Full Year Results For Year Ended 30 June 2022
SUPERMARKET INCOME REIT PLC
(the "Group" or the "Company")
LEI: 2138007FOINJKAM7L537
AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2022
GROCERY SECTOR STRENGTH AND RESILIENCE PROVIDE SUPPORTIVE BACKDROP
Supermarket Income REIT plc (LSE: SUPR), the UK supermarket real estateinvestment trust providing secure, inflation-protected, long income from grocery property in the UK, is today reporting its audited consolidated results for the Group for the year ended 30 June 2022 (the "Year").
FINANCIAL HIGHLIGHTS
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12 months to 30-June-22 |
12 months to 30-June-21 |
Change in Year |
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Annualised passing rent[1] |
£77.6m |
£57.8m |
+34% |
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EPRA Earnings 1 |
£57.4m |
£36.8m |
+56% |
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Profit before tax |
£110.3m |
£82.0m |
+35% |
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Dividend per share declared |
5.94 pence |
5.86 pence |
+1% |
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IFRS EPS |
11.3 pence |
12.6 pence |
-10% |
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EPRA EPS 1 |
5.9 pence |
5.6 pence |
+5% |
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EPRA dividend cover 1 |
1.08x[2] |
1.04x |
n/a |
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30-June-22 |
30-June-21 |
Change in Year |
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IFRS net assets |
£1,432m |
£871m |
+64% |
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EPRA NTA 1 |
£1,427m |
£872m |
+64% |
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EPRA NTA per share 1 |
115 pence |
108 pence |
+6% |
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Net loan to value (Direct Portfolio) 1 |
19.0% |
34.0% |
n/a |
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Direct Portfolio net initial yield 1 |
4.6% |
4.7% |
n/a |
· 7% Total Shareholder Return for the Year
· 48% Total Shareholder Return since IPO in 2017[3], a 9.7% annualised Total Shareholder Return
· EPRA NTA per share increased by 7 pence in the Year to 115 pence, a 6% increase
· Direct Portfolio[4] independently valued at £1.57 billion, increasing by £423.2 million
o Net initial yield ("NIY") of 4.6%
o Weighted average unexpired lease term ("WAULT") of 15 years
o Annualised passing rent increased by 34% to £77.6 million
o 81% of leases are inflation-linked
o 3.7% rental growth on a like-for-like basis
· Net loan to value ("LTV") ratio of 19.0% as at 30 June 2022
· 100% of total rent collected during the year
BUSINESS HIGHLIGHTS
· Further portfolio growth through deployment of £506.7 million of equity raised via two upsized and over-subscribed issuances of new ordinary shares leading to:
o Admission to the Official List of the FCA and to the Premium Segment of the London Stock Exchange plc's Main Market
o Inclusion in the FTSE 250 and FTSE EPRA/NAREIT Global Real Estate Index Series
· Acquisition of 12 supermarkets for an aggregate purchase price of £381.0 million (excluding acquisition costs) at a blended net initial yield of 4.5% and blended WAULT of 19 years[5]
· Value of investment in the Sainsbury's Reversion Portfolio increased by £46.8 million to £177.1 million, predominantly due the exercise of purchase options by Sainsbury's
· Fitch Ratings Limited ("Fitch") assigned an Investment Grade credit rating of BBB+ to the Company
Post balance sheet HIGHLIGHTS
· Purchase of five further assets for £216.1 million (excluding acquisition costs) at a blended NIY of 5.1%
· £412.1 million unsecured bank credit facility agreed at a margin of 1.5% over SONIA and a weighted average term of 6 years[6]
· FY 2023 dividend target increased by 1% to 6 pence per share
· Entered into interest rate swaps, hedging the Company's £381 million drawn unsecured debt
o Weighted average fixed rate of 2.8% (including margin) over an average term of 4 years
o 100% of drawn debt now hedged at an effective fixed rate of 2.6% (including margin)
o The cost of new hedging instruments were £35.3 million which will immediately impact EPRA NTA by 2.8 pence per share
· Agreement with Sainsbury's on the Joint Venture Reversion Portfolio
o £1,040 million sales price agreed on 21 option stores
o New 15 year leases agreed on four stores
o Increases joint venture investment value to estimated £190 million
Nick Hewson, Chairman of Supermarket Income REIT plc, commented:
"I am pleased to be reporting another set of strong full year results for the Company. This has been another significant year of growth and one in which we achieved the important milestones of being added to the Premium Segment of the London Stock Exchange and the FTSE 250 index.
During the year, our Direct Portfolio has benefitted from a 3.7% like-for-like increase in valuation delivering a 6% increase in EPRA NTA to 115 pence per share as at 30 June 2022. Since our IPO in 2017, we have delivered a 48% Total Shareholder Return.
At a time of considerable unpredictability and uncertainty especially for our economy, we believe our portfolio of targeted, sector specific real estate assets will continue to deliver stable, long-term, and growing income to our shareholders."
For further information:
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Atrato Capital Limited |
+44 (0)20 3790 8087 |
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Steve Noble / Rob Abraham / Chris McMahon |
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Stifel Nicolaus Europe Limited |
+44 (0)20 7710 7600 |
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Mark Young / Matt Blawat / Rajpal Padam |
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FTI Consulting |
+44 (0)20 3727 1000 |
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Dido Laurimore / Eve Kirmatzis / Andrew Davis |
SupermarketIncomeREIT@fticonsulting.com |
The Company will be holding an in-person presentation for analysts at 08.30am today at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. To register to attend the in-person meeting, please contact FTI Consulting: SupermarketIncomeREIT@fticonsulting.com. There will also be a webcast facility for that presentation. To join the presentation via the webcast, please register using the following link: https://stream.brrmedia.co.uk/broadcast/62fe317600178269f821b191
Notes:
Supermarket Income REIT plc (LSE: SUPR) is a real estate investment trust dedicated to investing in grocery properties which are an essential part of the UK's feed the nation infrastructure. The Company focuses on grocery stores which are omnichannel, fulfilling online and in-person sales. All of the Company's 75 supermarkets(1) are let to leading UK supermarket operators, diversified by both tenant and geography.
The Company provides investors with attractive, long-dated, secure, inflation-linked, growing income with the potential for capital appreciation over the longer term and targets a 7% to 10% p.a. total shareholder return(2). The Company has increased its dividend every year since IPO.
The Company is listed on the premium segment of the Official List of the UK Financial Conduct Authority and its Ordinary Shares are traded on the Main Market of the London Stock Exchange, having listed initially on the Specialist Fund Segment of the Main Market on 21 July 2017.
Atrato Capital Limited is the Company's Investment Adviser.
Further information is available on the Company's website www.supermarketincomereit.com
1. 49 directly owned supermarkets, plus 26 via joint venture. Please note that it was announced in January 2022 that Sainsbury's exercised its options to acquire a total of 21 of the 26 stores within the joint venture portfolio. The Sainsbury's acquisition of the stores will be completed in two tranches: 13 in March 2023 and 8 in July 2023. Further information is available on the Company's website.
2. There is no certainty that these illustrative projections will be achieved
CHAIRMAN'S STATEMENT
Dear Shareholder,
I am very pleased to report another year of solid performance by the Group, one in which we have delivered a 7% Total Shareholder Return and a cumulative total return of 48% since our IPO in 2017. The Company has grown its total NTA to £1.4 billion, a 64% increase on the previous year, and has grown its portfolio of handpicked supermarket assets to £1.75 billion[7]. We are now the largest landlord of supermarkets in the UK and our investment strategy of acquiring top trading omnichannel supermarkets continues to deliver growth for our shareholders against a challenging macroeconomic and geopolitical backdrop. During the year we also achieved a significant milestone for the business, being admitted to the Premium Segment of the London Stock Exchange, which due to our size, resulted in us becoming a constituent of the FTSE 250 as well as gaining membership of the FTSE EPRA/NAREIT indices. Inclusion in these indices increases liquidity in the shares and broadens our potential investor base.
The Company continues to benefit from access to capital and this financial year raised over £500 million through two highly successful, oversubscribed equity issuances. Post year-end the Company also arranged a new £412.1 million unsecured credit facility. We are delighted with the level of financing support, reaffirming the resilient nature and defensive characteristics of the grocery sector, particularly given the challenges facing the global economy.
The combination of inflation and sector volume growth has seen turnover at store level growing ahead of rents. Our estimated average rent to turnover across the portfolio is now less than 4% meaning that rents are becoming ever more affordable for our tenants. This combination of sustainable rental growth and continued investment demand has driven growth in capital values for our portfolio. As a result, EPRA NTA has increased 6% in the year to 115 pence per share (2021: 108 pence per share) with net initial yields remaining resilient despite the challenging backdrop for the broader real estate market.
Our business model has inflation protection at its core, with over 80% of our rent reviews being inflation-linked. However, rising interest rates have had a negative impact on earnings due to higher borrowing costs. In the financial year SONIA rates increased from 0.05% to 1.7% today. The business is partially protected from these cost pressures both through its inflation-linked income and its interest rate hedging policies. Additionally, the Company's borrowings are also well diversified across lenders and maturities. After the balance sheet date, the Company took the decision to fix its interest rate exposure by entering into new interest rate swaps. 100% of the Company's drawn debt is now hedged and has an effective fixed borrowing cost of 2.6%. Despite the increase in finance costs, the Company still achieved an EPRA Dividend Cover Ratio of 1.08x during the year.
Post balance sheet, the Company has also agreed a purchase price for the 21 stores in the JV portfolio which Sainsbury's had exercised an option to acquire. In addition Sainsbury's agreed a new leases on four of the remaining stores. Combined, this is estimated to increase the value of our investment in the JV to £190 million, or a 1.7 times return on purchase cost.
Environment, Social and Governance ("ESG") remains a key priority for us. During the year our Investment Adviser recruited a Head of Sustainability to advance and accelerate our ESG ambitions. We have become supporters of the Task Force on Climate-related Financial Disclosures ("TCFD") and signatories of the UN Principles for Responsible Investment ("UN PRI"). In addition, we have defined and published an equivalent tonnes of CO2 figure for the Company as part of our commitment to transparency and environmental stewardship and have now embarked on a benchmarking process to look for opportunities to improve further the sustainability of our sites.
We are also delighted to welcome Frances Davies to the Board. Frances brings a wealth of experience in corporate finance, asset management and relevant board roles. Frances has agreed to chair a new committee of the Board that we have established to deal specifically with ESG issues.
We have historically increased our dividend in line with our annualised rental growth, increasing the dividend from 5.5 pence per share at IPO to 5.94 pence per share in 2022. Whilst our annualised contractual rental growth for this year was 1.8% we recognise the current market uncertainty, especially around interest rates, and we are therefore targeting a more conservative increase in the dividend for the next financial year of 6.0 pence per share.
Outlook
While the impact of COVID lockdowns has receded this year, we are nevertheless faced with another set of macroeconomic headwinds in the form of higher interest rates, geopolitical uncertainty and a possible recessionary environment for the UK. At the same time, our long-dated, substantially inflation linked leases[8], together with our strong tenant covenants operating in a non-discretionary spend sector, positions us well as a business and we stand ready to take advantage of opportunities which may arise.
Nick Hewson
Chairman
20 September 2022
A conversation with Justin King about the future of the UK grocery sector
Justin King is a senior adviser to Atrato Capital, the Group's Investment Adviser. Justin is recognised as one of the UK's most successful grocery sector leaders, having served as CEO of Sainsbury's for over a decade and previously held senior roles at Marks & Spencer and Asda. He is currently Non-Executive Director of Marks & Spencer and advises a series of high profile consumer-focused companies. Justin is an advocate for responsible business, has been instrumental in launching a number of charitable concerns and also chairs the charity Made by Sport, which champions the power of sport to change young lives. Justin brings an unrivalled wealth of grocery sector experience and a deep understanding of grocery property strategy.
Consumers are facing unprecedented increases in the cost of living. What can supermarket operators do to support customers in this current cost of living crisis?
Well firstly, supermarket operators' primary role is to represent their customers in the supply chain. In the current market that means challenging food manufacturers and producers on the basis of any price inflation to keep price rises in check. We see evidence of that with the recent, and much publicised, row between Tesco and Heinz on the price of a tin of beans. The retailers are rightly challenging price rises through tough negotiation with the supply base.
Secondly, operators need to do what they can on their own cost structure and pass those savings through to consumers through lower prices. The operators' ability to limit price rises is less than many people think, as the sector's competitiveness already drives low margins and high operational efficiencies.
The third aspect operators can change is their product lines on the shelves. Facilitating customers' switch from expensive calories to less expensive calories could actually be their most impactful contribution. Think of it as giving the customer the ability to achieve a cut in their pence per calorie consumed. In previous recessions we have seen the effectiveness of supporting the customer through value alternatives. That's why the traditional supermarkets carry an extensive range of products to ensure their mix can cater for the changing needs of the customers' shopping basket.
Looking forward, can we expect operator profit margins to suffer as customers switch to less profitable value ranges?
Not necessarily, you need to remember that in a recession the first change the customer will make is a shift away from expensive calories and the most expensive are those consumed out of the home in restaurants and takeaways. Rarely will a customer's total calorie consumption change through the economic cycle, instead what you observe is a shift in the discretionary additional spend of their calorie consumption from eating out, to eating in. In a recession, that favours the supermarket. So, the net impact of a customer shifting towards perhaps lower margin value range is often offset via an increase in overall volumes across all price ranges.
Is there a risk those mechanics are changing given the growth of the German discounters in the UK?
It's worth remembering that the presence of discounters in the UK grocery market is not new, nor is their business model. Aldi and Lidl have opened stores and gained significant market share in recent years, however previous discounter brands such as Netto (acquired by Asda) and KwikSave (acquired in-part by Co-Op) have all but disappeared. The current market share of Aldi and Lidl is (16%) which is actually the 'normal' market share for the UK grocery discounter channel as far back as the early '90s.
In terms of growth, there is no doubt that Aldi and Lidl have been highly successful in opening smaller format stores and capturing market share quickly. Combined over the last five years, they've opened around 500 stores, hence the headlines on growth in sales and market share. In addition, the discounters have seen dramatic sales increases in more recent months, bringing more and more customers through their doors as the pressure of rising costs mounts and consumers look to greater value ranges to cut costs. According to data from Kantar, in the four weeks to 4 September 2022 Aldi exceeded Morrisons in becoming the fourth largest grocer in the UK.
However, if we look at Aldi and Lidl's current UK market share it's still significantly less than their market share in Europe and I think this illustrates just how effective the UK grocers have been in competing on price with their own value product range. It's also worth noting that we cannot look at this in isolation. While the discounter growth is capturing the headlines, in my view the traditional grocers are rightly focused on capitalising on the online and convenience growth opportunity. Over the last three years, the online channel has grown significantly and the traditional grocers have been highly successful in capturing this growth channel, already controlling over 80% of the online market. Remember most of these online customers are also physically shopping in their supermarkets too!
Online demand has declined over the last 12 months, does this worry you given the online capex investment we have seen in the last few years?
We are experiencing a post-COVID-19 normalisation of consumer shopping patterns as people return to shopping in stores. The data points to a reduction in online grocery's market share from its high point of above 15% during the height of the pandemic and national lockdown, to its current post pandemic level of around 12%.
The online channel's current market share of 12%, or £22 billion, is up around 80% compared to its pre-COVID level. That makes online the fastest growing channel in the UK. I believe this trend will continue, underpinned by the structural change in working habits towards more work from home. Working people are at home more often which means they don't have to rely on those scarce evening or weekend online delivery slots to get their groceries delivered.
The improvements in omnichannel profitability from this growth are impressive. Economies of scale drive profitability with both delivery densities and item pick rates per hour well above pre-pandemic levels. In my view, productivity and profitability will continue to improve. What this does show is the importance, flexibility and resilience of the omnichannel store pick model. The store pick model facilitated a doubling of online capacity in the height of the pandemic and allowed the traditional Big Four (Tesco, Sainsbury's, Asda, Morrisons) grocers to capture market share and dominate that channel. As online demand falls back post pandemic, that capacity is being scaled back at relatively little cost.
In contrast, pure play online operators that rely on heavily automated warehouses faced capacity constraints during COVID induced sharp market upturns. The pure play online operators lost market share to omnichannel operators who were able to rapidly flex their in-store fulfilment.
I have always believed one should think about customer, not channel. In a post pandemic era, the customer requires seamless integration between online and offline channels. The growing investment in the pursuit of omnichannel stores is a significant development within the grocery industry and empowers the grocer to be truly blind to channel. The grocers are best advised to be focused purely on the customer and agnostic to whether the sale takes place via the front of the store through physical sales or the back of the store via an online sale.
Given the recent record years for inward investment into both grocery operators and supermarket property, do you think the uncertain economic environment will impact investment volumes and returns from supermarket property?
During a period of macro-economic uncertainty, the grocery sector has been a stand-out positive performer. When you examine supermarket property investment performance trends over the last 15 years you see the strength and stability of this asset class.
I have always said that there is no greater retail business proposition than a large, grocery-led supermarket with fresh food at its heart, in the right location. Supermarkets generate significant cash flow and are the core infrastructure of how and where consumers shop.
Supermarkets represent resilient investments, generally avoiding the volatile peaks and troughs of the economic cycle. Investors looking for property assets that offer consistent returns and low volatility have increasingly targeted the supermarket property sector.
Having said that, not all supermarket property is equal and specialists like the Atrato Capital team are essential to ensure the right asset selection for the long term.
KEY PERFORMANCE INDICATORS
Our objective is to provide secure, inflation-protected, long income from grocery property in the UK. Set out below are the key performance indicators we use to track our progress.
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KPI |
Definition |
Performance
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1. Total Shareholder Return |
Shareholder return is one of the Group's principal measures of performance. Total Shareholder Return ("TSR") is measured by reference to the growth in the Company's share price over a period, plus dividends declared for that period.
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7% for the year to 30 June 2022 (2021: 11%) |
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2. WAULT |
WAULT measures the average unexpired lease term of the Direct Portfolio, weighted by the Direct Portfolio valuations. |
15 years WAULT as at 30 June 2022 (2021: 15 years)
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3. EPRA NTA per share |
The value of our assets (based on an independent valuation) less the book value of our liabilities, attributable to Shareholders and calculated in accordance with EPRA guidelines. EPRA provides three recommended measures of NAV, of which the Group deem EPRA NTA as the most meaningful measure. See Note 26 for more information.
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115 pence per share as at 30 June 2022 (2021: 108 pence per share) |
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4. Net Loan to Value |
The proportion of our Direct Portfolio gross asset value that is funded by borrowings calculated as balance sheet borrowings less cash balances divided by total investment properties valuation.
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19% as at 30 June 2022 (2021: 34%) |
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5. EPRA EPS |
Earnings attributable to Shareholders adjusted for other earnings not supported by cash flows and calculated in accordance with EPRA guidelines.
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5.9 pence per share for the year ended 30 June 2022 (2021: 5.6 pence per share) |
The Group uses alternative performance measures, as disclosed above and including the European Public Real Estate ("EPRA") Best Practice Recommendations ("BPR") to supplement its IFRS measures as the Board considers that these measures give users of the Annual Report and financial statements the best understanding of the underlying performance of the Group's property portfolio.
The EPRA measures are widely recognised and used by public real estate companies and investors and seek to improve transparency, comparability and relevance of published results in the sector.
The key EPRA performance measures used by the Group are disclosed on the following page.
Reconciliations between EPRA measures and the IFRS financial statements can be found in Notes 10 and 27 to the financial statements.
EPRA PERFORMANCE INDICATORS
The table below shows additional performance measures, calculated in accordance with the Best Practice Recommendations of the European Public Real Estate Association (EPRA). We provide these measures to aid comparison with other European real estate businesses. The Group voluntarily adopted the EPRA issued new best practice reporting guidelines in the current year, incorporating the new measure of loan to value: EPRA Loan-to-Value (EPRA LTV) and is defined as net debt divided by total property market value.
For a full reconciliation of all EPRA performance indicators, please see the Notes to EPRA measures within the unaudited supplementary section of the Annual Report.
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Measure |
Definition |
Performance |
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1. EPRA Earnings per Share |
A measure of EPS designed by EPRA to present underlying earnings from core operating activities. |
5.9 pence per share for the year ended 30 June 2022 (2021: 5.6 pence per share)
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2. EPRA Net Reinstatement Value (NRV) per share |
An EPRA NAV per share metric which assumes that entities never sell assets and aims to represent the value required to rebuild the entity.
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124 pence per share as at 30 June 2022 (2021: 118 pence per share) |
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3. EPRA Net Tangible Assets (NTA) per share |
An EPRA NAV per share metric which assumes entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax.
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115 pence per share as at 30 June 2022 (2021: 108 pence per share) |
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4. EPRA Net Disposal Value (NDV) per share |
An EPRA NAV per share metric which represents the Shareholders' value under a disposal scenario, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax.
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116 pence per share as at 30 June 2022 (2021: 107 pence per share) |
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5. EPRA Net Initial Yield (NIY) & EPRA "Topped-Up" Net Initial Yield |
Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs. The "topped-up" yield is the same as the standard measure as we do not have adjustments for any rent-free periods or other lease incentives.
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4.6% as at 30 June 2022 (2021: 4.8%) |
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6. EPRA Vacancy Rate |
Estimated Market Rental Value (ERV) of vacant space divided by ERV of the whole portfolio.
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0.2% as at 30 June 2022 (2021: 0.4%) |
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7. EPRA Cost Ratio |
Administrative & operating costs (including costs of direct vacancy) divided by gross rental income.
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16.5% for the year ended 30 June 2022 (2021: 16.8%) |
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8. EPRA LTV* |
Net debt divided by total property portfolio and other eligible assets. |
22.2% for the year ended 30 June 2022 (2021: 36.3%) |
*New measure reported during the year, with prior year comparative stated in line with new methodology
INVESTMENT ADVISER'S INTERVIEW
Atrato Capital Limited is the Investment Adviser to Supermarket Income REIT ("SUPR"). Ben Green (Principal of Atrato Capital) and Robert Abraham (Managing Director, Fund Management) answer questions on SUPR's performance and the long-term outlook for the business.
Q: Summarise the key achievements and milestones in the year for SUPR?
Ben: This has been a transformative year for SUPR. In February 2022 the Company migrated its listing to the Premium Segment of the London Stock Exchange and subsequently joined the FTSE 250 and FTSE EPRA NAREIT indices. This is a significant milestone for the Company which will bring a number of benefits to shareholders and reflects how far we have come in a relatively short time.
During the year, we raised over £500 million of equity through two significantly over-subscribed equity issues. In addition, Fitch Ratings assigned an Investment Grade credit rating of BBB+ to the Company in February. Following this, in July 2022 we announced a new £412.1 million unsecured credit facility . This is the first time the Company has accessed unsecured debt financing providing greater flexibility to manage our portfolio and optimise our capital structure.
The Company now has exposure to 75 UK supermarkets with a total portfolio value of £2 billion and has become the UK's largest landlord of omnichannel stores. We are delivering on our investment strategy of targeting handpicked, top performing, omnichannel supermarkets, providing long dated, inflation linked income. The Company's carefully selected Portfolio is unique, acquired during the rapid growth of omnichannel shopping in the space, and is impossible to replicate.
The market has recognised the success of the investment model as the Company has outperformed the FTSE All Share over the period since IPO.
Q: What has this growth done to the profile of the portfolio?
Rob: As our Portfolio continues to grow, we benefit from economies of scale and increased diversification by both geography and tenant, which is further reinforced by seeking to achieve representation of the key UK grocery market participants within the Portfolio.
Including post balance sheet acquisitions, we have deployed a total of £597.1 million into 19 carefully selected stores at an accretive blended net initial yield of 4.8%. This has been accretive to both the quality and geographic diversification of the Portfolio. We have also been able to maintain the WAULT at 15 years.
We were pleased to add our first two Asda stores and we acquired five additional high quality smaller format stores including two stores occupied by Aldi in the discounter space and three M&S Foodhalls as premium range operators.
All our investments go through a rigorous financial, property, ESG and performance due diligence assessment. A good example is the top trading Cwmbran, Asda acquired in January 2022 which was a fantastic addition to the Portfolio having a lease length of 10 years, representing the most dominant store in the town with strong trading performance and benefiting from a substantial investment programme by Asda to expand its home delivery operation from the store.
Our investment strategy is to buy the best performing supermarkets in the UK and in some cases we will acquire non-grocery units which are on the same site as the supermarket. These are complementary to the grocery offering and often drive greater footfall. We sometimes acquire additional non-grocery units in order to control the overall site. As at 30 June 2022 our non-grocery assets accounted for less than 10% of our Direct Portfolio by value and by rent.
Q: What is an omnichannel store and why the focus on omnichannel assets?
Ben: We have always seen omnichannel stores as the future model of UK grocery. The pandemic demonstrated that omnichannel stores are the optimal method of online fulfilment due to their proximity to consumers. This reduces delivery time and cost.
Omnichannel is the dominant model for last-mile grocery fulfilment. Over 80% of all online orders are now fulfilled from omnichannel supermarkets. These stores are critical to the operations of the UK's leading grocers and to the country as feed the nation infrastructure.
The seamless integration between online and offline fulfilment provides our tenants with economies of scale and operational efficiencies. Together with the growing profitability of online operations, this model is empowering operators to be truly agnostic to channel. The global themes of consumers demanding more choice, more quality, faster fulfilment and all at lower prices, results in omnichannel supermarkets being ideally placed to serve these desires whether online or physical.
There is not expected to be a return to historic working patterns. Greater home working leads to a bigger household spend on grocery and a larger penetration of online grocery. We estimate that this combination of enlarged market size and growing online penetration is driving like-for-like sales growth of over 13% for omnichannel stores. This makes omnichannel the fastest growing format in UK grocery and highly resilient as an asset class.
Q: What impact is inflation having on your investment portfolio?
Rob: Our rental income has in-built protection through the attractive terms of our leases.
All rents are upwards only at the point of review. We have a mix of review types, with 81% of our reviews linked to inflation. Consequently, these leases provide a natural inflation hedge and enable our income to grow in line with inflation (subject to caps and floors on the reviews).
On a like for like basis, the annualised increase in the Company's rental income was 3.7% with most of this rental growth also captured in our portfolio valuation. During the year, like-for-like value growth was also up 3.7%, increasing our Direct Portfolio valuation by £42 million and increasing our EPRA NTA by 6% to 115 pence per ordinary share as at 30 June 2022. Therefore, the benefits of inflation linked growth in our rents flow through to both EPRA earnings and EPRA NTA.
It is common for property leases with inflation linked rent reviews to be subject to annual caps. Across our Direct Portfolio our average inflation linked rent review cap is currently 4%. We are, of course, seeing grocery inflation above this 4% cap. As such the turnover of our stores is also growing ahead of rents making our leases more affordable as a proportion of store turnover. The estimated average rent to turnover in the Company's Portfolio is now 3.9% against an industry benchmark of 4%.
We have strategically increased the proportion of stores in the Portfolio with open market rent reviews ("OMV") to 12% by rental income. OMV rent reviews are typically uncapped and determined based on market rents in the local area. With the high growth in grocery revenues, we see value in these leases given the potential for uncapped future rental growth in a highly inflationary environment.
Q: What is the impact from the higher interest rate environment?
Ben: The Company has historically hedged its interest rate risk on annualised borrowings through either fixed rate debt or fixing variable rates using financial derivatives. At year end, 60% of the Company's drawn debt was hedged. After the balance sheet date, the Company took the decision to fix its interest rate exposure by entering into new interest rate swaps. 100% of the Company's drawn debt is now hedged and has an effective fixed rate borrowing of 2.6%. We believe this was a prudent and proactive decision which essentially de-risks the Company's interest rate exposure ahead of a period of extreme uncertainty.
Q: Will you have to invest significant capital into your existing assets to meet higher environmental standards?
Ben: The short answer is "no". We are well placed in this regard.
Firstly, our tenants all have genuine and ambitious commitments to net zero, which means that they have investment programmes across both freehold and leasehold stores, for instance rolling out energy efficient lighting and refrigeration.
Secondly, we own mission critical real estate so whether a supermarket operator achieves a physical sale or online, it all goes through the store networks. That means the operators are continually investing in our stores to keep them modern and improve the shopping experience, that also helps to improve energy efficiency.
We have a number of examples of stores which have improved from a legacy EPC E rating to a B rating simply through tenant works, at zero cost to the Company.
We have defined and published an equivalent tonnes of CO2 figure for our Portfolio as part of our commitment to transparency and environmental stewardship and have now embarked on a benchmarking process to look for opportunities to improve further the sustainability of our sites. For example, we are undertaking works to seek to improve the sustainability of our locations, which includes rooftop solar and working on the rollout of EV charging in our car parks.
Our Portfolio is now 81% A-C EPC rated and we have asset management plans in place for all properties which are D or below.
Q: Will you be acquiring more assets and what is the priority for 2023?
Rob: Yes, we plan to continue to grow where we see attractive acquisition opportunities which are accretive to our unique Portfolio.
As the UK's only listed specialist investor in grocery real estate, we have established unique relationships and coverage across the sector, coupled with our depth of experience in UK grocery, providing us with a competitive advantage in sourcing assets.
We operate with the aim of acquiring the best trading supermarkets in the UK and identifying further purchases which would be accretive to our return profile or where we can add value through active management. Our aim is to maximise risk-adjusted returns while ensuring we continue to maintain and grow income.
While we talk a lot about the growth in the portfolio, in the current economic environment it's also worth remembering the highly defensive nature of our Portfolio. Our supermarkets are held on long, inflation linked leases and our tenants are some of the biggest names in the non-discretionary, UK grocery space.
Ben: 2023 is going to be another very busy year. Continuing to embed our sustainability agenda across the business is a huge priority that will continue to make a positive impact on our local communities and environments. We will also continue to seek out new opportunities for growth to add to our already substantial pipeline and we'll be looking to drive further value from the existing Portfolio through active asset management.
We are also optimistic that the current economic uncertainty may unlock some assets that we have coveted for a long time and/or offer the opportunity to acquire assets at attractive yields.
THE COMPANY'S PORTFOLIO
We have built a unique portfolio of top trading omnichannel supermarkets, diversified both by geography and tenant. Our properties are 'mission critical' to our grocery tenants, operating as key online fulfilment hubs as well as generating in store physical sales. The leases on our stores benefit from long unexpired terms, with the strong covenants of the UK's leading and largest grocery operators reinforcing the value of these assets. As sector specialists we have strong relationships with the grocery operators and the financial year ended 30 June 2022 saw new grocery tenants added in Asda and M&S Food.
During the financial year, the Group further strengthened its Direct Portfolio with the addition of 12 supermarkets (including supermarket anchored) assets for £381.0 million (excluding acquisition costs)
These acquisitions have a blended unexpired lease term of 19 years and a blended net initial yield of 4.5%.
The Group's investment strategy is to acquire high quality supermarkets which are sometimes located on sites which contain non-grocery elements. During the year the Group acquired 12 non-grocery units on 3 supermarket sites for £16.4 million (excluding acquisition costs). This amount is included in the total site costs, listed above. All of the units are occupied.
Post balance sheet the Group acquired five assets for a total acquisition cost of £216.1 million (excluding acquisition costs) and a blended net initial yield of 5.1%.
The acquisitions were primarily financed by two expanded and oversubscribed equity raises and the proceeds of new and existing secured and, post balance sheet, unsecured banking facilities. For more information on financing arrangements see the Financial Statement in this document.
A table summarising the properties in the Direct Portfolio of supermarkets can be found in the Portfolio section on the Group's website: www.supermarketincomereit.com
|
Tenant exposure: |
||
|
Tenant |
Exposure by rent roll |
Exposure by valuation |
|
Tesco |
47.5% |
47.4% |
|
Sainsbury's |
27.9% |
29.9% |
|
Morrisons |
7.0% |
7.6% |
|
Waitrose |
5.4% |
6.0% |
|
Asda |
2.4% |
2.1% |
|
Aldi |
1.0% |
1.0% |
|
M&S |
0.8% |
0.8% |
|
Non-grocery |
8.0% |
5.3% |
|
Total |
100% |
100% |
The Direct Portfolio benefits from attractive long term, inflation linked leases with strong tenant covenants (Tesco, Sainsbury's, Morrisons, Waitrose, Aldi, Marks & Spencer and Asda).
The long-term strength and resilience of the Group's income is underpinned by a weighted average unexpired lease term of 15 years on the Direct Portfolio (including post balance sheet acquisitions) with a weighted average yield of 4.7% (including post balance sheet acquisitions). In addition to the long average length of these leases, our portfolio is heavily weighted towards fixed and inflation-linked leases which provide resilience in an inflationary environment. 81% of the Direct Portfolio benefits from upward only, indexed-linked rent reviews subject to annual floors and caps (Including post balance sheet acquisitions).
|
Tenant |
Income mix by rent review type |
|
RPI |
73.2% |
|
CPI |
7.7% |
|
Fixed |
2.4% |
|
OMV |
16.8% |
|
Total |
100.0% |
As we have continued to acquire high quality assets, our EPC scores have increased within the portfolio. A breakdown by rating seen below:
|
Supermarket EPC breakdown |
||
|
EPC rating |
% of portfolio |
|
|
A |
4.2% |
|
|
B |
43.8% |
|
|
C |
33.3% |
|
|
D |
18.8% |
|
|
Total |
100% |
|
Portfolio case studies:
Washington, Sainsbury's
This store provided a rare opportunity to acquire a strong trading Sainsbury's supermarket with a 35 year unexpired lease term and attractive lease fundamentals. The store, which was built in the late 1970s, was extensively refurbished in 2011 and has a significant omnichannel operation forming a key part of Sainsbury's online network in the region.
Leicester, Tesco and Aldi
The Tesco and Aldi in Leicester are both co-located on Bradgate Mall, Beaumont Leys. The Aldi was acquired on strong lease terms providing 15 years of 2% fixed rental growth and was the first Aldi store added to the Portfolio. On acquisition, the Tesco lease had 5-yearly OMV rent reviews with an 8 year unexpired lease term. Due to the strong trading performance of the store, Tesco agreed to regear the lease in February 2022. The new 15 year lease was agreed with rent reviews based on annual RPI (subject to a 0% floor and 4% cap). The store has a significant omnichannel operation servicing 18 delivery vans and a Click & Collect facility making it a key part of the Tesco online network within the region.
Prescot, Tesco
This large format Tesco supermarket was acquired in September 2021 as part of an off-market transaction. Tesco has operated from the site since the early 1990s and the store was redeveloped in 2010. The store has a large omnichannel operation supporting 12 delivery vans which form part of Tesco's online grocery network in the region. The store was regeared on acquisition with Tesco agreeing to a new 15 year lease with annual CPI linked rent reviews (subject to a 0% floor and 4% cap).
The asset further increases the proportion of indexation within the Portfolio and highlights the important relationships that the Company has within the market.
Sainsbury's Reversion Portfolio
In May 2020 the Company formed a 50:50 joint venture (the "JV") with British Airways Pension Trustees Limited to acquire from British Land Plc a 25.5% stake in one of the UK's largest portfolios of supermarket properties (the "Sainsbury's Reversion Portfolio") for £102 million, excluding acquisition costs. Subsequently, in February 2021 the JV acquired a further 25.5% stake in this portfolio from Aviva for £115 million, excluding acquisition costs.
The Company's total contribution to the JV was £112.0 million, excluding acquisition costs. The equity interests in the properties are now owned by Sainsbury's (49%) and the JV (51%).
The Sainsbury's Reversion Portfolio comprises a high-quality portfolio of 26 predominantly omnichannel Sainsbury's supermarkets with strong trading histories and attractive property fundamentals. The stores in the Sainsbury's Reversion Portfolio are leased to Sainsbury's until 2023. The investment case for acquiring the stakes in the Sainsbury's Reversion Portfolio was largely based on the Company's conviction that Sainsbury's would want to remain in occupation of a large majority of the stores.
In September 2021 and in January 2022, Sainsbury's exercised options to acquire 21 stores within the Portfolio. This outcome was in-line with the Company's initial underwriting of the transaction and is evidence of the strength of demand for UK grocery assets. The Company determined at the year end that the exercise of the purchase options resulted in the performance obligation being satisfied for a sale of properties in accordance with IFRS 15. Following the exercise of these options the JV was deemed to hold a contractual receivable from Sainsbury's, the value of which is based on the estimated purchase price for the assets and has been determined with reference to a valuation prepared by Cushman & Wakefield (see below).
After the year end, the Company announced the purchase price on the 21 option stores was formally agreed at £1,040 million. The purchase by Sainsbury's plc is expected to complete between March 2023 and July 2023 on expiry of the current leases.
Sainsbury's has agreed to retain occupation of 4 of the 5 remaining stores within the Portfolio under a new 15-year lease agreement with five yearly open market rent reviews and a tenant break at year 10.
This agreement is estimated to increase the value of the JV to £190 million.
Further details on the valuation of the Sainsbury's Reversion Portfolio can be found in Note 14 to the financial statements.
Portfolio valuation
Cushman & Wakefield valued the Direct Portfolio as at 30 June 2022, in accordance with the RICS Valuation - Global Standards which incorporate the International Valuation Standards and the RICS UK Valuation Standards edition current at the valuation date. The properties were valued individually without any premium/discount applying to the Portfolio as a whole. The Direct Portfolio market value was £1.57[9] billion, an increase of £423.2 million following valuation growth of £42.2 million and new acquisitions of £381.0 million.
This valuation growth of the Direct Portfolio reflects the supermarket operators' covenant strength as tenants, together with rental growth and overall increased demand in the investment market for high quality assets.
The properties within the Sainsbury's Reversion Portfolio were also independently valued by Cushman & Wakefield, in accordance with the RICS Valuation - Global Standards, which incorporate the International Valuation Standards and the RICS UK Valuation Standards edition current at the valuation date. The net carrying value of the Company's underlying investment was £177.1 million, increasing by £62.4 million above the Group's combined investment cost of £114.7 million (including capitalised acquisition costs), which arises from the profit generated by the joint venture in the post-acquisition period.
THE UK GROCERY MARKET
Atrato Capital Limited is the Investment Adviser to the Company. Steven Noble (Chief Investment Officer of Atrato Capital) discusses the UK grocery market and the outlook for real estate investment in the sector.
Q. How has the overall UK grocery market changed?
To understand longer term grocery market trends it's important to compare data to the pre-pandemic period. UK grocery is up 13% since 2019 and IGD estimates the UK grocery market will now reach £217 billion in 2022 which is an increase of over £25 billon since 2019.
The legacy of the pandemic has been the emergence of a permanent shift towards increased home working. This has increased in-home consumption and the weekly shopping basket by some 5% to 10%, resulting to a large extent in this positive 13% shift in grocery sales. Since the start of 2019, average inflation was around 7%[10] so the sector has experienced significant volume gains.
Looking ahead, inflation continues to rise. According to the latest data from Kantar, UK grocery inflation reached 12.4% in September 2022, up from 11.6% in August and 9.9% in July and that will drive further growth in the sector. Unlike other retail sectors, grocery is a non-discretionary expenditure so price inflation will inevitably translate into elevated market size. This is one reason why we view investment in UK grocery real estate as a good long-term hedge against inflation.
Q. Who are the largest operators in the UK grocery market?
The UK market is highly concentrated with the seven largest grocers controlling over 80% of the UK grocery space.
The traditional Big Four boast a combined market share of approximately 65%[11]. Each of these businesses have multi-billion-pound revenues, an established consumer brand and strong credit covenants. Together they serve customers through more than 7,500 stores in the UK. These operators play an integral role in the UK market, successfully operating a strategy of price and assortment management through a multi-channel brand focused strategy. Their combined market share is largely unchanged since 2019.
The second largest group of operators is the lower-price grocery operators (the "Discounters") such as Aldi and Lidl who continue to grow through ambitious store opening plans which have captured a combined market share of 16%[12]. Their lower cost, low-margin business model requires simplicity and standardisation of range which is attractive to price sensitive customers but at odds with the fulfilment intricacies and product assortment required in online grocery.
Q. What are the largest and fastest growing channels in the UK?
As illustrated below, the supermarket channel remains the dominant sales channel in the UK grocery market, while online grocery is the fastest growing.
Over the last three years online grocery is up over 73% and now has a 12% UK market share. This is up from 8% prior to the pandemic in 2019. Online ordering has now become an integrated part of customers' grocery shopping habits. Data from IGD shows that online grocery sales contributed over £10 billion to total UK grocery growth, materially exceeding the £5 billion growth in the UK discounter channel which is the second fastest growth channel.
Omnichannel store networks are key in meeting this increased demand for online fulfilment. The traditional Big Four dominate the online channel with a combined 85% market share in online grocery. Over 90%[13] of their online sales are fulfilled from omnichannel supermarkets.
Combining in-store supermarket sales (the most dominant channel) with online fulfilment (the fastest-growing channel) sees around 60%13 of all UK grocery market sales fulfilled through omnichannel supermarkets. This has resulted in like-for-like sales growth of 13% for omnichannel supermarkets. This sales growth means the Company's rents are highly affordable and we expect market rents in the omnichannel asset class will over time exceed wider supermarket market rents.
In more recent months, the discounters have seen dramatic sales increases, bringing more and more customers through their doors as the pressure of rising costs mounts and consumers transition towards greater value changing what they buy and how they shop to cut costs. According to Kantar in the 4 weeks to 4 September 2022, Aldi market share of 9.3% exceeded Morrisons 9.1% becoming the fourth largest grocer in that period.
These market share gains reflect consumers' reaction to the sudden cost-of-living increase caused by high energy price inflation as their lower cost, low-margin business model has been highly successful in attracting price sensitive consumers. We believe this channel will continue to grow
and expect to see a growing number of discount supermarket property come to the investment market.
Q. What changes have you seen in the omnichannel format?
The UK's traditional Big Four pioneered the development of an omnichannel business model which seamlessly integrates both in-store and online fulfilment. Their dominance in online grocery has only been achievable due to this network of omnichannel supermarkets and illustrates the vital role of the omnichannel store operating as last mile logistics nodes in the nation's food supply network. The COVID-19 pandemic generated an 80% increase in online demand. This increased online penetration has transformed the profitability of omnichannel grocery fulfilment. With in-store and online profit margins now at near parity, omnichannel stores provide operators the benefit of achieving a seamless integration of customer experience across all channels.[14]
Recent technology developments mean that smaller automated micro fulfilment systems, or urban fulfilment centres ("UFCs"), can now be housed within supermarket back of house areas. These smaller systems can house 20,000 product lines and automate the picking of dry goods that require minimal management within the storage system. Picking of fresh and frozen items that are difficult and expensive to automate is done in store via physical store pick. Whilst this technology is new and will take time to deploy, we believe it represents the next evolution of the omnichannel store model. This development would enable stores to meet greater demand and deliver increased profitability.
Q. What is a typical supermarket lease structure?
Supermarket lease agreements are often long dated and inflation linked. Original lease tenures range from 15 to 30 years without break options. Rent reviews often link the growth in rents to an inflation index such as RPI, RPIX or CPI (with caps and floors), or, alternatively, may have fixed annual growth rates or open market rent reviews.
An open market review means that the rent is adjusted (usually upwards only) to reflect the rent the landlord could achieve on a letting in the open market. Such rent reviews take place either annually or every five years, with the rent review delivering an increase in the rent at the growth rate, compounded over the period.
Landlords usually benefit from "full repairing and insuring leases". These are lease agreements whereby the tenant is obligated to pay all taxes, building insurance, other outgoings and repair and maintenance costs of the property, in addition to the rent and service charge.
Operators often have the option to acquire the leased property at the lease maturity date at market value. Furthermore, to ensure that the operator does not transfer its lease obligation to other parties, assignment of the lease by the tenant is restricted.
Q. How have supermarket investment returns and yields performed?
Supermarket property offers relative stability compared to the broader UK commercial property market. When you examine supermarket property investment performance over the last 15 years you see the strength and stability of this asset class. During periods of economic uncertainty, the grocery sector has been a strong and resilient investment, generally avoiding the volatile peaks and troughs of the economic cycle. Investors looking for property assets that offer consistent returns and low volatility have increasingly targeted the supermarket property sector.
Atrato compiles a yield series of all supermarket property transactions with lease lengths of greater than 10 years and larger store format sizes. This provides an accurate reflection of the segment of the market which the Company typically targets.
Average investment yields on supermarket property reached a 20 year low of 4.3% in 2007, during which interest rates peaked over 6%, before a period of negative yield shift during the financial crisis. Yields have since strengthened, tightening to a current average of 4.5% in 2022. In contrast to other property sectors, supermarket yields have remained relatively stable and resilient across this time period. Supermarket yields are currently higher than IPD All Property yields of 4.0% and Distribution Warehouses of 3.7% which have seen significant yield compression and valuation increases in recent years.
Supermarket property will not be entirely immune to the challenging broader macroeconomic environment. However, the defensive characteristics displayed by these assets coupled with ongoing demand for long-term secure income is expected to make supermarket property yields highly resilient.
Q. How has supply and demand for supermarket property performed?
The supermarket sector is a highly attractive asset class within real estate investment. The improved financial performance by the UK's major grocery operators against a backdrop of growing UK grocery demand and inflation has attracted domestic and international institutional investors to supermarket property.
In addition, we are also witnessing an increasing number of transactions with shorter lease terms. Research shows that transactions for those assets with an unexpired lease term of under 20 years accounted for 70% of deals in 2021, up from 60% in 2020. Meanwhile, more deals are completing with an open market rent review leasing structure. Both of these developments illustrate the increased confidence in rental growth driven by the strong trading performance of the grocery sector.
There has been some supply of new grocery investment property opportunities due to the growth in the store network of the Discounters, however, the buyback of supermarket property by Tesco over the previous five years has resulted in a net overall contraction of supply.
We expect investment volumes to decline somewhat in 2022 from the £1.8bn annual volumes seen in 2020 and 2021. However, the defensive characteristics displayed by supermarket property coupled with ongoing demand for long-term secure income is expected to continue to generate strong investor demand.
FINANCIAL OVERVIEW
Atrato Capital Limited, the Investment Adviser to the Group, is pleased to report the financial results of the Group for the 12 months ended 30 June 2022.
IFRS net rental income for the year to 30 June 2022 increased by 50% to £72.1 million, up from £47.9 million in the prior year. Contracted inflation rent reviews in the year, including a number of 5 yearly rent reviews, resulted in average passing rent increases in the Portfolio of 3.7% compared to 1.4% in the prior year, as a result of the higher inflationary environment witnessed over the last year, with many reviews hitting their maximum rental caps. A further £11.5 million of rental contributions were also recognised from new acquisitions during the year.
Administrative and other expenses, including management and advisory fees and other costs of running the Group, were £14.2 million (2021: £9.5 million), generating an EPRA cost ratio of 16.5% (2021: 16.8%).
Financing costs for the year were £13.0 million (2021: £8.5 million). The Group's weighted average cost of finance at 30 June 2022 was 2.6% (2021: 1.9%). The increase in net financing costs reflects the increase in the quantum of the Group's banking facilities and towards the latter part of the year increases in sterling borrowing rates. The Group's continued conservative leverage policy maintains a robust interest cover at 668% compared to the covenant at a minimum of 200%. Further information on financing and hedging is provided below.
As a result of the above, the Group's operating profit, before changes in fair value of investment properties and share of income from the joint venture, as reported under IFRS, increased by 50.4% to £58.2 million (2021: £38.7 million).
Change in fair value of the Direct Portfolio investment properties in the year was £21.8 million (2021: £36.3 million), which is comprised of a £42.3 million increase in valuation offset by £17.6 million of acquisition costs and £2.9 million of rent smoothing and guarantee adjustments. The Group's EPRA NTA at 30 June 2022 equates to 115 pence per ordinary share (2021: 108 pence per ordinary share).
The Sainsbury's Reversion Portfolio continues to be an accretive investment, with the share of income from joint venture increasing by 179% to £43.3 million (2021: £15.5 million), the growth in part due to the Group increasing its stake in the portfolio in February 2021. During the reporting period, Sainsbury's exercised purchase options to acquire 21 of the 26 stores in the portfolio.
The Group is a qualifying UK Real Estate Investment Trust ("REIT") which exempts the Group's property rental business from UK Corporation Tax[15]. The Total Shareholder Return for the year was 7% (2021: 11%). This is measured as the growth in share price over the financial year of 1.7% (2021: 5.6%), plus dividends declared for the year of 5.94 pence per share (2021: 5.86 pence per share) divided by the share price at the beginning of the financial year.
Equity raising and debt financing
In October 2021, the Group completed an upsized and oversubscribed £200 million Placing and Offer for Subscription in which 173,913,043 new ordinary shares were issued at 115 pence per share representing a 6.5% premium to prevailing EPRA NTA at the time of issue. Following a strong level of support from investors during the marketing roadshow, the October Placing was increased from the original target of £100.0 million.
In April 2022, the Company successfully completed a further oversubscribed Placing of ordinary shares, raising £306.7 million. A total of 253,492,160 new ordinary shares were issued at 121 pence per share, representing a 7.1% premium to the Company's last reported EPRA NTA at the time of issue. The April Placing was increased from an original target of £175 million due to strong levels of investor support during the marketing roadshow.
The Group has raised in total £506.7 million through its two equity placing programmes during the year, issuing a total of 427,405,203 shares. A further 1,743,049 shares were issued by the Group as part of its SCRIP dividend scheme, meaning 1,239,868,420 shares were in issue as at the year end.
During the year, the Group also increased its debt facilities as follows:
- In August 2021, the Group increased its secured term loan with Deka by £20.0 million to £96.6 million for the remaining three-year term. The new tranche of the secured term has a fixed rate of 1.72%.
- In August 2021 the Group also completed a one-year extension alongside a £10.0 million increase to its now £150.0 million Revolving Credit Facility with HSBC, priced at a margin of 1.75% above SONIA.
- In September 2021, the Group exercised its accordion option under the Wells Fargo credit facility by £61.3 million. The tranche was priced at a margin of 1.40% above SONIA and was refinanced shortly after the year end with the proceeds of the new unsecured facility of which Wells Fargo participated as part of the wider bank syndicate (see below).
- In January 2022, the Group arranged a £136.5 million increase to its Revolving Credit Facility with Barclays and Royal Bank of Canada. This facility was priced at a margin of 1.50% above SONIA and was also refinanced after the year end through the proceeds of the new unsecured facility, of which Barclays and Royal Bank of Canada both participated as part of the wider bank syndicate (see below).
After the year end, the Group secured a new £412 million unsecured borrowing facility at 1.5% above SONIA, which was the first time the Group accessed unsecured debt financing. The proceeds of the new facility were used to refinance a portion of the Group's existing secured debt and to fund further supermarket acquisitions which completed after the year end.
The Group also completed in September 2022, a further two-year extension (inclusive of a one-year accordion option at lender's discretion) on its £150 million Revolving Credit Facility with HSBC, where all other terms of the facility remained unchanged.
A summary of the Group's credit facilities as at the year end and after the balance sheet date is provided below:
|
Lender |
Facility |
Maturity* |
Interest cost** |
Loan commitment 30 June £m* |
Loan commitment (Post balance sheet) £m |
Amount drawn at 30 June 2022 £m |
|
Barclays / RBC |
Revolving Credit Facility |
Jan-26 |
1.50% plus SONIA |
300.0 |
77.5 |
138.75 |
|
Bayerische Landesbank |
Term Loan |
Jul-23 |
2.56% |
52.1 |
52.1 |
52.1 |
|
Bayerische Landesbank |
Additional Term Loan A |
Jul-23 |
1.98% |
7.3 |
7.3 |
7.3 |
|
Bayerische Landesbank |
Additional Term Loan B |
Aug-25 |
2.03% |
27.5 |
27.5 |
27.5 |
|
Deka Bank |
Term Loan |
Aug-26 |
1.89% |
47.6 |
47.6 |
47.6 |
|
Deka Bank |
Term Loan |
Aug-26 |
2.05% |
28.9 |
28.9 |
28.9 |
|
Deka Bank |
Term Loan |
Aug-26 |
1.72% |
20.0 |
20.0 |
20.0 |
|
HSBC |
Revolving Credit Facility |
Aug-25 |
1.65% plus SONIA |
100.0 |
100.0 |
- |
|
HSBC |
Revolving Credit Facility |
Aug-25 |
1.75% plus SONIA |
50.0 |
50.0 |
- |
|
Wells Fargo |
Revolving Credit Facility |
Sep-23 |
1.40% plus SONIA |
100.0 |
- |
- |
|
Wells Fargo |
Revolving Credit Facility |
Jul-27 |
2.19% |
30.0 |
30.0 |
30.0 |
|
Wells Fargo |
Revolving Credit Facility |
Jul-27 |
2.11% plus SONIA |
30.0 |
9.0 |
- |
|
Total |
|
|
|
793.4 |
449.9 |
352.2 |
|
Post balance sheet events |
|
|||||
|
Unsecured bank syndicate |
Revolving Credit Facility |
Jun-29 |
2.84% |
n/a |
250.0 |
n/a |
|
Unsecured bank syndicate |
Term Loan |
Jun-27 |
2.84% |
n/a |
100.0 |
n/a |
|
Unsecured bank syndicate - Hedged |
Term Loan |
Jan-25 |
2.84% |
n/a |
30.6 |
n/a |
|
Unsecured bank syndicate |
Term Loan |
Jan-25 |
1.50% plus SONIA |
n/a |
31.5 |
n/a |
|
Total |
|
|
|
793.4 |
862.1 |
352.2 |
*Inclusive of uncommitted accordion options
**Interest cost is inclusive of hedging arrangements where applicable. Amounts stated do not include unamortised arrangement fees.
The new and increased debt facilities combined (including post balance sheet events) have a weighted debt maturity of 4.5 years (including extension options) (2021: 4.0 years) and a current cost of borrowing of 2.8% (2021: 1.9%).
The Group continues to have a conservative leverage policy, with a medium term LTV target of 30%-40%. At the end of the year, total net debt was £297.3 million, resulting in a net loan-to-value ("LTV") ratio of 19% (2021: 34%). Including post balance sheet acquisitions, the Group's Gross LTV currently stands at 33%. The Group has further balance sheet capacity to utilise for opportunities which may come to market.
Each loan drawn under the credit facilities requires interest payments only until maturity and is secured against both the subject properties and the shares of the property-owning entities. This is with the exception of the new unsecured facilities completed after the year end where the loans are not secured against any of the Group's properties. Each property-owning entity is either directly or ultimately owned by the Group.
The Group continues to maintain significant headroom on its LTV covenants which contain a maximum 60% LTV threshold and a minimum 200% interest cover ratio for each asset in the Portfolio. As at 30 June 2022, the Group could afford to suffer a fall in property values of 54% before being in breach of its LTV covenants. With current hedging arrangements in place the Group has significant interest cover headroom. Within the Going Concern period of 12 months from the signing of the accounts, £59.4 million of the BLB loan falls due, however as per the Going Concern Note 1 of the financial statements this is expected to be refinanced.
After the year end date, the Company took the decision to fix its interest rate exposure by entering into interest rate swaps to hedge the Company's £381 million of drawn unsecured debt for a weighted average term of 4 years. 100% of the Company's drawn debt is now hedged at an effective fixed rate of 2.6% (including margin). The cost of acquiring the hedges was £35.2 million which will immediately impact EPRA NTA by 2.8 pence per share.
Further details of the Group's debt and interest rate hedging can be found in Notes 20 and 21 to the financial statements.
Dividends
The Company has declared four interim dividends for the year as follows:
· On 23 September 2021, a first interim dividend of 1.485 pence per share, which was paid on 16 November 2021
· On 10 January 2022, a second interim dividend of 1.485 pence per share, which was paid on 25 February 2022
· On 6 April 2022, a third interim dividend of 1.485 pence per share, which was paid on 27 May 2022
· On 8 July 2022, a fourth interim dividend of 1.485 pence per share, which was paid on 22 August 2022
The Group's EPRA dividend cover ratio was 1.08x for the year (2021: 1.04x). The increase reflects the level of deployment of the equity proceeds resulting in an increase in the EPRA earnings available to cover the dividends paid in the financial year.
The Company has increased the quarterly dividend payable from October 2022 by 1.0% from 1.485 to 1.50 pence per share, which will be the fifth consecutive year of annual dividend increases.
The Company is targeting a dividend for the year to 30 June 2023 of 6.0 pence per share.
Atrato Capital Limited
Investment Adviser
20 September 2022
SUSTAINABILITY AND TCFD ALIGNED REPORT
Introduction
During the reporting period, the Company has continued to develop its sustainability strategy. As part of the implementation of this strategy the Investment Advisor has recruited a Head of Sustainability, Christoph Scaife. Christoph took up this role in February 2022 and will take the lead in further developing and implementing the Company's sustainability strategy with the Company's investment team. A key element of the Company's ESG strategy focuses on defining the Company's investment impact. This includes environmental, social and governance risk management, as well as quantifying positive and negative impacts from its investment activities. These actions are designed to ensure that investments are made having assessed all aspects of risks and opportunities to preserve and grow capital for the long term.
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As part of the work undertaken by the Investment Adviser's board in 2021 and 2022 several sustainability related priorities have been identified as key to delivering value for the Company's stakeholders. These were based on an in-depth materiality assessment which highlighted four key elements, namely: i) mitigation of environmental impact, ii) introducing the highest standards of governance and reporting, iii) engagement with tenants and wider stakeholders, and iv) responsible citizenship and support for communities.
Task-Force on Climate Related Financial Disclosures (TCFD)
During the reporting year the Company has commenced reporting climate related disclosures using the four pillars from the TCFD framework. This includes the calculation of the Company's carbon emissions. The Company has interpreted these disclosures below.
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Governance |
Refining our Approach
Building on work such as the detailed materiality assessment undertaken in 2021, the Company continues to refine its strategy to deliver more sustainable business practices. We have also started to develop an operational framework that drives continuous focus on safeguarding of the environment and society.
In May 2022 SUPR joined the United Nations Principles for Responsible Investing (PRI). This introduction of a best-in-class sector related governance standard was an important step in bringing the Company in line with international best practice as a Responsible Investor. The PRI defines responsible investment as a strategy and practice to incorporate ESG factors in investment decisions and active ownership. With a strong emphasis on stewardship, and close contact between our investors and Company Board, the Group is well suited to fulfil the role of a responsible investor. In 2022/3 the Company will focus on refining its approach to identifying and managing ESG issues across the Portfolio.
The Nomination Committee recommended the appointment of Frances Davies with effect from 1 June 2022. Frances' depth of experience in corporate finance and asset management will allow her to contribute to the development and implementation of our strategy and the long-term sustainable success of the Group. Frances is currently a partner of Opus Corporate Finance, a corporate finance advisory business, and is a Non-Executive Director at HICL Infrastructure Plc and JP Morgan Smaller Companies Investment Trust. Frances will be the Sustainability Champion for the Board and will ensure that Sustainability matters are taken into account at all levels.
During the financial year, the Board has worked to implement a more formal sustainability approach by reviewing the reporting and governance framework under which it operates. The Terms of Reference of the Audit Committee were updated to include the responsibilities of ESG oversight in relation to the Company's internal processes and the investment activities carried out by the Investment Adviser. Subsequently it was agreed that the Board would convene a dedicated ESG Committee which will be Chaired by Frances Davies as part of her role as Sustainability Champion for the Board. We have outlined our approach to responsible investment on our website, and, prior to the end of 2022, we will publish our commitments to implement goals and targets for the period ahead.
The Board continues to review updates to the business strategy, ensuring performance, policy and fund objectives meet the changing requirements for Sustainability in the sector. By the end of 2022 the Investment Adviser has and will continue to focus on refining and developing their ESG evaluation methodologies and impact measurement frameworks to address the incoming legislation and climate change disclosure requirements. The Investment Adviser will draw upon the highest governance standards and best practices to ensure that the fund achieves its long-term goals. These commitments will be met with tangible steps to drive performance. Consequently, we have primarily focused our initial actions on the following areas:
• Strengthening oversight of ESG and sustainability
• Integration of ESG and sustainability criteria into the evaluation of asset acquisition
• Ensuring our assets enhance the communities in which they are located
• Commitment to enhance the sustainability of our buildings
• Engagement and partnership with tenants
Progress on Key Sustainability Themes
Good Governance and Reporting
As a first step, we have formalised our ESG commitments into policies, updated the Terms of Reference of the Board's committees, and refined our overall reporting framework. During the year to 30 June 2022, we commenced a rigorous assessment of our approach to oversight and governance of sustainability, which is central to the development of an effective strategy. This review resulted in integrating sustainability criteria into the remit of the newly appointed ESG Committee, under the oversight of Frances Davies, the Chair. The Terms of Reference of the Committee were updated to reflect this change and to ensure a focus on sustainability factors on a par with the financial aspects of our business. Simultaneously, Steve Windsor, Principal at Atrato Group, undertook responsibility for the monitoring and managing of ESG risks and opportunities at our Investment Adviser.
This decision was guided by an internal analysis of the skills, knowledge, experience of our directors, which identified the most appropriate framework to address and oversee ESG factors. In line with the recommendations of the AIC Code of Corporate Governance, during the past year, the Board also carried out an assessment of the current structure and operation of the Board. That assessment evaluated the balance of skills, knowledge, experience, independence and diversity of the Board. The results of this evaluation helped us to identify areas we can strengthen. The process is detailed in full in the Nomination Committee report.
Under the strengthened governance structure, the Board has approved the Group's Sustainability Strategy, Sustainability Policy and other relevant policies. Quarterly updates are sent from the Investment Adviser. The Board also oversees the Investment Adviser's policies to ensure that environmental and social priorities are incorporated into the investment strategy. In line with the increased focus on sustainability at the Company and across our stakeholders, the Atrato Group recently finalised and published its own ESG policy, which can be found on its website.
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Our Strategy |
Materiality Risk Assessment
The Company completed its risk evaluation matrix in 2021, which highlighted the need to address climate related issues from a sustainability point of view, as well as from a compliance aspect. As the UK government has finalised its Minimum Energy Efficiency Standard (MEES), an industry goal to achieving a 2oC world and Net Zero target, with increased energy efficiency at the heart of achieving these goals. As the assets held within the Portfolio are managed though the tenants, an engagement strategy has been developed by the Company to collaborate with tenants on how to tackle these issues, including climate related factors such as flooding, power purchasing and carbon reduction commitments from the tenant's supply chain.
Labour standards and the minimum wage levels have become a major risk for operators as the cost of living has risen dramatically in 2022. These issues have a knock-on effect for tenants and consumers alike and the need to reduce operational costs throughout the supply chain needs to be addressed. The need to be aware of consumer habits and satisfaction is more material than ever, with a renewed focus on the consumer and the cost of supply as well as disposal or end of useful life for products.
Opportunity Identification
A key route to delivering positive impact are the possibilities arising from the growth of the electric vehicles industry, and its need for electric charging points. The Company is looking at where there is a viable demand for charging stations, both on assets that are directly managed and those where tenants have the capacity to install charging points.
The Company is looking at where there is a viable demand for charging stations and parking capacity and rights for installation. The Company is also keen to support tenant led installations, where possible. This initiative aligns with the UK government's intention to reduce subsidies for private home charging connections and focus on providing charging points that are accessible to the wider public.
Tenant engagement
The majority of the Company's tenants are leading supermarket retailers who have already committed to implementing high standard sustainability practices. However, as these clients have large portfolios and varying sustainability agendas the focus of these groups may not align with the Company's priorities. As a result, the portfolio management team will draft an engagement strategy to address key sustainability aspects to ensure the Company meets its sustainability agenda. One focus of the Company's engagement strategy includes obtaining data on how tenants are capturing and reporting their emissions data as well as their actions to reduce greenhouse gas emissions and lower energy usage. The Company will focus engagement efforts over the coming year with tenants to obtain accurate data on energy performance, looking at what energy sources tenants are drawing their power from, and whether they have considered purchasing renewable energy. Tenants are strongly considering how to reduce energy costs and emissions and these efforts also include roof top solar.
Environmental
Establishing responsible practices throughout the Company's landlord controlled operations and supply chain is a key part of the Company's engagement strategy. During 2022 the Company will continue to focus on the responsible disposal of waste and green energy contracts. A key focus area of engagement between the Company and the tenants is the energy performance of assets. The Company has set out a target to ensure the Portfolio remains in line with the Government's requirements and selected assets have been identified as medium risks to not achieving compliance with these standards in 2023. Collaborating with our tenants to address major environmental risks through the use of independent assessments is being introduced by the Company and will continue as part of a monitoring and assurance programme.
Social
As a result of the growth of electric vehicles, the need for a greater quantity of electric charging points has arisen. EV charging points improve accessibility for customers who drive EV vehicles, and may encourage others to move to this type of vehicle. Supermarkets offer a compelling opportunity to include EV charging points for shoppers, as this is an efficient use of consumers' time to charge their vehicles while they shop. We articulate this further below.
Governance
The Company continues to keep EPC assessments up-to-date to understand the environmental performance of its assets. Included in these assessments are possible opportunities for energy efficiency improvements which we assess on a case-by-case basis. This assurance process allows the portfolio management team to focus their engagement efforts on those assets most at risk of underperforming against key sustainability metrics, as well as highlighting possible high impact energy efficiency opportunities that can maximise shareholder value.
Responsible Citizenship and Community Support
The Board firmly believes that the Company can achieve a positive impact in its communities. The Company, through its Investment Adviser, is in the process of incorporating the Atrato Charitable Foundation which plans to use capital from the fund to support various charities whose values align with that of the Group. These charities may include community development, educational support and gender inclusivity.
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Risks |
Mitigation of Environmental Risks
Climate change is one of the defining issues of our time and we realise that actions taken today will have repercussions for the future. While decoupling the economy from emission generation is a complex task, requiring major policy and behaviour changes, we believe that there is a role to play for all sectors and especially investors such as the Company. New technology now forms a part of the investment consideration, where assets can provide their own routes to positive impact and reduce their own carbon footprint, for example, through the use of solar PV panels, waste management and reduced water consumption, to name a few. As these solutions become more cost effective and accessible, we are engaging with our tenants to look at possibilities to optimise their positive impact opportunities and look beyond what are the current normal conventions of day-to-day business.
As identified in the risk materiality assessment undertaken in 2021, and evaluated on a rolling basis since then, the risk of downgrading energy inefficient assets is material for some assets. The Company is conducting third party evaluations of its sites to monitor changes in risks. These independent reviews will provide the Group with reliable and up to date EPC assessments of the performance of its assets. Included in these assessments are possible opportunities for impact improvements, energy savings and key asset improvements. This assurance allows the asset management team to focus their engagement efforts on those assets most at risk on underperforming as well as highlighting possible impact opportunities that can maximise shareholders value. It is expected that these corrective measures will ensure that the Company maintains its compliance with MEES while also reducing possible to other environmental risks, and in some cases the exposure to volatile energy costs.
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Metrics and Targets |
During the reporting period, we continued to assess the EPC ratings of our Portfolio and benchmark current performance against historic performance, as well against the future Minimum Energy Efficiency Standards that came into effect in 2016. The overall value weighted portfolio rating is C-56, as at 30 June 2022. There were eight properties with an EPC rating of 'D' on that date representing 19% of the Portfolio by number and 18% by value. This compares to 14 properties which had a D or E rating at the end of the prior financial year, showing progressive improvement in the energy rating of our assets year-on-year.
We make a conscious effort to acquire assets with stronger EPC ratings or where we are able to identify opportunities to improve the EPC rating through active engagement with the occupier.
In addition to enabling the Company to drive improvements in its existing Portfolio, a deeper understanding and assessment of the EPC profile of the Portfolio also provides additional detail to help inform future investment strategy. We are also actively looking at how lease renewals on existing properties can be structured to add incentives that would encourage tenants to undertake improvements to reduce emissions, energy and resource use.
Company Emissions
2022 marks the first year in which the Company has calculated its emissions at the Company and at the Investment Adviser level. Following this exercise, it was concluded that the total emissions, mostly due to electricity and refrigerants, account for 97% of the Company's total emissions. No refrigerants were included in the analysis for Petrol Filling Stations (PFS) or non-grocery sites, as tenants do not disclose their air conditioning reports, and as such certain adjustments and assumptions had to be made to include these assets in the overall total. The reporting sample covers 105 supermarket sites and PFS, which were counted separately.
The Company's total emissions for the reporting period are 87,715 tonnes of CO2 equivalent. The classification of these emissions is categorised as Scope 3 Category 13 Downstream Leased Assets, since any asset that a company owns but does not have control over must be included in its Scope 3 indirect emissions. The Company leases properties to tenants, which means it must include the tenants' Scope 1 and 2 emissions within the Company's Scope 3 Category 13 emissions. The main heating fuel type according to the data from the EPC assessments of our supermarket portfolio was natural gas, whereas non-grocery and PFS sites were mainly heated using electricity. As per GHG Protocol guidelines, the emissions from biomass are out of scope and, therefore, not included in the total Scope 1,2, and 3 emissions. Natural gas accounts for 77% of emissions and it should be noted that if tenants switched to non-fossil fuel heating, this would represent a significant opportunity to decrease emissions for the Company and tenants alike. The Company does not have any offices or employees, as such only the emissions of its tenants are included in the GHG inventory. The Investment Adviser will report separately on its emissions in its annual report.
SUPR GHG Inventory Methodology
SUPR accounts for the emissions of commercial buildings that it is directly owns and leases out to various tenants, some of whom do not record their emissions or have a strategic plan to reduce their emissions. In the first year of Greenhouse Gas (GHG) accounting, no activity data was available, so estimations were required throughout. Scope 1 (heating and refrigerants) and scope 2 (electricity) was estimated for each site using publicly available data from Energy Performance Certificates (EPCs). CIBSE data was used to provide intensity estimates based on floor area for the different commercial building types. Certain data assumptions have been made to estimate the size of petrol filling stations, since this data was not provided.
Scope 1 (Heating)
The main heating fuel type was taken from the EPC. Some gaps existed and it was assumed that, in these cases, sites at the same location used the same heating fuel types. CIBSE data was used to provide intensity estimates (kWh/m2) of the fossil fuel heating use. For sites that used electricity as their main heating fuel type, the fossil fuel heating consumption was given a value of 0 (nil). CIBSE provides intensity estimates for typical and good practice energy use. The EPC rating was used to assume whether a site had typical practice energy use (EPC rating of D or below) or good practice energy use (EPC rating of C or above).
When petrol filling stations are counted as their own site, five sites used biomass heating and 53 used natural gas. The remaining 47 sites were heated using electricity. The latest DEFRA emission factors were applied to the kWh of consumption for heating to calculate the emissions at a site level.
Scope 1 (Refrigerants)
Publicly available air conditioning (AC) certificates were used to determine the type and amount of refrigerants used by supermarkets. Where this data was not available for certain sites, other sites that were similar in terms of size and tenant were used as a proxy.
As per EPA data, the size of the air conditioning equipment used was dependent on the amount of refrigerant used and the floor area. It was assumed that air conditioning was used for 6 months of the year in the UK. Loss rates were taken from DEFRA data. Supermarket refrigeration was estimated as no activity data was available. An intensity estimate (refrigerant charge per square foot) was taken from EPA data and the refrigerant used was the most common for this activity according to UNEP. Refrigerant loss rate for refrigeration was taken from DEFRA data.
No refrigerants were estimated for non-grocery or petrol filling station sites.
Scope 2 (Electricity)
CIBSE data was used to provide intensity estimates (kWh/m2) of the electricity use. The EPC rating was used to assume whether a site had typical practice energy use (EPC rating of D or below) or good practice energy use (EPC rating of C or above).
Five supermarket sites have solar photovoltaic (PV) panels on their roofs. Google Maps was used to identify the number of solar panels on the roofs. An estimate was made as to the amount of energy produced per panel and that was applied to the total solar panels for each site. The amount of electricity generated from the solar panels at these five sites was subtracted from the estimate for the total electricity consumption. It was assumed that the five supermarkets receive the full generation from the panels, meaning the electricity generated from them is attributed solely to the supermarkets.
The latest DEFRA emission factors were applied to the kWh of consumption for electricity to calculate the emissions at a site level.
The calculations and evaluations have been calculated by The Anthesis Group, a third party contractor who was contracted out by the Company.
External Recommendation on Emissions
The Company contracted Anthesis Consulting to undertake its emissions calculations, as well as provide recommendations to improve the emissions and reporting quality for future reports. Selected recommendations include the setting of targets, and to validate emissions through an external organisation such as the SBTi.
As the majority of our tenants publicise their GHG emissions, the Company should use its position to encourage tenants to provide more detailed data and communicate it publicly to show stakeholder groups their improvements on sustainability practices.
The Company is required to meet emissions reductions and future MEES legislation, and this will influence the focus of the Investment Adviser's efforts to ensure that all investments meet these requirements.
The Investment Adviser will develop training for key staff members on the importance of climate action and their role in it.
OUR PRINCIPAL RISKS
The Board and JTC Global AIFM Solutions Limited, the Company's Alternative Investment Fund Manager (the "AIFM"), together have joint overall responsibility for the Company's risk management and internal controls, with the Audit Committee reviewing the effectiveness of the Board's risk management processes on its behalf.
To ensure that risks are recognised and appropriately managed, the Board has agreed a formal risk management framework. This framework sets out the mechanisms through which the Board identifies, evaluates and monitors its principal risks and the effectiveness of the controls in place to mitigate them.
The Board aims to operate in a low-risk environment, focusing substantially on a single sector of the UK real estate market. The Board and the AIFM therefore recognise that effective risk management is key to the Group's success. Risk management ensures a defined approach to decision making that seeks to decrease the uncertainty surrounding anticipated outcomes, balanced against the objective of creating value for Shareholders.
The Board determines the level of risk it will accept in achieving its business objectives, and this has not changed during the year. We have no appetite for risk in relation to regulatory compliance or the health, safety and welfare of our tenants, service providers and the wider community in which we work. We continue to have a moderate appetite for risk in relation to activities which drive revenues and increase financial returns for our investors.
There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results.
The risk management process includes the Board's identification, consideration and assessment of those emerging risks which may impact the Group. Emerging risks are specifically covered in the risk framework, with assessments made both during the regular quarterly risk review and as potentially significant risks arise. The quarterly assessment includes input from the Investment Adviser and review of information by the AIFM, prior to consideration by the Audit Committee.
The matrix below illustrates our assessment of the impact and the probability of the principal risks identified. The rationale for the perceived increases and decreases in the risks identified is contained in the commentary for each risk category.
The following risks have been removed in the current year and are no longer shown on the matrix:
· Impact of COVID-19: The Company has not experienced any material adverse impacts from the COVID pandemic, which warrants the removal of this as a principal risk. However, we continue to monitor the impact closely
· European Union exit without EU trade deal ("Brexit"): The Company has not experienced any material adverse impacts from Brexit. However, we are keeping this under constant review given the recent news of plans to amend parts of the NI protocol
The following risks have been added in the current year and are discussed in detail below:
· A reduction in the energy efficiency of the portfolio
· Volatile changes to weather systems
· The rise in cyber risks
· Inflationary pressures on the valuation of the portfolio
· Impact of the war in Ukraine
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Property Risk |
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1. The lower-than-expected performance of the Portfolio could reduce property valuations and/or revenue, thereby affecting our ability to pay dividends or lead to a breach of our banking covenants |
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Probability: |
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Mitigation |
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Low |
Moderate An adverse change in our property valuations may lead to breach of our banking covenants. Market conditions may also reduce the revenues we earn from our property assets, which may affect our ability to pay dividends to Shareholders. A severe fall in values may result in us selling assets to repay our loan commitments, resulting in a fall in our net asset value. |
Our Direct Portfolio is 99.9% let (100% of supermarket assets are let) with long weighted average unexpired lease terms and an institutional-grade tenant base.
All the leases contain upward-only rent reviews, 81% are inflation linked, 17% are open market value and the rest contain fixed uplifts. These factors help maintain our asset values.
We manage our activities to operate within our banking covenants and constantly monitor our covenant headroom on Loan to Value and Interest Cover. We are reviewing alternative financing arrangements to lessen any dependence on the banking sector. |
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2. Our ability to source assets may be affected by competition for investment properties in the supermarket sector |
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Moderate The Company faces competition from other property investors. Competitors may have greater financial resources than the Company and a greater ability to borrow funds to acquire properties.
The supermarket investment market continues to be considered a safe asset class for investors seeking long term secure cash flows which is maintaining competition for quality assets. This has led to increased demand for supermarket assets without a comparable increase in supply, which could potentially increase prices and make it more difficult to deploy capital. |
The Investment Adviser has extensive contacts in the sector and we often benefit from off-market transactions. They also maintain close relationships with a number of investors and agents in the sector, giving us the best possible opportunity to secure future acquisitions for the Group.
The Company has acquired assets which are anchored by supermarket properties but which also have ancillary retail on site, and these acquisitions allow the Company to access quality Supermarket assets whilst providing additional asset management opportunities.
We are not exclusively reliant on acquisitions to grow the Portfolio. Our leases contain upward-only rent review clauses, which mean we can generate additional income and value from the current Portfolio. We also have the potential to add value through active asset management and we are actively exploring opportunities for all our sites.
We maintain a disciplined approach to appraising and acquiring assets, engaging in detailed due diligence and do not engage in bidding wars which drive up prices in excess of underwriting.
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3. The default of one or more of our lessees would reduce revenue and may affect our ability to pay dividends |
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High Our focus on supermarket property means we directly rely on the performance of UK supermarket operators. Insolvencies could affect our revenues earned and property valuations. |
Our investment policy requires the Group to derive at least 60% of its rental income from a Portfolio let to the largest four supermarket operators in the UK by market share. Focusing our investments on assets let to tenants with strong financial covenants and limiting exposure to smaller operators in the sector decreases the probability of a tenant default.
Before investing, we undertake a thorough due diligence process with emphasis on the strength of the underlying covenant and receive a recommendation on any proposed investment from the AIFM.
We select assets that have strong property fundamentals (good location, large sites with low site cover) and which should be attractive to other occupiers or have strong alternative use value should the current occupier fail. |
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Financial Risk |
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4. Our use of floating rate debt will expose the business to underlying interest rate movements as interest rates continue to rise |
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Moderate (from Low) |
Moderate Interest on the majority of our debt facilities is payable based on a margin over SONIA. Any adverse movements in SONIA could significantly impair our profitability and ability to pay dividends to shareholders. |
We have entered into interest rate swaps to partially mitigate our direct exposure to movements in SONIA, by capping our exposure to SONIA increases.
We aim to hedge prudently our SONIA exposure, keeping the hedging strategy under constant review in order to balance the risk of exposure to rate movements against the cost of implementing hedging instruments.
We selectively utilise hedging instruments with a view to keeping the overall exposure at an acceptable level.
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5. A lack of debt funding at appropriate rates may restrict our ability to grow |
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Low Without sufficient debt funding we may be unable to pursue suitable investment opportunities in line with our investment objectives.
If we cannot source debt funding at appropriate rates, this will impair our ability to maintain our targeted level of dividend. |
Before we contractually commit to buying an asset, we enter discussions with our lenders to get uncommitted approvals (where borrowings are secured), which ensures that we can borrow against the asset and maintain our borrowing policy.
The Board keeps our liquidity and gearing levels under review. We have recently broadened our capital structure by starting to transition our balance sheet to an unsecured structure, reducing our reliance on a single source of funding.
Supermarket property has remained popular with lenders, owing to long leases and letting to single tenants with strong financial covenants and being seen as a safe asset class in times of market uncertainty. We have seen increased appetite from lenders to provide financing for future acquisitions albeit that some of our existing lenders have indicated that they are close to reaching capacity in some asset classes.
The Company has had two oversubscribed capital raises during the year ended 30 June 2022 which has provided increased liquidity and enabled the continuation of the Company's growth. We believe that this indicates that alternative credit sources will become available in the short to medium term and we will become less reliant on bank funding.
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6. We must be able to operate within our banking covenants |
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Low |
Moderate The Group's borrowing facilities contain certain financial covenants relating to Loan to Value ratio and Interest Cover ratio, a breach of which would lead to a default on the loan. The Group must continue to operate within these financial covenants to avoid default. |
We and the AIFM continually monitor our banking covenant compliance to ensure we have sufficient headroom and to give us early warning of any issues that may arise.
We will enter into interest rate caps and swaps to mitigate the risk of interest rate rises and also invest in assets let to institutional grade covenants. |
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Corporate Risk |
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7. There can be no guarantee that we will achieve our investment objectives |
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Low |
Low Our investment objectives include achieving the dividend and total returns targets. The amount of any dividends paid or total return we achieve will depend, among other things, on successfully pursuing our investment policy and the performance of our assets.
Future dividends are subject to the Board's discretion and will depend, on our earnings, financial position, cash requirements, level and rate of borrowings, and available distributable reserves. |
The Board uses its expertise and experience to set our investment strategy and seeks external advice to underpin its decisions, for example independent asset valuations. There are complex controls and detailed due diligence arrangements in place around the acquisition of assets, designed to ensure that investments will produce the expected results.
Significant changes to the Portfolio, both acquisitions and disposals, require specific Board approval.
The Investment Adviser's significant experience in the sector should continue to provide us with access to assets that meet our investment criteria going forward.
Rental income from our current Portfolio, coupled with our hedging policy, supports the current 6.00 pence per share dividend target. Movement in capital value is subject to market yield movements and the ability of the Investment Adviser to execute asset management strategies.
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8. We are reliant on the continuance of the Investment Adviser. |
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Moderate We rely on the Investment Adviser's services and reputation to execute our investment strategy. Our performance will depend to some extent on the Investment Adviser's ability and the retention of its key staff. |
A new Investment Advisory Agreement was entered into on 14 July 2021; this revised agreement provides that unless there is a default, either party may terminate by giving not less than two years written notice. This provides additional certainty for the Company. The Board keeps the performance of the Investment Adviser under continual review and undertakes a formal review at least annually.
The interests of the Company and the Investment Adviser are aligned due to (a) key staff of the Investment Adviser having personal equity investments in the Company and (b) any fees paid to the Investment Adviser in shares of the Company are to be held for a minimum period of 12 months. The Board can pay up to 25% of the Investment Adviser fee in shares of the Company.
In addition, the Board has set up a management engagement committee to assess the performance of the Investment Adviser and ensure we maintain a positive working relationship.
The AIFM receives and reviews regular reporting from the Investment Adviser and reports to the Board on the Investment Adviser's performance. The AIFM also reviews and makes recommendations to the Board on any investments or significant asset management initiatives proposed by the Investment Adviser. |
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Taxation Risk |
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9. We operate as a UK REIT and have a tax-efficient corporate structure, with advantageous consequences for UK Shareholders. Any change to our tax status or in UK tax legislation could affect our ability to achieve our investment objectives and provide favourable returns to Shareholders |
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Probability: |
Impact: |
Mitigation |
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Low |
Moderate If the Company fails to remain a REIT for UK tax purposes, our profits and gains will be subject to UK corporation tax. |
The Board uses its expertise to maintain adherence to the UK REIT regime by monitoring the REIT compliance. The Board has also engaged third-party tax advisers to help monitor REIT compliance requirements and the AIFM also monitors compliance by the Company with the REIT regime. |
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Climate Risks |
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10. The assets within the Group's Portfolio that are less energy efficient may be exposed to downward pressure on valuation or increased pressure to invest in the improvement of individual assets |
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Probability: |
Impact: |
Mitigation |
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Low |
Moderate As investors increase their focus on climate risk, there is likely to become a larger pool of capital looking to invest in energy efficient assets.
Although this represents an opportunity for those best-in-class assets to achieve a 'green premium', there is likely to be an impact on yield demanded, and therefore valuation, on assets within the Portfolio which are less energy efficient. Given the unexpired lease terms across the Portfolio, this trend may impact the residual values implicit in valuations and reduce tenant demand for these properties. |
An ESG committee has been created to develop a roadmap for an energy efficient property portfolio including an appropriate policy for minimum energy performance across the Group's assets.
The Company has engaged with external experts to assess the work required and the respective costs of implementation.
Many of the supermarket operators have published targets to achieve net zero and are actively upgrading stores to make them more energy efficient.
The Company continues to work with its tenants to help them meet this target and has entered into a framework agreement with Atrato Onsite Energy to install rooftop solar panels across the Company's Portfolio. |
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Market Price Risk |
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13. Shareholders may not be able to realise their shares at a price above or the same as they paid for the shares or at all |
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Probability: |
Impact: |
Mitigation |
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Moderate |
Moderate
Although the Company's ordinary shares have to date traded in a relatively narrow range closely related to the price at which they were issued, this is largely a function of supply and demand for the ordinary shares in the market and cannot therefore be controlled by the Board. The Company's recent move to the premium list of the London Stock Exchange will increase liquidity in shares, thereby reducing the risk that Shareholders will not be able to sell their shares at all. |
The Company may seek to address any significant discount to EPRA NTA at which its ordinary shares may be trading by purchasing its own ordinary shares in the market on an ad hoc basis. The Directors have the authority to make market purchases of up to 14.99% of the ordinary shares in issue as at IPO; being 1.21% of the total shares in issue as at 30 June 2022.
Ordinary shares will be repurchased only at prices below the prevailing NAV per ordinary share, which should have the effect of increasing the NAV per ordinary share for remaining Shareholders. It is intended that a renewal of the authority to make market purchases will be sought from Shareholders at each Annual General Meeting of the Company.
Purchases of ordinary shares will be made within guidelines established from time to time by the Board.
Investors should note that the repurchase of ordinary shares is entirely at the discretion of the Board and no expectation or reliance should be placed on such discretion being exercised on any one or more occasions or as to the proportion of ordinary shares that may be repurchased. |
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Macroeconomic Risks |
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14. Inflationary pressures on the valuation of the Portfolio |
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Probability: |
Impact: |
Mitigation |
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Low |
Moderate The UK is experiencing historic price rises with the highest inflation rate in 40 years, and a slowing economy. The Bank of England has responded by successive interest rate increases which could lead to a sharp decline in economic activity, stock markets and possibly stagflation. A recessionary environment could impact real estate valuations.
Continued high inflation may cause rents to exceed market levels and result in the softening of valuation yields. Where leases have capped rental uplifts, high inflation may cause rent reviews to cap out at maximum values, causing rental uplifts to fall behind inflation.
|
Inflation is monitored closely by the Investment Adviser. The Group's Portfolio rent reviews include a mixture of fixed, upward only capped as well as open market rent reviews, to hedge against a variety of inflationary outcomes.
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Macroeconomic Risks |
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15. Impact on the war in Ukraine |
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Probability: |
Impact: |
Mitigation |
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Low |
Moderate Russia's invasion of the Ukraine in February 2022 has led to a surge in global energy and food prices. The extent and impact of military action, resulting sanctions and further market disruptions is difficult to predict which increases the uncertainty, and challenges of tenant operators as well as consumer confidence and financial markets. This could lead to a recession should the conflict move towards a broader regional or global one. |
Supermarket operators have historically been able to successfully pass on inflationary increases through increasing price increases to the end consumer.
Whilst sales volumes may fall in a recessionary environment, the nature of food means that demand is relatively inelastic, where the end consumer may decide to substitute luxury brands for supermarket own-branded products.
Our tenants have strong balance sheets with robust and diversified supply chains. The tenants are therefore well positioned to deal with any disruption that may occur. As a result, we believe any adverse impact for the Group would be minimal. The Group invests solely in UK properties.
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Going concern
In light of the current macroeconomic backdrop, the Directors have continued to place significant focus on the appropriateness of adopting the going concern basis in preparing the Group's and Company's financial statements for the year ended 30 June 2022. In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.
The Board regularly monitors the Group's ability to continue as a going concern. Included in the information reviewed at quarterly Board meetings are summaries of the Group's liquidity position, compliance with loan covenants and the financial strength of its tenants. Based on this information, the Directors are satisfied that the Group and Company are able to continue in business for the foreseeable future, being a period of at least twelve months from the date of approval of the financial statements, and therefore have adopted the going concern basis in the preparation of these financial statements.
In light of the Group's current position and principal risks, the Board has assessed the prospects of the Group for the period to 30 September 2023, reviewing the Group's liquidity position, compliance with loan covenants and the financial strength of its tenants, together with forecasts of the Group's future performance under various scenarios. The Board has concluded there is a reasonable expectation that the Group will be able to continue in operation and meet its liabilities over that period. The Board has also assessed the prospects of the Group over a longer period than the going concern review and has a reasonable expectation that the Group will be able to continue in business over the five-year period examined in that assessment.
During the year covered by this report, the Group has raised a total of £506.7 million from the issue of equity shares and a further £180.0 million under the various banking facilities. All financial covenants have been met to date; at the year end, there was significant headroom in our covenants including property values needing to fall by 54.3% for a breach of covenants to occur. £59.4 million of the Group's BLB loan facility falls due in July 2023. The Directors' expect this facility to be refinanced in advance of its expiry however it is also noted that the Group has sufficient headroom in its existing facilities to repay this facility in full if required.
After the year end, the Group secured a new £412 million unsecured borrowing facility at 1.5% above SONIA, which was the first time the Group accessed unsecured debt financing. The Group also completed in August 2022, a further two-year extension (inclusive of a one-year accordion option at lender's discretion) on its £150 million Revolving Credit Facility with HSBC, where all other terms of the facility remained unchanged. Further details are set out in the notes to the financial statements.
The Group generated net cash flow from operating activities in the year of £63.0 million, with its cash balances at 30 June 2022 totalling £51.2 million and available debt facilities at 30 June 2022 of £705.0 million. The available debt facilities post year end were £862.1 million. The Group had no capital commitments or contingent liabilities as at the balance sheet date. 100% of contractual grocery rent for the Year has been collected in full.
The Group benefits from a secure income stream from its property assets that are let to tenants with excellent covenant strength, and are critical to the UK grocery infrastructure, under long leases that are subject to upward only rent reviews. The WAULT at the year-end was 15 years (2021: 15 years).
As a result, the Directors believe that the Group is well placed to manage its financing and other business risks and that the Group will remain viable, continuing to operate and meeting its liabilities as they fall due over the assessment period. The Directors are therefore of the opinion that the going concern basis adopted in the preparation of the financial statements is appropriate.
Assessment of viability
The period over which the Directors consider it feasible and appropriate to report on the Group's viability is the five-year period to 30 June 2027. This period has been selected because it is the period that is used for the Group's medium-term business plans and individual asset performance forecasts. The assumptions underpinning these forecast cash flows and covenant compliance forecasts were sensitised to explore the resilience of the Group to the potential impact of the Group's significant risks, or a combination of those risks. The principal risks on pages 40 to 52 summarise those matters that could prevent the Group from delivering on its strategy. A number of these principal risks, because of their nature or potential impact, could also threaten the Group's ability to continue in business in its current form if they were to occur. The Directors paid particular attention to the risk of a deterioration in economic outlook which could impact property fundamentals, including investor and occupier demand which would have a negative impact on valuations, and give rise to a reduction in the availability of finance.
The sensitivities performed were designed to be severe but plausible; and to take full account of the availability of mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks.
Viability Statement
The Board has assessed the prospects of the Group over the five years from the balance sheet date to 30 June 2027, which is the period covered by the Group's longer term financial projections. The Board considers five years to be an appropriate forecast period since, although the Group's contractual income extends beyond five years, the availability of most finance and market uncertainty reduces the overall reliability of forecast performance over a longer period.
The Board considers the resilience of projected liquidity, as well as compliance with secured debt covenants and UK REIT rules, under a range of RPI and property valuation assumptions.
The principal risks and the key assumptions that were relevant to this assessment are as follows:
|
Risk |
Assumption |
|
Borrowing risk |
The Group continues to comply with all relevant loan covenants. The Group was able to extend the £150.0 million RCF falling due in August 2023 on acceptable terms. The Group is able to refinance all debt falling due within the viability assessment period on acceptable terms. |
|
Interest Rate Risk |
The increase in variable interest rates are managed by a reduction of variable debt from cash inflows and by hedges enacted after the year end. |
|
Liquidity risk |
The Group continues to generate sufficient cash to cover its costs while retaining the ability to make distributions. |
|
Tenant risk |
Tenants (or guarantors where relevant) comply with their rental obligations over the term of their leases and no key tenant suffers an insolvency event over the term of the review. |
Based on the work performed, the Board has a reasonable expectation that the Group will be able to continue in business over the five-year period of its assessment.
Other disclosures
Disclosures in relation to the Company's business model and strategy have been included within the Investment Adviser's report on pages 13 to 20. Disclosures in relation to the main industry trends and factors that are likely to affect the future performance and position of the business have been included within The UK Grocery Market on pages 21 to 25. Disclosures in relation to environmental and social issues have been included within the ESG section on pages 30 to 39. Employee diversity disclosures have not been included as the Directors' do not consider these to be relevant to the Company.
Key Performance Indicators (KPIs)
The KPIs and EPRA performance measures used by the Group in assessing its strategic progress have been included on pages 9 to 12.
Nick Hewson
Chairman
20 September 2022
SECTION 172(1) STATEMENT
The Directors consider that in conducting the business of the Company over the course of the year ended 30 June 2022, they have acted to promote the long-term success of the Company for the benefit of shareholders, whilst having regard to the mattes set out in section 172(1)(a-f) of the Companies Act 2006 ("the Act").
Details of our key stakeholders and how the Board engages with them can be found on pages 55 to 61. Further details of the Board activities and principal decisions are set out on pages 75 to 77 providing insight into how the Board makes decisions and their link to strategy.
Other disclosures relating to our consideration of the matters set out in s172(1)(a-f) of the Act have been noted as follows:
|
s172 Factor |
Our approach |
Relevant disclosures |
|
A. The likely consequences of any decision in the long term
|
The Board has regard to its wider obligations under Section 172 of the Act. As such strategic discussions involve careful considerations of the longer-term consequences of any decisions and their implications on Shareholders and other stakeholders and the risk to the longer term success of the business. Any recommendation is supported by detailed cash flow projections based on various scenarios, which include: availability of funding; borrowing; as well as the wider economic conditions and market performance. |
Key decisions of the Board during the year on page 77. Our Key Stakeholder relationships on pages 55 to 61. Board activities during the year on pages 75 and 76.
|
|
B. The interests of the Company's employees |
The Group does not have any employees as a result of its external management structure. The Board's main working relationship is with the Investment Adviser. Consequently, the Directors have regard to the interests of the individuals who are responsible for delivery of the investment advisory services to the Company to the extent that they are able to do so. |
Our Key stakeholders on pages 55 to 61.
Culture on pages 71 and 72. |
|
C. The need to foster the Company's business relationships with suppliers, customers and others |
The Company's key service providers and customers include the Investment Adviser, professional firms such as lenders, property agents, accounting and law firms, tenants with which we have longstanding relationships and transaction counterparties which are generally large and sophisticated businesses or institutions. |
Our Key stakeholders on pages 55 to 61.
|
|
D. The impact of the Company's operations on the community and the environment |
As an owner of assets located in communities across the UK, we aim to ensure that our buildings and their surroundings provide safe and comfortable environments for all users. The Board and the Investment Adviser have committed to limiting the impact of the business on the environment where possible and engage with tenants to seek to improve the ESG credentials of the properties owned by the Company. |
Our Key stakeholders on pages 55 to 61.
Details of the ESG policy and strategy are included on pages 30 to 39. The Board's approach to sustainability is explained on pages 30 to 39. |
|
E. The desirability of the Company maintaining a reputation for high standards of business conduct |
The Board is mindful that the ability of the Company to continue to conduct its investment business and to finance its activities depends in part on the reputation of the Board, the Investment Adviser and Investment Advisory Team. The risk of falling short of the high standards expected and thereby risking business reputation is included in the Audit and Risk Committee's review of the Company's risk register, which is conducted at least annually. |
Chairman's letter on corporate governance on pages 62 and 63. Principal risks and uncertainties on pages 40 to 52. Our culture on pages 71 and 72. |
|
F. The need to act fairly as between members of the Company |
The Board recognises the importance of treating all members fairly and oversees investor relations initiatives to ensure that views and opinions of Shareholders can be considered when setting strategy. |
Chairman's letter on corporate governance on pages 62 and 63. Our Key stakeholders on pages 55 to 61. |
DIRECTORS' REPORT
The Directors present their report together with the audited financial statements for the year ended 30 June 2022. The Corporate Governance Statement pages 78 to 82 forms part of this report.
Principal activities and status
The Company is registered as a UK public limited company under the Companies Act 2006. It is an Investment Company as defined by Section 833 of the Companies Act 2006 and has been established as a closed-ended investment company with an indefinite life. The Company has a single class of shares in issue which were traded during the year until 22 February 2022 on the Specialist Fund Segment of the London Stock Exchange's Main Market. On the 23 February 2022, the Company migrated to the Premium List of the London Stock Exchange's Main Market and the Company's shares were traded on the Premium List from this date. The Group has entered the Real Estate Investment Trust (REIT) regime for the purposes of UK taxation.
The Company is a member of the Association of Investment Companies (the "AIC").
Results and dividends
The results for the year are set out in the attached financial statements. It is the policy of the Board to declare and pay dividends as quarterly interim dividends.
In respect of the 30 June 2022 financial year, the Company has declared interim dividends amounting to aggregate 5.94 pence per share (2021: 5.9 pence per share). The following dividends were declared during the year and subsequently:
|
Date declared |
Amount per share (pence) |
Date paid |
|
8 July 2021 |
1.465 |
7 August 2021 |
|
23 September 2021 |
1.485 |
16 November 2021 |
|
10 January 2022 |
1.485 |
25 February 2022 |
|
6 April 2022 |
1.485 |
27 May 2022 |
|
8 July 2022 |
1.485 |
22 August 2022 |
Dividend policy
Subject to market conditions and performance, financial position and outlook, it is the Directors' intention to pay an attractive level of dividend income to Shareholders on a quarterly basis. The Company intends to grow the dividend progressively through investment in supermarket properties with upward-only, predominantly inflation-protected, long term lease agreements.
Directors
The Directors who served throughout the year unless otherwise stated otherwise, are detailed below:
|
Director |
Service in the year to 30 June 2022 |
|
Nick Hewson |
Served throughout the year |
|
Jon Austen |
Served throughout the year |
|
Frances Davies |
Appointed 1 June 2022 |
|
Vince Prior |
Served throughout the year |
|
Cathryn Vanderspar |
Served throughout the year |
All of the above Directors remain in office at the date of this report.
Biographical details of the current Directors of the Company are shown on pages 64 to 66.
Powers of Directors
The Board will manage the Company's business and may exercise all the Company's powers, subject to the Articles, the Companies Act and any directions given by the Company by special resolution.
The Board's role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed. It also sets up the Group's strategic aims, ensuring that the necessary resources are in place for the Group to meet its objectives and review investment performance. The Board also sets the Group's values, standards and culture. Further details on the Board's role can be found in the Corporate Governance Report on page 70.
Directors' interests
The beneficial interests of the Directors and their closely connected persons in the ordinary shares of the Company as at 30 June 2022 were as follows:
|
|
Number of shares |
Percentage of issued share capital |
|
Nick Hewson |
661,670 |
0.05% |
|
Jon Austen |
279,779 |
0.02% |
|
Vince Prior |
134,886 |
0.01% |
|
Cathryn Vanderspar Frances Davies |
91,738 |
0.01% 0.00% |
Appointment and replacement of Directors
All Directors retired and were re-elected at the AGM on 24 November 2021, with the exception of Frances Davies who was appointed to the Board on 1 June 2022. In accordance with the AIC Corporate Governance Code, all the Directors will retire and those who wish to continue to serve will offer themselves for election or re-election at the forthcoming Annual General Meeting.
Directors' indemnification and insurance
The Company maintains £25 million of Directors' and Officers' Liability Insurance cover for the benefit of the Directors, which was in place throughout the year. The level of cover was increased to £30m on 19 July 2022 and continues in effect at the date of this report.
Political contributions
The Group made no political contributions during the year (2021: none).
Significant shareholdings
The table below shows the interests in shares notified to the Company in accordance with Chapter 5 of the Disclosure Guidance and Transparency Rules issued by the Financial Conduct Authority who have a disclosable interest of 3% or more in the ordinary shares of the Company as at 30 June 2022.
|
|
Number of shares |
Percentage of issued share capital |
|
Evelyn Partners (formerly Smith & Williamson) |
91,946,704 |
7.42% |
|
Quilter Cheviot Investment Management |
78,092,320 |
6.30% |
|
Close Brothers Asset Management |
72,417,780 |
5.84% |
|
Waverton Investment Management |
50,822,795 |
4.10% |
|
BMO Global Asset Management (UK) |
48,242,334 |
3.89% |
|
Cazenove Capital Management |
43,230,456 |
3.49% |
Since the year end, and up to 20 September 2022, the Company has been notified of the following interests in its ordinary shares in accordance with DTR 5. The information provided is correct as at the date of notification:
|
|
Number of shares |
Percentage of issued share capital |
|
BlackRock Inc. |
64,767,491 |
5.21% |
|
Columbia Threadneedle Investments |
61,728,272 |
4.98% |
|
Waverton Investment Management |
49,926,559 |
4.02% |
Branches outside the UK
The Company has no branches outside the UK.
Financial instruments
The Group's exposure to, and management of, capital risk, market risk and liquidity risk is set out in note 22 to the Group's financial statements.
Employees
The Group has no employees and therefore no employee share scheme or policies for the employment of disabled persons or employee engagement.
Greenhouse gas emissions
The Group is considered to be a low energy user due to the fact it has no Scope 1 or Scope 2 emissions and therefore is not required to make any disclosures under the Streamlined Energy and Carbon Reporting Framework. Information regarding Scope 3 emissions arising from the Group's activities are included within the TCFD aligned report on pages 30 to 39.
Other disclosures
Disclosures of financial risk management objectives and policies and exposure to financial risks are included in note 22 to the financial statements. Details of future developments are included in the Strategic Report.
No additional disclosures are required in accordance with Listing Rule (LR) 9.8.4C R.
Disclosure of information to auditor
All of the Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the auditor for the purposes of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant audit information of which the auditor is unaware.
Auditor
BDO LLP was appointed as auditor by the Directors in June 2017 and was last re-appointed as auditor by the Company's Shareholders at the AGM held on 7 November 2021. BDO LLP have expressed their willingness to continue as auditor for the financial year ending 30 June 2023. A resolution to appoint BDO LLP as auditor of the Company will be proposed at the forthcoming AGM.
Change of control - significant agreements
The Company entered into a new unsecured borrowing facility on 1 July 2022 provided by a syndicate of lenders. The facility includes provisions that may require any outstanding borrowings to be repaid or the alteration or termination of the facilities in the event of a change of control at the ultimate parent company level.
Share capital structure
As at 30 June 2022, the Company's issued share capital consisted of 1,239,868,420 ordinary shares of one penny each, all fully paid and listed on the Premium List of the London Stock Exchange's Main Market. Further details of the share capital, including changes throughout the year are summarised in note 23 of the financial statements.
Subject to authorisation by Shareholder resolution, the Company may purchase its own shares in accordance with the Companies Act 2006. At the Annual General Meeting held in 2021, Shareholders authorised the Company to make market purchases of up to 147,641,558 Ordinary Shares or 14.99 per cent of the Ordinary Shares in issue at that time. The Company has not repurchased any of its ordinary shares under this authority, which is due to expire at the AGM in 2022 and appropriate renewals will be sought.
There are no restrictions on transfer or limitations on the holding of the ordinary shares. None of the shares carry any special rights with regard to the control of the Company. There are no known arrangements under which financial rights are held by a person other than the holder of the shares and no known agreements on restrictions on share transfers and voting rights.
Post balance sheet events
For details of events since the year-end date, please refer to note 29 of the consolidated financial statements.
Corporate Governance
The Company's statement on corporate governance can be found in the Corporate Governance Report on pages 78 to 82 of his Annual Report. The Corporate Governance Report forms part of this directors' report and is incorporated into it by cross-reference.
Signed by order of the Board on 20 September 2022.
Nick Hewson
Chairman
20 September 2022
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Background
The Alternative Investment Fund Manager's Directive (the "AIFMD") came into force on 22 July 2013. The objective of the AIFMD was to ensure a common regulatory regime for funds marketed in or into the EU which are not regulated under the UCITS regime. This was primarily for investors' protection and also to enable European regulators to obtain adequate information in relation to funds being marketed in or into the EU to assist their monitoring and control of systemic risk issues.
The AIFM is a non-EU Alternative Investment Fund Manager (a "Non-EU AIFM"), the Company is a non-EU Alternative Investment Fund (a "Non-EUAIF") and the Company is marketed primarily into the UK, but also into the EEA. Although the AIFM is a non-EU AIFM, so the depositary rules in Article 21 of the AIFMD do not apply, the transparency requirements of Articles 22 (Annual report) and 23 (Disclosure to investors) of the AIFMD do apply to the AIFM and therefore to the Company. In compliance with those articles, the following information is provided to the Company's shareholders by the AIFM.
1. Material Changes in the Disclosures to Investors
During the financial year under review, there were no material changes to the information required to be made available to investors before they invest in the Company under Article 23 of the AIFMD from that information set out in the Company's prospectus dated 1 October, 2021, save as updated in the supplementary prospectus dated 7 April, 2022 and as disclosed below and in certain sections of the Strategic Report, those being the Chairman's Statement, Investment Adviser's Report, The UK Grocery Market, Sustainability and TCFD Aligned Report, the Directors' Report and Our Principal Risks sections in this Annual Financial Report.
2. Risks and Risk Management Policy
The current principal risks facing the Company and the main features of the risk management systems employed by AIFM and the Company to manage those risks are set out in the Strategic Report (Our Principal Risks), the Directors' Report and in notes 20 and 22 to the financial statements.
3. Leverage and borrowing
The Company is entitled to employ leverage in accordance with its investment policy and as described in the section entitled "POST BALANCE SHEET HIGHLIGHTS", the Chairman's Statement, the section entitled "FINANCIAL OVERVIEW" in the Strategic Report, and in notes 2, 20, 21 and 28 to the financial statements. Other than as disclosed therein, there were no changes in the Company's borrowing powers and policies.
4. Environmental, Social and Governance ("ESG") Issues and Regulation (EU) 2019/2099 on Sustainability-Related Disclosures in the Financial Services Sector (the "SFDR")
As a member of the JTC group of Companies, the AIFM's ultimate beneficial owner and controlling party is JTC Plc, a Jersey-incorporated company whose shares have been admitted to the Official List of the UK's Financial Conduct Authority and to trading on the London Stock Exchange's Main Market for Listed Securities (mnemonic JTC LN, LEI 213800DVUG4KLF2ASK33). In the conduct of its own affairs, the AIFM is committed to best practice in relation to ESG matters and has therefore adopted JTC Plc's ESG framework (the "ESG Framework") and a copy of the ESG Framework can be viewed on the AIFM's website at https://www.jtcgroup.com/wp-content/themes/jtcgroup/dist/img/review-2019/pdfs/esg.pdf.
From the perspective of the SFDR, although the AIFM is a non-EU AIFM, the Company is marketed into the EEA, so that the AIFM is required to comply with the SFDR in so far as it applies to the Company and the AIFM's management of the Company, which the Company has classified as being within the scope of Article 6 of the SFDR.
The AIFM and Atrato Capital Limited ("Atrato") as the Company's alternative investment fund manager and investment advisor respectively do consider ESG matters in their respective capacities, as explained in SUPR's prospectus dated 1 October, 2021, a copy of which can be found at 174243 Project Charlie - Online Guide (supermarketincomereit.com), as updated by SUPR's supplementary prospectus dated 7 April, 2022, a copy of which can be found at 77d474_705dd82df0b94e56b563d2685573b7ae.pdf (supermarketincomereit.com).
Since the publication of those documents, the AIFM, Atrato and the Company have continued to enhance their collective approach to ESG matters and detailed reporting on (a) enhancements made to each party's policies, procedures and operational practices and (b) our collective future intentions and aspirations is included in the Sustainability and TCFD Aligned Report included in the Strategic Report this annual financial report.
The AIFM also has a comprehensive risk matrix (the "Matrix"), which is used to identify, monitor and manage material risks to which the Company is exposed, including ESG and sustainability risks, the latter being an environmental, social or governance event or condition that, if it occurred, could cause an actual or a potential material negative impact on the value of an investment. We also consider sustainability factors, those being environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
As at the date of this report, one subsidiary of JTC Plc is currently a U.N. Principles for Responsible Investment signatory. During the remainder of 2022 a project is underway to extend this across the JTC Group.
The AIFM is also cognisant of the announcement published by H.M. Treasury in the UK of its intention to make mandatory by 2025 disclosures aligned with the recommendations of the Task Force on Climate-Related Disclosures, with a significant proportion of disclosures mandatory by 2023. The AIFM also notes the roadmap and interim report of the UK's Joint Government-Regulator TCFD Taskforce published by H.M. Treasury on 9 November, 2020. The AIFM continues to monitor developments and intends to comply with the UK's regime to the extent either mandatory or desirable as a matter of best practice.
5. Remuneration of the AIFM's Directors and Employees
During the financial year under review, no separate remuneration was paid by the AIFM to its executive directors, Graham Taylor, Gregory Kok and James Tracey, because they were all employees of the JTC group of companies, of which the AIFM forms part. Matthew Tostevin is a non-executive director and is paid a fixed fee of £10,000 for acting as a director, attendance at all Board meetings and work performed as a director of the Company in the ordinary course of business. Subject to the prior approval of the Board of directors on each occasion, Mr Tostevin is paid additional remuneration on a time spent basis for services rendered to the Company which are not in the ordinary course of business. Other than the directors, the AIFM has no employees. The Company has no agreement to pay any carried interest to the AIFM. During the year under review, the Company paid £10,000 in fixed fees and £20,982.50 in variable remuneration to its directors.
During the Company's financial year, Messrs Kok and Tracey resigned as directors of the AIFM and Mr Kobus Cronje was appointed as a director. Mr Cronje is not paid any separate remuneration for acting as a director of the AIFM, because he is an employee of the JTC group of companies.
6. Remuneration of the AIFM Payable by the Company
The AIFM was during the year under review until 31 March, 2022 paid a fee of 0.04% per annum of the net asset value of the Company, subject to a minimum of £50,000 per annum, such fee being payable quarterly in arrears. With effect from 1 April, 2022, the AIFM reduced its fees on the net asset value of the Company over £1 billion to 0.03% of the net asset value over £1 billion. The total fees paid to the AIFM during the year under review were £327,413.15.
JTC Global AIFM Solutions Limited
Alternative Investment Fund Manager
20 September, 2022
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2022
|
|
Notes |
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Gross rental income |
3 |
72,363 |
48,156 |
|
Service charge income |
3 |
2,086 |
830 |
|
Service charge expense |
4 |
(2,338) |
(1,044) |
|
Net Rental Income |
|
72,111 |
47,942 |
|
Administrative and other expenses |
5 |
(13,937) |
(9,262) |
|
Operating profit before changes in fair value of investment properties and share of income from joint venture |
|
58,174 |
38,680 |
|
Changes in fair values of investment properties and associated rent guarantees |
12 |
21,820 |
36,288 |
|
Share of income from joint venture |
14 |
43,301 |
15,506 |
|
Total share of income from joint venture |
|
43,301 |
15,506 |
|
Operating profit |
|
123,295 |
90,474 |
|
|
|
|
|
|
Finance expense |
8 |
(12,992) |
(8,518) |
|
Profit before taxation |
|
110,303 |
81,956 |
|
|
|
|
|
|
Tax charge for the year |
9 |
- |
- |
|
Profit for the year |
|
110,303 |
81,956 |
|
|
|
|
|
|
Items to be reclassified to profit or loss in
|
|
|
|
|
Fair value movements in interest rate derivatives |
20 |
5,566 |
1,569 |
|
|
|
|
|
|
Total comprehensive income for the year |
|
115,869 |
83,525 |
|
Total comprehensive income for the year attributable to ordinary Shareholders |
|
115,869 |
83,525 |
|
Earnings per share - basic and diluted |
10 |
11.3 pence |
12.6 pence |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2022
|
|
Notes |
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
|
129 |
129 |
|
Investment properties |
12 |
1,561,590 |
1,148,380 |
|
Investment in joint ventures |
14 |
177,140 |
130,321 |
|
Contract fulfilment asset |
17 |
93 |
85 |
|
Financial asset at amortised cost |
16 |
10,626 |
- |
|
Interest rate derivatives |
20 |
5,114 |
763 |
|
Total non-current assets |
|
1,754,692 |
1,279,678 |
|
Current assets |
|
|
|
|
Financial assets held at fair value through profit and loss |
15 |
283 |
237 |
|
Trade and other receivables |
18 |
1,863 |
3,140 |
|
Cash and cash equivalents |
|
51,200 |
19,579 |
|
Total current assets |
|
53,346 |
22,956 |
|
Total assets |
|
1,808,038 |
1,302,634 |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Bank borrowings |
21 |
348,546 |
409,684 |
|
Interest rate derivatives |
20 |
- |
1,210 |
|
Total non-current liabilities |
|
348,546 |
410,894 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Deferred rental income |
|
16,360 |
12,061 |
|
Trade and other payables |
19 |
10,677 |
8,369 |
|
Total current liabilities |
|
27,037 |
20,430 |
|
Total liabilities |
|
375,583 |
431,324 |
|
Net assets |
|
1,432,455 |
871,310 |
|
|
|
|
|
|
Equity |
|
|
|
|
Share capital |
23 |
12,399 |
8,107 |
|
Share premium reserve |
23 |
494,174 |
778,859 |
|
Capital reduction reserve |
23 |
778,859 |
- |
|
Retained earnings |
|
141,909 |
84,796 |
|
Cash flow hedge reserve |
|
5,114 |
(452) |
|
Total equity |
|
1,432,455 |
871,310 |
|
|
|
|
|
|
Net asset value per share - basic and diluted |
27 |
116 pence |
108 pence |
|
EPRA NTA per share |
27 |
115 pence |
108 pence |
The consolidated financial statements were approved and authorised for issue by the Board of Directors on 20 September 2022 and were signed on its behalf by:
Nick Hewson
Chairman
20 September 2022
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2022
|
|
Share capital £'000 |
Share premium reserve £'000 |
Cash flow hedge reserve £'000 |
Capital reduction reserve £'000 |
Retained earnings £'000 |
Total £'000 |
|
As at 1 July 2021 |
8,107 |
778,859 |
(452) |
- |
84,796 |
871,310 |
|
Comprehensive income for the year |
|
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
- |
110,303 |
110,303 |
|
Other comprehensive income |
- |
- |
5,566 |
- |
- |
5,566 |
|
Total comprehensive income for the year |
- |
- |
5,566 |
- |
110,303 |
115,869 |
|
|
|
|
|
|
|
|
|
Transactions with owners |
|
|
|
|
|
|
|
Ordinary shares issued at a premium during the year |
4,292 |
504,539 |
- |
- |
- |
508,831 |
|
Share premium cancellation to capital reduction reserve |
- |
(778,859) |
- |
778,859 |
- |
- |
|
Share issue costs |
- |
(10,365) |
- |
- |
- |
(10,365) |
|
Interim dividends paid |
- |
- |
- |
- |
(53,190) |
(53,190) |
|
As at 30 June 2022 |
12,399 |
494,174 |
5,114 |
778,859 |
141,909 |
1,432,455 |
For the year ended 30 June 2021
|
|
Share capital £'000 |
Share premium reserve £'000 |
Cash flow hedge reserve £'000 |
Capital reduction reserve £'000 |
Retained earnings £'000 |
Total £'000 |
|
As at 1 July 2020 |
4,735 |
436,126 |
(2,021) |
- |
38,321 |
477,161 |
|
Comprehensive income for the year |
|
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
- |
81,956 |
81,956 |
|
Other comprehensive income |
- |
- |
1,569 |
- |
- |
1,569 |
|
Total comprehensive income for the year |
- |
- |
1,569 |
- |
81,956 |
83,525 |
|
|
|
|
|
|
|
|
|
Transactions with owners |
|
|
|
|
|
|
|
Ordinary shares issued at a premium during the year |
3,372 |
350,132 |
- |
- |
- |
353,504 |
|
Share issue costs |
- |
(7,399) |
- |
- |
- |
(7,399) |
|
Interim dividends paid |
- |
- |
- |
- |
(35,481) |
(35,481) |
|
As at 30 June 2021 |
8,107 |
778,859 |
(452) |
- |
84,796 |
871,310 |
CONSOLIDATED CASH FLOW
For the year ended 30 June 2022
|
|
Notes |
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Operating activities |
|
|
|
|
Profit for the year (attributable to ordinary Shareholders) |
|
110,303 |
81,956 |
|
Adjustments for: |
|
|
|
|
Changes in fair value of investment properties and associated rent guarantees |
12 |
(21,820) |
(36,288) |
|
Movement in rent smoothing adjustments |
3 |
(2,654) |
(1,998) |
|
Finance expense |
8 |
12,992 |
8,518 |
|
Share of income from joint venture |
14 |
(43,301) |
(15,506) |
|
Cash flows from operating activities before changes
|
|
55,520 |
36,682 |
|
Decrease/(increase) in trade and other receivables |
|
1,277 |
(1,437) |
|
(Increase) / decrease in rent guarantee receivables |
|
(87) |
185 |
|
Increase in deferred rental income |
|
4,299 |
6,858 |
|
Increase in trade and other payables |
|
2,004 |
516 |
|
Net cash flows from operating activities |
|
63,013 |
42,804 |
|
|
|
|
|
|
Investing activities |
|
|
|
|
Acquisition of contract fulfilment assets |
17 |
(8) |
(85) |
|
Acquisition of investment properties |
12 |
(371,093) |
(541,210) |
|
Acquisition of other financial assets |
16 |
(10,626) |
(766) |
|
Investment in joint venture |
14 |
(3,518) |
(58,734) |
|
Capitalised acquisition costs |
|
(17,603) |
(28,752) |
|
Net cash flows used in investing activities |
|
(402,848) |
(629,547) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
Proceeds from issue of Ordinary Share Capital |
23 |
506,727 |
352,956 |
|
Costs of share issues |
23 |
(10,366) |
(7,399) |
|
Bank borrowings drawn |
21 |
402,922 |
582,961 |
|
Bank borrowings repaid |
21 |
(464,029) |
(298,300) |
|
Loan arrangement fees paid |
|
(2,187) |
(3,211) |
|
Bank interest paid |
|
(9,846) |
(5,578) |
|
Bank commitment fees paid |
|
(681) |
(527) |
|
Dividends paid to equity holders |
|
(51,084) |
(34,933) |
|
Net cash flows from financing activities |
|
371,456 |
585,969 |
|
Net movement in cash and cash equivalents in the year |
|
31,621 |
(774) |
|
Cash and cash equivalents at the beginning of the year |
|
19,579 |
20,353 |
|
Cash and cash equivalents at the end of the year |
|
51,200 |
19,579 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
General information
Supermarket Income REIT plc (the "Company") is a company registered in England and Wales with its registered office at The Scalpel 18th Floor, 52 Lime Street, London, United Kingdom EC3M 7AF. The principal activity of the Company and its subsidiaries (the "Group") is to provide its Shareholders with an attractive level of income together with the potential for capital growth by investing in a diversified portfolio of supermarket real estate assets in the UK.
At 30 June 2022 the Group comprised the Company and its wholly owned subsidiaries as set out in Note 13.
Basis of preparation
The consolidated financial information set out in this preliminary announcement covers the year to 30 June 2022, with comparative figures relating to the year to 30 June 2021, and includes the results and net assets of the Group. The financial information has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 30 June 2022. Whilst the financial information included in this announcement has been computed in accordance with the recognition and measurement requirements of UK adopted international accounting standards this announcement does not itself contain sufficient information to comply with IFRS.
The financial information does not constitute the Group's financial statements for the years ended 30 June 2022 or 30 June 2021, but is derived from those financial statements. Those financial statements give a true and fair view of the assets, liabilities, financial position and results of the Group. Financial statements for the year ended 30 June 2021 have been delivered to the Registrar of Companies and
those for the year ended 30 June 2022 will be delivered following the Company's AGM. The auditors' reports on both the 30 June 2022 and 30 June 2021 financial statements were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under section 498
(2) or (3) of the Companies Act 2006.
The principal accounting policies applied in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all years presented, other than where new policies have been adopted.
Going concern
In light of the significant impact of rising inflation, the energy crisis, the Ukrainian conflict and supply-chain issues on the UK economy, and the retail sector, the Directors have placed a particular focus on the appropriateness of adopting the going concern basis in preparing the Group's and Company's financial statements for the year ended 30 June 2022. In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.
During the year covered by this report, the Group raised a total of £506.7 million from the issue
of equity shares and a further £180.0m million of debt; being £150.0m under the Barclays / RBC Bank facility and increases to the existing HSBC RCF and Deka loan facility of £10.0m and £20.0m respectively (see note 21 for further information). All financial covenants have been met to date.
In July 2022, the Company arranged a new £412.1 million unsecured with a bank syndicate comprising Barclays, Royal Bank of Canada, Wells Fargo and Royal Bank of Scotland International, of which £255 million was used to refinance existing secured commitments (See note 29 for further information).
In September 2022, the HSBC RCF facility that was due to mature in August 2023 was extended by
a further two years to mature in August 2025.
The Group generated net cash flow from operating activities in the year of £63.0 million, with its cash balances at 30 June 2022 totalling £51.2 million. The Group had no capital commitments or contingent liabilities as at the year-end date.
As at the date of issuance of these consolidated financial information, all contractual grocery rent for the March and June quarters has been collected in full; similarly, over 99.5% from non-grocery units has been collected or recovered under vendor provided rental guarantees.
The Group benefits from a secure income stream from its property assets that are let to tenants with excellent covenant strength, and are critical to the UK grocery infrastructure, under long leases that are subject to upward only rent reviews.
£59.4 million of the Group's BLB loan facility falls due in July 2023. The Directors' expect this facility to be refinanced in advance of its expiry however it is also noted that the Group has sufficient headroom in its existing facilities to repay this facility in full if required. As mentioned above the Group successfully raised additional debt financing in July 2022.
As a result, the Directors believe that the Group is well placed to manage its financing and other business risks and that the Group will remain viable, continuing to operate and meet its liabilities for the foreseeable future, being the period to 30 September 2023, which is at least a period of 12 months from the date of approval of the financial information. The Directors are therefore of the opinion that the going concern basis adopted in the preparation of the financial information is appropriate.
Accounting convention and currency
The consolidated financial information (the "financial information") have been prepared on a historical cost basis, except that investment properties, rental guarantees and interest rate derivatives are measured at fair value.
The financial information is presented in Pounds Sterling and all values are rounded to the nearest thousand (£'000), except where otherwise indicated. Pounds Sterling is the functional currency of the Company and the presentation currency of the Group.
Adoption of new and revised standards
In the current financial year, the Group has adopted a number of minor amendments to standards effective in the year issued by the IASB, none of which have had a material impact on the Group.
The Interest Rate Benchmark Reform - IBOR 'phase 2' amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 provide a practical expedient to account for changes in the basis for determining contractual cash flows of financial assets and financial liabilities as a result of IBOR reform. Under the practical expedient, entities will account for these changes by updating the effective interest rate using the guidance in paragraph B5.4.5 of IFRS 9 without the recognition of an immediate gain or loss. This practical expedient applies only to such a change and only to the extent that it is necessary as a direct consequence of interest rate benchmark reform, and the new basis is economically equivalent to the previous basis.
There was no material effect from the adoption of other amendments to IFRS effective in the year. They have no significant impact on the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies
Standards and interpretations in issue not yet adopted
The following are new standards, interpretations and amendments, which are not yet effective, and have not been early adopted in this financial information, that will or may have an effect on the Group's future financial statements:
· Amendments to IAS 1 which are intended to clarify the requirements that an entity applies in determining whether a liability is classified as current or non-current. The amendments are intended to be narrow-scope in nature and are meant to clarify the requirements in IAS 1 rather than modify the underlying principles. The Group will review the further amendments when they are issued (expected November 2022), at this stage, based on communications from the IASB to date there is not expected to be a material impact on the classification of liabilities as current or non-current on the Statement of Financial Position
The amendments include clarifications relating to:
- How events after the end of the reporting period affect liability classification
- What the rights of an entity must be in order to classify a liability as non-current
- How an entity assesses compliance with conditions of a liability (e.g. bank covenants)
- How conversion features in liabilities affect their classification
The amendments were originally effective for periods beginning on or after 1 January 2022 which was then deferred to 1 January 2023.
The IASB has proposed further amendments in an exposure draft that was issued in November 2021, as part of these further amendments the effective date is proposed to be deferred to 1 January 2024. The Group will review the further amendments when they are issued (expected November 2022), at this stage, based on communications from the IASB to date there is not expected to be a material impact on the classification of liabilities as current or non-current on the Statement of Financial Position.
· Amendments to IFRS 3 Business Combinations and IAS 8 Accounting policies (effective for periods beginning on or after 1 January 2022)
There are other new standards and amendments to standards and interpretations which have been issued that are effective in future accounting periods, and which the Group has decided not to adopt early. None of these are expected to have a material impact on the consolidated financial statements of the Group.
Significant accounting judgements, estimates and assumptions
The preparation of these financial information in accordance with IFRS requires the Directors of the Company to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial information.
Key estimate: Fair value of investment properties
The fair value of the Group's investment properties is determined by the Group's independent valuer on the basis of market value in accordance with the RICS Valuation - Global Standards (the 'Red Book'). Recognised valuation techniques are used by the independent valuer which are in accordance with those recommended by the International Valuation Standard Committee and compliant with IFRS 13 "Fair Value Measurement."
The independent valuer did not include any material valuation uncertainty clause in relation to the valuation of the Group's investment property for 30 June 2022 or 30 June 2021.
The independent valuer is considered to have sufficient current local and national knowledge of the supermarket property market and the requisite skills and understanding to undertake the valuation competently.
In forming an opinion as to fair value, the independent valuer makes a series of assumptions, which are typically market-related, such as those in relation to net initial yields and expected rental values. These are based on the independent valuer's professional judgement. Other factors taken into account by the independent valuer in arriving at the valuation of the Group's investment properties include the length of property leases, the location of the properties and the strength of tenant covenants.
The fair value of the Group's investment properties as determined by the independent valuer, along with the significant methods and assumptions used in estimating this fair value, are set out in note 12.
Key judgement: Joint ventures - joint control
In prior years, the Group entered into a 50:50 joint venture with the British Airways Pension Trustees Limited to acquire 100% of the issued share capital in Horndrift Limited for a combined total consideration of £102m plus costs. The joint venture also acquired 100% of the issued share capital in Cornerford Limited for a combined total consideration of £115m plus costs (together "the Joint Venture Interest").
Horndrift Limited and Cornerford Limited each hold a 25.2% beneficial interest in a property trust arrangement / bond securitisation structure (the "Structure") which previously held a portfolio of 26 Sainsbury's supermarket properties funded by bonds which mature in 2023. During the year, Sainsbury's exercised options to acquire 21 of these stores within the Structure and it has been determined that the exercise of the purchase options by Sainsbury's resulted in the performance obligation being satisfied for a sale of the properties in accordance with IFRS 15. The JV is deemed to hold a contractual receivable from Sainsbury's plc in respect of these 21 properties, with the cash proceeds expected to be received during the course of 2023. The remaining 5 stores continue to be held as Investment Properties within the Joint Venture.
The classification and accounting treatment of the Joint Venture Interest in the property trust arrangement in the Group's consolidated financial information is subject to significant judgement. By reference to the contractual arrangements and deeds that regulate the Structure, it was necessary to determine whether the Joint Venture Interest, together with the other key parties of the Structure had the ability to jointly control the Structure through their respective rights as defined by the contractual arrangements and deeds of the Structure. The review of the Joint Venture Interest and the other key parties rights required significant judgement in assessing whether the rights identified were substantive as defined by IFRS 10 Consolidated Financial Statements, principally in respect of whether there were any economic barriers that prevent the joint venture investment or the other key parties from exercising their rights. Through assessing the expected possible outcomes either before or upon maturity of the Structure it was determined that there were no significant economic barriers that would prevent Horndrift Limited, Cornerford Limited or the other key parties from exercising their rights under the contractual arrangements and deeds of the Structure.
The Directors therefore concluded that through its Joint Venture Interest, the Group indirectly has joint control of the Structure as defined by IFRS 10 Consolidated Financial Statements. As such the Group's interest in the Structure is accounted for using the equity method of accounting under IAS 28.
Key judgement: Acquisition of investment properties
The Group has acquired and intends to acquire further investment properties. At the time of each purchase the Directors assess whether an acquisition represents the acquisition of an asset or the acquisition of a business.
Under the Definition of a Business (Amendments to IFRS 3 "Business Combinations"), to be considered as a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The optional 'concentration test' is also applied, where if substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business.
During the year, the group completed 10 acquisitions. In 10 cases the concentration test was applied and met, resulting in the acquisitions being accounted for as asset purchases.
All £371.1 million of acquisitions during the year were accounted for as asset purchases.
Key judgement: Acquisition of financial assets at amortised cost
The Group has acquired properties under a sale and leaseback arrangement. At the time of the purchase the Directors assess whether the acquisition represents the acquisition of an investment property or a financial asset.
Under IFRS 15, for the transfer of an asset to be accounted for as a true sale, satisfying a performance obligation of transferring control of an asset must be met for this to be deemed a property transaction and accounted for under IFRS 16. If not, it is accounted for as an asset under IFRS 9.
During the year, the Group acquired a property under a sale and leaseback arrangement with a Big Four Supermarket Operator. In this case, it was deemed that as the lease was for a significant part of the asset's useful economic life, control was not passed and the asset was therefore accounted for under IFRS 9 as an amortised cost asset.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of the consolidated financial information are set out below.
2.1. Basis of consolidation
The consolidated financial information comprise the financial information of the Company and all of its subsidiaries drawn up to 30 June 2022.
Subsidiaries are those entities including special purpose entities, directly or indirectly controlled
by the Company. Control exists when the Company is exposed or has rights to variable returns from
its investment with the investee and has the ability to affect those returns through its power over
the investee. In assessing control, potential voting rights that presently are exercisable are taken
into account.
The financial information of subsidiaries are included in the consolidated financial information from
the date that control commences until the date that control ceases.
In preparing the consolidated financial information, intra group balances, transactions and unrealised gains or losses are eliminated in full.
Uniform accounting policies are adopted for all entities within the Group.
2.2. Segmental information
The Directors are of the opinion that the Group is currently engaged in a single segment business, being investment in United Kingdom in supermarket property assets; the non-supermarket properties are ancillary in nature to the supermarket property assets and are therefore not segmented.
2.3. Rental income
Rental income arising on investment properties is accounted for in profit or loss on a straight-line basis over the lease term, as adjusted for the following:
· Any rental income from fixed and minimum guaranteed rent review uplifts is recognised on
a straight-line basis over the lease term, variable lease uplift calculations are not rebased when a rent review occurs and the variable payment becomes fixed;
· Lease incentives are spread evenly over the lease term, even if payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.
Contingent rents, such as those arising from indexed-linked rent uplifts or market based rent reviews, are recognised in the period in which they are earned.
Where income is recognised in advance of the related cash flows due to fixed and minimum guaranteed rent review uplifts or lease incentives, an adjustment is made to ensure that the carrying value of the relevant property, including the accrued rent relating to such uplifts or lease incentives, does not exceed the external valuation.
Rental income is invoiced in advance with that element of invoiced rental income that relates to a future period being included within deferred rental income in the consolidated statement of financial position.
Leases classified under IFRS 9 as financial assets recognise income received from the tenant between finance income and a reduction of the asset value, based on the interest rate implicit in the lease.
2.4. Finance expense
Finance expenses consist principally of interest payable and the amortisation of loan arrangement fees.
Loan arrangement fees are expensed using the effective interest method over the term of the relevant loan. Interest payable and other finance costs, including commitment fees, which the Group incurs in connection with bank borrowings, are expensed in the period to which they relate.
2.5. Administrative and other expenses
Administrative and other expenses, including the investment advisory fees payable to the Investment Adviser, are recognised as a profit or loss on an accruals basis.
2.6. Dividends payable to Shareholders
Dividends to the Company's Shareholders are recognised when they become legally payable, as a reduction in equity in the financial information. Interim equity dividends are recognised when paid. Final equity dividends will be recognised when approved by Shareholders at an AGM.
2.7. Taxation
Non-REIT taxable income
Taxation on the Group's profit or loss for the year that is not exempt from tax under the UK-REIT regulations comprises current and deferred tax, as applicable. Tax is recognised in profit or loss except to the extent that it relates to items recognised as direct movements in equity, in which case it is similarly recognised as a direct movement in equity.
Non-REIT taxable income continued
Current tax is tax payable on any non-REIT taxable income for the year, using tax rates enacted or substantively enacted at the end of the relevant period.
Entry to the UK-REIT regime
The Group obtained its UK-REIT status effective from 21 December 2017. Entry to the regime results in, subject to continuing relevant UK-REIT criteria being met, the profits of the Group's property rental business, comprising both income and capital gains, being exempt from UK taxation.
The Group intends to ensure that it complies with the UK-REIT regulations on an on-going basis and regularly monitors the conditions required to maintain REIT status.
2.8. Investment properties
Investment properties consist of land and buildings which are held to earn income together with the potential for capital growth.
Investment properties are recognised when the risks and rewards of ownership have been transferred and are measured initially at cost, being the fair value of the consideration given, including transaction costs. Where the purchase price (or proportion thereof) of an investment property is settled through the issue of new ordinary shares in the Company, the number of shares issued is such that the fair valueof the share consideration is equal to the fair value of the asset being acquired. Transaction costs include transfer taxes and professional fees for legal services. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period incurred and included within the book cost of the property. All other property expenditure is written off in profit or loss as incurred.
After initial recognition, investment properties are measured at fair value, with gains and losses recognised in profit or loss in the period in which they arise.
Gains and losses on disposals of investment properties will be determined as the difference between the net disposal proceeds and the carrying value of the relevant asset. These will be recognised in profit or loss in the period in which they arise.
Initially, rental guarantees are recognised at their fair value and separated from the purchase price on initial recognition of the property being purchased. They are subsequently measured at their fair value at each reporting date with any movements recognised in the profit or loss.
2.9. Joint ventures
Interests in joint ventures are accounted for using the equity method of accounting. The Group's joint ventures are arrangements in which the partners have joint control and rights to the net assets of the arrangement. Investments in joint ventures are carried in the statement of financial position at cost
as adjusted by post-acquisition changes in the Group's share of the net assets of the joint venture, less any impairment or share of income adjusted for dividends. In assessing whether a particular entity
is controlled, the Group considers the same principles as control over subsidiaries as described in
note 2.1.
2.10. Property, plant and equipment
Property, plant and equipment comprises of rooftop solar panels. Rooftop solar panels are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is recognised over the useful lives of the equipment, using the straight-line method at a rate of between 25- 30 years depending on the useful economic life.
Residual value is reviewed at least at each financial year and there is no depreciable amount if
residual value is the same as, or exceeds, book value. Any gain or loss arising on the disposal of the rooftop solar panels are determined as the difference between the sales proceeds and the carrying amount of the asset.
2.11. Financial assets and liabilities
Financial assets and liabilities are recognised when the relevant Group entity becomes a party to the unconditional contractual terms of an instrument. Unless otherwise indicated, the carrying amounts
of financial assets and liabilities are considered by the Directors to be reasonable estimates of their
fair values.
Financial assets
Financial assets are recognised initially at their fair value. All of the Group's financial assets, except interest rate derivatives, are held at amortised cost using the effective interest method, less any impairment.
For assets where changes in cash flows are linked to changes in an inflation index, the Group updates the effective interest rate at the end of each reporting period and this is reflected in the carrying amount of the asset each reporting period until the asset is derecognised.
Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and short-term deposits in banks with an original maturity of three months or less.
Trade and other receivables
Trade and other receivables, including rents receivable, are recognised and carried at the lower of their original invoiced value and recoverable amount. Provisions for impairment are calculated using an expected credit loss model. Balances will be written-off in profit or loss in circumstances where the probability of recovery is assessed as being remote.
Trade and other payables
Trade and other payables are recognised initially at their fair value and subsequently at amortised cost.
Bank borrowings
Bank borrowings are initially recognised at fair value net of attributable transaction costs. After initial recognition, bank borrowings are subsequently measured at amortised cost, using the effective interest method. The effective interest rate is calculated to include all associated transaction costs.
In the event of a modification to the terms of a loan agreement, the Group considers both the quantitative and qualitative impact of the changes. Where a modification is considered substantial, the existing facility is treated as settled and the new facility is recognised. Where the modification is not considered substantial, the carrying value of the liability is restated to the present value of the cash flows of the modified arrangement, discounted using the effective interest rate of the original arrangement. The difference is recognised as a gain or loss on refinancing through the statement of comprehensive income.
Derivative financial instruments and hedge accounting
The Group's derivative financial instruments currently comprise of interest rate swaps. These are designated as hedging instruments for which hedge accounting is being applied as under IAS 39. These instruments are used to manage the Group's cash flow interest rate risk.
The instruments are initially recognised at fair value on the date that the derivative contract is entered into, being the cost of any premium paid at inception, and are subsequently re-measured at their fair value at each reporting date.
Fair value measurement of derivative financial instruments
The fair value of derivative financial instruments is the estimated amount that the Group would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the relevant group entity and its counterparties.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole.
A number of assumptions are used in determining the fair values including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contract rate and the valuation rate.
Hedge accounting
At the inception of a hedging transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedging transaction.
The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Assuming the criteria for applying hedge accounting continue to be met the effective portion of gains and losses on the revaluation of such instruments are recognised in other comprehensive income and accumulated in the cash flow hedging reserve. Any ineffective portion of such gains and losses will be recognised in profit or loss within finance income or expense as appropriate. The cumulative gain or loss recognised in other comprehensive income is reclassified from the cash flow hedge reserve to profit or loss (finance expense) at the same time as the related hedged interest expense is recognised.
2.12. Equity instruments
Equity instruments issued by the Company are recorded at the amount of the proceeds received, net of directly attributable issue costs. Costs not directly attributable to the issue are immediately expensed in profit or loss.
Further details of the accounting for the proceeds from the issue of shares in the period are disclosed in note 23.
2.13. Fair value measurements and hierarchy
Fair value is the price that would be received on the sale of an asset, or paid to transfer a liability,
in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market. It is based on the assumptions that market participants would use when pricing the asset
or liability, assuming they act in their economic best interest. A fair value measurement of a non-financial asset takes into account the best and highest value use for that asset.
The fair value hierarchy to be applied under IFRS 13 is as follows:
Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are carried at fair value and which will be recorded in the financial information on a recurring basis, the Group will determine whether transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.
3. Gross rental income
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Rental income - freehold property |
44,332 |
29,679 |
|
Rental income - long leasehold property |
28,031 |
18,477 |
|
Gross rental income |
72,363 |
48,156 |
|
|
|
|
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Property insurance recoverable |
449 |
251 |
|
Service charge recoverable |
1,637 |
579 |
|
Total property insurance and service charge income |
2,086 |
830 |
|
Total property income |
74,449 |
48,986 |
Included within rental income is a £2,654,000 (2021: £1,998,000) rent smoothing adjustment that arises as a result of IFRS 16 'Leases' requiring that rental income in respect of leases with rents increasing by a fixed percentage be accounted for on straight-line basis over the lease term. During the year this resultedin an increase in rental income and an offsetting entry being recognised in profit or loss as an adjustment to the investment property revaluation.
On an annualised basis, rental income comprises £34,420,000 (2021: 27,012,000) relating to the Group's largest tenant, £24,265,000 (2021: £17,271,000) relating to the Group's second largest tenant and £6,272,000 (2021: £5,340,000) relating to the Group's third largest tenant. There were no further tenants representing more than 10% of annualised gross rental income during either year.
4. Service charge expense
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Property insurance expenses |
639 |
379 |
|
Service charge expenses |
1,699 |
665 |
|
Total property insurance and service charge expense |
2,338 |
1,044 |
5. Administrative and other expenses
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Investment Adviser fees (Note 28) |
9,405 |
6,255 |
|
Directors' remuneration (Note 7) |
269 |
260 |
|
Corporate administration fees |
893 |
676 |
|
Legal and professional fees |
2,249 |
916 |
|
Other administrative expenses |
1,121 |
1,155 |
|
Total administrative and other expenses |
13,937 |
9,262 |
The fees relating to the issue of shares in the year have been treated as share issue expenses and offset against the share premium reserve.
6. Operating profit
Operating profit is stated after charging fees for:
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Audit of the Company's consolidated and individual financial statements |
190 |
155 |
|
Audit of subsidiaries, pursuant to legislation |
64 |
78 |
|
Total audit services |
254 |
233 |
|
Audit related services: interim review |
32 |
31 |
|
Total audit and audit related services |
286 |
264 |
The Group's auditor also provided the following services in relation to the placing of share capital, the fees for which have been recognised within equity as a deduction from share premium:
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Other non-audit services: corporate finance services in connection with the October 2021 and April 2022 placings |
78 |
- |
|
Other non-audit services: corporate finance services in connection with the transition to premium segment of LSE |
45 |
- |
|
Other non-audit services: corporate finance services in connection with the October 2020 and May 2021 placings |
- |
90 |
|
Total other non-audit services |
123 |
90 |
|
Total fees charged by the Group's auditor |
409 |
354 |
7. Directors' remuneration
The Group had no employees in the current or prior year. The Directors, who are the key management personnel of the Company, are appointed under letters of appointment for services. Directors' remuneration, all of which represents fees for services provided, was as follows:
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Directors' fees |
245 |
240 |
|
Employer's National Insurance Contribution |
24 |
20 |
|
Total Directors' remuneration |
269 |
260 |
The highest paid Director received £70,000 (2021: £70,000) for services during the year.
8. Finance expense
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Interest payable on bank borrowings and hedging arrangements |
9,565 |
5,810 |
|
Fair value adjustment of interest rate derivatives (Note 20) |
296 |
706 |
|
Commitment fees payable |
969 |
532 |
|
Amortisation of loan arrangement fees |
2,157 |
1,442 |
|
Amortisation of interest rate derivative premium (Note 20) |
5 |
28 |
|
Total finance expense |
12,992 |
8,518 |
The above finance expense includes the following in respect of liabilities not classified as fair value through profit and loss:
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Total interest expense on financial liabilities held at amortised cost |
11,723 |
7,252 |
|
Fee expense not part of effective interest rate for financial liabilities held at amortised cost |
969 |
532 |
|
Total finance expense |
12,692 |
7,784 |
9. Taxation
A) Tax charge in profit or loss
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Corporation tax |
- |
- |
|
|
|
|
|
B) Total tax expense
|
|
|
|
Tax charge in profit and loss as per the above |
- |
- |
|
Share of tax expense of equity accounted joint ventures |
987 |
511 |
|
Total tax expense |
987 |
511 |
The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT regime exempts the profits of the Group's property rental business from UK corporation tax. To operate as a UK Group REIT a number of conditions had to be satisfied in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since the 21 December 2017 the Group has met all such applicable conditions.
The reconciliation of the profit before tax multiplied by the standard rate of corporation tax for the year of 19% to the total tax charge is as follows:
|
C) Reconciliation of the total tax charge for the year |
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Profit on ordinary activities before taxation |
110,303 |
81,956 |
|
Theoretical tax at UK standard corporation tax rate of 19% |
20,958 |
15,572 |
|
Effects of: |
|
|
|
Investment property revaluation not taxable |
(4,146) |
(6,895) |
|
REIT exempt income |
(16,812) |
(8,677) |
|
Share of tax expense of equity accounted joint ventures |
987 |
511 |
|
Total tax expense for the year |
987 |
511 |
UK REIT exempt income includes property rental income that is exempt from UK corporation tax in accordance with Part 12 of CTA 2010.
10. Earnings per share
Earnings per share (EPS) amounts are calculated by dividing the profit or loss for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares in issue during the year. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.
The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings on a comparable basis. EPRA EPS is a measure of EPS designed by EPRA to enable entities to present underlying earnings from core operating activities, which excludes fair value movements on investment properties and negative goodwill.
The calculation of basic, diluted and EPRA EPS is as follows:
1 Based on the weighted average number of ordinary shares in issue
|
For the year ended 30 June 2022 |
Net profit attributable to ordinary Shareholders
|
Weighted average number of ordinary shares Number |
Earnings/ per share Pence |
|
Basic and diluted EPS |
110,303 |
975,233,858 |
11.3 |
|
Adjustments to remove: |
|
|
|
|
Changes in fair value of investment properties and rent guarantees |
(21,820) |
- |
(2.2) |
|
Group share of changes in fair value of joint venture investment properties |
6,021 |
- |
0.6 |
|
Group share of gain on disposal of joint venture investment properties |
(37,102) |
- |
(3.8) |
|
EPRA EPS |
57,402 |
975,233,858 |
5.9p |
|
|
|
|
|
|
For the year ended 30 June 2021 |
|
|
|
|
Basic and diluted EPS |
81,956 |
652,828,945 |
12.6 |
|
Adjustments to remove: |
|
|
|
|
Changes in fair value of investment properties and rent guarantees |
(36,288) |
- |
(5.6) |
|
Group share of changes in fair value of joint venture investment properties |
(5,619) |
- |
(0.9) |
|
Group share of negative goodwill from joint venture investment |
(3,265) |
- |
(0.5) |
|
EPRA EPS |
36,784 |
652,828,945 |
5.6p |
1 Based on the weighted average number of ordinary shares in issue.
11. Dividends
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Amounts recognised as a distribution to ordinary Shareholders in the year: |
|
|
|
Dividends paid |
53,190 |
35,481 |
On 8 July 2021, the Board declared a fourth interim dividend for the year ended 30 June 2021 of 1.465 pence per share, which was paid on 7 August 2021 to Shareholders on the register on 16 July 2021.
On 23 September 2021 the Board declared a first interim dividend for the year ended 30 June 2022 of 1.485 pence per share, which was paid on 16 November 2021 to Shareholders on the register on 8 October 2021.
On 10 January 2022, the Board declared a second interim dividend for the year ended 30 June 2022 of 1.485 pence per share, which was paid on 25 February 2022 to Shareholders on the register on 21 January 2022.
On 6 April 2022, the Board declared a third interim dividend for the year ended 30 June 2022 of 1.485 pence per share, which was paid on 27 May 2022 to Shareholders on the register on 22 April 2022.
On 8 July 2022, the Board declared a fourth interim dividend for the year ended 30 June 2022 of 1.485 pence per share, which was paid on 22 August 2022 to Shareholders on the register on 15 July 2022. This has not been included as a liability as at 30 June 2022.
12. Investment properties
In accordance with IAS 40 "Investment Property", the Group's investment properties have been independently valued at fair value by Cushman & Wakefield, an accredited independent valuer with
a recognised and relevant professional qualification and with recent experience in the locations and categories of the investment properties being valued. The valuations have been prepared in accordance with the RICS Valuation - Global Standards (the "Red Book") and incorporate the recommendations
of the International Valuation Standards Committee which are consistent with the principles set out
in IFRS 13.
The independent valuer in forming its opinion on valuation makes a series of assumptions. As explained in note 2, all the valuations of the Group's investment property at 30 June 2022 are classified as 'level 3' in the fair value hierarchy defined in IFRS 13.
The valuations are ultimately the responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the Board.
|
|
Freehold £'000 |
Long Leasehold £'000 |
Total £'000 |
|
At 1 July 2021 |
723,540 |
424,840 |
1,148,380 |
|
Property additions |
150,363 |
220,447 |
370,810 |
|
Capitalised acquisition costs |
7,825 |
9,778 |
17,603 |
|
Revaluation movement |
22,122 |
2,675 |
24,797 |
|
Valuation at 30 June 2022 |
903,850 |
657,740 |
1,561,590 |
|
|
|
|
|
|
At 1 July 2020 |
244,030 |
295,380 |
539,410 |
|
Property additions |
438,710 |
102,500 |
541,210 |
|
Capitalised acquisition costs |
23,331 |
5,799 |
29,130 |
|
Revaluation movement |
17,469 |
21,161 |
38,630 |
|
Valuation at 30 June 2021 |
723,540 |
424,840 |
1,148,380 |
There were 10 property acquisitions during the year, of which two were purchased through the acquisition of a corporate structure, rather than acquiring the asset directly. All corporate acquisitions during the year have been treated as asset purchases rather than business combinations because they are considered to be acquisitions of properties rather than businesses.
Included within the carrying value of investment properties at 30 June 2022 is £6,212,000 (2021: £3,558,000) in respect of the smoothing of fixed contractual rent uplifts as described in note 3. The difference between rents on a straight-line basis and rents actually receivable is included within the carrying value of the investment properties but does not increase that carrying value over fair value. The effect of this adjustment on the revaluation movement during the year is as follows:
12. Investment properties continued
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Revaluation movement per above |
24,797 |
38,630 |
|
Rent smoothing adjustment (note 3) |
(2,654) |
(1,998) |
|
Movements in associated rent guarantees (note 15) |
(323) |
(344) |
|
Change in fair value recognised in profit or loss |
21,820 |
36,288 |
Valuation techniques and key unobservable inputs
Valuation techniques used to derive fair values
The valuations have been prepared on the basis of market value which is defined in the RICS Valuation Standards as 'the estimated amount for which an asset or liability should exchange on the date of
the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion'. Market value as defined in the RICS Valuation Standards is the equivalent of fair value under IFRS.
The yield methodology approach is used when valuing the Group's properties which uses market rental values capitalised with a market capitalisation rate. This is sense-checked against the market comparable method (or market comparable approach) where a property's fair value is estimated based on comparable transactions in the market.
Unobservable inputs
Significant unobservable inputs include: the estimated rental value ("ERV") based on market conditions prevailing at the valuation date and net initial yield. Other unobservable inputs include but are not limited to the future rental growth - the estimated average increase in rent based on both market estimations and contractual situations, and the physical condition of the individual properties determined by inspection.
A decrease in ERV would decrease the fair value. A decrease in net initial yield would increase the
fair value.
Sensitivity of measurement of significant valuation inputs
As described in note 2 the determination of the valuation of the Group's investment property portfolio is open to judgement and is inherently subjective by nature.
Sensitivity analysis - impact of changes in net initial yields and rental values
Net initial yields of the Group's investment properties at 30 June 2022 range from 3.8% to 6.6% (2021: 3.9% to 6.2%). Rental values (being passing rents or ERV as relevant) on the Group's investment properties at 30 June 2022 range from £0.3 million to £4.2 million (2021: £0.4 million to £4.8 million).
The table below analyses the sensitivity on the fair value of investment properties for changes in rental values and net initial yields:
|
|
+1% Rental value £m |
-1% Rental value £m |
+0.25% Net Initial Yield £m |
-0.25% Net Initial Yield £m |
|
(Decrease)/increase in the fair value of investment properties as at 30 June 2022 |
15.6 |
(15.6) |
(81.1) |
90.7 |
|
(Decrease)/increase in the fair value of investment properties as at 30 June 2021 |
11.5 |
(11.5) |
(58.8) |
65.6 |
13. Subsidiaries
The entities listed in the following table were the subsidiary undertakings of the Company at 30 June 2022 all of which are wholly owned. All but one subsidiary undertakings are incorporated in England with their registered office at The Scalpel 18th Floor, 52 Lime Street, London, United Kingdom EC3M 7AF. The remaining Company as stated below is incorporated in Jersey and have a registered office of 28 Esplanade, St. Helier, JE2 3QA, Jersey.
|
Company name |
Holding type |
Nature of business |
|
Supermarket Income Investments UK Limited |
Direct |
Intermediate parent company |
|
Supermarket Income Investments (Midco2) UK Limited |
Direct |
Intermediate parent company |
|
Supermarket Income Investments (Midco3) UK Limited |
Direct |
Intermediate parent company |
|
Supermarket Income Investments (Midco4) UK Limited |
Direct |
Intermediate parent company |
|
SII UK Halliwell (MIDCO) LTD |
Direct |
Intermediate parent company |
|
Supermarket Income Investments (Midco6) UK Limited |
Direct |
Intermediate parent company |
|
SUPR Green Energy Limited |
Direct |
Energy provision company |
|
Supermarket Income Investments UK (NO1) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO2) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO3) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO4) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO5) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO6) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO7) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO8) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO9) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO10) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO11) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO12) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO16) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO16a) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO16b) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO16c) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO17) Limited |
Indirect |
Property investment |
|
TPP Investments Limited |
Indirect |
Property investment |
|
T (Partnership) Limited |
Indirect |
Property investment |
|
The TBL Property Partnership |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO19) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO20) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO21) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO22) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO23) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO24) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO25) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO26) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO27) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO28) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO29) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO30) Limited |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO31) Limited* |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO32) Limited** |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO33) Limited* |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO34) Limited* |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO35) Limited**^ |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO36) Limited* |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO37) Limited* |
Indirect |
Property investment |
|
Supermarket Income Investments UK (NO38) Limited* |
Indirect |
Property investment |
|
SII UK Halliwell (No1) LTD |
Indirect |
Investment in Joint venture |
|
SII UK Halliwell (No2) LTD |
Indirect |
Investment in Joint venture |
|
SII UK Halliwell (No3) LTD |
Indirect |
Investment in Joint venture |
|
SII UK Halliwell (No4) LTD |
Indirect |
Investment in Joint venture |
|
SII UK Halliwell (No5) LTD |
Indirect |
Investment in Joint venture |
|
SII UK Halliwell (No6) LTD |
Indirect |
Investment in Joint venture |
* New subsidiaries incorporated during the year ended 30 June 2022
** Subsidiaries acquired during the year ended 30 June 2022
^ Jersey registered entity
The following subsidiaries will be exempt from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of Section 479A of that Act.
|
Company name |
Companies House Registration Number |
|
SII UK Halliwell (MIDCO) LTD |
12473355 |
|
SUPR Green Energy Limited |
12890276 |
|
SII UK Halliwell (No1) LTD |
12475261 |
|
SII UK Halliwell (No2) LTD |
12475599 |
|
SII UK Halliwell (No3) LTD |
12478141 |
|
SII UK Halliwell (No4) LTD |
12604032 |
|
SII UK Halliwell (No5) LTD |
12605175 |
|
SII UK Halliwell (No6) LTD |
12606144 |
14. Investment in joint ventures
As at 30 June 2022 the Group has one joint venture investment. On the 28 May 2020, the Group entered into a 50:50 joint venture with the British Airways Pension Trustees Limited to acquire 100%
of the issued share capital in Horndrift Limited for a combined total consideration of £102m plus costs.
On the 17 February 2021, the joint venture also acquired 100% of the issued share capital in Cornerford Limited for a combined total consideration of £115m plus costs. Further amounts have been advanced in the year to fund operating costs and taxation liabilities on a pro-rata basis with the other parties.
Horndrift and Cornerford Limited each hold a 25.2% share of certain beneficial interests in a property trust arrangement that holds a portfolio of 26 Sainsbury's supermarket properties funded by bonds which mature in 2023 (the "Structure"). Rental surpluses generated by the Structure are required
to be applied in the repayment of the bonds and not therefore capable of being transferred to the
joint venture or Group until those bonds have been repaid.
The Group deems this to be a joint venture, as through the Group's interest in Horndrift Limited and Cornerford Limited it indirectly has joint control of the structure.
Under the terms of the Horner (Jersey) LP (the "JV") Limited Partnership Agreement ("LPA"), an
affiliate of the Investment Adviser, Atrato Halliwell Limited (the "Carry Partner"), has a carried interest entitlement over the investment returns from the JV's investment in the Structure. Under the terms of the LPA, once the Group and its JV partner have received a return equal to their total investment in the JV plus an amount equivalent to a 10% per annum preferred return on that investment, the Carry Partner is entitled to share in any further cash returns to be distributed by the JV. The Carry Partner's entitlement to share in cash returns in excess of the preferred return increases depending on the extent of those cash returns, up to a maximum entitlement of £15,000,000.
The Group has estimated the value of the Carry Partner's interest in the Group's share of the JV as
at 30 June 2022 to be £7,500,000 (2021: £2,200,000). This has been determined by reference to the expected returns from the JV's investment in the Structure, assuming that the proceeds realised from the future sale of the properties held by within the Structure are equal to the independent valuations of those properties as at 30 June 2022. Accordingly, the Group's beneficial interest in the JV, and therefore the Group's share of the JV's net assets as at 30 June 2022, is estimated to amount to 47.9%.
The carried interest payments are only payable upon cash distributions from the JV to the Group. To date there have been no cash distributions received by the Group and therefore no carried interest payment has yet become payable.
|
Entity |
Partner |
Address and principal place of business |
Ownership |
|
Jersey Horner (Jersey) LP |
British Airways Pensions Trustees Limited |
Third Floor, Liberation House, Castle Street, St Helier, Jersey, JE1 2LH |
50% owned by the Group |
|
Horner REIT Limited |
|
Third Floor, Liberation House, Castle Street, St Helier, Jersey, JE1 2LH |
100% owned by Horner (Jersey) LP |
|
United Kingdom Horndrift Limited |
|
Langham Hall UK LLP, 1 Fleet Street, London, E4M 7RA |
100% owned by Horner REIT Limited |
|
Cornerford Limited |
|
Langham Hall UK LLP, 1 Fleet Street, London, E4M 7RA |
100% owned by Horner REIT Limited |
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Opening balance |
130,321 |
56,081 |
|
Acquired in the year |
3,518 |
58,734 |
|
Negative goodwill arising on acquisition |
- |
- |
|
Group's share of profit after tax |
43,301 |
15,506 |
|
Closing balance |
177,140 |
130,321 |
The joint venture entities have a 31 March year end. For accounting purposes consolidated management accounts have been prepared for the joint venture for the periods from acquisition to 30 June 2022 using accounting policies that are consistent with those of the Group.
The financial statements of Horner (Jersey) LP prepared on this basis would be as follows:
|
Statement of comprehensive income |
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Share of income from joint venture |
97,464 |
28,885 |
|
Negative goodwill |
- |
6,530 |
|
Profit for the year and total comprehensive income |
97,464 |
35,415 |
|
Group's share of profit for the year |
43,301 |
15,506 |
|
Statement of financial position |
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Investment in joint venture |
369,280 |
265,045 |
|
Net assets |
369,280 |
265,045 |
|
Group's share of net assets |
177,140 |
130,320 |
Horner (Jersey) LP's share of the aggregate amounts recognised in the consolidated statement of comprehensive income and statement of financial position of the Structure are as follows:
|
|
|
Year to
|
Year to £'000 |
|
Rental income |
|
12,878 |
19,886 |
|
Finance income |
|
15,988 |
- |
|
Administrative and other expenses |
|
(190) |
(585) |
|
Change in fair value of investment properties |
|
(11,336) |
13,259 |
|
Gain on disposal of investment properties |
|
84,095 |
- |
|
Operating profit |
|
101,435 |
32,560 |
|
Finance expense |
|
(1,996) |
(2,470) |
|
Profit before taxation |
|
99,439 |
30,090 |
|
Tax charge for the period |
|
(1,974) |
(1,205) |
|
Profit for the year |
|
97,465 |
28,885 |
|
Non-current assets |
|
As at
£'000 |
As at
£'000 |
|
Investment properties |
|
37,005 |
477,447 |
|
Total non-current assets |
|
37,005 |
477,447 |
|
|
|
|
|
|
Current assets |
|
|
|
|
Contractual receivable |
|
530,481 |
- |
|
Trade and other receivables |
|
2,897 |
15,163 |
|
Cash and cash equivalents |
|
- |
- |
|
Total current assets |
|
533,378 |
15,163 |
|
Total assets |
|
570,383 |
492,610 |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Debt securities in issue |
|
176,243 |
190,788 |
|
Interest rate derivative |
|
3,451 |
8,836 |
|
Deferred tax |
|
4,196 |
11,048 |
|
Other liabilities |
|
9,883 |
9,188 |
|
Total non-current liabilities |
|
193,773 |
219,860 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
|
7,329 |
7,705 |
|
Total current liabilities |
|
7,329 |
7,705 |
|
Total liabilities |
|
201,102 |
227,565 |
|
Net assets |
|
369,281 |
265,045 |
During the year, Sainsbury's exercised options to acquire 21 stores within the Structure. The purchase price under the options is determined based on the assumption of a new 20-year lease term at the higher of passing or open market rent, subject to upward-only, five yearly market rent reviews. The purchase price is subject to contractual negotiations and as at the year-end had not been agreed.
As the year end, the Group determined that the exercise of the purchase options by Sainsbury's Plc resulted in the performance obligation being satisfied for a sale of the properties in accordance with IFRS 15. The JV is deemed to hold a contractual receivable from Sainsbury's plc, with the cash proceeds expected to be received during the course of 2023 as noted above.
In arriving at the valuation of the contractual receivable, the fair value of the 21 properties subject to option exercise were valued as at 30 June 2022 by the Group's independent valuer in accordance with the RICS Valuation -Global Standards (the 'Red Book') given the absence of an agreed purchase option price. This amount was adjusted based on future expected rental receipts from the properties together with an indexation adjustment of the property valuation over the last years based on the MSCI Supermarket Property Index as per the terms of the contractual documents. The total of all these amounts was then discounted to present value.
After the year end, the Company announced the purchase price on the 21 option stores was formally agreed at £1,040 million. The purchase by Sainsbury's plc is expected to complete between March 2023 and July 2023 on expiry of the current leases.
Sainsbury's has agreed to retain occupation of 4 of the 5 remaining stores within the Portfolio under a new 15-year lease agreement with five yearly open market rent reviews and a tenant break at year 10. The JV has exclusivity to purchase these stores for £68 million (excluding acquisition costs), reflecting a net initial yield of 6%, which can be exercised upon expiry of the current leases between March and July 2023. The remaining store is expected to be sold in March 2023 subject to vacant possession.
15. Financial assets held at fair value through profit or loss
Rental guarantees provided by the seller of an investment property are recognised as a financial asset when there is a valid expectation that the Group will utilise the guarantee over the contractual term. Rental guarantees are classified as financial assets at fair value through profit and loss in accordance with IFRS 9.
In determining the fair value of the rental guarantee, the Group makes an assessment of the expected future cash flows to be derived over the term of the rental guarantee and discounts these at the market rate. A review is performed on a periodic basis based on payments received and changes in the estimation of future cash flows.
The fair value of rental guarantees held by the Group are as follows:
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
At start of year |
237 |
- |
|
Additions |
283 |
766 |
|
Fair value changes (including changes in estimated cash flows) |
(326) |
(344) |
|
Collected during the year |
89 |
(185) |
|
Total financial assets held at fair value through profit and loss at end of year |
283 |
237 |
16. Financial assets held at amortised cost
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
At start of year |
- |
- |
|
Additions |
10,626 |
- |
|
Amortisation |
- |
- |
|
Impairment |
- |
- |
|
Total financial asset held at amortised cost |
10,626 |
- |
On 8 June 2022, the Group acquired an Asda store in Carcroft, via a sale and leaseback transaction for £10.6m, this has been recognised in the Statement of Financial Position as a Financial asset in accordance with IFRS 9. The financial asset is measured using the amortised cost model, which recognises the rental payments as financial income and reductions of the asset value based on the implicit interest rate in the lease. The carrying value of financial assets held at amortised cost approximates fair value.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and ageing. The expected loss rates are based on the Group's historical credit losses experienced over the period from incorporation to 30 June 2022. The historical loss rates are then adjusted for current and forward-looking information on macro-economic factors affecting the Group's customers. Both the expected credit loss provision and the incurred loss provision in the current year is immaterial. No reasonable possible changes in the assumptions underpinning the expected credit loss provision would give rise to a material expected credit loss.
17. Contract fulfilment assets
In the prior year, the Group was chosen to provide renewable electricity to one of its tenants through the use of its acquired rooftop solar panels under the terms of a Purchasing Power Agreement ("PPA"). It is intended that under the terms of the PPA, the tenant will acquire 100% of the systems generated power with a maximum 75% contracted under a take or pay arrangement and 25% under a purchase option. The term of the PPA will be 20 years with a break option coterminous with the occupational lease expiry. As at the year end, no electricity under the PPA was provided to its tenant.
Under IFRS 15, the incremental costs of obtaining a contract with a customer are recognised as a contract fulfilment asset if the costs are expected to be recoverable. The Group has determined that the following costs may be capitalised as contract fulfilment assets: i) legal fees to draft a contract (once the Group has been selected as a preferred supplier for a bid) and ii) any commissions payable that are directly related to winning a specific contract.
Costs incurred prior to selection as preferred supplier are not capitalised but are expensed as incurred.
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
At start of year |
85 |
- |
|
Additions |
8 |
85 |
|
Amortisation |
|
- |
|
Total contract fulfilment assets at end of year |
93 |
85 |
In preparing this consolidated financial information, a review was undertaken to identify indicators of impairment of contract fulfilment assets. As at the year-end no such indicators were noted.
18. Trade and other receivables
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Other receivables |
1,430 |
2,624 |
|
Prepayments and accrued income |
433 |
516 |
|
Total trade and other receivables |
1,863 |
3,140 |
The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and ageing. The expected loss rates are based on the Group's historical credit losses experienced over the period from incorporation to 30 June 2022. The historical loss rates are then adjusted for current and forward-looking information on macro-economic factors affecting the Group's customers. Both the expected credit loss provision and the incurred loss provision in the current and prior year are immaterial. No reasonable possible changes in the assumptions underpinning the expected credit loss provision would give rise to a material expected credit loss.
19. Trade and other payables
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Corporate accruals |
8,958 |
6,153 |
|
VAT payable |
1,719 |
2,216 |
|
Total trade and other payables |
10,677 |
8,369 |
20. Interest rate derivatives
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Non-current asset: Interest rate swaps |
5,114 |
763 |
|
Non-current liability: Interest rate swaps |
- |
(1,210) |
The rate swaps are remeasured to fair value by the counterparty bank on a quarterly basis.
|
The fair value at the end of year comprises: |
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
At start of year (net) |
(447) |
(1,988) |
|
Amortisation of cap premium in the year (note 8) |
(5) |
(28) |
|
Changes in fair value of interest rate derivative in the year |
5,270 |
863 |
|
Charge to the profit or loss (note 8) |
296 |
706 |
|
Fair value at end of year (net) |
5,114 |
(447) |
To partially mitigate the interest rate risk that arises as a result of entering into the floating rate debt facilities referred to in note 20, the Group has entered derivative interest rate swaps in relation to the loan facilities with Bayerische Landesbank ('the BLB swaps') and Wells Fargo Bank ('the Wells swap').
The total notional value of the BLB swaps was £86.9 million, which is equal to the total amounts drawn under Bayerische Landesbank loan facility. The terms of the BLB swaps coincide with the maturity of the respective Bayerische Landesbank loan facility. The fixed interest rate of £52.1 million of the swap exposure as at 30 June 2022 was 1.305%. The fixed interest rate of the swaps of £27.5 million and £7.3 million for the remaining exposure of £34.8 million were 0.178% and 0.128% respectively.
The total notional value of the Wells swap was £30.0 million with its term coinciding with the maturity of the Wells Fargo loan facility. The fixed interest rate of the swap as at 30 June 2022 was 0.189%.
61% of the Group's outstanding debt as at 30 June 2022 was hedged through the use of fixed rate debt or financial instruments as at 30 June 2022 (2021: 63%). It is the Group's target to hedge at least 50% of the Group's total debt at any time using fixed rate loans or interest rate derivatives.
The derivatives have been valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the last working day prior to each reporting date. The fair values
are calculated using the present values of future cash flows, based on market forecasts of interest rates and adjusted for the credit risk of the counterparties. The amounts and timing of future cash flows are projected on the basis of the contractual terms.
All interest rate derivatives are classified as level 2 in the fair value hierarchy as defined under IFRS 13 and there were no transfers to or from other levels of the fair value hierarchy during the year.
In accordance with the Group's treasury risk policy, the Group applies cash flow hedge accounting
in partially hedging the interest rate risks arising on its variable rate linked loans. Changes in the fair values of derivatives that are designated as cash flow hedges and are effective are recognised directly in the cash flow hedge reserve and included in other comprehensive income. Any ineffectiveness that may arise in this hedge relationship will be included in profit or loss.
All floating rate loans and interest rate derivatives are contractually linked to the Sterling Overnight Index Average ("SONIA").
After the year end date, the Company took the decision to fix its interest rate exposure by entering into interest rate swaps to hedge the Company's £381 million of drawn unsecured debt for a weighted average term of 4 years. 100% of the Company's drawn debt is now hedged at an effective fixed rate of 2.6% (including margin). The cost of acquiring the hedges was £35.2 million which will immediately impact EPRA NTA by 2.8 pence per share.
21. Bank borrowings
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Amounts falling due after more than one year: |
|
|
|
Secured debt |
352,213 |
413,320 |
|
Less: Unamortised finance costs |
(3,667) |
(3,636) |
|
Bank borrowings per the consolidated statement of financial position |
348,546 |
409,684 |
A summary of the Group's borrowing facilities as at 30 June 2022 are shown below:
|
Lender |
Facility |
Expiry |
Credit margin |
Variable |
Loan commitment £m^ |
Amount drawn 30 June 2022 £m |
|
HSBC |
Revolving credit facility |
Aug 2025* |
1.65% |
SONIA |
£100.0 |
Nil |
|
HSBC |
Revolving credit facility |
Aug 2025* |
1.75% |
SONIA |
£50.0 |
Nil |
|
Deka |
Term Loan |
Aug 2026* |
1.89% |
|
£47.6 |
£47.6 |
|
Deka |
Term Loan |
Aug 2026* |
2.05% |
|
£28.9 |
£28.9 |
|
Deka |
Term Loan |
Aug 2026* |
1.72% |
|
£20.0 |
£20.0 |
|
BLB |
Term Loan |
Jul 2023 |
1.25% |
SWAP (Note 20) |
£52.1 |
£52.1 |
|
BLB |
Term Loan |
Aug 2025 |
1.85% |
SWAP (Note 20) |
£27.5 |
£27.5 |
|
BLB |
Term Loan |
Jul 2023 |
1.85% |
SWAP (Note 20) |
£7.3 |
£7.3 |
|
Wells Fargo |
Revolving credit facility |
Jul 2027* |
2.00% |
SWAP (Note 20) |
£30.0 |
£30.0 |
|
Wells Fargo |
Revolving credit facility |
Jul 2027* |
2.11% |
SONIA |
£30.0 |
Nil |
|
Wells Fargo |
Revolving credit facility |
Sep 2023 |
1.40% |
SONIA |
£100.0 |
Nil |
|
Barclays |
Revolving credit facility |
Jan 2026* |
1.50% |
SONIA |
£300.0 |
£138.8 |
|
Total |
|
|
|
|
£793.4 |
£352.2 |
*Includes extension options
^Includes uncommitted accordions
The Group has been in compliance with all of the financial covenants across the Group's bank facilities as applicable throughout the periods covered by this financial information.
Any associated fees in arranging the bank borrowings that are unamortised as at the end of the year are offset against amounts drawn under the facility as shown in the table above. The debt is secured
by charges over the Group's investment properties and by charges over the shares of certain Group undertakings, not including the Company itself. There have been no defaults of breaches of any loan covenants during the current year or any prior period.
As disclosed in note 1, the Group has adopted Interest Rate Benchmark Reform - IBOR 'phase 2'. Applying the practical expedient introduced by the amendments, when the benchmarks affecting the credit facility and the BLB loan facility were transitioned from LIBOR to SONIA the adjustments to the contractual cash flows have been reflected as an adjustment to the effective interest rate. Therefore, the replacement of the loans' benchmark interest rate has not result in an immediate gain or loss recorded in profit or loss.
Each of the Group's facilities impacted by the changes resulting from interest rate benchmark reform transitioned during the period and the Group does not consider that the transition from LIBOR to SONIA within the Group's floating rate facilities gives rise to a significant change in market risk.
22. Categories of financial instruments
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Financial assets |
|
|
|
Financial assets at amortised cost: |
|
|
|
Lease Receivables |
10,626 |
- |
|
Cash and cash equivalents |
51,200 |
19,579 |
|
Trade and other receivables |
1,430 |
2,624 |
|
Financial assets at fair value: |
|
|
|
Rent guarantees |
283 |
237 |
|
Derivatives in effective hedges: |
|
|
|
Interest rate derivative |
5,114 |
763 |
|
Total financial assets |
68,653 |
23,203 |
|
|
|
|
|
Financial liabilities |
|
|
|
Financial liabilities at amortised cost: |
|
|
|
Secured debt |
348,546 |
409,684 |
|
Trade and other payables |
8,958 |
6,153 |
|
Derivatives in effective hedges: |
|
|
|
Interest rate derivative |
- |
1,210 |
|
Total financial liabilities |
357,504 |
417,047 |
At the year end, all financial assets and liabilities were measured at amortised cost except for the interest rate derivatives and rental guarantees which are measured at fair value. The interest rate derivative valuation is classified as 'level 2' in the fair value hierarchy as defined in IFRS 13 and its fair value was calculated using the present values of future cash flows, based on market forecasts of interest rates and adjusted for the credit risk of the counterparties.
Financial risk management
Through the Group's operations and use of debt financing it is exposed to certain risks. The Group's financial risk management objective is to minimise the effect of these risks, for example by using interest rate cap and interest rate swap derivatives to partially mitigate exposure to fluctuations in interest rates, as described in note 20.
The exposure to each financial risk considered potentially material to the Group, how it arises and the policy for managing it is summarised below.
Market risk
Market risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group's market risk arises from open positions in interest bearing assets and liabilities, to the extent that these are exposed to general and specific market movements.
The Group's interest-bearing financial instruments comprise cash and cash equivalents and bank borrowings. Changes in market interest rates therefore affect the Group's finance income and costs, although the Group has purchased interest rate derivatives as described in note 20 in order to partially mitigate the risk in respect of finance costs. The Group's sensitivity to changes in interest rates, calculated
on the basis of a ten-basis point increase in the three-month LIBOR and the SONIA daily rate, was as follows:
|
|
Year to 30 June 2022 £'000 |
Year to 30 June 2021 £'000 |
|
Effect on profit |
413 |
356 |
|
Effect on other comprehensive income and equity |
(223) |
(376) |
Trade and other receivables and payables are interest free as long as they are paid in accordance with their terms, and have payment terms of less than one year, so it is assumed that there is no material interest rate risk associated with these financial instruments.
The Group prepares its financial information in Sterling and all of its current operations are Sterling denominated. It therefore has no exposure to foreign currency and does not have any direct sensitivity to changes in foreign currency exchange rates.
Inflation risk arises from the impact of inflation on the Group's income and expenditure. The majority of the Group's passing rent at 30 June 2022 is subject to inflation linked rent reviews. Consequently, the Group is exposed to movements in the Retail Prices Index ("RPI"), which is the relevant inflation benchmark. However, all RPI-linked rent review provisions provide those rents will only be subject to upwards review and never downwards. As a result, the Group is not exposed to a fall in rent in deflationary conditions.
The Group does not expect inflation risk to have a material effect on the Group's administrative expenses, with the exception of the investment advisory fee which is determined as a function of the reported net asset value of the Group resulting from any upward rent reviews.
Credit risk
Credit risk is the risk of financial loss to the Group if a counterparty fails to meet its contractual obligations. The principal counterparties are the Group's tenants (in respect of rent receivables arising under operating leases) and banks (as holders of the Group's cash deposits).
The credit risk of rent receivables is considered low because the counterparties to the operating leases are considered by the Board to be high quality tenants and any lease guarantors are of appropriate financial strength. Rent collection dates and statistics are monitored to identify any problems at an early stage, and if necessary rigorous credit control procedures will be applied to facilitate the recovery of rent receivables. The credit risk on cash deposits is limited because the counterparties are banks with credit ratings which are acceptable to the Board and are kept under review each quarter.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the finance costs and principal repayments on its secured debt. It is the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group seeks to manage its liquidity risk by ensuring that sufficient cash is available to meet its foreseeable needs. These liquidity needs are relatively modest and are capable of being satisfied by the surplus available after rental receipts have been applied in payment of interest as required by the credit agreement relating to the Group's secured debt.
Before entering into any financing arrangements, the Board assesses the resources that are expected to be available to the Group to meet its liabilities when they fall due. These assessments are made on the basis of both base case and downside scenarios. The Group prepares detailed management accounts which are reviewed by the Board at least quarterly to assess ongoing liquidity requirements and compliance with loan covenants. The Board also keeps under review the maturity profile of the Group's cash deposits in order to have reasonable assurance that cash will be available for the settlement of liabilities when they fall due.
The following table shows the maturity analysis for financial assets and liabilities. The table has been drawn up based on the undiscounted cash flows of non-derivative financial instruments, including future interest payments, based on the earliest date on which the Group can be required to pay and assuming that the SONIA daily rate remains at the 30 June 2022 rate. Interest rate derivatives are shown at fair value and not at their gross undiscounted amounts.
|
As at 30 June 2022 |
Less than one year £'000 |
One to two years £'000 |
Two to five years £'000 |
More than five years £'000 |
Total £'000 |
|
Financial assets: |
|
|
|
|
|
|
Cash and cash equivalents |
51,200 |
- |
- |
- |
51,200 |
|
Trade and other receivables |
1,430 |
- |
- |
- |
1,430 |
|
Amortised cost asset |
290 |
290 |
870 |
76,415 |
77,865 |
|
Rent guarantees |
283 |
- |
- |
- |
283 |
|
Interest rate derivatives |
- |
843 |
4,271 |
- |
5,114 |
|
Total financial assets |
53,203 |
1,133 |
5,141 |
76,415 |
135,892 |
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
Bank borrowings |
9,335 |
205,679 |
156,510 |
- |
371,524 |
|
Trade payables and other payables |
8,958 |
- |
- |
- |
8,958 |
|
Interest rate derivatives |
- |
- |
- |
- |
- |
|
Total financial liabilities |
18,293 |
205,679 |
156,510 |
- |
380,482 |
|
|
|
|
|
|
|
|
As at 30 June 2021 |
|
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
Cash and cash equivalents |
19,579 |
- |
- |
- |
19,579 |
|
Trade and other receivables |
2,624 |
- |
- |
- |
2,624 |
|
Rent guarantees |
237 |
- |
- |
- |
237 |
|
Interest rate derivatives |
- |
- |
763 |
- |
763 |
|
Total financial assets |
22,440 |
- |
763 |
- |
23,203 |
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
Bank borrowings |
6,153 |
111,962 |
312,366 |
- |
430,481 |
|
Trade payables and other payables |
6,153 |
- |
- |
- |
6,153 |
|
Interest rate derivatives |
- |
- |
1,210 |
- |
1,210 |
|
Total financial liabilities |
12,306 |
111,962 |
313,576 |
- |
437,844 |
Capital risk management
The Board's primary objective when monitoring capital is to preserve the Group's ability to continue as a going concern, while ensuring it remains within its debt covenants so as to safeguard secured assets and avoid financial penalties.
Bank borrowings are secured on the Group's property portfolio by way of fixed charges over property assets and over the shares in the property-owning subsidiaries and any intermediary holding companies of those subsidiaries. The Group does not provide any cross-group guarantees nor does the Company act as a guarantor to the lending bank.
At 30 June 2022, the capital structure of the Group consisted of bank borrowings (note 21), cash and cash equivalents, and equity attributable to the Shareholders of the Company (comprising share capital, retained earnings and the other reserves referred to in notes 23 and 24).
In managing the Group's capital structure, the Board considers the Group's cost of capital. In order to maintain or adjust the capital structure, the Group keeps under review the amount of any dividends or other returns to Shareholders and monitors the extent to which the issue of new shares or the realisation of assets may be required.
Reconciliation of financial liabilities relating to financing activities
|
|
Bank borrowings due in more than 1 year £'000 |
Interest and commitment fees payable £'000 |
Interest rate derivatives £'000 |
Total £'000 |
|
As at 1 July 2021 |
409,684 |
1,634 |
447 |
411,765 |
|
Cash flows: |
|
|
|
|
|
Debt drawdowns in the year |
402,922 |
- |
- |
402,922 |
|
Debt repayments in the year |
(464,029) |
- |
- |
(464,029) |
|
Interest and commitment fees paid |
- |
(10,527) |
- |
(10,527) |
|
Loan arrangement fees paid |
(2,188) |
- |
- |
(2,188) |
|
Non-cash movements: |
|
|
|
|
|
Finance costs in the statement of comprehensive income |
2,157 |
10,832 |
5 |
12,994 |
|
Fair value changes |
- |
- |
(5,566) |
(5,566) |
|
As at 30 June 2022 |
348,546 |
1,939 |
(5,114) |
345,371 |
|
|
|
|
|
|
|
As at 1 July 2020 |
126,791 |
692 |
1,988 |
129,471 |
|
Cash flows: |
|
|
|
|
|
Debt drawdowns in the year |
582,961 |
- |
- |
582,961 |
|
Debt repayments in the year |
(298,300) |
- |
- |
(298,300) |
|
Interest and commitment fees paid |
- |
(6,105) |
- |
(6,105) |
|
Loan arrangement fees paid |
(3,211) |
- |
- |
(3,211) |
|
Non-cash movements: |
|
|
|
|
|
Finance costs in the statement of comprehensive income |
1,443 |
7,047 |
28 |
8,518 |
|
Fair value changes |
- |
- |
(1,569) |
(1,569) |
|
At 30 June 2021 |
409,684 |
1,634 |
447 |
411,765 |
Movements in respect to share capital are disclosed in note 23 below.
The interest and commitment fees payable are included within the corporate accruals balance in note 19. Cash flow movements are included in the consolidated statement of cash flows and the non-cash movements are included in note 8. The movements in the interest rate derivative financial liabilities can be found in note 20.
23. Share capital
|
|
Ordinary Shares of 1 pence Number |
Share capital £'000 |
Share premium reserve £'000 |
Capital reduction reserve £'000 |
Total £'000 |
|
As at 1 July 2021 |
810,720,168 |
8,107 |
778,859 |
- |
786,966 |
|
Scrip Dividends issued and fully paid - 20 August 2021 |
300,468 |
3 |
348 |
- |
351 |
|
Ordinary shares issued and fully paid - 22 October 2021 |
173,913,043 |
1,740 |
198,261 |
- |
200,001 |
|
Scrip dividends issued and fully paid - 16 November 2021 |
500,750 |
5 |
578 |
- |
583 |
|
Share premium cancelled during the year and transferred to capital reduction reserve |
- |
- |
(778,859) |
778,859 |
- |
|
Scrip dividends issued and fully paid - 25 February 2022 |
111,233 |
1 |
136 |
- |
137 |
|
Ordinary shares issued and fully paid - 29 April 2022 |
253,492,160 |
2,535 |
304,191 |
- |
306,726 |
|
Scrip dividends issued and fully paid - 27 May 2022 |
830,598 |
8 |
1,026 |
- |
1,034 |
|
Share issue costs |
- |
- |
(10,366) |
- |
(10,366) |
|
As at 30 June 2022 |
1,239,868,420 |
12,399 |
494,174 |
778,859 |
1,285,432 |
|
|
|
|
|
|
|
|
As at 1 July 2020 |
473,620,462 |
4,735 |
436,126 |
- |
440,861 |
|
Ordinary shares issued and fully paid - 9 October 2020 |
192,307,692 |
1,923 |
198,077 |
- |
200,000 |
|
Scrip dividends issued and fully paid - 26 February 2021 |
124,795 |
2 |
132 |
- |
134 |
|
Ordinary shares issued and fully paid - 23 March 2021 |
144,297,503 |
1,443 |
151,513 |
- |
152,956 |
|
Scrip dividends issued and fully paid - 21 May 2021 |
369,716 |
4 |
410 |
- |
414 |
|
Share issue costs |
- |
- |
(7,399) |
- |
(7,399) |
|
As at 30 June 2021 |
810,720,168 |
8,107 |
778,859 |
- |
786,966 |
Share allotments and other movements in relation to the capital of the Company in the year:
On 22 October 2021 the Company completed an equity fundraising and issued an additional 173,913,043 ordinary shares of one pence each at a price of £1.15 per share. The consideration received in excess of the par value of the ordinary shares issued, net of total capitalised issue costs, of £193.8 million was credited to the share premium reserve.
Following a successful application to the High Court and lodgement of the Company's statement of capital with the Registrar of Companies, the Company was permitted to reduce the capital of the Company by an amount of £778.9 million. This was effected on 15 December 2021 by a transfer of that amount from the share premium reserve to the capital reduction reserve. The capital reduction reserve is classed as a distributable reserve.
On 29 April 2022 the Company completed an equity fundraising and issued an additional 253,492,160 ordinary shares of one pence each at a price of £1.21 per share. The consideration received in excess of the par value of the ordinary shares issued, net of total capitalised issue costs, of £298.3 million was credited to the share premium reserve.
Scrip dividends were issued on 20 August 2021, 16 November 2021, 25 February 2021 and 27 May 2022 at a reference price of £1.17, £1.16, £1.23 and £1.25 per share respectively. The Company issued a combined total of 1,743,049 shares under the scrip dividend programme during the year. The consideration received in excess of the par value of the ordinary shares issued, of £2.1 million was credited to the share premium reserve.
Ordinary Shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. Ordinary Shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights. The aggregate ordinary shares in issue at 30 June 2022 total was 1.24 billion.
24. Reserves
The nature and purpose of each of the reserves included within equity at 30 June 2022 are as follows:
· Share premium reserve: represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of equity issues
·Cash flow hedge reserve: represents cumulative gains or losses, net of tax, on effective cash flow hedging instruments
· Capital reduction reserve: represents a distributable reserve created following a Court approved reduction in capital less dividends paid
· Retained earnings represent cumulative net gains and losses recognised in the statement
of comprehensive income.
The only movements in these reserves during the year are disclosed in the consolidated statement of changes in equity.
25. Capital commitments
The Group had no capital commitments outstanding as at 30 June 2022 and 30 June 2021.
26. Operating leases
The Group's principal assets are investment properties which are leased to third parties under non-cancellable operating leases. The weighted average remaining lease term at 30 June 2022 is 15.1 years (2021: 14.8 years). The leases contain predominately fixed or inflation-linked uplifts.
The future minimum lease payments receivable under the Group's leases, are as follows:
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Within one year |
77,438 |
57,348 |
|
Between one year and five years |
307,774 |
231,448 |
|
More than five years |
834,128 |
612,471 |
|
Total |
1,219,340 |
901,267 |
27. Net asset value per share
NAV per share is calculated by dividing the Group's net assets as shown in the consolidated statement of financial position, by the number of ordinary shares outstanding at the end of the year. As there are no dilutive instruments outstanding, basic and diluted NAV per share are identical.
The European Public Real Estate Association ("EPRA") publishes guidelines for the calculation of three measures of NAV to enable consistent comparisons between property companies, which were updated in the prior year and took effect from 1 January 2020. The Group uses EPRA Net Tangible Assets ("EPRA NTA") as the most meaningful measure of long-term performance and the measure which is being adopted by the majority of UK REITs, establishing it as the industry standard benchmark. It excludes items that are considered to have no impact in the long term, such as the fair value of derivatives.
NAV and EPRA NTA per share calculation are as follows:
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Net assets per the consolidated statement of financial position |
1,432,455 |
871,310 |
|
Intangibles |
(93) |
(85) |
|
Fair value of financial assets at amortised cost |
(666) |
- |
|
Fair value of interest rate derivatives |
(5,114) |
447 |
|
EPRA NTA |
1,426,582 |
871,672 |
|
|
|
|
|
|
|
|
|
Ordinary shares in issue at 30 June |
1,239,868,420 |
810,720,168 |
|
NAV per share - Basic and diluted (pence) |
116p |
108p |
|
EPRA NTA per share (pence) |
115p |
108p |
28. Transactions with related parties
Details of the related parties to the Group in the year and the transactions with these related parties were as follows:
a. Directors
Directors' fees
Nick Hewson, Chairman of the Board of Directors of the Company, is paid fees of £70,000 per annum, with the other Directors each being paid fees of £50,000 per annum. Jon Austen is paid an additional £7,500 per annum for his role as chair of the Company's Audit Committee, Vince Prior is paid an additional £2,500 per annum for his role as chair of the Company's Nomination Committee and £5,000 for his role as Senior Independent Director. Cathryn Vanderspar is paid an additional £5,000 for her role as Chair of the Remuneration Committee.
The total remuneration payable to the Directors in respect of the current year and previous year are disclosed in note 7.
Directors' interests
Details of the direct and indirect interests of the Directors and their close families in the ordinary shares of one pence each in the Company at 30 June 2022 were as follows:
· Nick Hewson: 661,670 shares (0.05% of issued share capital)
· Jon Austen: 279,779 shares (0.02% of issued share capital)
· Vince Prior: 134,886 shares (0.01% of issued share capital)
· Cathryn Vanderspar: 91,738 (0.01% of issued share capital)
Details of the direct and indirect interest of the Directors and their close families in the ordinary shares of one pence each in the Company at the date of signing the accounts were as follows:
· Nick Hewson: 1,086,670 shares (0.09% of issued share capital)
· Jon Austen: 305,339 shares (0.02% of issued share capital)
· Vince Prior: 151,923 shares (0.01% of issued share capital)
· Cathryn Vanderspar: 108,645 (0.01% of issued share capital)
b. Investment Adviser
Investment advisory and accounting fees
The investment adviser to the Group, Atrato Capital Limited (the 'Investment Adviser'), is entitled to certain advisory fees under the terms of the Investment Advisory Agreement (the 'Agreement') dated 14 July 2021.
The entitlement of the Investment Adviser to advisory fees is by way of what are termed 'Monthly Management Fees' and 'Semi-Annual Management Fees' both of which are calculated by reference to the net asset value of the Group at particular dates, as adjusted for the financial impact of certain investment events and after deducting any uninvested proceeds from share issues up to the date of the calculation of the relevant fee (these adjusted amounts are referred to as 'Adjusted Net Asset Value' for the purpose of calculation of the fees in accordance with the Agreement).
Until the Adjusted Net Value of the Group exceeds £1,500 million, the entitlements to advisory fees can be summarised as follows:
· Monthly Management Fee payable monthly in arrears: 1/12th of 0.7125% per calendar month of Adjusted Net Asset Value up to or equal to £500 million, 1/12th of 0.5625% per calendar month of Adjusted Net Asset Value above £500 million and up to or equal to £1,000 million and 1/12th of 0.4875% per calendar month of Adjusted Net Asset Value above £1,000 and up to or equal to £1,500 million.
· Semi-Annual Management Fee payable semi-annually in arrears: 0.11875% of Adjusted Net Asset Value up to or equal to £500 million, 0.09375% of Adjusted Net Asset Value above £500 million and up to or equal to £1,000 million and 0.08125% of Adjusted Net Asset Value above £1,000 million and up to or equal to £1,500 million.
For the year to 30 June 2022 the total advisory fees payable to the Investment Adviser were £9,404,938 (2021: £6,255,423) of which £1,446,246 (2021: £1,463,898) is included in trade and other payables in the consolidated statement of financial position.
The Investment Adviser is also entitled to an annual accounting and administration service fee equal to: £51,500; plus (i) £4,175 for any indirect subsidiary of the Company and (ii) £1,620 for each direct subsidiary of the Company. A full list of the Company and its direct and indirect subsidiary undertakings is listed in Note 13 of this financial information.
For the year to 30 June 2022 the total accounting and administration service fee payable to the Investment Adviser was £237,559 (2021: £64,920) of which £81,833 (2021: £52,646) is included in trade and other payables in the consolidated statement of financial position.
Introducer Services
Atrato Partners, an affiliate of the Investment Adviser, is entitled to fees in relation to the successful introduction of prospective investors in connection with subscriptions for ordinary share capital in
the Company.
The entitlement of the Investment Adviser to introducer fees is by fees and/or commission which can be summarised as follows:
· Commission basis: 1% of total subscription in respect of ordinary shares subscribed for
by any prospective investor introduced by Atrato Partners.
For the year to 30 June 2022 the total introducer fees payable to the affiliate of the Investment Adviser were £271,239 (2021: £269,172).
Interest in shares of the Company
Details of the direct and indirect interests of the Directors of the Investment Adviser and their close families in the ordinary shares of one pence each in the Company at 30 June 2022 were as follows:
· Ben Green: 1,199,938 shares (0.10% of issued share capital)
· Steve Windsor: 1,319,486 shares (0.11% of issued share capital)
· Steven Noble: 204,130 shares (0.02% of issued share capital)
· Natalie Markham: 52,529 shares (0.00% of issued share capital)
Carried interest held in the Group's joint venture
Under the terms of the Horner (Jersey) LP (the "JV") Limited Partnership Agreement ("LPA"), an affiliate of the Investment Adviser, Atrato Halliwell Limited (the "Carry Partner"), has a carried interest entitlement over the investment returns from the JV's investment in the Structure. Further details regarding the estimated value of the Carry Partner's interest in the JV are included in note 14.
The carried interest payments are only payable to the extent that distributions are made from the JV
to the Group. To date there have been no cash distributions received by the Group and therefore no carried interest payment has yet become payable.
29. Subsequent events
Debt financing
· In July 2022 the Group announced the arrangement of a new £412.1 million unsecured credit facility with a bank syndicate comprising Barclays, Royal Bank of Canada, Wells Fargo and Royal Bank of Scotland International. This consists of:
o A £250 million five-year revolving credit facility at a margin of 1.5% over SONIA, with two further one-year extension options;
o A £100 million three-year term loan at a margin of 1.5% over SONIA, with two further one-year extension options;
o A £62.1 million eighteen-month term loan at a margin of 1.5% over SONIA, with one further eighteen-month extension option.
· In July 2022, the new unsecured facility was used to refinance the following existing secured facilities:
o A reduction of the Barclays/RBC facility of £300.0 million including uncommitted accordion options to £77.5 million;
o A reduction of the Wells Fargo facility of £160.0 million including uncommitted accordion options to £39.0 million.
· In September 2022, the Group announced a two-year extension to its revolving credit facility with HSBC, inclusive of a one - year accordion option at lender's discretion.
Hedging
· After the year end date, the Company took the decision to fix its interest rate exposure by entering into interest rate swaps to hedge the Company's £381 million of drawn unsecured debt for a weighted average term of 4 years. 100% of the Company's drawn debt is now hedged at an effective fixed rate of 2.6% (including margin). The cost of acquiring the hedges was £35.2 million which will immediately impact EPRA NTA by 2.8 pence per share.
Acquisitions
· In July 2022, the Group announced the acquisition of a Tesco superstore, M&S Foodhall and an Iceland in Chineham, Basingstoke with non-grocery units for £72.9 million (excluding acquisition costs). The Tesco superstore has a 12-year unexpired lease term and is subject to 5-yearly open market rent reviews.
· In August 2022, the Group announced the acquisition of a Sainsbury's supermarket and an M&S Foodhall in Glasgow with non-grocery units for £34.5 million (excluding acquisition costs). The unexpired lease terms of the two stores are 10 and 4 years respectively and are both subject to 5-yearly upwards only, open market rent reviews.
· In August 2022, the Group announced the acquisition of a Tesco in Newton-le-Willows, Merseyside for £16.6 million (excluding acquisition costs). The store has a 12-year unexpired lease term and is subject to annual RPI-linked rental uplifts
· In August 2022, the Group announced the acquisition of a Tesco in Bishops Cleeve, Cheltenham for £25.4 million (excluding acquisition costs). The store has a 12-year unexpired lease term and is subject to annual RPI-linked rental uplifts.
· In September 2022, the Group announced the acquisition of a Tesco supermarket in Llanelli, South Wales for £66.8 million (excluding acquisition costs). The store has a 12-year unexpired lease term and is subject to annual, upwards only RPI linked rent reviews.
Joint Venture investment
· After the year end, the Company announced the purchase price on the 21 option stores was formally agreed at £1,040 million. The purchase by Sainsbury's plc is expected to complete between March 2023 and July 2023 on expiry of the current leases.
· Sainsbury's has agreed to retain occupation of 4 of the 5 remaining stores within the Portfolio under a new 15-year lease agreement with five yearly open market rent reviews and a tenant break at year 10.
· The JV has exclusivity to purchase these stores for £68 million (excluding acquisition costs), reflecting a net initial yield of 6%, which can be exercised upon expiry of the current leases between March and July 2023. The remaining store is expected to be sold in March 2023 subject to vacant possession.
UNAUDITED SUPPLEMENTARY INFORMATION
Notes to EPRA and other Key Performance Indicators
1. EPRA Earnings per Share
|
For the period from 1 July 2021 to 30 June 2022 |
Net profit attributable
£'000 |
Weighted average number of ordinary shares1 Number |
Earnings/ per share Pence |
|
Net profit / (loss) attributable to ordinary Shareholders |
115,869 |
975,233,858 |
11.9p |
|
Adjustments to remove: |
|
|
|
|
Changes in fair value of interest rate derivatives |
(5,566) |
- |
(0.6p) |
|
Changes in fair value of investment properties and associated rent guarantees |
(21,820) |
- |
(2.2p) |
|
Group share of changes in fair value of joint venture investment properties |
6,021 |
-
|
0.6p |
|
Group share of gain on disposal of joint venture investment properties |
(37,102) |
- |
(3.8p) |
|
EPRA EPS |
57,402 |
975,233,858 |
5.9p |
1 Based on the weighted average number of ordinary shares in issue in the year ended 30 June 2022.
|
For the period from 1 July 2020 to 30 June 2021 |
Net profit attributable
£'000 |
Weighted average number of ordinary shares1 Number |
Earnings/ per share Pence |
|
Net profit / (loss) attributable to ordinary Shareholders |
83,526 |
652,858,945 |
12.8p |
|
Adjustments to remove: |
|
|
|
|
Changes in fair value of interest rate derivatives |
(1,570) |
- |
(0.2p) |
|
Changes in fair value of investment properties and associated rent guarantees |
(36,288) |
- |
(5.6p) |
|
Group share of changes in fair value of joint venture investment properties |
(5,619) |
- |
(0.9p) |
|
Group share of negative goodwill from joint venture investment |
(3,265) |
- |
(0.5p) |
|
EPRA EPS |
36,784 |
652,858,945 |
5.6p |
2 Based on the weighted average number of ordinary shares in issue in the year ended 30 June 2021.
2. EPRA NTA per share
EPRA NTA is considered to be the most relevant measure for the Group and is now the primary measure of net assets, replacing the previously reported EPRA Net Asset Value metric. For the current period EPRA NTA is calculated as net assets per the consolidated statement of financial position excluding the fair value of interest rate derivatives.
|
30 June 2022 |
EPRA NTA £'000 |
EPRA NRV £'000 |
EPRA NDV £'000 |
|
|
IFRS NAV attributable to ordinary Shareholders |
1,432,455 |
1,432,455 |
1,432,455 |
|
|
Fair value of interest rate derivatives |
(5,114) |
(5,114) |
- |
|
|
Fair value of Financial asset held at amortised cost |
(666) |
(666) |
(666) |
|
|
Intangibles |
(93) |
- |
- |
|
|
Purchasers' costs |
- |
113,935 |
- |
|
|
Fair value of debt |
- |
- |
4,320 |
|
|
EPRA metric |
1,426,582 |
1,540,610 |
1,436,109 |
|
|
EPRA metric per share |
115p |
124p |
116p |
|
|
|
|
|
|
|
|
30 June 2021 |
EPRA NTA £'000 |
EPRA NRV £'000 |
EPRA NDV £'000 |
|
|
IFRS NAV attributable to ordinary Shareholders |
871,310 |
871,310 |
871,310 |
|
|
Fair value of interest rate derivatives |
447 |
447 |
447 |
|
|
Intangibles |
(85) |
- |
- |
|
|
Purchasers' costs |
- |
83,787 |
- |
|
|
Fair value of debt |
- |
- |
(2,111) |
|
|
EPRA metric |
871,672 |
955,544 |
869,646 |
|
|
EPRA metric per share |
108p |
118p |
107p |
|
3. EPRA Net Initial Yield (NIY) and EPRA "topped up" NIY
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Investment Property - wholly owned (note 12) |
1,561,590 |
1,148,380 |
|
Investment Property - share of joint ventures |
266,500 |
233,125 |
|
Completed Property Portfolio |
1,828,090 |
1,381,505 |
|
Allowance for estimated purchasers' costs |
133,380 |
100,797 |
|
Grossed up completed property portfolio valuation (B) |
1,961,470 |
1,482,302 |
|
Annualised passing rental income - wholly owned |
77,230 |
57,754 |
|
Annualised passing rental income - share of joint venture |
13,372 |
13,239 |
|
Annualised non-recoverable property outgoings |
(400) |
(482) |
|
Less: contracted rent under rent free periods |
- |
- |
|
Annualised net rents (A) |
90,202 |
70,511 |
|
Rent expiration of rent-free periods and fixed uplifts |
56 |
- |
|
Topped up annualised net rents (C) |
90,258 |
70,511 |
|
EPRA NIY (A/B) |
4.60% |
4.76% |
|
EPRA "topped up" NIY (C/B) |
4.60% |
4.76% |
4. EPRA Vacancy Rate
|
EPRA Vacancy Rate |
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Estimated rental value of vacant space |
188 |
238 |
|
Estimated rental value of the whole portfolio |
77,237 |
57,762 |
|
EPRA Vacancy Rate |
0.2% |
0.4% |
5. EPRA Cost Ratio
|
|
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
Administration expenses per IFRS |
13,937 |
9,262 |
|
|
|
|
|
Service charge income |
(2,086) |
(830) |
|
Service charge costs |
2,338 |
1,044 |
|
Net Service charge costs |
252 |
214 |
|
Share of joint venture expenses |
95 |
292 |
|
Total costs (including direct vacant property costs) (A) |
14,284 |
9,768 |
|
Vacant property costs |
(99) |
(187) |
|
Total costs (excluding direct vacant property costs) (B) |
14,185 |
9,581 |
|
|
|
|
|
Gross rental income per IFRS |
72,363 |
48,156 |
|
Less: service charge components of gross rental income |
- |
- |
|
Add: Share of Gross rental income from Joint Ventures |
14,423 |
9,944 |
|
Gross rental income (C) |
86,786 |
58,100 |
|
|
|
|
|
EPRA Cost ratio (including direct vacant property costs) (A/C) |
16.46% |
16.81% |
|
EPRA Cost ratio (excluding vacant property costs) (B/C) |
16.34% |
16.49% |
6. EPRA LTV
The Group voluntarily adopted the EPRA issued new best practice reporting guidelines in the year ending 30 June 2022, incorporating the new measure of loan to value: EPRA Loan-to-Value (EPRA LTV) and is defined as net debt divided by total property market value.
The table below illustrates the reconciliation of the numbers under the new measures, where prior year comparative figures have also been restated in line with the new EPRA methodology.
|
|
As at |
As at |
|
|
30 June 2022 £'000 |
30 June 2022 £'000 |
|
Group Net Debt |
|
|
|
Borrowings from financial institutions |
348,546 |
409,684 |
|
Net payables |
24,893 |
17,053 |
|
|
|
|
|
Less: Cash and cash equivalents |
(51,200) |
(19,579) |
|
Group Net Debt Total (A) |
322,239 |
407,158 |
|
Group Property Value |
|
|
|
Investment properties at fair value |
1,561,590 |
1,148,380 |
|
Intangibles |
93 |
85 |
|
Financial assets |
10,626 |
- |
|
Total Group Property Value (B) |
1,572,309 |
1,148,465 |
|
Group LTV (A-B) |
20.49% |
35.45% |
|
|
|
|
|
Share of Joint Ventures Debt |
|
|
|
Bond loans |
88,121 |
95,394 |
|
Net payables |
822 |
865 |
|
JV Net Debt Total (A) |
88,943 |
96,259 |
|
Group Property Value |
|
|
|
Owner-occupied property |
|
|
|
Investment properties at fair value |
277,407 |
238,724 |
|
Total JV Property Value (B) |
277,407 |
238,724 |
|
JV LTV (A-B) |
32.06% |
40.32% |
|
|
|
|
|
Combined Net Debt (A) |
411,182 |
503,417 |
|
Combined Property Value (B) |
1,849,717 |
1,387,189 |
|
Combined LTV (A-B) |
22.23% |
36.29% |
7. Total Shareholder Return
|
Total Shareholder Return |
Year to 30 June 2022 Pence per share |
Year to 30 June 2021 Pence per share |
|
Share price at start of the year |
117.50 |
111.4 |
|
Share price at the end of the year |
119.50 |
117.5 |
|
Increase in share price |
2.00p |
6.1p |
|
Dividends declared for the year |
5.94p |
5.86p |
|
Increase in share price plus dividends |
7.94p |
11.96p |
|
Share price at start of year |
117.50p |
111.4p |
|
Total Shareholder Return |
7% |
11% |
8. Net loan to value ratio
The proportion of our gross asset value that is funded by borrowings calculated as statement of financial position borrowings less cash balances divided by total investment properties valuation.
|
Net loan to value |
As at 30 June 2022 £'000 |
As at 30 June 2021 £'000 |
|
|
Bank borrowings |
348,546 |
409,684 |
|
|
Less cash and cash equivalents |
(51,200) |
(19,579) |
|
|
Net borrowings |
297,346 |
390,105 |
|
|
Investment properties valuation |
1,561,590 |
1,148,380 |
|
|
Net loan to value ratio |
19% |
34% |
|
9. Annualised passing rent
Annualised passing rent is the annualised cash rental income being received as at the stated date.
COMPANY INFORMATION
|
AGM |
Annual General Meeting |
|
AIFMD |
Alternative Investment Fund Managers Directive |
|
Direct Portfolio |
Wholly Owned Properties held by the Group |
|
EPRA |
European Public Real Estate Association |
|
EPS |
Earnings per share, calculated as the profit for the period after tax attributable to members of the parent company divided by the weighted average number of shares in issue in the period |
|
FRI |
A lease granted on an FRI basis means that all repairing and insuring obligations are imposed on the tenant, relieving the landlord from all liability for the cost of insurance and repairs |
|
IFRS |
International accounting standards in conformity with the requirements of the Companies Act 2006 |
|
IPO |
An initial public offering (IPO) refers to the process of offering shares of a corporation to the public in a new stock issuance |
|
LTV |
Loan to Value: the outstanding amount of a loan as a percentage of property value |
|
NAV |
Net Asset Value |
|
Net Initial Yield |
Annualised net rents on investment properties as a percentage of the investment property valuation, less assumed purchaser's costs of 6.8% |
|
Net Loan to Value or Net LTV |
LTV calculated on the gross loan amount less cash balances |
|
Omnichannel |
Stores offering both instore picking and online fulfilment |
|
REIT |
Real Estate Investment Trust |
|
Running yield |
The anticipated Net Initial Yield at a future date, taking account of any rent reviews in the intervening period |
|
Sainsbury's Reversionary Portfolio |
A portfolio consisting of the freehold interest in 26 geographically diverse high quality Sainsbury's supermarkets |
|
Total Shareholder Return |
The movement in share price over a period plus dividends declared for the same period expressed as a percentage of the share price at the start of the Period
|
|
WAULT |
Weighted Average Unexpired Lease Term. It is used by property companies as an indicator of the average remaining life of the leases within their portfolios |
|
Directors |
Nick Hewson (Non-Executive Chairman) Vince Prior (Chair of Nomination Committee & Senior Independent Director) Jon Austen (Chair of Audit Committee) Cathryn Vanderspar (Chair of Remuneration Committee) Frances Davies (Chair of ESG Committee)
|
|
Company Secretary |
JTC (UK) Limited The Scalpel, 52 Lime Street, 18th Floor, London, EC3M 7AF
|
|
Registrar |
Link Asset Services The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU
|
|
AIFM |
JTC Global AIFM Solutions Limited Ground floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, Channel Islands, GY1 2HT
|
|
Investment Adviser |
Atrato Capital Limited 36 Queen Street, London, EC4R 1BN |
|
Financial adviser, Broker and Placing Agent |
Stifel Nicolaus Europe Limited 150 Cheapside, London, EC2V 6ET |
|
Auditors |
BDO LLP 55 Baker Street, London, W1U 7EU |
|
Property Valuers |
Cushman & Wakefield 125 Old Broad Street, London, EC2N 1AR |
|
Financial PR Advisers |
FTI 200 Aldersgate Street, London, EC1A 4HD |
|
Website |
|
|
Registered Office |
The Scalpel 52 Lime Street, 18th Floor, London, EC3M 7AF |
|
Stock exchange ticker ISIN |
SUPR GB00BF345X11 |
This report will be available on the Company's website.
END
[1] The alternative performance measures used by the Group have been defined and reconciled to the IFRS financial statements within the unaudited supplementary information
[2] Calculated as EPRA earnings divided by dividends paid during the year
[3] Includes the Q4 2022 interim dividend paid on 22 August 2022
[4] Includes property acquisition recognised as financial asset at amortised cost under IFRS
[5] Includes property acquisition recognised as financial asset at amortised cost under IFRS
[6] Inclusive of uncommitted accordion options
[7] Includes the Company's investment in the Sainsbury's Reversion Portfolio
[8] Inflation linked leases are subject to annual floors and caps
[9] Includes property acquisition recognised as a financial asset at amortised cost under IFRS
[10] Office for National Statistics
[11] Kantar: September 2022
[12] Kantar: August 2022
[13] Atrato Capital research
[14] Atrato Capital research
[15] Profits which are not derived from property rental business would be subject to corporation tax
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