinary shares will only be made through the
market for cash at prices below the prevailing published net asset
value of an ordinary share (as last calculated, adjusted downwards
for the amount of any dividend declared by the Company upon the
shares going ex-dividend), where the Directors believe such
purchases will enhance shareholder value. Such purchases will also
only be made in accordance with the rules of the UK Listing
Authority which provide that the price to be paid must not be more
than the higher of (i) five per cent. above the average of the
middle market quotations for the ordinary shares for the five
business days before the purchase is made and (ii) the higher of
the last independent trade and the highest current independent bid
on the London Stock Exchange. The minimum price (exclusive of
expenses) that may be paid is 25
pence a share.
The Company may retain any shares bought back as treasury shares
for future re-issue, or transfer, or may cancel any such shares.
During the period when the Company holds shares as treasury shares,
the rights and obligations in respect of those shares may not be
exercised or enforced by or against the Company. The maximum number
of shares that can be held as treasury shares by the Company is 10
per cent of the aggregate nominal value of all issued ordinary
shares. Ordinary shares held as treasury shares will only be
re-issued, or transferred at prices which are not less than the
published net asset value of an ordinary share.
Prior to the publication of this report, the share buyback
policy included an intention by the Directors that they may buyback
ordinary shares if the share price is more than 5 per cent below
the published net asset value. However the Board are modifying this
policy in the paragraph below to focus on long term risk adjusted
returns for shareholders as it weighs up buybacks versus real
estate opportunities, be it new assets or capital expenditure in
the existing portfolio. The Directors believe that this policy is
better suited to an illiquid asset class.
It is the intention of Directors that the share buy back
authority may be used to purchase ordinary shares in the Company,
(subject to the income and cash flow requirements of the Company)
if the level of discount represents an opportunity that will
generate risk adjusted returns in excess of that which could be
achieved by investing in real estate opportunities at a particular
time.
The discount control policy of the Company provides that in the
event that the share price discount to prevailing published NAV (as
last calculated, adjusted downwards for the amount of any dividend
declared by the Company upon the shares going ex-dividend) is more
than 5 per cent for 90 dealing days or more, following the second
anniversary of the Company’s most recent continuation vote, the
Directors will convene an Extraordinary General Meeting (“EGM”) to
be held within three months to consider an ordinary resolution for
the continuation of the Company. If this continuation resolution is
not passed, the Directors will convene a further extraordinary
general meeting to be held within six months of the first EGM to
consider the winding up of the Company or a reconstruction of the
Company which offers all shareholders the opportunity to realise
their investment. If any such continuation resolution is passed,
this discount policy, save in respect of share buy backs, would not
apply for a period of two years thereafter. The last continuation
vote was held on 9 November 2016. As
at 15 April 2019, the discount,
adjusted for the shares going ex-dividend, was 3.7%.
Directors’ Responsibility
Statement
The Directors are responsible for preparing the Annual Report
and the Group financial statements in accordance with applicable
Guernsey law and those International Financial Reporting Standards
(“IFRS”) as have been adopted by the European Union. They are also
responsible for ensuring that the Annual Report includes
information required by the Rules of the UK Listing Authority.
The Directors are required to prepare Group financial statements
for each financial year which give a true and fair view of the
financial position of the Group and the financial performance and
cash flows of the Group for that period. In preparing those Group
financial statements the Directors are required to:
· select suitable accounting policies in
accordance with IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors and then apply them consistently;
· present information, including
accounting policies, in a manner that provides relevant, reliable,
comparable and understandable information;
· provide additional disclosures when
compliance with the specific requirements in IFRS is insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the Group’s financial
position and financial performance;
· state that the Group has complied with
IFRS, subject to any material departures disclosed and explained in
the financial statements; and
· prepare the financial statements on a
going concern basis unless it is inappropriate to presume that the
Group 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 Group and enable them to ensure that the
Group financial statements comply with the Companies (Guernsey) Law
2008. They are also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are also responsible for ensuring that the Group
complies with the provisions of the Listing Rules and the
Disclosure Rules and Transparency Rules of the UK Listing Authority
which, with regard to corporate governance, require the Group to
disclose how it has applied the principles, and complied with the
provisions, of the UK Corporate Governance Code applicable to the
Group.
We confirm that to the best of our knowledge:
· the Group financial statements,
prepared in accordance with the IFRS, give a true and fair view of
the assets, liabilities, financial position and profit or loss of
the Group and comply with the Companies Law;
· that in the opinion of the Board, the
Annual Report and Accounts taken as a whole, is fair, balanced and
understandable and it provides the information necessary to assess
the Group’s position, performance, business model and strategy;
and
· the Strategic Report includes a fair
review of the progression and performance of the business and the
position of the Group together with a description of the principal
risks and uncertainties that it faces.
On behalf of the Board
Andrew Wilson
Director
25 April 2019
Consolidated Statement of Comprehensive Income
For the year ended 31 december
2018
|
|
Year Ended
31 December
2018 |
Year Ended
31 December
2017 |
|
Notes |
£’000 |
£’000 |
Revenue |
|
|
|
Rental income |
2 |
65,936 |
69,826 |
Service charge income |
3 |
5,950 |
- |
Gains/(Losses) on investment
properties
|
10 |
18,947 |
90,416 |
Interest income |
|
510 |
295 |
Total income |
|
91,343 |
160,537 |
Expenditure |
|
|
|
Investment management fee |
4 |
(9,567) |
(9,215) |
Direct property expenses |
5 |
(3,569) |
(4,444) |
Service charge expenses |
5 |
(5,950) |
|
Other expenses |
5 |
(5,446) |
(3,565) |
Total expenditure |
|
(24,532) |
(17,224) |
Operating profit before finance
costs |
|
66,811 |
143,313 |
Finance costs |
|
|
|
Finance costs |
6 |
(7,976) |
(8,143) |
|
|
(7,976) |
(8,143) |
Net profit from ordinary activities
before taxation |
|
58,835 |
135,170 |
Taxation on profit on ordinary
activities |
7 |
(5,830) |
(3,608) |
Net profit for the year |
|
53,005 |
131,562 |
Other comprehensive income to be
reclassified to Profit or Loss |
|
|
|
Gain arising on
effective portion of interest
rate swap |
14 |
1,388 |
1,664 |
Other comprehensive income |
|
1,388 |
1,664 |
Total comprehensive income for the
year |
|
54,393 |
133,226 |
|
|
|
|
Basic and diluted earnings per
share |
9 |
4.08p |
10.12p |
EPRA earnings per share (excluding
non-recurring tax items) |
|
3.03p |
3.42p |
All of the profit and total comprehensive income for the year is
attributable to the owners of the Company. All items in the above
statement derive from continuing operations. The accompanying notes
are an integral part of this statement. The accompanying notes are
an integral part of this statement.
Consolidated Balance Sheet
As at 31 December 2018
|
Notes |
2018
£’000 |
2017
£’000 |
Non-current
assets |
|
|
|
Investment
properties |
10 |
1,430,851 |
1,332,923 |
Deferred tax
asset |
7 |
- |
3,271 |
Interest rate
swap |
14 |
166 |
- |
|
|
1,431,017 |
1,336,194 |
Current
assets |
|
|
|
Investment properties
held for sale |
10 |
- |
47,600 |
Trade and other
receivables |
12 |
23,765 |
23,433 |
Cash and cash
equivalents |
|
43,505 |
72,443 |
|
|
67,270 |
143,476 |
Total assets |
|
1,498,287 |
1,479,670 |
Current
liabilities |
|
|
|
Trade and other
payables |
13 |
(35,139) |
(22,408) |
Interest rate
swap |
14 |
(868) |
(1,130) |
|
|
(36,007) |
(23,538) |
Non-current
Liabilities |
|
|
|
Bank Loan |
14 |
(249,661) |
(249,126) |
Interest rate
swap |
14 |
- |
(960) |
|
|
(249,661) |
(250,086) |
Total liabilities |
|
(285,668) |
(273,624) |
Net assets |
|
1,212,619 |
1,206,046 |
Represented by: |
|
|
|
Share capital |
15 |
539,872 |
539,872 |
Special distributable
reserve |
|
570,158 |
583,920 |
Capital reserve |
|
103,291 |
84,344 |
Revenue reserve |
|
- |
- |
Interest rate swap
reserve |
|
(702) |
(2,090) |
Equity shareholders’
funds |
|
1,212,619 |
1,206,046 |
|
|
|
|
Net asset value per
share |
16 |
93.3p |
92.8p |
EPRA Net asset value
per share |
|
93.4p |
93.0p |
The accounts were approved and authorised for issue by the Board
of Directors on 25 April 2019 and
signed on its behalf by:
Andrew
Wilson
Ken McCullagh
Director
Director
The accompanying notes are an integral part of this
statement.
Consolidated Statement of Changes in Equity
For the year ended 31 December
2018
|
Notes |
Share
Capital
£’000 |
Special Distributable Reserve £’000 |
Capital
Reserve
£’000 |
Revenue
Reserve
£’000 |
Interest Rate Swap Reserve £’000 |
Equity Shareholders’ funds
£’000 |
At 1 January 2018 |
|
539,872 |
583,920 |
84,344 |
- |
(2,090) |
1,206,046 |
Net profit for the
year |
|
- |
- |
- |
53,005 |
- |
53,005 |
Other comprehensive
income |
|
- |
- |
- |
- |
1,388 |
1,388 |
Total comprehensive
income |
|
- |
- |
- |
53,005 |
1,388 |
54,393 |
Dividends paid |
8 |
- |
- |
- |
(47,820) |
- |
(47,820) |
Transfer in respect of
gains on investment property |
10 |
- |
- |
18,947 |
(18,947) |
- |
- |
Transfer from special
distributable reserve |
|
- |
(13,762) |
- |
13,762 |
- |
- |
At 31 December
2018 |
|
539,872 |
570,158 |
103,291 |
- |
(702) |
1,212,619 |
|
|
|
|
|
|
|
|
FOR THE YEAR ENDED
31 DECEMBER 2017 |
|
|
|
|
|
|
|
|
Notes |
Share
Capital
£'000 |
Special Distributable Reserve
£'000 |
Capital Reserve
£'000 |
Revenue Reserve
£'000 |
Interest Rate Swap Reserve
£'000 |
Equity Shareholders’ funds
£’000 |
At 1 January 2017 |
|
539,872 |
590,594 |
(6,072) |
- |
(3,754) |
1,120,640 |
Net profit for the
year |
|
- |
- |
- |
131,562 |
- |
131,562 |
Other comprehensive
income |
|
- |
- |
- |
- |
1,664 |
1,664 |
Total comprehensive
income |
|
- |
- |
- |
131,562 |
1,664 |
133,226 |
Dividends paid |
8 |
- |
- |
- |
(47,820) |
- |
(47,820) |
Transfer in respect of
gains on investment property |
10 |
- |
- |
90,416 |
(90,416) |
- |
- |
Transfer from special
distributable reserve |
|
- |
(6,674) |
- |
6,674 |
- |
- |
At 31 December
2017 |
|
539,872 |
583,920 |
84,344 |
- |
(2,090) |
1,206,046 |
The accompanying notes are an integral part of this
statement.
Consolidated Cash Flow Statement
For the year ended 31 December
2018
|
Notes |
Year ended
31 December 2018
£’000 |
Year ended
31 December 2017
£’000 |
Cash flows from
operating activities |
|
|
|
Net profit for the
year before taxation |
|
58,835 |
135,170 |
Adjustments for: |
|
|
|
Gains on investment
properties |
10 |
(18,947) |
(90,416) |
Movement in lease
incentives |
10 |
2,408 |
(6,597) |
Movement in provision
for bad debts |
12 |
71 |
(130) |
Increase in operating
trade and other receivables |
|
(7,996) |
(672) |
(Decrease)/Increase in
operating trade and other payables |
|
4,571 |
(3,094) |
Finance costs |
6 |
7,976 |
8,131 |
Cash generated by
operations |
|
46,918 |
42,392 |
Tax paid |
|
(1,010) |
- |
Net cash inflow from
operating activities |
|
45,908 |
42,392 |
Cash flows from
investing activities |
|
|
|
Purchase of investment
properties |
10 |
(156,030) |
(52,016) |
Sale of investment
properties |
10 |
171,928 |
41,513 |
Capital
expenditure |
10 |
(40,490) |
(8,981) |
Net cash outflow from
investing activities |
|
(24,592) |
(19,484) |
Cash flows from
financing activities |
|
|
|
Dividends paid |
|
(43,008) |
(47,820) |
Bank loan interest
paid |
|
(6,215) |
(6,114) |
Payments under
interest rate swap arrangement |
|
(1,031) |
(1,424) |
Net cash outflow from
financing activities |
|
(50,254) |
(55,358) |
|
|
|
|
Net decrease in cash
and cash equivalents |
|
(28,938) |
(32,450) |
|
|
|
|
Opening cash and cash
equivalents |
|
72,443 |
104,893 |
|
|
|
|
Closing cash and cash
equivalents |
|
43,505 |
72,443 |
Represented by: |
|
|
|
Cash at bank |
|
16,363 |
27,735 |
Money market
funds |
|
27,142 |
44,708 |
|
|
43,505 |
72,443 |
The accompanying notes are an integral part of this
statement.
Notes to the Accounts
1. Accounting Policies
A summary of the principal accounting policies, all of which
have been applied consistently throughout the year, is set out
below.
(a) Basis of Accounting
The consolidated accounts have been prepared in accordance with
International Financial Reporting Standards issued by the
International Accounting Standards Board (the IASB),
interpretations issued by the IFRS Interpretations Committee that
remain in effect, and to the extent that they have been adopted by
the European Union, applicable legal and regulatory requirements of
Guernsey law and the Listing Rules of the UK Listing Authority. The
audited Consolidated Financial Statements of the Group have been
prepared under the historical cost convention as modified by the
measurement of investment property and derivative financial
instruments at fair value. The consolidated financial statements
are presented in pound sterling.
New and amended standards and
interpretations
The accounting policies adopted are consistent with those of the
previous financial year. There have been other new and amended
standards issued or have come into effect in the European Union
from 1 January 2018 but either these
were not applicable or did not have a material impact on the annual
consolidated financial statements of the Group and hence not
discussed and are detailed below:
Annual Improvements to IFRSs 2015–2017 Cycle
(b) Significant accounting
judgements, estimates and assumptions
The preparation of the Group’s financial statements requires
management to make judgements, estimates and assumptions that
affect the amounts recognised in the financial statements. However,
uncertainty about these judgements, assumptions and estimates could
result in outcomes that could require a material adjustment to the
carrying amount of the asset or liability affected in the future.
In applying the Group’s accounting policies, there were no critical
accounting judgements.
Key estimation uncertainties
Fair value of investment properties: Investment property is
stated at fair value as at the balance sheet date as set out in
note 1(h) and note 10 to these accounts.
The determination of the fair value of investment properties
requires the use of estimates such as future cash flows from the
assets and unobservable inputs such as capitalisation rates. The
estimate of future cash flows includes consideration of the repair
and condition of the property, lease terms, future lease events, as
well as other relevant factors for the particular asset.
These estimates are based on local market conditions existing at
the balance sheet date.
(c) Basis of Consolidation
The consolidated accounts comprise the accounts of the Company
and its subsidiaries drawn up to 31 December each year.
Subsidiaries are consolidated from the date on which control is
transferred to the Group and cease to be consolidated from the date
on which control is transferred out of the Group.
The Jersey Property Unit Trusts (“JPUTS”) are all controlled via
voting rights and hence those entities are consolidated.
(d) Functional and Presentation
currency
Items included in the financial statements of the Group are
measured using the currency of the primary economic environment in
which the Company and its subsidiaries operate (“the functional
currency”) which is Pounds Sterling. The financial statements are
also presented in Pounds Sterling. All figures in the financial
statements are rounded to the nearest thousand unless otherwise
stated.
(e) Revenue Recognition
Rental income, excluding VAT, arising from operating leases
(including those containing stepped and fixed rent increases) is
accounted for in the Statement of Comprehensive Income on a
straight line basis over the lease term. Lease premiums paid and
rent free periods granted, are recognised as assets and are
amortised over the non-cancellable lease term.
Non-rental service charge income is recognised in the period
where the non-rental service charge income is received.
Interest income is accounted on an accruals basis and included
in operating profit.
(f) Expenses
Expenses are accounted for on an accruals basis. The Group’s
investment management and administration fees, finance costs and
all other expenses are charged through the Statement of
Comprehensive Income.
(g) Taxation
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted by the
reporting date. Current income tax relating to items recognised
directly in equity is recognised in equity and not in profit or
loss. Positions taken in tax returns with respect to situations in
which applicable tax regulations are subject to interpretation are
periodically evaluated and provisions established where
appropriate.
Deferred income tax is provided using the liability method on
all temporary differences at the reporting date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred income tax assets are
recognised only to the extent that it is probable that taxable
profit will be available against which deductible temporary
differences, carried forward tax credits or tax losses can be
utilised.
The amount of deferred tax provided is based on the expected
manner of realisation or settlement of the carrying amount of
assets and liabilities. In determining the expected manner of
realization of an asset the directors consider that the Group will
recover the value of investment property through sale. Deferred
income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
(h) Investment Properties
Investment properties are initially recognised at cost, being
the fair value of consideration given, including transaction costs
associated with the investment property. Any subsequent capital
expenditure incurred in improving investment properties is
capitalised in the period during which the expenditure is incurred
and included within the book cost of the property.
After initial recognition, investment properties are measured at
fair value, with the movement in fair value recognised in the
Statement of Comprehensive Income and transferred to the Capital
Reserve. Fair value is based on the external valuation provided by
CBRE Limited, chartered surveyors, at the Balance Sheet date. The
assessed fair value is reduced by the carrying amount of any
accrued income resulting from the spreading of lease incentives
and/or minimum lease payments.
On derecognition, gains and losses on disposals of investment
properties are recognised in the Statement of Comprehensive Income
and transferred to the Capital Reserve.
Recognition and derecognition occurs when the risks and rewards
of ownership of the properties have transferred between a willing
buyer and a willing seller.
Investment property is transferred to current assets held for
sale when it is expected that the carrying amount will be recovered
principally through sale rather than from continuing use. For this
to be the case, the property must be available for immediate sale
in its present condition, subject only to terms that are usual and
customary for sales of such property and its sale must be highly
probable.
The Group has entered into forward funding agreements with third
party developers in respect of certain properties. Under these
agreements the Group will make payments to the developer as
construction progresses. The value of these payments is assessed
and certified by an expert.
Investment properties are recognised for accounting purposes
upon completion of contract. Properties purchased under forward
funding contracts are recognised at certified value to date.
Investment properties acquired through the purchase of a company
or other form of special purpose vehicle are treated as asset
acquisitions if the vehicle is deemed to be a corporate
wrapper. If the vehicle is not deemed to be a corporate
wrapper then the acquisition would be treated as business
combination.
(i) Operating Lease Contracts –
the Group as Lessor
The Group has entered into commercial property leases on its
investment property portfolio. The Group has determined, based on
an evaluation of the terms and conditions of the arrangements that
it retains all the significant risks and rewards of ownership of
these properties and so accounts for leases as operating leases.
Initial direct costs incurred in negotiating and arranging an
operating lease are added to the carrying amount of the leased
asset and recognised as an expense on a straight-line basis over
the lease term.
(j) Share Issue Expenses
Incremental external costs directly attributable to the issue of
shares that would otherwise have been avoided are written off to
capital reserves.
(k) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a
single segment of business being property investment in the
United Kingdom. The directors are
of the opinion that the four property sectors analysed throughout
the financial statements constitute this single segment, and are
not separate operating segments as defined by IFRS 8 Operating
Segments.
(l) Cash and Cash
Equivalents
Cash and cash equivalents are defined as cash in hand, demand
deposits, and other short-term highly liquid investments readily
convertible within three months or less to known amounts of cash
and subject to insignificant risk of changes in value.
(m) Trade and Other Receivables
Trade receivables are recognised initially at their transaction
price unless they contain a significant financing component, when
they are recognised at fair value. Trade receivables are
subsequently measured at amortised cost using the effective
interest method.
Other receivables are initially recognised at fair value plus
any directly attributable transaction costs and subsequently
measured at amortised cost using the effective interest method.
The Group applies the IFRS 9 simplified approach to measuring
expected credit losses which uses a lifetime expected loss
allowance for all trade receivables and contract assets.
(n) Trade and Other Payables
Rental income received in advance represents the pro-rated
rental income invoiced before the year end that relates to the
period post the year end. VAT payable is the difference between
output and input VAT at the year end. Other payables are accounted
for on an accruals basis and include amounts which are due for
settlement by the Group as at the year end and are generally
carried at the original invoice amount. An estimate is made for any
services incurred at the year end but for which no invoice has been
received.
(o) Reserves
Share Capital
This represents the proceeds from issuing ordinary shares.
Special Distributable Reserve
The special reserve is a distributable reserve to be used for
all purposes permitted under Guernsey law, including the buyback of
shares and the payment of dividends. Dividends can be paid from all
of the below listed reserves.
Capital Reserve
The following are accounted for in this reserve:
– gains and losses on the disposal of investment properties;
– increases and decreases in the fair value of investment
properties held at the year end.
Revenue Reserve
Any surplus arising from the net profit on ordinary activities
after taxation and payment of dividends is taken to this reserve,
with any deficit charged to the special distributable reserve.
Interest Rate Swap Reserve
Any surplus/deficit arising from the marked to market valuation
of the swap instrument is credited/charged to this account.
Treasury Share Reserve
This represents the cost of shares bought back by the Company
and held in Treasury. The balance within this reserve is currently
nil.
(p) Interest-bearing
borrowings
All bank loans and borrowings are initially recognised at cost,
being the fair value of the consideration received net of
arrangement costs associated with the borrowing. After initial
recognition, all interest bearing loans and borrowings are
subsequently measured at amortised cost. Amortised cost is
calculated by taking into account any loan arrangement costs and
any discount or premium on settlement.
On maturity, bank loans are recognised at par, which is
equivalent to amortised cost. Bank loans redeemed before maturity
are recognised at amortised cost with any charges associated with
early redemptions being taken to the Statement of Comprehensive
Income.
(q) Derivative financial
instruments
The Group uses derivative financial instruments to hedge its
risk associated with interest rate fluctuations.
Derivative instruments are initially recognised in the Balance
Sheet at their fair value split between current and non-current.
Fair value is determined by reference to market values for similar
instruments. Transaction costs are expensed immediately.
Gains or losses arising on the fair value of cash flow hedges in
the form of derivative instruments are taken directly to Other
Comprehensive Income. Such gains and losses are taken to a reserve
created specifically for that purpose, described as the Interest
Rate Swap Reserve in the Balance Sheet.
On termination the unrealised gains or losses arising from cash
flow hedges in the form of derivative instruments, initially
recognised in Other Comprehensive Income, are transferred to profit
or loss.
The Group considers its interest rate swap qualifies for hedge
accounting when the following criteria are satisfied:
– The instrument must be related to an asset or liability
– It must change the character of the interest rate by
converting a variable rate to a fixed rate or vice versa;
– It must match the principal amounts and maturity date of the
hedged item; and
– As a cash flow hedge the forecast transaction (incurring
interest payable on the bank loan) that is subject to the hedge
must be highly probable and must present an exposure to variations
in cash flows that could ultimately affect the profit or loss. The
effectiveness of the hedge must be capable of reliable measurement
and must be assessed as highly effective on an ongoing basis
throughout the financial reporting periods for which the hedge was
designated.
If a derivative instrument does not satisfy the Group’s criteria
to qualify for hedge accounting that instrument will be deemed as
an ineffective hedge.
Should any portion of an ineffective hedge be directly related
to an underlying asset or liability, that portion of the derivative
instrument should be assessed against the Group’s effective hedge
criteria to establish if that portion qualifies to be recognised as
an effective hedge.
Where a portion of an ineffective hedge qualifies against the
Group’s criteria to be classified as an effective hedge that
portion of the derivative instrument shall be accounted for as a
separate and effective hedge instrument and treated as other
comprehensive income.
Gains or losses arising on any derivative instrument or portion
of a derivative instrument which is deemed to be ineffective will
be recognised in profit or loss. Gains and losses, regardless of
whether related to effective or ineffective hedges, are taken to a
reserve created specifically for that purpose described in the
balance sheet as the Interest Rate Swap Reserve.
(r) New standards, amendments
and interpretation not yet effective
There are a number of new standards, amendments and
interpretations that have been issued for this accounting year. The
standards, amendments and interpretations which have been adopted
by the Group on 1 January 2018 are
listed below.
IFRS 9 — Financial Instruments
The final version of IFRS 9 Financial Instruments (“IFRS 9”) was
published in July 2014 by the IASB.
IFRS 9 replaces IAS 39 Financial Instruments and is effective for
annual periods beginning on or after 1
January 2018.
The IASB split the changes into 3 main phases; classification
and measurement of financial assets and financial liabilities,
hedge accounting and impairment requirements relating to the
expected credit losses. The Group elected not to restate
comparative on adoption of IFRS 9.
Classification and Measurement
The Group has assessed the changes of the classification of
financial assets and financial liabilities under IFRS 9 and
concludes that there are no changes to the classification of the
Group’s financial assets and financial liabilities on adoption of
IFRS 9.
The Group has assessed the changes of measurement of financial
assets and financial liabilities under IFRS 9 and the Group will
continue to initially recognize financial assets and financial
liabilities at fair value plus, any directly attributable
transactions costs, with subsequent measurement at amortised cost
using the effective interest method, with exception to trade
receivables. Trade receivables will now be measured in accordance
with IFRS 15. The Group has updated the accounting policy for trade
receivables, 1 (m), but has made no adjustments to the Group’s
financial statements following the adoption of IFRS 9.
Hedge Accounting
The Group concludes that there are no changes on adoption of
IFRS 9 on accounting for the Group’s interest rate swap. The Group
has updated the hedge documentation, so that it is compliant under
IFRS 9.
Impairment
The Group has identified trade receivables being subject to the
new expected credit loss model on adoption to IFRS 9. The Group
shall apply the simplified approach to measure the loss allowance
at an amount equal to lifetime expected credit losses for trade
receivables, as outlined in the updated accounting policy, 1 (m).
The Group applies a loss rate to trade receivables of more than 90
days past due where, the full net amount is charged as a provision
for bad debt to the profit and loss account. The Group continues to
monitor the loss rate and adjusts for any forward-looking
estimates. There is no material impact on the Group’s bad debt
provision on adoption to IFRS 9, when compared to the bad debt
provision under IAS 39.
Refinance
IFRS 9 brings changes to the accounting for modified debt terms,
in which a 10% test is applied to assess if the modifications of
debt terms are substantial. This will have no impact to the Group’s
refinance, in 2019 detailed in Note 21, as the changes to the
Groups’ modified debt terms are considered substantial
IFRS 15 — Revenue from Contracts
IFRS 15 Revenue from Contractors with Customers (“IFRS 15”) was
issued in 2014 by the IASB. IFRS 15 replaces IAS 18 Revenue and IAS
11 Construction Contracts and is effective for annual periods
beginning on or after 1 January 2018.
The Group has assessed its revenue streams on adoption of IFRS 15
and has identified the following:
Rental Income
The Group’s rental income, which is derived from operating
leases, is out with the scope of IFRS 15, as
the Group’s leases contracts are within scope of IAS 17.
Non-rental Income
The Group has identified a non-rental revenue stream of service
charge income, which is within scope of the standard. The new
financial statement line “Non-rental service charge income” and
accompanying note have been included as a result of implementing
the standard. Comparative figures have been included accordingly.
There has been no financial impact of the new standard to the
Group.
IAS 7 – Statement of Cash Flows
In January 2016, the IASB amended
IAS 7 Statement of Cash Flows (“IAS 7”) to require entities to
provide disclosures that enable users of financial statements to
evaluate changes in liabilities arising from financing activities.
The new movements table in Note 14 is included as a result of
implementing the amended standard.
(s) New standards, amendments and
interpretation not yet effective
IFRS 16 — Leases
IFRS 16 Leases (“IFRS 16”) replaces IAS 17 Leases (“IAS 17”) and
is effective for annual periods beginning on or after 1 January 2019. The key changes are the lessee
and lessor accounting models are no longer symmetrical.
For lessees, the accounting for leases will change to a new
single lessee accounting model, requiring recognition of a
right-of-use asset (right to use underlying leased asset) and a
lease liability (obligation to make lease payments) for a lease
with a term greater than 12 months, exclusion to recognition is if
the underlying asset is of a low value when new.
For lessors, this remains relatively unchanged – IFRS 16 retains
IAS 17’s distinction of finance and operating lease however, IFRS
16 has introduced changes for the lessor where the lessor acts as
an intermediate lessor in the lease contract. The Group has made an
assessment of the leases, where the Group acts as intermediate
lessor in the lease agreement, and has identified that the Group
has five investment properties held on leased land. The rent per
annum ranges from one peppercorn to £5 per annum. The
classification of the head leases will change from operating lease
to financial lease on transition to IFRS 16.
The Group currently does not anticipate that the standard will
have any material impact on the Group’s financial statements as
presented for the current year.
Annual Improvements to IFRS
In addition to the above, Annual Improvements to IFRS 2015–2017
Cycle (effective 1 January 2019) have
not been adopted early.
2. Rental Income
|
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Rental Income |
65,936 |
69,826 |
Included within rental income is amortisation of lease premiums
and rent free periods granted.
2. Service Charge Income
|
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Non-rental service
charge income |
5,950 |
5,896 |
The Group’s managing agents Jones Lang
LaSalle manage service charge accounts for all the Group’s
properties. Service charges on rented properties are detailed in
note 5. Service charge expenses, are recharged to tenants. The
service charge paid by the Group in respect of void units was £0.6
million (2017: £1.4 million) and is included within note 5 Direct
Property Expenses.
4. Investment Management Fees
|
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Investment management
fee |
9,567 |
9,215 |
The Group’s Investment Manager up to 10
December 2018 was Standard Life Investments (Corporate
Funds) Limited and after this was Aberdeen Standard Fund Managers
Limited. The Investment Manager received an aggregate annual fee
from the Group at an annual rate of 0.65 per cent of the Total
Assets. The Investment Manager is also entitled to an
administration fee of £100,000 per annum. The total paid in
relation to this fee in the year was £100,000 (2017: £100,000). The
Investment Management agreement is terminable by either of the
parties to it on 12 months’ notice. From 1
January 2019, the fee will be 0.60% on total assets up to
£1.75 billion and 0.475% on total assets over £1.75 billion. There
will be no administration fee.
5. Expenses
|
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Direct Property
Expenses |
3,569 |
4,444 |
Service charge
expenses |
5,950 |
5,896 |
Other
Expenses |
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Professional fees
(including valuation fees) |
4,739 |
2,744 |
Movement in bad debt
provision |
(71) |
130 |
Directors’ fees |
282 |
222 |
Administration
fee |
100 |
100 |
Administration and
company secretarial fees |
85 |
85 |
Regulatory fees |
230 |
212 |
Auditor’s remuneration
for: |
|
|
Statutory audit |
81 |
68 |
Non audit
services |
- |
4 |
|
5,446 |
3,565 |
6. Finance costs
|
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Interest on principal
loan amount |
6,352 |
5,794 |
Amounts payable in
respect of interest rate swap arrangement |
894 |
1,435 |
Facility fees |
332 |
321 |
Amortisation of loan
set up fees |
398 |
593 |
|
7,976 |
8,143 |
7. Deferred and Current Taxation
The Company owns five Guernsey tax exempt subsidiaries, UK
Finance Holdings Limited (UKFH), UK Commercial Property GP Limited
(GP), UK Commercial Property Holdings Limited (UKCPH), UK
Commercial Property Estates Limited (UKCPEL) and UK Commercial
Property Estates Holdings Limited (UKCPEH). GP and UKCPH are
partners in a Guernsey Limited Partnership (“the Partnership”).
UKFH and UKCPH own two JPUTS. UKCPEL and UKCPEH also own two JPUTS.
Up to REIT conversion on 1 July, The Partnership, UKCPH and UKCPEL
owned a portfolio of UK properties and derived rental income from
those properties. As the Partnership and the unit trusts are income
transparent for UK tax purposes, the partners and unit holders were
liable to UK income tax on their share of the net rental profits of
the Partnership and unit trusts respectively. The entities directly
owning UK property were also liable to UK income tax on their own
net UK rental profits. All entities subject to UK income tax
elected to receive rental income gross under HMRC’s non-resident
landlord scheme.
UK REIT Status
The Group migrated tax residence to the UK and elected to be
treated as a UK REIT with effect from 1 July
2018. As a UK REIT, the income profits of the Group’s UK
property rental business are exempt from corporation tax as are any
gains it makes from the disposal of its properties, provided they
are not held for trading or sold within three years of completion
of development. The Group is otherwise subject
to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to
distribute at least 90% of the income profits of the Group’s UK
property rental business. There are a number of other conditions
that also are required to be met by the Company and the Group to
maintain REIT tax status. These conditions were met in the period
and the Board intends to conduct the Group’s affairs such that
these conditions continue to be met for the foreseeable future.
Accordingly, deferred tax is no longer recognised on temporary
differences relating to the property rental business or income tax
losses previously built up.
The Company and its Guernsey subsidiaries have obtained exempt
company status in Guernsey so that they are exempt from Guernsey
taxation on income arising outside Guernsey and bank interest
receivable in Guernsey.
A reconciliation between the tax charge and the product of
accounting profit multiplied by the applicable tax rate for the
year ended 31 December 2018 and 2017
is prepared below.
|
Year ended |
Year ended |
|
31 December
2018 |
31 December
2017 |
|
£’000 |
£’000 |
Net profit before tax |
58,835 |
135,170 |
UK corporation tax at a rate of 19
percent (2017: Income tax – 20%) |
11,178 |
27,034 |
Effect of: |
|
|
Capital gains on Investment
properties not taxable |
(3,600) |
(18,084) |
UK REIT exemption on
net income |
(3,963) |
- |
Income not taxable |
(50) |
(59) |
Intercompany loan interest |
(3,478) |
(7,099) |
Expenditure not allowed for income
tax purposes |
415 |
(1,428) |
Total current tax charge |
502 |
364 |
Net Movement in deferred tax
asset |
3,271 |
3,244 |
Corporation tax charge on
acquisition of White Building, Reading |
2,057 |
|
Total tax charge/(credit) |
5,830 |
3,608 |
The components of the tax charge in the consolidated income
statement are as follows:
Reconciliation of current corporation and income tax in the
consolidated income statement |
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Income tax charge in
the year |
502 |
481 |
Adjustment in respect of prior year over provision |
- |
(117) |
Corporation tax charge
in the year |
2,057 |
- |
At 31 December
2018 |
2,559 |
364 |
The Company owns two UK Limited Companies, Brixton Radlett
Property Limited (“BRPL”) and UK Commercial Property Estates
(Reading) Limited. In terms of BRPL, prior to REIT conversion, the
losses of the Group could not be used to offset the profits of
BRPL, hence the profits of BRPL were subject to corporation tax in
the UK, at a rate of 19%. As the inter-company debt in BRPL was
payable to a Guernsey entity, withholding tax was suffered on
payment of this interest. During 2016, this debt was listed as a
eurobond on the Guernsey Stock Exchange, resulting in withholding
tax no longer being payable. This listing was cancelled post REIT
conversion. For the year ended 31 December
2018 & 2017 the total amount payable in corporation tax
was nil and withholding tax was nil.
The White Building, Reading was acquired in June 2018 via the purchase of the share capital
of UK Commercial Property Estates (Reading) Limited. The purchase,
and subsequent allocation of the property as an investment
property, triggered a corporation tax charge of £2,057,000 which
was deducted from the purchase price.
Reconciliation of deferred tax in the consolidated income
statement |
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Movement in deferred
tax asset on tax losses |
5,635 |
2,793 |
Movement
in deferred tax asset in respect of capital allowance timing
differences |
481 |
(144) |
Movement
in deferred tax liability in respect of capital allowance timing
differences |
(2,845) |
595 |
|
3,271 |
3,244 |
The Components of the deferred tax asset in the consolidated
balance sheet are as follows:
Reconciliation of deferred tax in the consolidated balance
sheet |
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
Deferred tax asset on
tax losses |
- |
5,635 |
Deferred
tax asset in respect of capital allowance timing differences |
- |
481 |
Deferred
tax liability on temporary timing differences |
- |
(2,845) |
|
- |
3,271 |
Deferred tax asset
Pre REIT conversion the Group has unused income tax losses
carried forward of £40,186,000 (2016/2017: £49,537,000) based on
the 2017/2018 tax returns to 5 April
2018. Post REIT conversion the Group is now part of the UK
corporation tax regime and hence it is not anticipated that these
losses will be utilised. As a result both the deferred tax asset
and liability balance, which netted off to £3,271,000 has been
written off in 2018.
8. Dividends
Dividends on Ordinary Shares:
2017 Fourth interim of 0.92p per share paid |
Year
ended
31 December 2018
£’000 |
Year
ended
31 December 2017
£’000 |
|
28 February 2018 (2016
Fourth interim:0.92p) |
11,955 |
11,955 |
2018 First interim of
0.92p per share paid |
|
|
31 May 2018 (2016
First interim: 0.92p) |
11,955 |
11,955 |
2018 Second interim of
0.92p per share paid |
|
|
31 August 2018 (2016
First interim: 0.92p) |
11,955 |
11,955 |
2018 Third interim of 0.92p per share(split between
property income distribution of 0.643p per ordinary share and
ordinary dividend of 0.277p per ordinary share) paid
30 November 2018 (2017 Third interim: 0.92p) |
|
|
11,955 |
11,955 |
|
47,820 |
47,820 |
A fourth interim dividend of 0.92p was paid on 28 February 2019 to shareholders on the register
on 15 February 2019. This dividend
was split between a property income distribution of 0.775p per
ordinary share and an ordinary dividend of 0.145p per ordinary
share. Although this payment relates to the year ended 31 December 2018, under International Financial
Reporting Standards it will be accounted for in the year ending
31 December 2019.
9. Basic and diluted Earnings per
Share
|
Year
ended
31 December 2018 |
Year
ended
31 December 2017 |
Number of Shares |
1,299,412,465 |
1,299,412,465 |
Net Profit (£) |
53,005,000 |
131,562,000 |
|
4.08 |
10.12 |
As there are no dilutive instruments outstanding, basic and
diluted earnings per share are identical.
10. Investment Properties
Freehold and
Leasehold properties |
Year
ended 31 December 2018
£’000 |
Year
ended 31 December 2017
£’000 |
Opening valuation |
1,380,523 |
1,270,624 |
Purchases at cost |
156,030 |
52,016 |
Capital
expenditure |
40,490 |
8,981 |
Gain on revaluation to
fair value |
14,650 |
94,994 |
Disposals at prior
year valuation |
(163,250) |
(39,495) |
Lease incentive
movement |
2,408 |
(6,597) |
Total fair value at 31
December |
1,430,851 |
1,380,523 |
Less: reclassified as
held for sale |
- |
(47,600) |
Fair value as at 31
December |
1,430,851 |
1,332,923 |
Gains on investment
properties at fair value comprise |
|
|
Valuation gains |
14,649 |
94,994 |
Movement in provision
for lease incentives |
2,408 |
(6,597) |
Gain on disposal |
1,890 |
2,019 |
|
18,947 |
90,416 |
Gains on investment
properties sold |
|
|
Original cost of
investment properties sold |
(168,188) |
(28,293) |
Sale proceeds less
sales costs |
171,928 |
41,513 |
Profit on investment
properties sold |
3,740 |
13,220 |
Recognised in previous
periods |
(4,938) |
11,201 |
Recognised in current
period |
8,678 |
2,019 |
|
3,740 |
13,220 |
Given the objectives of the Group and the nature of its
investments, the Directors believe that the Group has only one
asset class, that of Commercial Property. CBRE Limited, (the
“Property Valuer”) completed a valuation of Group investment
properties as at 31 December 2018 on
the basis of fair value in accordance with the requirements of the
Royal Institution of Chartered Surveyors (RICS) ‘RICS Valuation —
Global Standards 2017 (the ‘Red Book’). For most practical purposes
there would be no difference between Fair Value (as defined in IFRS
13) and Market Value. The Property Valuer, in valuing the
portfolio, is acting as an ‘External Valuer’, as defined in the Red
Book, exercising independence and objectivity. The Property
Valuer’s opinion of Fair Value has been primarily derived using
comparable recent market transactions in order to determine the
price that would be received to sell an asset in an orderly
transaction between market participants at the valuation date. The
fair value of these investment properties amounted to
£1,445,170,000 (2017: £1,397,250,000). The difference between the
fair value and the value per the consolidated balance sheet at
31 December 2018 consists of accrued
income relating to the pre-payment for rent-free periods recognised
over the life of the lease totalling £14,319,000 (2017:
£16,727,000) which is separately recorded in the accounts as a
current asset.
The Group has entered into leases on its property portfolio as
lessor (See note 19 for further information).
· No one property accounts for more than
15 per cent of the gross assets of the Group.
· All leasehold properties have more
than 60 years remaining on the lease term.
· There are no restrictions on the
realisability of the Group’s investment properties or on the
remittance of income or proceeds of disposal.
However, the Group’s investments comprise UK commercial
property, which may be difficult to realise.
The property portfolio’s fair value as at 31 December 2018 has been prepared adopting the
following assumptions:
· That, where let, the Estimated Net
Annual Rent (after void and rent free period assumptions) for each
property, or part of a property, reflects the terms of the leases
as at the date of valuation. If the property, or parts thereof, are
vacant at the date of valuation, the rental value reflects the rent
the Property Valuer considers would be obtainable on an open market
letting as at the date of valuation.
· The Property Valuer has assumed that,
where let, all rent reviews are to be assessed by reference to the
estimated rental value calculated in accordance with the terms of
the lease. Also there is the assumption that all tenants will meet
their obligations under their leases and are responsible for
insurance, payment of business rates, and all repairs, whether
directly or by means of a service charge.
· The Property Valuer has not made any
adjustments to reflect any liability to taxation that may arise on
disposal, nor any costs associated with disposals incurred by the
owner.
· The Property Valuer assumes an initial
yield in the region of 3 to 7.25 per cent, based on market
evidence. For the majority of properties, the Property Valuer
assumes a reversionary yield in the region of 3.25 to 9 per
cent.
· The Property Valuer takes account of
deleterious materials included in the construction of the
investment properties in arriving at its estimate of Fair Value
when the Investment Manager advises of the presence of such
materials.
The majority of the leases are on a full repairing basis and as
such the Group is not liable for costs in respect of repairs or
maintenance to its investment properties.
The following disclosure is provided in relation to the adoption
of IFRS 13 Fair Value Measurement. All properties are deemed Level
3 for the purposes of fair value measurement and the current use of
each property is considered the highest and best use. There have
been no transfers from Level 3 in the year. The fair value of
completed investment property is determined using a yield
methodology.
Under this method, a property’s fair value is estimated using
explicit assumptions regarding the benefits and liabilities of
ownership over the asset’s life including an exit or terminal
value. As an accepted method within the income approach to
valuation, this method involves the projection of a series of cash
flows on a real property interest. To this projected cash flow
series, an appropriate, market derived discount rate
(capitalisation rate) is applied to establish the present value of
the cash inflows associated with the real property.
The duration of the cash flow and the specific timing of inflows
and outflows are determined by events such as rent reviews, lease
renewal and related void or rent free periods, re-letting,
redevelopment, or refurbishment. The appropriate duration is
typically driven by market behaviour that is a characteristic of
the class of property. In the case of investment properties,
periodic cash flow is typically estimated as gross income less
vacancy, non-recoverable expenses, collection losses, lease
incentives, maintenance cost, agent and commission costs and other
operating and management expenses. The series of periodic net cash
inflows, along with an estimate of the terminal value anticipated
at the end of the projection period, is then discounted. Set out
below are the valuation techniques used for each property sector
plus a description and quantification of the key unobservable
inputs relating to each sector. There has been no change in
valuation technique in the year.
Sector |
Fair
Value at |
Valuation Techniques
techniques |
Unobservable
inputs |
Range |
|
31/12/18
(£m) |
|
|
(weighted average) |
Industrial |
670.5 |
Yield methodology |
Annual rent per sq
ft |
£0-£17 (£7) |
|
|
|
Capitalisation
rate |
4.1%-6.8% (4.8%) |
Office |
231.9 |
Yield methodology |
Annual rent per sq
ft |
£15-£57 (£27) |
|
|
|
Capitalisation
rate |
3.3%-7.2% (5.4%) |
Retail |
384.9 |
Yield methodology |
Annual
rent per sq ft |
£18-£305
(£60) |
|
|
|
Capitalisation rate |
3.3%-8.7% (5.5%) |
Alternatives |
157.9 |
Yield methodology |
Annual
rent per sq ft |
£0-£21
(£14) |
|
|
|
Capitalisation rate |
5.1%-6.1% (5.6%) |
|
|
|
|
|
|
|
|
|
|
|
Sensitivity analysis
The table below presents the sensitivity of the valuation to
changes in the most significant assumptions underlying the
valuation of investment property.
Sector |
Assumption |
Movement |
Effect on valuation |
Industrial |
Capitalisation rate |
+50 basis points |
Decrease £69.3m |
|
|
-50 basis points |
Increase £86.0m |
Office |
Capitalisation rate |
+50 basis points |
Decrease £22.3m |
|
|
-50 basis points |
Increase £27.4m |
Retail |
Capitalisation rate |
+50 basis points |
Decrease £35.0m |
|
|
-50 basis points |
Increase £42.9m |
Alternatives |
Capitalisation rate |
+50 basis points |
Decrease £13.9m |
|
|
-50 basis points |
Increase £16.5m |
Investment property valuation
process
The valuations of investment properties are performed quarterly
on the basis of valuation reports prepared by independent and
qualified valuers and reviewed by the Property Valuation Committee
of the Company.
These reports are based on both:
· Information provided by the Investment
Manager such as current rents, terms and conditions of lease
agreements, service charges and capital expenditure. This
information is derived from the Investment Manager’s financial and
property management systems and is subject to the Investment
Manager’s overall control environment.
· Assumptions and valuation models used
by the valuers — the assumptions are typically market
related, such as yields. These are based on their professional
judgment and market observation.
The information provided to the valuers and the assumptions and
valuation models used by the valuers are reviewed by the Investment
Manager. This includes a review of fair value movements over the
period.
Asset held for sale
There are no assets held for sale as at 31 December 2018. At the prior year end the
assets held for sale were the three Shrewsbury shopping centres, Charles Darwin,
Pride Hill and Riverside. The assets were shown at fair value in
the Balance Sheet as a held for sale asset and included within the
investment property table shown in this note. The assets were sold
by the Group on 24 January 2018 for
approximately £51 million and the losses on these assets are shown
in investment property table and included within the consolidated
statement of comprehensive income as losses on investment
properties.
11. Subsidiary Undertakings
The Company owns 100 per cent of the issued ordinary share
capital of UK Commercial Property Finance Holdings Limited (UKCFH),
a company incorporated in Guernsey whose principal business pre
REIT conversion was that of a holding company.
The Company owns 100 per cent of the issued share capital of UK
Commercial Property Estates Holdings Limited (UKCPEH), a company
incorporated in Guernsey whose principal business pre REIT
conversion was that of a holding company. UKCPEH Limited owns 100
per cent of the issued share capital of UK Commercial Property
Estates Limited, a company incorporated in Guernsey whose principal
business is that of an investment and property company. UKCPEH also
owns 100% of Brixton Radlett Property Limited, a UK company, whose
principal business is that of an investment and property
company.
UKCFH owns 100 per cent of the issued ordinary share capital of
UK Commercial Property Holdings Limited (UKCPH), a company
incorporated in Guernsey whose principal business is that of an
investment and property company.
UKCFH owns 100 per cent of the issued share capital of UK
Commercial Property GP Limited, (GP), a company incorporated in
Guernsey whose principal business is that of an investment and
property company.
UKCPT Limited Partnership, (GLP), is a Guernsey limited
partnership, and it holds a portfolio of properties. UKCPH and GP,
have a partnership interest of 99 and 1 per cent respectively in
the GLP. The GP is the general partner and UKCPH is a limited
partner of the GLP.
UKCFH owns 100 per cent of the issued share capital of UK
Commercial Property Nominee Limited, a company incorporated in
Guernsey whose principal business is that of a nominee company.
In addition the Group controls four JPUTS namely Junction 27
Retail Unit Trust, St George’s Leicester Unit Trust, Kew Retail
Park Unit Trust and Rotunda Kingston Property Unit Trust. The
principal business of the Unit Trusts is that of investment in
property.
Following REIT conversion all direct properties held by UKCPH,
UKCPEL and the Limited Partnership were transferred to UKCPFH and
UKCPEH.
12. Trade and Other receivables
|
2018
£’000 |
2017
£’000 |
Rents receivable |
4,067 |
2,995 |
Lease Incentive |
14,319 |
16,727 |
Other debtors and prepayments |
5,379 |
3,711 |
|
23,765 |
23,433 |
Provision for bad debts as at 31
December 2017/20156 |
790 |
660 |
Movement in the year |
(71) |
130 |
Provision for bad debts as at 31
December 2018/2017 |
719 |
790 |
The ageing of these receivables is as follows:
|
2018
£’000 |
2017
£’000 |
Less than 6 months |
566 |
374 |
Between 6 and 12 months |
124 |
290 |
Over 12 months |
29 |
126 |
|
719 |
790 |
Other debtors include tenant deposits of £2,618,000 (2017:
£3,070,000)
All other debtors are due within one year. No other debts past
due are impaired in either year.
13. Trade and Other payables
|
2018
£’000 |
2017
£’000 |
Rental income received in
advance |
13,308 |
14,334 |
Investment Manager fee payable |
2,381 |
2,370 |
VAT payable |
- |
641 |
Income tax payable |
2,030 |
|
Withholding tax payable* |
608 |
481 |
Other payables |
16,812 |
4,582 |
|
35,139 |
22,408 |
* Tax withheld on PIDs at the basic rate of income tax,
currently 20%.
Other payables include tenant deposits of £2,618,000 (2017:
£3,070,000), bank loan and interest rate swap payments of
£1,429,000 (2017: £1,430,000), dilapidation settlement of
£3,500,000 (2017: £0), acquisition costs of £830,000 (2017: £0) and
dividend payable of £4,182,000 (2017: £0). As at the payment date
of the third interim dividend (30 November
2018), Phoenix Life Limited were deemed to be a substantial
shareholder under the REIT regulations. PLL notified the Company
they were no longer a substantial shareholder in January 2019 and the dividend was subsequently
paid. The Group’s payment policy is to ensure settlement of
supplier invoices in accordance with stated terms.
14. Bank Loan and Interest rate
swaps
|
2018 |
2017 |
|
£’000 |
£’000 |
Total Facilities available |
300,000 |
300,000 |
Drawn down: |
|
|
Barclays facility |
150,000 |
150,000 |
Cornerstone facility |
100,000 |
100,000 |
Set up costs incurred |
(4,536) |
(4,536) |
Accumulated amortisation of set up
costs |
3,465 |
3,067 |
Accrued variable rate interest on
bank loan |
732 |
595 |
Total due |
249,661 |
249,126 |
(i) Barclays Facility
The Group has a five year £150 million facility, maturing in
April 2020, with Barclays Bank plc
initially taken out in May 2011 and
extended in April 2015. As at
31 December 2018 this entire loan was
drawn down. The bank loan is secured on the property portfolio held
by UKCPEL. Under bank covenants related to the loan UKCPEL is to
ensure that at all times:
· The loan to value percentage does not
exceed 60 per cent.
· Interest cover at the relevant payment
date is not less than 160 per cent.
UKCPEL met all covenant tests during the year.
Interest rate exposure is hedged by the purchase of an interest
rate swap contract. The notional amount of the swap and the swap
term matches the loan principal and the loan term. As at
31 December 2018 the Group had in
place one interest rate swap totaling £150 million with Barclays
Bank plc (2017: £150 million). The interest rate swap effectively
hedges the current drawn down loan with Barclays Bank plc.
Interest on the swap is receivable at a variable rate calculated
on the same LIBOR basis as for the bank loan (as detailed below but
excluding margins) and payable at a fixed rate of 1.30 per cent per
annum on the £150 million swap. The fair value of the liability in
respect of the interest rate swap contract at 31 December 2018 is £702,000 (2017: liability of
£2,090,000) which is based on the marked to market value.
Interest is payable by UKCPEL at a rate equal to the aggregate
of LIBOR, mandatory costs of the Bank and a margin. The applicable
margin is fixed at 1.50 per cent per annum and this was the
applicable margin as at 31 December
2018 (2017: 1.50 per cent).
In addition to the above UKPCPEL has a £50 million revolving
credit facility (“RCF”) with Barclays Bank plc at a margin of 1.50
per cent above LIBOR available for four years but cancellable at
any time. The RCF has a non-utilisation fee of 0.6 per cent per
annum charged on the proportion of the RCF not utilised on a
pro-rata basis. At 31 December 2018
the RCF remained unutilised.
(ii) Barings Facility
The Group has a twelve year £100 million loan which is due to
mature in April 2027 with Barings
Real Estate Advisers LLP (previously Cornerstone Real Estate
Advisers LLP), a member of the MassMutual Financial Services Group.
The loan was taken out by UK Commercial Property Finance Holdings
Limited (UKCFH). As at 31 December
2018 this entire loan was drawn down. The bank loan is
secured on the portfolio of eight properties held within the wider
Group. Under bank covenants related to the loan UKCFH is to ensure
that at all times:
· The loan to value percentage does not
exceed 75 per cent.
· Interest cover at the relevant payment
date and also projected over the course of the proceeding 12 months
is not less than 200 per cent.
UKCFH met all covenant tests during the year.
Interest is payable by UKCFH at a fixed rate equal to the
aggregate of the equivalent 12 year gilt yield, fixed at the time
of drawdown and a margin. This resulted in a fixed rate of interest
payable of 3.03 per cent per annum. There are no interest rate
swaps in place relating to this facility.
Swap Instruments
As at 31 December 2018 the Group
had in place an interest rate swap instrument totalling £150
million which was deemed to be an effective hedge as per note
1(q).
The revaluation of this swap at the year end resulted in a gain
on interest rate swaps of £1.4 million (2017: gain of £1.7
million). Of the total loss arising on interest rate swaps, £1.4
million related to effective hedge instruments (2017: gain £1.7
million) which is credited through Other Comprehensive Income in
the Statement of Comprehensive Income.
The valuation techniques applied to fair value the derivatives
include the swap models including the CVA/DVA swap models, using
present value calculations. The model incorporates various inputs
including the credit quality of counterparties and forward
rates.
The fair value of the interest rate swaps as at 31 December 2018 amounted to a liability of
£702,000 (2017: Liability of £2,090,000). Based on current yield
curves and non-performance risk, £868,000 (2017: £1.1 million) of
this value is a liability which relates to the next 12 months and
is therefore classified as a current liability. The remainder is
classified as a long term liability.
15. Share capital accounts
|
|
|
2018 |
2017 |
|
|
|
£’000 |
£’000 |
Share capital |
|
|
|
|
Opening balance |
|
|
539,872 |
539,872 |
Share Capital as at 31
December |
539,872 |
539,872 |
|
|
|
(number of shares in
issue at the year end being 1,299,412,465 (2017: 1,299,412,465) of
25p each. |
Ordinary shareholders participate in all general meetings of the
Company on the basis of one vote for each share held. The Articles
of Association of the Company allow for an unlimited number of
shares to be issued, subject to restrictions placed by AGM
resolutions. There are no restrictions on the shares in issue.
16. Net Asset Value per Share
The net asset value per ordinary share is based on net assets of
£1,212,619,000 (2017: £1,206,046,000) and 1,299,412,465 (2017:
1,299,412,465) ordinary shares, being the number of ordinary shares
in issue at the year end.
17. Related Party Transactions
No Director has an interest in any transactions which are or
were unusual in their nature or significant to the nature of the
Group. Standard Life Investments (Corporate Funds) Limited, as the
Manager of the Group up until 10 December
2018 and Aberdeen Standard Fund Managers Limited after this
date, received fees for their services as investment managers.
Further details are provided in note 3. The total management fee
charged to the Statement of Comprehensive Income during the year
was £9,567,000 (2017: £9,215,000) of which £2,381,000 (2017:
£2,370,000) remained payable at the year end. The Investment
Manager also received an administration fee of £100,000 (2017:
£100,000), of which £25,000 (2017: £25,000) remained payable at the
year end.
The Directors of the Company are deemed as key management
personnel and received fees for their services. Further details are
provided in the Directors’ Remuneration Report (unaudited). Total
fees for the year were £282,443 (2017: £222,000) none of which
remained payable at the year end (2017: nil).
The Group invests in the Aberdeen Standard Investments Liquidity
Fund which is managed by Aberdeen Standard Investments Limited. As
at 31 December 2018 the Group had
invested £27.1 million in the Fund (2017: £44.7 million). No
additional fees are payable to Aberdeen Standard Investments as a
result of this investment.
18. Financial Instruments and
Investment Properties
The Group’s investment objective is to provide ordinary
shareholders with an attractive level of income together with the
potential for income and capital growth from investing in a
diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial
property investments. The Group’s financial instruments consist of
cash, receivables and payables that arise directly from its
operations and loan facilities and swap instruments.
The main risks arising from the Group’s financial instruments
are credit risk, liquidity risk, market risk and interest rate
risk. The Board reviews and agrees policies for managing its risk
exposure. These policies are summarised below and remained
unchanged during the year.
Fair value hierarchy
The following table shows an analysis of the fair values of
investment properties recognized in the balance sheet by level of
the fair value hierarchy:
Explanation of the fair value
hierarchy:
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity can access at the
measurement date.
Level 2 – Use of a model with inputs (other than quoted prices
included in level 1) that are directly or indirectly observable
market data.
Level 3 – Use of a model with inputs that are not based on
observable market data.
Investment Properties
31 December 2018 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
|
£'000 |
£'000 |
£'000 |
£'000 |
Investment
properties |
- |
- |
1,445,170 |
1,445,170 |
|
|
|
|
|
31 December 2017 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
|
£'000 |
£'000 |
£'000 |
£'000 |
Investment
properties |
- |
- |
1,397,250 |
1,397,250 |
The lowest level of input is the underlying yield on each
property which is an input not based on observable market data.
The following table shows an analysis of the fair values of
loans recognised in the balance sheet by level of the fair value
hierarchy:
Bank Loans |
|
|
|
|
31 December 2018 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
|
£'000 |
£'000 |
£'000 |
£'000 |
Bank loans |
- |
253,950 |
- |
253,950 |
|
|
|
|
|
31 December 2017 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
|
£'000 |
£'000 |
£'000 |
£'000 |
Bank loans |
- |
264,720 |
- |
264,720 |
The lowest level of input is the interest rate payable on each
borrowing which is a directly observable input.
The following table shows an analysis of the fair values of
financial instruments and trade receivables and payables recognised
at amortised cost in the balance sheet by level of the fair value
hierarchy:
31 December 2018 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
|
£’000 |
£’000 |
£’000 |
£’000 |
Interest rate
swap |
- |
(702) |
- |
(702) |
Trade and other
receivables |
- |
23,765 |
- |
23,765
|
Trade and other
payables |
- |
35,139 |
- |
35,139 |
|
|
|
|
|
31 December 2017 |
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
|
£’000 |
£’000 |
£’000 |
£’000 |
Interest rate
swap |
- |
(2,090) |
- |
(2,090) |
Trade and other
receivables |
- |
23,433 |
- |
23,433
|
Trade and other
payables |
- |
22,408 |
- |
22,408 |
|
|
|
|
|
The lowest level of input is the three month LIBOR yield curve
which is a directly observable input.
The carrying amount of trade and other receivables and payables
is equal to their fair value, due to the short term maturities of
these instruments. Expected maturities are estimated to be the same
as contractual maturities.
The fair value of investment properties is calculated using
unobservable inputs as described in note 10.
The fair value of the derivative interest rate swap contract is
estimated by discounting expected future cash flows using current
market interest rates and yield curves over the remaining term of
the instrument.
The fair value of the bank loans are estimated by discounting
expected future cash flows using the current interest rates
applicable to each loan.
There have been no transfers between levels in the year for
items held at fair value.
Real Estate Risk
The Group has identified the following risks associated with the
real estate portfolio:
•
The cost of any development schemes may increase if there are
delays in the planning process. The Group uses advisers who are
experts in the specific planning requirements in the scheme’s
location in order to reduce the risks that may arise in the
planning process;
•
A major tenant may become insolvent causing a significant loss of
rental income and a reduction in the value of the associated
property (see also credit risk below). To reduce this risk, the
Group reviews the financial status of all prospective tenants and
decides on the appropriate level of security required via rental
deposits or guarantees;
•
The exposure of the fair values of the portfolio to market and
occupier fundamentals such as tenants financial position.
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.
At the reporting date, the maturity of the Group’s financial
assets was:
Financial Assets
2018 |
|
|
|
|
|
3 months
or less |
More
than 3 months but less than
one year |
More than
one year |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
Cash |
43,505 |
- |
- |
43,505 |
Rent receivable |
4,067 |
- |
- |
4,067 |
Other debtors |
5,379 |
- |
- |
5,379 |
|
52,951 |
- |
- |
52,951 |
|
|
|
|
|
Financial Assets
2017 |
|
|
|
|
|
3 months
or less |
More
than 3 months but less than
one year |
More than
one year |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
Cash |
72,443 |
- |
- |
72,443 |
Rent receivable |
2,995 |
- |
- |
2,995 |
Other debtors |
3,711 |
- |
- |
3,711 |
|
79,149 |
- |
- |
79,149 |
In the event of default by a tenant, the Group will suffer a
rental shortfall and incur additional costs, including legal
expenses, in maintaining, insuring and re-letting the property
until it is re-let. The Board receives regular reports on
concentrations of risk and any tenants in arrears. The Investment
Manager monitors such reports in order to anticipate and minimise
the impact of defaults by tenants.
The Company has a diversified tenant portfolio. The maximum
credit risk from the rent receivables of the Group at 31 December 2018 is £6,710,000 (2017:
£6,065,000). The Group holds rental deposits of £2,618,000 (2017:
£3,070,000) as collateral against tenant arrears/defaults. All
tenant deposits are in line with market practice. There is no
residual credit risk associated with the financial assets of the
Group. Other than those included in the provision for bad debts, no
financial assets past due are impaired.
All of the cash is placed with financial institutions with a
credit rating of A or above. £27.1 million (2017: £44.7 million) of
the year end cash balance is held in the Aberdeen Standard
Investments Liquidity Fund, which is a money market fund and has a
triple A rating. Bankruptcy or insolvency of a financial
institution may cause the Group’s ability to access cash placed on
deposit to be delayed or limited. Should the credit quality or the
financial position of the banks currently employed significantly
deteriorate, the Investment Manager would move the cash holdings to
another financial institution subject to restrictions under the
loan facilities.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter
difficulty in realising assets or otherwise raising funds to meet
financial commitments. While commercial properties are not
immediately realisable, the Group has sufficient cash resources to
meet liabilities.
The Group’s liquidity risk is managed on an ongoing basis by the
Investment Manager investing in a diversified portfolio of prime
real estate and placing cash in liquid deposits and accounts. This
is monitored on a quarterly basis by the Board. In certain
circumstances, the terms of the Group’s bank loan entitles the
lender to require early repayment, and in such circumstances the
Group’s ability to maintain dividend levels and the net asset value
attributable to the ordinary shares could be adversely
affected.
As at 31 December 2018 the cash
balance was £43,505,000 (2017: £72,443,000).
At the reporting date, the contractual maturity of the Group’s
liabilities, which are considered to be the same as expected
maturities, was:
Financial
Liabilities 2018 |
3
months
or less
£’000 |
More
than
3 months but less
than one year
£’000 |
More
than
one year
£’000 |
Total
£’000 |
Bank loan |
1,783 |
5,447 |
272,167 |
279,397 |
Other creditors |
33,800 |
- |
- |
33,800 |
|
35,583 |
5,447 |
272,167 |
313,197 |
|
|
|
|
|
Financial
Liabilities 2017 |
3
months
or less
£’000 |
More
than
3 months but less
than one year
£’000 |
More
than
one year
£’000 |
Total
£’000 |
Bank loan |
1,783 |
5,447 |
279,028 |
286,258 |
Other creditors |
21,207 |
- |
- |
21,207 |
|
22,990 |
5,447 |
279,028 |
307,465 |
The amounts in the table are based on contractual undiscounted
payments.
Interest rate risk
The cash balance as shown in the Balance Sheet, is its carrying
amount and has a maturity of less than one year. Interest is
receivable on cash at a variable rate ranging from 0.2 per cent to
0.6 per cent at the year end and deposits are re-priced at
intervals of less than one year.
An increase of 1 per cent in interest rates as at the reporting
date would have increased the reported profit by £435,000 (2017:
increased the reported profit by £774,000). A decrease of 1 per
cent would have reduced the reported profit £435,000 (2017:
decreased the reported profit by £774,000). The effect
on equity is nil (excluding the impact of a change in retained
earnings as a result of a change in net profit).
As the Group’s bank loans have been hedged by interest rate
swaps or are at fixed rates, these loans are not subject to
interest rate risk.
As at 31 December 2018 the Group
had in place a total of £150 million of interest rate swap
instruments (2017: £150 million). The values of these instruments
are marked to market and will change if interest
rates change. It is estimated that an increase of 1 per cent in
interest rates would result in the swap liability decreasing by
£1.8 million (2017: £3.3 million) which would increase the reported
other comprehensive income by the same amount. A decrease of 1 per
cent in interest rates would result in the swap liability
increasing by £1.8 million (2017: £3.3 million) which would
decrease the reported other comprehensive income by the same
amount.
The other financial assets and liabilities of Group are
non-interest bearing and are therefore not subject to interest rate
risk.
Foreign Currency Risk
There was no foreign currency risk as at 31 December 2018 or 31
December 2017 as assets and liabilities of the Group are
maintained in pounds Sterling.
Capital Management Policies
The Group considers that capital comprises issued ordinary
shares, net of shares held in treasury, and long-term borrowings.
The Group’s capital is deployed in the acquisition and management
of property assets meeting the Group’s investment criteria with a
view to earning returns for shareholders which are typically made
by way of payment of regular dividends. The Group also has a policy
on the buyback of shares which it sets out in the Directors’
Authority to Buy Back Shares section of the Directors’ Report.
The Group’s capital is managed in accordance with investment
policy which is to hold a diversified property portfolio of
freehold and long leasehold UK commercial properties. The Group
invests in income producing properties. The Group will principally
invest in four commercial property sectors: office, retail,
industrial and leisure. The Group is permitted to invest up to 15
per cent of its Total Assets in indirect property funds and other
listed investment companies. The Group is permitted to invest cash,
held by it for working capital purposes and awaiting investments,
in cash deposits, gilts and money market funds.
The Group monitors capital primarily through regular financial
reporting and also through a gearing policy. Gearing is defined as
gross borrowings divided by total assets less current liabilities.
The Group’s gearing policy is set out in the Investment Policy
section of the Report of the Directors. The Group is not subject to
externally imposed regulatory capital requirements but does have
banking covenants on which it monitors and reports on a quarterly
basis. Included in these covenants are requirements to monitor loan
to value ratios which is calculated as the amount of outstanding
debt divided by the market value of the properties secured. The
Group’s Loan to value ratio is shown below.
The Group did not breach any of its loan covenants, nor did it
default on any other of its obligations under its loan arrangements
in the year to 31 December 2018.
|
2018 |
2017 |
|
£’000 |
£’000 |
Carrying amount of
interest-bearing loans and borrowings |
249,661 |
249,126 |
External valuation of
completed investment property (excluding lease incentive
adjustments) |
1,445,170 |
1,397,250 |
Loan to value
ratio |
17.3% |
17.8% |
The Group’s capital balances are set out in the Consolidated
Statement of Changes in Equity and are regarded as the Group’s
equity and net debt.
19. Capital Commitments
The Group had contracted capital commitments as at 31 December 2018 of £11.5 million (31 December 2017 – £44.4 million), which
included:
· £1 million capital works refurbishment
of Magna Park, Lutterworth.
· £2.5 million capital works building
pre-let additional units at St George’s Retail Park, Leicester.
· £2.3 million for capital works across
Cineworld Complex Glasgow, Motor Park Portsmouth, Ventura Park
Radlett and M8 Interlink.
· £5.7 million forward funding of the
pre-let Maldron Hotel, Newcastle.
20. Lease Analysis
The Group leases out its investment properties under operating
leases.
The future income under non-cancellable operating leases, based
on the unexpired lease length at the year end was as follows (based
on total rentals):
|
2018
£000 |
2017
£000 |
Less than one
year |
65,487 |
65,675 |
Between one and five
years |
218,547 |
200,249 |
Over five years |
355,523 |
307,618 |
Total |
639,557 |
573,542 |
The largest single tenant at the year end accounted for 5.9 per
cent (2017: 5.8 per cent) of the current annual rental income.
The unoccupied property expressed as a percentage of annualised
total rental value was 6.9 per cent (2017: 7.6 per cent) at the
year end.
The Group has entered into commercial property leases on its
investment property portfolio. These properties, held under
operating leases, are measured under the fair value model as the
properties are held to earn rentals. The majority of these
non-cancellable leases have remaining non-cancellable lease terms
of between 5 and 15 years.
21. Events After the Balance Sheet
Date
On 21 February 2019 the Company
announced it had refinanced its
debt facilities as follows:
Barclays Facility
· The £150 million Barclays term loan
facility due to expire in April 2020
has been repaid along with the associated interest rate swap. The
cost of closing out the swap was £703,000. There were no repayment
fees on the term loan facility.
· The current £50 million Barclays RCF
has been increased to £150 million and extended to February 2024. £55 million of this RCF has been
utilised to repay the term loan.
Barings Real Estate (“Barings”)
Facility
· A new £100 million 2.72% fixed rate
facility has been taken out with Barings Real Estate, part of
Barings LLC, one of the world’s largest diversified real estate
investment managers, maturing in February
2031, which has been used to repay the balance of the
Barclays term loan facility. The Group now has £200 million of debt
in two equal tranches with Barings with £100 million expiring in
April 2027 and £100 million in
February 2031.
This Annual Financial Report
announcement is not the Company's statutory accounts for the year
ended 31 December 2018. The statutory
accounts for the year ended 31 December
2018 received an audit report which was unqualified.
The Annual Report will be posted to
shareholders in May 2018 and
additional copies will be available from the Manager (Tel. 0131 245
3151) or by download from the Company's webpage
(www.ukcpreit.co.uk).
Please note that past performance is
not necessarily a guide to the future and that the value of
investments and the income from them may fall as well as rise.
Investors may not get back the amount they originally invested.