Final results for the year ended 31.12.2020
Guernsey: 23 April 2021
LEI: 213800JN4FQ1A9G8EU25
UK Commercial Property REIT Limited
("UKCM" or the "Company")
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2020
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which is managed and advised by Aberdeen Standard Investments and owns a diversified portfolio of high quality income-producing UK commercial property announces its final results for the year ended 31 December 2020.
FINANCIAL REVIEW AND KEY PERFORMANCE INDICATORS
2020 FINANCIAL HIGHLIGHTS
· NET ASSET VALUE
NAV of £1.1 billion as at 31 December 2020 (2019: £1.2 billion) representing a NAV total return in the year of −0.9% as valuations came under pressure as a result of COVID-19. Over the longer term (10 years) the Company has delivered a NAV total return of 85.6% compared to the Association of Investment Companies ("AIC") peer group of 32.4%.
· EPRA EARNINGS PER SHARE
EPRA Earnings per Share of 2.71p (2019: 3.50p) as earnings were impacted by bad debt provisions and sales made in the year resulting in reduced income.
· SHARE PRICE TOTAL RETURN
A total return of −19.7% (2019: 11.3%) as the share prices of most diversified REITs fell due to negative sentiment associated with COVID-19. As at 31 March 2021, the Company's discount to the last published NAV was 16.7%, in line with other diversified REITs.
· LOW NET GEARING
Low net gearing of 6.4% (2019: 14.7%) which remains one of the lowest in the peer group and the wider REIT sector (AIC Sector average of 31.0%).
· SIGNIFICANT FINANCIAL RESOURCES
£218 million at the year-end (2019: £130 million) further boosted by sales in Quarter 1, 2021 resulting in the Company having £276 million to invest into the portfolio and enhance earnings.
· FIFTH INTERIM DIVIDEND
In order to comply with the REIT rules, the Board is pleased to announce shareholders will also receive a further interim dividend in relation to 2020 of 0.531p which will be paid on 21 May 2021 to shareholders on the register at 7 May 2021.
2020 PORTFOLIO REVIEW AND KEY PERFORMANCE INDICATORS
· PORTFOLIO PERFORMANCE
Portfolio produced a positive total return of 1.1% (2019: 1.4%), significantly outperforming the −0.9% (2019: 1.8%) from the MSCI benchmark as the Company's portfolio weightings provided a tail wind to relative performance.
· RENT COLLECTION
Rent Collection of 83% in 2020 (compared to 77% reported in the Interim Report and 97% for whole of 2019) as rent collection rates continued to increase as the year progressed.
· ACQUISITIONS
£74 million of acquisitions with funding of two student accommodation assets in Exeter and Edinburgh as well as an acquisition of an Asda store in Torquay. These assets will generate secure income as we build a modern economy portfolio.
· OCCUPANCY RATE
Occupancy rate of 93.5% (2019: 92.1%) has increased in the year despite COVID-19 as successful letting activity, in particular at XDock 77 in Lutterworth, resulted in higher occupancy levels than in the previous year. Also compares favourably to the MSCI benchmark occupancy rate of 92.6%.
· WELL-ALIGNED PORTFOLIO STRUCTURE
Industrial weighting of 58% (Benchmark: 30%) and Retail weighting of 17% (Benchmark: 25%). Portfolio strategy continues to be implemented with portfolio well aligned to Industrial sector that is forecast to outperform and underweight to the retail sector as a result of several sales in the year.
· ENVIRONMENTAL FOOTPRINT
In the reporting period, all landlord- procured electricity was from 100% renewable sources.
Commenting on the results, Ken McCullagh, Chair of UKCM, said:
"A key focus over the past year has been to work in partnership with our tenants to find mutually acceptable solutions to rent collection and I am pleased that UKCM, with its strong focus on ESG matters, has managed to do this with our occupiers across the portfolio. We have maintained dividend payments and we see potential for dividend growth in the short to medium term. There has also been good progress in selling assets in line with our strategy, further and selectively reducing retail exposure, and investing in assets fit for a diversified modern economy portfolio with an intentionally strong weighting to the industrial and logistics market."
"The past year has understandably resulted in profound changes to the way businesses operate and how individuals live their lives. Although there is much speculation over the future of the office sector, for example, as businesses adjust to hybrid working practices, UKCM is in a strong position and the success of the vaccine rollout thus far should provide confidence that businesses can reopen and rebuild."
"The portfolio that has been put in place over the last few years has enabled the Company to weather the current difficult situation and emerge in a position of relative strength to create additional value in the future."
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, added:
"2020 was a year of unprecedented challenges but as the vaccine rollout continues successfully, we are in a strong position as the economy begins to recover. Rent collection has remained robust, with 83% total rent for the year paid, and our asset management team continues to actively work with occupiers where appropriate."
"COVID-19 has accelerated some of the structural trends that were already underway, which has benefitted industrial and logistics in particular. Our overweight position to this sector, as a result of our long term strategy, and the outperformance of our assets have delivered strong returns against the benchmark. Positive leasing activity, notably at Ventura Park in Radlett and Magna Park in Lutterworth, have significantly reduced our voids while increasing income and occupancy."
"We have also continued to sell out of those retail assets we believe will underperform, with retail now accounting for only 17% of our portfolio, and no shopping centre and limited high street exposure. Our divestment activity has continued into 2021, giving us £276 million of available capital as we continue to look for opportunities to invest in modern economy, future fit property sectors that are supported by structural changes, while ensuring our investors benefit from the geographic and sector diversification our portfolio affords."
PERFORMANCE SUMMARY
|
CAPITAL VALUES AND GEARING |
31 December 2020 |
31 December 2019 |
% Change |
|
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|
CAPITAL VALUES AND GEARING |
|
|
|
||||
|
Total assets less current liabilities (excl. bank loan) £'000 |
1,324,825 |
1,414,591 |
(6.3) |
||||
|
IFRS Net asset value £'000 |
1,126,976 |
1,167,144 |
(3.4) |
||||
|
Net asset value per share (p) |
86.7 |
89.8 |
(3.4) |
||||
|
Ordinary share price (p) |
69.0 |
88.8 |
(22.3) |
||||
|
Discount to net asset value (%) |
(20.4) |
(1.1) |
n/a |
||||
|
Gearing (%) - Net* |
6.4 |
14.7 |
n/a |
||||
|
Gearing (%) - Gross** |
15.1 |
17.7 |
n/a |
||||
|
|
|
|
|
||||
|
|
1year %return |
3year %return |
5year %return |
||||
|
TOTAL RETURN |
|
|
|
||||
|
NAV† |
(0.9) |
3.8 |
20.8 |
||||
|
Share price† |
(19.7) |
(12.4) |
(0.5) |
||||
|
UKCM Direct portfolio |
(1.1) |
(8.5) |
(27.1) |
||||
|
MSCI UK Balanced Portfolios Quarterly Property Index |
(0.9) |
7.9 |
23.8 |
||||
|
FTSE Real Estate Investment Trusts Index |
(16.2) |
(4.1) |
0.2 |
||||
|
FTSE All-Share Index |
(9.8) |
(2.7) |
28.5 |
||||
|
|
|
|
|
||||
|
|
31December 2020 |
31December 2019 |
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EARNINGS AND DIVIDENDS |
|
|
|
||||
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Net (loss)/profit for the year £'000 |
(10,282) |
1,643 |
|
||||
|
EPRA Earnings per share (p) |
2.71 |
3.50 |
|
||||
|
IFRS Earnings per share (p) |
(0.79) |
0.13 |
|
||||
|
Dividends paid per ordinary share (p) |
2.3 |
3.68 |
|
||||
|
Dividend yield (%)# |
3.3 |
4.1 |
|
||||
|
MSCI benchmark yield (%) |
4.7 |
4.8 |
|
||||
|
FTSE Real Estate Investment Trusts Index Yield (%) |
3.1 |
3.9 |
|
||||
|
FTSE All-Share Index yield (%) |
3.4 |
4.1 |
|
||||
|
ONGOING CHARGES AND VACANCY RATE |
|
|
|
||||
|
As a % of average net assets including direct property costs |
1.5 |
1.5 |
|
||||
|
As a % of average net assets excluding direct property costs |
0.8 |
0.8 |
|
||||
|
Vacancy rate (%) |
6.5 |
7.9 |
|
||||
* Calculated as net borrowings (gross borrowings less cash) divided by total assets less current liabilities (excl cash and borrowings).
** Calculated as gross borrowings divided by total assets less current liabilities (excl borrowing).
† Assumes re-investment of dividends excluding transaction costs.
# Based on dividend paid in 2020 of 2.3p and the share price at 31 December 2020.
Sources: Aberdeen Standard Investments, MSCI
CHAIR'S STATEMENT
Background
The past year will be remembered and marked for many years to come. The arrival of the COVID-19 virus on our shores has resulted in the workplace and living environment undergoing profound change. Whether this change is permanent will be not be clear for some time, but many people have suffered and it has had a dramatic effect on how we live our lives.
We have experienced a time where all businesses have been affected throughout the economy by the pandemic and the uncertainty around the agreement of a deal on Brexit. While some industries have prospered many others have been severely impacted. The vaccine rollout will hopefully see an end to periods of lockdown and provide confidence that business can reopen and rebuild in the years ahead.
In the context of UKCM we have had to adjust and evolve as the business has adapted over the last year. We have been conscious of the challenges on our tenants, our asset managers and our shareholders and the obligation to protect all of our stakeholders through a difficult time. The key focus for landlords has been on rent collection given the unprecedented financial pressures that some tenants have suffered as a result of the start/stop nature of the various lockdowns. It is incumbent on responsible landlords to work in partnership with tenants to find mutually acceptable solutions and I am pleased that UKCM, with its strong focus on Environmental, Social and Governance ("ESG") matters, has managed to do this with many tenants in its portfolio. We have also continued to maintain the payment of a dividend which reflects our commitment to our shareholders in uncertain times.
The UK commercial real estate market has always been heavily linked to the performance of the nation's economy and hence, as with the wider economy, COVID-19 has had a major impact.
This manifested in a large reduction in investment transactions over the course of the year and, in many sectors, declining rental and capital values, resulting in valuation falls. The main exceptions to this were build-to-rent residential, supermarkets and logistics units.
UKCM Review
Against this background, UKCM has continued to make good progress. We have sold assets in line with our strategy, further and selectively reducing retail exposure, and invested in assets fit for a diversified modern economy portfolio with an intentionally strong weighting to the industrial/ logistics market. Combined with an institutional tenant base, strong balance sheet and minimal gearing at a low cost, overall this has resulted in a measure of protection against the difficult financial environment caused by COVID-19.
Portfolio Activity
The Company has been active in the year, even given COVID-19, with three retail sales totalling £94 million further reducing the sector weighting to 17% at the end of 2020 (2019: 21%) and significantly below the benchmark weighting of 25%. These sales have the dual benefit of reducing risk and generating capital which can be recycled into opportunities with more positive longer-term fundamentals. This approach was also in evidence with the sale of the Company's one remaining City of London office, Eldon House, as well as the sale of the M8 Industrial Estate, just outside Glasgow.
More specifically, our strategy is to re-invest into in a modern economy portfolio. During the year we announced two such new investments - a supermarket in Torquay with the benefit of an index-linked rental stream and the development funding of a new 221 bed student residential development in Exeter, adjacent to the main university campus, which will be completed in time for the 2022/23 academic year. In addition, post year end we increased our exposure to this development of a strategically located purpose built 230 bed student accommodation asset in Central Edinburgh, also scheduled for delivery in 2022. We believe both these student accommodation investments are in prime locations that will prove attractive for students and provide a sustainable income stream.
Post the year end the Company continued to implement its portfolio strategy by selling Kew Retail Park to a housebuilder for £41 million, thereby further reducing the Company's exposure to retail and also Hartshead House in Sheffield for £17 million, where there is increasing credit risk in relation to the sole tenant.
Further details on all investment transactions and significant lettings are given in the Investment Manager's Review.
Portfolio and Corporate Performance
In 2020 the UKCM portfolio performance was a tale of two halves with values under pressure in the first half of the year when the COVID lockdown was at its nadir, but rebounding strongly in the second half. This resulted in an overall annual portfolio return of 1.1%, significantly outperforming the benchmark performance of -0.9%. This performance was driven by the fact that the portfolio is well aligned to parts of the economy that are supported by strong structural drivers, being significantly overweight in the industrial sector and underweight in retail. In addition, the underlying UKCM assets in the industrial sector have contributed to relative out-performance due to positive letting activity.
377,000 sq.ft. XDock 77 to Armstrong Logistics which also reduced the vacancy rate by over a third. This strong industrial performance more than offset the negative performance of the Company's retail and leisure holdings, the latter exposed to cinemas and restaurants which have been particularly impacted by the lockdowns.
Over the longer term the portfolio has outperformed the benchmark over three and five years and since inception as the portfolio strategy that has been undertaken begins to bear fruit.
Further details on the Company's portfolio performance are given in the Investment Managers' review.
The portfolio performance was the main driver behind a -0.9% NAV total return for the period, a relatively robust return given COVID-19. The share price return, taking into account dividends paid over the period, was significantly lower at -19.7% as the discount at which the Company's shares traded versus their net asset value increased from 1.1% at the end of December 2019 to 20.4% at 31 December 2020 as overall market sentiment to the UK commercial property market deteriorated during the year. As at 31 March 2021, the discount stood at 16.7% and continues to be in-line with other diversified peers in the Association of Investment Companies ("AIC") Property - UK Commercial peer group.
Over the longer term the Company has outperformed the AIC peer group on both a NAV and share price total return basis delivering 85.6% and 40.0% respectively over ten years compared to the 32.4% and 10.8% returns from the peer group.
Financial Resources
UKCM continues to be in a strong financial position. The NAV as at 31 December was £1.1 billion and, with low net gearing of just 6.4% (gross gearing of 15.1%), UKCM remains one of the lowest geared companies in the AIC peer group and the wider REIT sector, a positive position to be in at a time when many values have been declining and uncertainties remain. The Company continues to be comfortably within the covenants on its three debt facilities and had over £418 million of unencumbered assets at the year end which provide further significant headroom and flexibility with respect to the Company's covenants and overall gearing strategy.
The Company had substantial financial resources available at the year end of £218 million comprising £68 million of uncommitted cash and £150 million undrawn from the Company's low cost, flexible revolving credit facility ("RCF"). Post year end uncommitted cash was further boosted by £58 million from the aforementioned sales of Kew Retail Park and Hartshead House in Sheffield.
In terms of the utilisation of these resources, the Company, through its Investment manager, continually explores and assesses potential opportunities especially in the current disrupted market environment. However, it should be highlighted any acquisitions need to be consistent with the ongoing portfolio strategy of building a modern economy portfolio while also providing sustainable income.
Rent Collection
The Board has been acutely aware of its responsibility to all the Company's stakeholders during COVID-19 and maintaining a high level of ESG standards. This has also been demonstrated through the Company's approach to tenants during the period of the COVID-19 pandemic where requests for rental assistance have been approached by the UKCM asset management team in a manner which is fair and, where possible, is balanced by a future benefit for the Company. Throughout the last 12 months UKCM has put in place a number of rent deferrals and monthly lease payment structures for tenants which are designed to assist both the tenant and the Company with a number of these leading to lease renegotiations, creating value through securing longer lease commitments in return for short-term rent incentives/support.
As at the end of 2020, the overall rent collection for the four rent quarters of 2020 was 83% with the remaining 17% being a mixture of deferred rents, lease renegotiations, continuing arrears or in some cases the rent having been subsequently received.
Dividends
The Board recognises that the payment of an attractive sustainable dividend is of primary importance to many shareholders, particularly in this low interest rate environment and when COVID-19 has forced many listed companies, both in the real estate sector and beyond, to cancel or suspend their dividends.
The Board took the decision to use the strength of the Company's balance sheet to maintain shareholder distributions throughout this period of uncertainty and paid a dividend throughout the year at 50% of the pre-pandemic level. In order to comply with the REIT rules, the Board is pleased to announce shareholders will also receive a further interim dividend in relation to 2020, of 0.531p which will be paid on 21 May 2021 to shareholders on the register at 7 May 2021.
Looking forward, there is the potential for a progressive dividend in the next 18 months as and when investment activity is undertaken and earnings are on a sustainable upward trajectory.
Environmental, Social and Governance ("ESG")
As highlighted above the Board takes corporate citizenship very seriously and, in that respect, reduced Directors' fees by 20% from April 2020 through to the year-end given COVID-19. The Board is also pleased with the number of ESG initiatives under way across the portfolio. These are detailed in the UKCM's ESG document entitled "Dialling up the Integration of ESG" which is available on our website at the link below and which I would urge all UKCM stakeholders to read:
https:/ /www . ukcpreit.com/en/literature-library
Annual General Meeting ("AGM")
At the time of writing, elements of the National Lockdown remain in place and the timetable for easing restrictions is not assured. Shareholder attendance at AGMs currently is not legally permissible and, therefore, to provide certainty in arrangements, the AGM will regrettably be conducted as a closed meeting. However, the Board continues to welcome engagement with shareholders and encourages shareholders to ask questions in advance of the AGM. A Question & Answer Session, responding to shareholder questions, will be recorded and published on the Company's website in early June before the AGM and questions can be submitted to commercial.property@aberdeenstandard.com .
Voting at the closed AGM will be conducted on a poll, with the Chairman of the AGM holding the proxy votes. We, therefore, request all shareholders to submit their votes ahead of the deadline of 16 June to ensure that their votes are registered and counted.
The Board hopes to be able to welcome shareholders in person to the AGM next year.
Outlook
As the vaccine rollout continues, and in the expectation restrictions are gradually eased, then the key question is how fast and to what extent the economy can rebound from the seismic impact of the pandemic which resulted in a 9.9% fall in UK GDP in 2020. Another factor that may impact the strength of the economy is the Brexit trade deal between the UK and Europe and whether this will result in significant disruption between the two trading blocs. Our Investment Manager is forecasting 6.2% GDP growth in 2021, on the basis there are no further setbacks.
It remains to be seen whether valuations of UK commercial real estate, which were already under pressure pre COVID-19, will recover to the same extent as the wider UK economy with valuation movements and hence total returns likely to be polarised between the sectors and within sectors. COVID-19 accelerated the structural retail trend away from the high street and shopping centres to online retail and while this trend may flatten out, or indeed partially recede, as people are allowed back to the shops, it is unlikely to completely reverse. There is much speculation over the future of the office sector as businesses adjust to hybrid working practices. However, there is no doubt that some offices will act more as collaboration hubs, reducing the requirement for office space, and that there will be an even more distinct polarisation between well located prime modern offices that fulfil the modern occupiers' exacting requirements and older, more secondary stock which will fall out of favour. Leisure should recover to an extent but this will be very much linked to the easing of lockdown and the public being both able and confident enough to visit places like cinemas and restaurants.
UKCM is in a strong position. The portfolio is overweight to the industrial sector and underweight to the retail sector which should provide positive relative portfolio performance. On the corporate side the Company has a robust balance sheet with low gearing and significant financial resources. This will allow us to invest into opportunities that can boost earnings as they arise, further enhance our modern economy portfolio and maintain UKCM's status as one the UK's largest diversified REITs. When combined with more normalised rent collection levels, this should also allow for a progressive dividend.
Overall, the portfolio and financial foundations that have been put in place over the last few years have enabled the Company to both weather the current difficult situation and emerge in a position of relative strength to create additional value in the future.
Ken McCullagh
Chair
22 April 2021
INVESTMENT MANAGER REVIEW
Market Review
UK gross domestic product (GDP) fell by 9.9% in 2020, the largest annual decline in output in 300 years. The effects of the pandemic were far reaching, with no sector of the economy coming out unscathed. However, the UK did record GDP growth of 1% between October and December, meaning that the economy avoided a double-dip recession. Less stringent restrictions in the run-up to Christmas enabled the UK to record growth of 1.2% in the month of December, following a 2.6% dip in November. New lockdown measures implemented at the very end of 2020 are likely to result in the economy shrinking by 4% in the first quarter of 2021. Although largely dependent on a smooth vaccine roll out, the UK economy is expected to see growth return in the second half of 2021.
Returns in the UK real estate market turned negative in 2020, with a total annual return of −2.3% for the MSCI Quarterly index (this is different from the Company's benchmark which is the MSCI UK Balanced Portfolios Quarterly Property Index benchmark), the first negative calendar year since 2008. As was the case pre-pandemic, returns at the sector level remained highly polarised with industrials and residential being the two most prominent of very few sectors to post positive total returns during the year. The industrial sector was the stand out performer, recording another strong year with returns of 9.2%, aided by capital value growth of 4.6%. Both South East and rest of UK industrials had a strong 2020, with total returns of 10.1% and 7.6% respectively. The retail sector continued to weigh on all commercial property returns with a total return of −12.4% and values falling by 17.1% over the course of the year. At -1.0% in Q4, the office sector saw its weakest quarterly return since Q3 2016, contributing to an annual return of −1.7%.
The fourth quarter rally in 2019 for the FTSE UK REIT index was quickly unwound in the first quarter of 2020 as the pandemic took hold. During the first quarter of 2020, the index recorded a total return of −27%, and despite a late vaccine relief rally in the final months of 2020, the FTSE UK REIT index delivered a total return of −15.9% for the full year, underperforming the wider UK equity market by 4.2%. The hierarchy of favoured sectors remains broadly the same, with the variance in NAV's between the most and least favoured sectors becoming more pronounced. Industrial names benefited from a clear acceleration in structural shifts towards online retailing, largely to the detriment of retail REITs. As a result, pricing is holding up better for the former, whereas pricing for retail REITs continue to trade a deep discounts to NAV. With uncertainty surrounding the outlook for the office occupational market, London office developers continue to trade at discounts to NAV.
COVID-19 has created near-term cyclical headwinds for the UK real estate sector, whilst providing the catalyst for acceleration in structural trends that were already underway pre-pandemic.
The requirement for more flexible workplace arrangements is evident in the office sector and a number of companies are reassessing their requirements in light of more flexible working arrangements. Take-up was down across major office markets and availability rates rose sharply. Demand for the best quality space has proven to be more resilient and this is likely to be the case going forward for the sector. The clear beneficiary in the acceleration of structural changes was the industrial and logistics sector. The logistics sector recorded its strongest year of take-up on record in 2020 as the closure of non-essential retail units, for a large part of the year, facilitated a greater transition to online retailing. Despite the obvious challenges, the COVID-19 impact on UK retail has not been homogenous across all retail sub-sectors as illustrated by the resilience of supermarket trading. In fact, the supermarket sector benefited from unprecedented Christmas demand in 2020, with take home grocery sales rising 11.4% year-on- year over the 12 weeks to December 27 according to Kantar data.
Review by Sector
Office
The office sector delivered a total return of −1.7% in 2020 according to the MSCI Quarterly Index. The −1.0% total return delivered in Q4 was the weakest quarterly return for offices since the third quarter of 2016. However, the headline number masks significant variation in returns both geographically and even within cities.
Within Central London there was a clear divergence in performance, where City offices recorded a total return of 1.1% with values declining by −2.2% in 2020. Conversely West End offices recorded a total return of
−5.8% in 2020, with values down −8.8% over the year. Regional offices experienced capital value declines of −4.2%, resulting in a marginally positive total return of 0.3% over the year. This performance is unsurprising given that the pandemic has resulted in a noticeable deterioration in the occupational market for both regional and Central London offices.
Aside from the more short-term cyclical disruption COVID-19 has undoubtedly hastened, it has created longer term structural challenges for the sector. The increased prominence of working from home for the majority of office based staff has resulted in some occupiers putting requirements for future space on hold while they evaluate how to deal with more agile working arrangements. The result was a reduction in take-up of over 50% in 2020, with both vacancy and availability rates at the year end across Central London increasing to 8.1% and 10% respectively.
However, it is important to highlight a clear distinction by building quality. The availability of Grade A office space remains well balanced in the capital, as it does in key regional markets, especially for larger floorplates. But there has been a sharp increase in sub-let or so called grey space coming to the market, accounting for 75% of the total in London. Similar trends were witnessed in the regions, with take up down 33% on the ten- year average within the largest nine regional office markets. There remains scant evidence of the weak occupational market putting material downward pressure on headline rents at this point, but the momentum by the end of 2020 was negative as rents declined by −0.8% over the course of the year. We therefore expect to see further rental declines in 2021 as more evidence becomes apparent. The office sector will remain an area of significant change, with a greater divergence in returns expected between offices that meet occupier needs, and those that do not.
Retail
According to the MSCI Quarterly Index, the retail sector delivered a total return of −12.4% in 2020, with values falling by 16.9%. That overall performance masks significant dispersion within the sector, however. Shopping centre values collapsed by just under 30% over the last 12 months, dwarfing the 17.7% fall in value seen in 2019. Average shopping centre values now sit 66% below their 2007 peak level and, with virtually no investment market liquidity, pricing suggests further falls in 2021.
In complete contrast, supermarket values rose by 1.2% in 2020, with their status as essential infrastructure and their long, secure income profiles proving highly attractive to investors.
Retail warehouses, which represent a broad church of assets, sit right in-between, with values down 15.8% on average over the last 12 months. Solus units, many let to DIY or discount operators on long leases, lost only 8.8% of value on average. By the end of the year, solus units had stabilised and begun to see modest capital growth. But the largest parks, often with more exposure to the fashion sector, saw values fall by nearly 21% in 2020.
Meanwhile, high streets have also suffered from a collapse in footfall and the enforced closure of fashion occupiers. For the first time, Central London has not been immune, with values down 17.2%, compared with a national average of 20%. Indeed, London suffered the most of any region in the final quarter. The impact of COVID-19 on international travel and office-related footfall going forward is a major threat to retail and hospitality businesses in London, where rents and business rates have soared over the last 10 years.
While the government has provided significant support and protection for retailers since the pandemic began, a number of measures are due to expire from the spring of this year, which could herald further business failures and rising vacancy rates. The polarisation between positive performance from assets in essential retail use, relying on predictable local catchment spending, and discretionary retail that is hamstrung by travel limitations and trading restrictions which may continue for much of 2021.
In the longer term, the acceleration of sales transitioning online during the pandemic and greater prevalence of turnover-based rental payments is expected to mean a further rebasing of rents across discretionary retail locations. In contrast, however, the step change in online grocery spend underpins the importance and performance prospects of the dominant, well-configured supermarkets that are crucial for fulfilment and last-mile distribution.
Industrial
Industrial maintained its position as the best performing UK commercial real estate sector for the fourth consecutive year. The sector delivered a total return of 9.2% in 2020, with values rising by 4.6% according to the MSCI Quarterly Index. Sentiment remains very positive given the favourable structural drivers of the occupier market, especially for space constrained logistics in urban areas. This is particularly the case in the South East where the segment recorded a total return of 10.1%, driven by capital growth of 5.9%.
Within industrial, London was the strongest performer, delivering a total return of 7.9% in Q4 and 12.3% for the calendar year. Despite a year categorised by multiple lockdowns and impeded travel and inspections, investment levels reached £10.1bn in 2020, the highest level recorded since 2017. Accounting for 22% of total UK real estate investment activity this was the highest market share on record for industrial.
The pandemic clearly resulted in an acceleration in the transition to online retailing which was reflected in the occupational market. The UK logistics sector experienced a record year of take-up in 2020 with 50.1 million sq ft of new leases agreed on warehouse space, 12.7 million sq ft ahead of the previous record set in 2016 according to Savills. It is interesting to note that while leases agreed with Amazon accounted for a quarter of all take-up last year, without these and excluding short-term deals, sector leasing still set new records.
Aided by this record year, the vacancy rate for the logistics sector now stands at 5.7% at the national level and an even lower 3.5% in London and the South East. Market fundamentals remain supportive for continued rental growth driven a structurally supportive demand outlook.
Alternatives
The UK real estate alternative sector, or "Other Property" as it is categorised by MSCI, represents real estate which falls outside the traditional 'Retail', 'Office' or 'Industrial' definitions. This sector recorded a total return of −5.3% in 2020.
This is predominantly due to the large weighting of leisure and hotels within the sample. Returns for these segments during the year were −14.6% and −2.6% respectively. Both of these consumer facing segments have borne the brunt of the difficulties created as a result of the pandemic, with the path to recovery expected to be gradual and not without its challenges, especially for the hospitality sector.
The Purpose Built Student Accommodation (PBSA) sector continued to attract investor interest, despite lockdowns inhibiting the return of students to university. In the face of a challenging occupational backdrop, the sector still managed to deliver a total return of 4.9% in the year to September 2020 according to CBRE. As was the case with the majority of sectors, PBSA returns were highly polarised. Prime assets which are aligned to top tier universities significantly outperformed secondary assets.
Early indications from UCAS illustrate that applications for the 2021/22 academic year look positive and, provided a vaccine can be rolled out by September 2021, these are expected to be converted into bookings.
Investor interest in the build to rent (BtR) sector continued unabated in 2020, recording its highest annual investment total on record at £3.5 billion, with a number of new entrants to the market announced during 2020.
Although these sectors remain nascent compared to more developed international markets, there remains significant interest given their more resilient performance during the pandemic.
Market Outlook
A renewed sense of optimism moving into 2021, with a no-deal Brexit averted and the vaccine starting to be rolled out, was tempered, at least initially, by the latest national lockdown as investors began to assess the potential damage to occupier markets. With liquidity also impaired in the first quarter, 2021 looks set to be a year of two halves for the investment market. Provided vaccinations can be rolled out at sufficient scale in the first half of the year to materially supress the virus, we expect to see a recovery in activity in the second half of 2021.
With the macroeconomic backdrop likely to be challenging, particularly in the first half of the year, the basket of "All Property" capital values are expected to fall this year. Significant dispersion across, and even within sectors, is predicted to remain a key feature of the market during 2021. While we expect positive capital value growth for the industrial sector, the same cannot be said for the retail sector where rents will experience further downward pressure and yields are expected to move out, particularly for discretionary retail. The supermarket sector is a clear exception to the retail story as the sector's long, secure income profiles remain highly attractive to investors, providing support for capital values.
As such, many current investment strategies will continue to favour sectors with more defensive characteristics such as logistics and supermarkets, which are positively impacted by, or largely insulated from, the ongoing pandemic.
Portfolio Performance
During the reporting period, the Company's property portfolio generated a total return of 1.1% versus −0.9% for its MSCI benchmark. This strong relative outperformance was predominantly attributable to the Company's overweight industrial position and the outperformance of its assets in this sector.
Since inception and over one, three and five years, the Company's portfolio has outperformed its MSCI UK Balanced Portfolios Quarterly Property Index benchmark.
The table adjacent sets out the components of these returns for the year to 31 December 2020 with all valuations undertaken by the Company's external valuer, CBRE Limited.
Industrial Capital Growth
The industrial portfolio's capital growth at 6.9%, well above the benchmark at 4.9%, has been the major driver of performance and has partially mitigated capital value declines across the other sectors. A whole portfolio capital decline of 2.7% was almost half the 5.2% decline for the benchmark. The income return has lagged the benchmark at 3.9% v 4.5% after accounting for challenging rent collection from the retail and leisure tenants and enhanced provision for bad debt.
The Company has continued to grow its industrial exposure with a 58% allocation of assets in the sector, up from 51% at the end of 2019. This heavily overweight exposure has been a major driver of returns over the year, most notably amongst the assets situated in London and the South East where shortages of space have driven capital and rental value growth. We have seen good tenant demand driving income returns and occupancy, most notably through leasing XDock 377 in Lutterworth.
The Company has continued to sell down risk in the retail sector, which has been heavily impacted by the COVID-19 pandemic, reducing exposure to 17%. With no shopping centres and limited high street exposure the Company has 77% of its retail holdings in the more resilient out-of-town sector and a further 15% in supermarkets which have arguably benefited from the disruption of the last year.
|
|
Total Return * |
Income Return |
Capital Growth |
|||
|
|
Fund % |
Benchmark % |
Fund % |
Benchmark % |
Fund % |
Benchmark % |
|
Industrials |
10.7 |
9.4 |
3.6 |
4.3 |
6.9 |
4.9 |
|
Office |
-4.2 |
-1.5 |
4.9 |
3.9 |
-8.8 |
-5.1 |
|
Retail |
-10.5 |
-9.6 |
5.1 |
5.6 |
-14.6 |
-14.4 |
|
Leisure/Other |
-15.2 |
-2.2 |
1.8 |
4.2 |
-16.8 |
-6.1 |
|
Total |
1.1 |
-0.9 |
3.9 |
4.5 |
-2.7 |
-5.2 |
Source: MSCI
* Multi-period capital growth and income return may not sum perfectly to total return due to the cross product that occurs as income is assumed to be reinvested on a monthly basis and is subject to capital value change.
Industrial
The industrial portfolio, now 58% of the Company's holdings by capital value, has delivered a strong total return for the year of 10.7% against the benchmark return of 9.4%. The greatest contributor to Fund performance was Ventura Park in Radlett where positive leasing activity and sharpening yields drove a 14.4% return for the year in the company's largest holding with a value of over £125 million.
In addition to this, the other four of the Company's top five largest contributors to outperformance were in the industrial sector. We saw strong capital growth at Dolphin Estate at Sunbury-on-Thames (West London), the Ocado unit at Hatfield and our unit in Neasden (North West London) which we had recently let to Amazon. The other major contributor to outperformance was XDock 377, Magna Park, Lutterworth, which was let in the third quarter to Armstrong Logistics on a 15 year lease at a rent of
£2.45 million per annum. This was previously the largest void in the company and the letting will increase income and occupancy.
Office
The Company's office portfolio had a disappointing year delivering a total return of −4.2% compared to the benchmark return of −1.5%. Although the income return was significantly ahead of the benchmark, this was offset by capital declines of 8.8%.
The largest capital declines were at Apsley 2 in Hemel Hempstead, where the tenant vacated the asset, and at Colmore Row in Birmingham where the short unexpired lease terms on a number of leases led to a great decline in valuation.
The Company reduced its exposure to the Central London market with the sale of Eldon House, EC2 in the second quarter. The sale at £40 million crystallized a significant profit following its purchase for £27.8 million in 2015 and the completion of its asset management strategy. Craven House in Soho is the Company's last remaining Central London office comprising 2.4% of the portfolio.
Retail
Performance of the Company's retail portfolio, which made up 17% of the total by value at the year end, was broadly in line with the benchmark at −10.3% v −9.6%. It was a challenging year for physical retailing with a number of enforced closures and this was reflected in capital declines of 14.6%.
The Company completed two retail sales over the year, at Tunbridge Wells and Horsham, which reduced short/medium term void risk and potential capital expenditure.
UKCM has no shopping centres and limited high street exposure, with the vast majority of the portfolio in retail warehouses and supermarkets. These sectors have proved more resilient through the COVID-19 pandemic as this larger format retail is generally in car borne locations and offers greater flexibility to allow shopping with social distancing. Further selective disposals may be considered where income is at risk.
Alternatives
It was an unprecedented 12 months for the alternatives sector with the impact of COVID-19 forcing many businesses to remain closed through the year. Of all the property sectors leisure and hotels have seen the greatest impact upon their operations, with uncertainty over when many properties will reopen and how they will be used in the future. A large proportion of the Company's alternative holdings, some 69%, are in cinema-anchored leisure schemes. Whilst the cinemas at the largest two of these assets, Odeon at The Rotunda in Kingston upon Thames and Cineworld in Glasgow, are believed to be "top-UK" trading cinemas in a normal environment, the impact of COVID caused these two assets to be amongst the five largest negative contributors to portfolio performance.
Total returns were −15.2% v −2.2% benchmark driven by large capital declines at the cinema anchored leisure assets. Rent collection was also challenging over the year as many tenants refused to pay rent as their businesses remained closed. This drove a low income return for the year of just 1.8%.
Investment Activity
Despite the complications caused by the COVID-19 pandemic we have completed a number of sales and purchases over the year as we continue to recycle capital out of higher risk assets predominantly in the retail sector and into assets offering more durable income streams.
Sales
The Company completed five sales in the year. In February we sold Motor Park, which comprises seven car showrooms and two office pavilions in Portsmouth, to Glasgow City Council for £29.8 million. The sale crystallised the value created by a successful programme of active asset management, which increased the weighted unexpired lease length at the asset, with new leases to Snows Business Holdings, which operates BMW, Mini and SEAT franchises, and Harwoods, which operates an Audi franchise.
In March, we completed the sale of Broadbridge Retail Park, Horsham for £18.1 million in line with valuation. The retail park had exposure to Homebase and Carpetright both of which have been through CVAs and the disposal was in line with our strategy of reducing exposure to riskier retail assets.
In May 2020, the Company completed the disposal of Eldon House in the City of London for £40 million. With headwinds in the office sector caused by the COVID-19 pandemic and uncertainty over when and how occupiers will reoccupy space, the Central London office market looks particularly vulnerable. The sale successfully crystallized a profit from the completed asset management activity at the asset.
In September we completed the sale of Great Lodge Retail Park, Tunbridge Wells for £46.25 million. The net sale price was in line with the valuation and was a continuation of UKCM's strategy to reduce its retail exposure. UKCM had undertaken a programme of active asset management at the retail park, agreeing new leases to ALDI and Starbucks. Other tenants include B&Q, DFS and Curry's.
We also sold the M8 Interlink industrial estate near Glasgow in Scotland for £25.4 million in December. The sale was opportunistic with a price ahead of valuation and in line with UKCM's strategy to generate capital for reinvestment into opportunities with longer-term fundamentals, including in the alternatives sector.
Post year end the portfolio strategy continued apace with the sale of Hartshead House in Sheffield for £17 million and Kew Retail Park for £41 million both of which were forecast to have limited future returns. At Kew, despite only owning part of the wider retail park, we capitalised on housebuilder interest for strategic London sites having worked to position the lease profile to better allow future redevelopment. These sales generated further capital to invest into income accretive properties, particularly modern economy assets with the potential to deliver sustainable and growing income returns over the long term.
Purchases
The Company completed two acquisitions over the year and exchanged contracts for a further transaction in December 2020 (which subsequently completed early in the New Year).
In March, and in line with the expanded investment policy, the Company agreed a land purchase and development funding agreement for a new 221 bed student residential development in central Exeter, adjacent to the main university campus. The scheme is due to complete in time for the 2022/2023 academic year and benefits from a high proportion of more affordable cluster units and excellent ESG credentials. The land, with full planning permission, was acquired for £6.5 million with an additional capped funding commitment of c.£21.5 million. The asset is the Company's first operational holding which will see UKCM appointing an operator to run the asset on our behalf and enter into direct tenancy agreements with students; it is anticipated that we will take control of the site and asset in late summer of 2022 and we anticipate a net operating yield of 5.6%.
In December we completed the acquisition of an ASDA supermarket in Torquay, for £16.6 million. The store has 15.5 years remaining on the lease with five yearly RPI linked rent reviews and benefits from a tight catchment with limited competition. Although we have been looking to sell down our retail exposure, the supermarket sector is the exception to the rule, offering durable income streams and not under the same pressures faced by the majority of the sector.
Finally, in December we exchanged contracts to acquire a site and enter into a development funding agreement for the development of a 230 unit student accommodation scheme in Edinburgh and concluded the transaction in January 2021 for a total commitment of £29.1 million from which we anticipate generating a net operating yield of 5.5%. The University of Edinburgh has an outstanding global reputation being ranked in the top 30 in the world in The Times' ranking and with over five applications for every available academic space. The property is in a prime position in the traditional accommodation heartland for the University of Edinburgh, whilst also being conveniently located for Napier and Heriot Watt Universities. As with Exeter it is anticipated that we will take control of the site and asset in the summer of 2022, in time for the 2022/2023 academic year.
Asset Management Activity
Due to the unprecedented impact of the COVID-19 Pandemic on the UK economy there was a shift in focus of the asset management team over 2020. While prioritising the health and safety of our stakeholders, the primary focus of the asset management team has been engaging with tenants on requests for rental assistance in a manner which is fair and, where possible, balanced by a future benefit for the Company.
In March and April we engaged with over 55 of our tenants who were looking for assistance with their rental payments as non-essential retail and leisure assets were closed and huge falls in business activity made an impact across the portfolio. We put in place a number of rent deferrals in place with tenants and also managed to negotiate a number of commercial regears, whereby tenants could benefit from an immediate rent free period in return for a longer lease commitment. This gave the tenants a short term reduction in fixed costs whilst providing less risky, longer lease terms to the Company with a subsequent valuation uplift.
Rent collection became a focus for the asset management team following the first lockdown in March 2020, with a number of tenants unable or unwilling to pay rent. Given the moratorium on forfeiture and winding up notices, the asset managers have had to negotiate with tenants to clear historic arrears as legal routes to rent collection have been closed.
For the March 2020 quarter the company collected 77% of rents due and this increased over the year to 83% for the June quarter and 85% for the September quarter. The December figure is 85% showing a positive trend through the year. There was a large discrepancy between the business space tenants in the office and industrial assets, where we saw high collection rates and the retail and, particularly, leisure tenants who were most exposed to the lockdown and social distancing rules.
A summary of rent collection for the year is below:
|
Sector |
Collection % |
|
Industrial |
90% |
|
Office |
91% |
|
Retail |
76% |
|
Leisure |
49% |
|
Total |
83% |
Of the 17% of rent that we had reported as uncollected over the course of the year we have subsequently recovered 3% including over £1 million from three major retailers. A further 5% has been restructured through commercial lease regear arrangements or rent deferral agreements with tenants. Given the volume of corporate restructures 2% has been subject to a CVA or administration with the remaining 7% still outstanding and will be pursued for payment.
The average weighted unexpired lease term of the portfolio increased marginally to 9.0 years compared to 8.9 years at 31 December 2019. There has been a small increase in the proportion of portfolio income derived from leases with fixed or inflation-linked uplifts which now accounts for 20% of estimated rental value.
The asset management team continues to look to extend leases and rebase rents with retail tenants. One positive outcome from the disruption caused by the COVID-19 lockdown has been the number of commercial re-gears we have managed to negotiate with tenants. The most noticeable examples were at The Rotunda in Kingston upon Thames and Junction 27 Retail Park, Leeds, where we have extended lease terms in return for a rent free period and/or rebased rent. This enabled us to secure new long term lease commitments which have been accretive to value, while also giving the tenants much needed financial support during a challenging trading year.
The following asset management activity, grouped by sector with percentage occupancy shown as at 31 December 2020, represents a summary of noteworthy transactions:
INDUSTRIAL / LOGISTICS DISTRIBUTION - 93% OCCUPIED
XDock 377, Magna Park, Lutterworth
In Q3 we let XDock377, a 377,000 sq ft logistics unit at Magna Park in Lutterworth to Armstrong Logistics, a pan-European distribution company. Armstrong Logistics signed a 15.5-year lease with open market rent reviews at £6.50 per sq ft, in line with ERV. This will add a further £2.45 million of annualised income to the Company's rent roll after incentives which comprised a capital contribution amounting to 14 months' rent free equivalent (paid in three instalments subject to completion of tenant work in the unit) as well as 18 months' rent free from 1 September 2020 comprising 12 month's initial rent free followed by 12 months half rent.
This transaction filled the largest void in the Company's portfolio which had accounted for 3.5% of portfolio ERV. Earlier in the year we completed a dilapidations settlement with the previous tenant which generated a cash receipt of £3.4 million.
Ventura Park, Radlett
A new occupier, Express Logistics Ltd, was secured at Unit D, under a new 10 year lease without incentive, with a break option at year five. The lease was agreed at a headline rent of £11psf per annum, 5% ahead of the ERV for the unit, and equating to £177,914 per annum.
A new five year reversionary lease from June 2020 was agreed with Inspired Gaming (UK) Ltd at Unit F at a rent of £327,624 per annum. The lease has a break option in year three and a lower annual rent of £246,000 for the first year, payable in lieu of a three month rent free period.
In Q4 we agreed a regear at Unit 6a with the occupier Forward Trucking to extend its lease by 10 years from expiry of the existing lease to October 2033. There is a tenant only break option in October 2028. A revised rent has also been agreed following a rent review at £138,500 (£12 per sq ft) per annum an increase of 38% on the previous rent passing.
At the year-end three units were vacant (28% property level vacancy) - all three have since been let, ahead of ERV, to new occupiers or to existing tenants who were looking to expand their business.
Dolphin Trading Estate, Sunbury-on-Thames
In Q1 the company settled two rent reviews at Dolphin Industrial Estate, Sunbury at a total rent of £388,500 per annum, 33% ahead of the previous passing rent and 6% ahead of ERV.
Later in the year we let Unit C to Avenue 51, a distribution operator on a 10 year lease with a break at year five at a rent of £275,000 per annum, which reflected a rate of £13.00 per sq ft and was in excess of ERV. The estate is now fully let.
Newton's Court, Dartford
The existing lease had been due to expire in December 2020 but we agreed a new follow-on 10 year reversionary lease with the occupier, Gisela Graeme, at a minimum rent of £196,000 per annum. As part of the agreement, we have inserted a rent review at the start point, which we expect to result in a significant uplift in the passing rent once that process concludes. A six month rent free period was granted from March to September, which assisted the tenant through the COVID-19 lockdown period.
Gatwick Gateway, Crawley
We completed new three year leases with DFS at units 3b and 3c at a rent of £243,246 per annum, reflecting a rate of £12.00 per sq ft and ahead of the £11.50 per sq ft ERV.
Gallan Park, Cannock
We agreed a new 10 year reversionary lease with Rhenus Logistics commencing on expiry of its current lease in 2024, with fixed increases in 2024 and 2029. With a passing rent of £667,680 per annum, and after a lease incentive of £315,000 paid to the tenant, we secured a 12% uplift in value. The asset was acquired as part of a portfolio in 2019.
M8 Interlink, Coatbridge
We signed a new 10 year lease with M. Markovitz at a rent of £150,000 per annum, 8% ahead of ERV. The lease is subject to a tenant break in year five, a nine month rent free period, and the completion of landlord works to the unit. This asset was sold in Q4.
OFFICE - 86% OCCUPIED
Apsley Two, Hemel Hempstead
We agreed a dilapidations settlement with the outgoing tenant providing a receipt of £550,000. We have now conditionally exchanged contracts to sell the asset, which is vacant and comprises 1.5% of the company void.
The White Building, Reading
We completed a three year lease extension with Roc Search which occupies the fifth floor at a rent of £453,832 per annum. This increases the unexpired term to seven years and was agreed in return for a six month rent free period.
Central Square, Newcastle
We agreed a rent review with ARUP on the first and second floors at this multi let office in central Newcastle. The new rent of £596,300 was 3.2% ahead of the previous passing rent and 9.6% ahead of ERV.
RETAIL & LEISURE - 89% OCCUPIED
Junction 27 Retail Park, Leeds
At this prime bulky goods park adjacent to an Ikea store, we completed lease extensions with Barker & Stonehouse and Furniture Village. Both tenants agreed five year lease extensions giving 9.5 year and 8.75 year term certain respectively. The tenants were granted six months' rent free and rents rebased to £25.00 per sq ft and £27.00 per sq ft, ahead of and in line with ERV, respectively. These deals were both structured to grant rent free periods and assist tenants through the COVID-19 lockdown period. Tenant trading reports from this retail park are very positive.
The Rotunda, Kinston upon Thames
Completed lease re-gears with Odeon and David Lloyd at this leisure asset in South West London. Both tenants had ceased trading and Odeon extended its lease from seven years to 15 years in return for a 12-month incentive equivalent and a lower fixed rental rebase in 2027 to a figure ahead of ERV. David Lloyd extended its lease to 25 years without break at a rent of £350,000 per annum subject to five yearly RPI linked reviews. This has secured the scheme's two anchor tenants, both robust businesses in normal times, on long term lease commitments.
Environmental, Social and Governance (ESG)
The Investment Manager, in line with the Board, views ESG as a fundamental part of its business and investment and management process. Whilst real estate investment provides valuable economic benefits and returns for investors it has, by its nature, the potential to affect environmental and social outcomes, both positively and negatively.
The Investment Manager's approach is underpinned by the following three principles:
· Transparency, Integrity and Reporting: being transparent in the ways in which we communicate and discuss our strategy, approach and performance with our investors and stakeholders.
· Capability and Collaboration: drawing together and harnessing the capabilities of our ESG platform, with the insights and experiences of our property consultants and industry best practice.
· Investment Process and Asset Management: integrating ESG into decision making, governance, underwriting decisions and asset management approach. This includes the identification and management of material ESG risks and opportunities across the portfolio.
A key element of our approach is the employment of our ESG Impact Dial, a proprietary research framework in support of investment strategies and asset management approach. We have identified four major forces for change:
· Environment and Climate
· Governance and Engagement
· Demographics and Technology
· Infrastructure
These forces together form the basis of the ESG Impact Dial and guide the assessment of materiality and integration of ESG factors within the Company's portfolio and provide the framework for our ESG objectives.
In the last year the Company produced a brochure highlighting its ESG commitments and. Its brochure, "Dialling up the Integration of ESG", can be found on the Company website, www.ukcpreit.com.
Over the year the Company maintained an EPRA sBPR Gold Award rating which ranks the quality of ESG reporting.
Despite being placed second of eight within its peer group, UKCM received a GRESB 2 star rating with a score of 67/100 (0.01 short of 3 stars). GRESB changed its scoring system during 2020, with greater weight given to the recording of energy data. This is harder to extract, particularly it seems in the UK, from single let standalone properties which the Company has a material number of from its high weighting to the industrial logistics warehouse market. One solution involves the automation of energy data collection, much like residential 'smart meters', which the Company is investigating with the aim to improve this rating in 2021.
Specific examples of our ESG Strategy in action include:
· 100% of the electricity sourced by the Company now comes from renewable sources.
· 100% of the waste produced at our managed assets is diverted from landfill.
· Ensuring our new developments at Exeter and Edinburgh rate highly. At both assets we will look to incorporate the provision of sustainably sourced electricity and encourage recycling whilst diverting 100% of waste from landfill. Specifically, Exeter will be constructed to a BREEAM Very Good standard and as a planning condition will be built to a carbon neutral construction program and we have reserved the right to incorporate further ESG features to the development such as photovoltaic panels on the roof. Edinburgh will have a BREEAM rating of Good or equivalent, predominantly due to the mixed nature of the project using the existing historic structure as part of the development. However this means that we will be saving on new materials on this element as we are using the existing structure (carbon saving). We will also incorporate a Ground Source Heat Pump System to sustainably heat the development.
In many ways the "E" (environmental) and "G" (governance) are the simpler of the ESG strands to understand and apply, particularly with corporate governance around a REIT; however perhaps the greatest ESG activity of 2020 related to the "S" (social) element in the form of enhanced interaction between our asset management team and our tenants as the COVID-19 pandemic and consequent lockdown impacted on business in March 2020. We had conversations with 55 of our tenants who were requesting assistance as businesses were closed or severely disrupted. Through these conversations we agreed a multitude of rent deferrals, monthly rent payment plans and commercial regears (improvements to landlord lease terms), for example by extending the duration of a lease or removing a tenant break option in return for an element of rent free period. We believe this activity has a strong social benefit helping businesses and jobs whilst also building long term relationships with our stakeholders.
Two examples of this positive social interaction, and from different sectors, include an early approach in Spring 2020 from the principal of a popular and successful children's crèche in a leisure asset and from a supplier of beauty and hair products based at one of our London industrial estates.
The principal of a children's crèche approached us early in Spring 2020 to explain they were unable to trade. From our initial discussions we established they had furloughed staff and applied for a government loan to pay the property service charge. In response to their trading difficulties, we agreed to provide a rent free period and extended the term of their lease. When the business could gradually open, only limited numbers of children, staff and parents were allowed into the unit, but nonetheless the creche started paying its rent again. With the most recent early 2021 lock down, and despite the business closing again, the crèche continues to pay its property service charge from its government loan. However, with no operational income it cannot meet its rental obligations during lockdown. In this case we do not expect to charge rent until the business is permitted to re-open when we hope to welcome them back.
Our first call for help during the pandemic came in March 2020 from a supplier of beauty and hair products to retail hair salons. During the initial lockdown their turnover stopped overnight. We had many discussions with them offering help, but our tenant was too distracted with concerns about the duration and severity of the pandemic to reach an agreement.
However, with the initial reopening of salons and shops in July 2020 this tenant experienced a positive spike in trade and they resumed paying rent. As might be expected, the second lock-down early in 2021 impacted them again but this time we are having some success in engaging with them to help put what would normally be a thriving but small business back on a sustainable footing.
Specific ongoing ESG projects for 2021 include:
· An aim to define the Company's net zero pathway in line with the Investment Manager's approach. This will involve benchmarking the carbon and energy intensity of each asset in the portfolio against net zero trajectories and understanding the nature of required improvements over time to meet net zero commitments.
· Feasibility studies and negotiations with tenants to install photovoltaic roofs to large format retail and industrial assets which allow the production of clean electricity that can then be sold to the tenants. We are also looking to include photovoltaics in the refurbishment specification at some of our industrial assets.
· Investigating the potential to enhance biodiversity at our assets including the creation of green spaces and incorporating bee hives on the roofs of assets.
· Encouraging community activities at our large format retail and leisure assets once it is deemed to be safe with examples including charity collections and children's entertainment.
· We continue to enhance facilities for cyclists at our office assets and in Birmingham are looking to improve the provision of showers, bike storage and lockers.
Portfolio Strategy
Our continued focus on both working with those occupiers most impacted by the lockdowns and enabling those business that have either benefited from, or been able to effectively adapt their operations to this new environment, has supported the Company's own performance. Once again we have seen positive leasing momentum particularly in the industrial and logistics sectors where we have deliberately built up a strong position over the past few years to capture the rental and valuation growth of this in-demand sector.
Your Company's aim remains to deliver an attractive level of income, together with the potential for capital and income growth, through investment in a diversified UK commercial property portfolio. Our strategy remains consistent but has evolved as it adapts to the twin impacts of Brexit and COVID-19. Both have contributed to an acceleration of structural changes already taking place in society and business - from near-shoring, inventory building and hunger for e-commerce driving the logistics market, to the potential for an evolved model for the use of offices focused on staff well-being, attracting talent and improving productivity. As we have witnessed in the retail sector, there is a reasonable likelihood of significant polarisation in the office sector with a focus on building quality, flexibility, surrounding amenity and multi-nodal transport options.
We will continue to look for opportunities to invest in modern economy, future fit, property sectors which are supported by structural changes in society while at the same time ensuring our investors continue to benefit from the geographic and sector diversification our portfolio affords.
In a nutshell this will be property which companies want and need to occupy and from which they can expect to trade at profit.
We expect assets functioning in the broad scope of goods and services distribution to feature prominently
- these include, for example, the industrial/logistics sector, data centres, certain supermarkets and certain out-of-town retail where click-and-collect services and convenience play a part.
It is of course essential to understand the draw any particular location or asset has to its current and potential future occupier. As evidenced by our investment into the development of two new and very well located and designed student schemes, due to open for the 2022/23 academic year, we remain interested in the alternatives sector but with selective caution.
As we have said before, alternatives represent an increasing share of the commercial property investment market encouraged by a combination of favourable structural drivers which we believe are set to continue - for example demographics, urbanisation and trends in technology, together with the stability of income returns and diversification benefits that investing in this alternative sector brings, pandemics aside.
Of course we also remain alert to take advantage of pricing anomalies and opportunities across our favoured sectors and have, at the year-end, £218 million of capital available to invest, comprising £68 million in cash and £150 million undrawn debt from our revolving credit facility. Taking account of post-year end investment activity throughout the first quarter of 2020 we now have £276 million of available capital.
We believe a diversified portfolio of scale, in a company with good share liquidity, and heavily weighted towards performing sectors, should have a broad reaching appeal. Linking this with the UK property sector's strong correlation with economic growth, and forecasts of a strong UK economic recovery (accepted from a low base) in the second half of 2021, coupled with an expectation of interest rates that are ultra-low for even longer, suggests the appeal for UK real estate may be on the rise. With a clear investment strategy, sound asset allocation, improving rent collection data and a strong balance sheet with low gearing, we believe we are well placed in this environment tempered with a cautionary note on the evolution of the virus and success of the vaccination program to reignite the economy.
Will Fulton
Fund Manager
Aberdeen Standard Investments
22 April 2021
STRATEGIC OVERVIEW
Investment Strategy
The Group's investment strategy, and purpose, is set out in its investment objective and policy below. It should be considered in conjunction with the Chair's Statement and the Investment Manager Review which both give a more in depth review of performance and future strategy.
The Group's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio. In order to achieve this objective the Group has an investment strategy that focuses on identifying and acquiring institutional grade, secure income producing assets in favoured sectors as well as identifying assets that benefit from wider infrastructure improvements delivered by others where possible. In addition, the Group will look to sell assets that have limited future return prospects or where there are significant risks to achieving future acceptable returns. As part of this investment strategy, the Group also recognises that tenants are a key stakeholder and aims to foster a culture whereby the experience of tenants is seen as paramount to the future success of the Group. The Investment Manager works closely with tenants to understand their needs through regular communication and visits to properties. Where required, and in consultation with tenants, the Group refurbishes and manages the owned assets to improve the tenants' experience, including consideration of health and safety and environmental factors, with the aim being to generate greater tenant satisfaction and retention and hence lower voids, higher rental values and stronger returns.
In addition, members of the Board visit properties and where appropriate engage with tenants directly which enables the Board to have an enhanced understanding of each property and the tenants' requirements. Further details of how the Company engages with all its stakeholders is set out in the Stakeholder Engagement section of the Annual Report encompassing section 172 of the UK Companies Act 2006.
On 18 April 2019, shareholders voted in favour of an amendment to the investment policy to provide the Investment Manager with the flexibility to invest across a wider spectrum of commercial property assets such as healthcare, car parks and the commercially managed private rental sector. The Group's investment policy as approved on 18 April 2019 is as follows:
"Investment risks to the Group are managed by investing in a diversified portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing assets across the commercial property sectors including industrial, offices, retail and other alternative commercial property sector assets. The Group has not set any maximum geographic exposures within the UK nor any maximum weighting limits in any of the principal property sectors. No single property shall, however, exceed at the time of acquisition 15 per cent of the gross assets of the Group.
The Group is currently permitted to invest up to 15 per cent of its total assets in indirect property funds including in other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investment, in cash deposits, gilts and money market funds."
Although not part of the Company's formal investment policy, the Board intends to limit the Company's investment into alternative sectors to 35 per cent of the gross assets of the Group at the time of acquisition.
The Company's current gearing policy, as approved by shareholders at an EGM in 2011, is as follows: "Gearing, calculated as borrowings as a percentage of the Group's gross assets, may not exceed 65 per cent. The Board intends that borrowings of the Group at the time of draw down will not exceed 25 per cent of the Total Assets of the Group. The Board receives recommendations on gearing levels from the Investment Manager and is responsible for setting the gearing range within which the Investment Manager may operate".
The Group restructured its debt facilities in February 2019 which increased the weighted average maturity of the Group's debt profile, lowered the cost and increased the debt available while still maintaining the 25 per cent debt cap referred to above.
The Group's performance in meeting its objective is measured against key performance indicators. A review of the Group's returns during the year, the position of the Group at the end of the year, and the outlook for the coming year is contained in the Chair's Statement and the Investment Manager Review.
The Board of Directors is responsible for the overall stewardship of the Company, including investment and dividend policies, corporate strategy, corporate governance, and risk management. Biographical details of the Directors, all of whom are non-executive, can be found in the Annual Report and indicate their range of property, investment, commercial, professional, financial and governance experience. The Company has no executive Directors or employees.
Management of Assets and Shareholder Value
The Board contractually delegated the management of the investment portfolio and other services to Aberdeen Standard Fund Managers Limited from 10 December 2018 (prior to this Standard Life Investments (Corporate) Funds Limited).
The Group invests in properties which the Investment Manager believes will generate a combination of long-term growth in income and capital for shareholders. Investment decisions are based on analysis of, amongst other things, prospects for future capital growth, sector and geographic prospects, tenant covenant strength, lease length and initial yield. In the year to 31 December 2020, the Group generated operating cash flows of £73.8 million (2019: £32.1 million) and a net loss for the year of £10.3 million (2019: Profit of £1.6 million).
The fall in profits in 2020 was attributable to the slowing UK commercial real estate sector as a result of COVID-19 with losses on investments of £45.5 million (2019: £43.1 million) of which £39.2 million (2019: £15.2 million) were unrealised and revenue profits decreasing to £35.2 million compared to £44.7 million in 2019.
Investment risks are spread through investing in a range of geographical areas and sectors, and through letting properties to low risk tenants.
At each Board meeting, the Board receives a detailed portfolio, financial, risk and shareholder presentation from the Investment Manager together with a comprehensive analysis of the performance of the portfolio during the reporting period.
The Board and the Investment Manager recognise the importance of managing the premium/discount of share price to net asset value in enhancing shareholder value. One aspect of this involves appropriate communication to gauge investor sentiment. The Investment Manager meets with current and potential new shareholders, and with stockbroking analysts who cover the investment company sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company's website, ukcpreit.com, and the Company also utilises a public relations agency to enhance its profile among investors. In addition the Chair of the Board meets key shareholders on an annual basis.
Key Performance Indicators/Alternative Performance Measures
The Company's benchmark is the MSCI UK Balanced Portfolios Quarterly Index. This benchmark incorporates all monthly and quarterly valued property funds and the Board believes this is the most appropriate measure to compare against the performance of a quarterly valued property investment company with a balanced portfolio.
The Board uses a number of performance measures to assess the Company's success in meeting its objectives. The key performance indicators/ alternative performance measures are as follows:
· Net asset value and share price total return against a peer group of similar companies
· Portfolio performance against the MSCI benchmark and other selected comparators
· Premium/(Discount) of share price to net asset value
· Earnings, dividend cover and dividend yield
· Ongoing charges
Given the structure of the Company and the Company's knowledge of its underlying shareholder base, it is believed the above measures are the most appropriate for shareholders to determine the performance of the Company. In addition the Board considers specific property KPIs such as void rates, rent collection levels and weighted average lease length on a regular basis.
Risk Management
In accordance with the UK Corporate Governance Code and FRC Guidance, the Board has established procedures to identify and manage risk, to oversee the internal control framework and to determine the nature and extent of the principal risks the Company is willing to take in order to achieve its long-term strategic objectives.
The Board recognises its responsibility to carry out a robust assessment of the Company's principal risks and emerging risks. Principal risks are defined as those that could result in events or circumstances that might threaten the Company's business model, future performance, solvency or liquidity and reputation. Emerging risks are those that have not yet occurred but are at an early stage of development or are current risks that are expected to increase in significance and become more fundamental in the future.
The Board has appointed a Risk Committee to ensure that proper consideration of risk is undertaken in all aspects of the Company's business on a regular basis. The Risk Committee meets quarterly and comprises all members of the Board and is chaired by Margaret Littlejohns.
Its duties include the assessment of the Company's risk appetite and the regular review of principal and emerging risks, seeking assurance that these risks are appropriately rated and that effective mitigating controls are in place, where possible.
Risks are identified and weighted according to their potential impact on the Company and to their likelihood of occurrence. The impact is evaluated in terms of the effect on the Company's business, finances and reputation, the three of which are usually interlinked. Each identified risk is assessed twice: first as a "gross risk" before taking into consideration any mitigating controls and secondly as a residual or "net risk" after reviewing the safeguards in place to manage and reduce either the severity of its impact or the probability of its event. The Risk Committee uses a detailed Risk Matrix to prioritise the individual risks, allocating scores of 1 to 5 to each risk for both the likelihood of its occurrence (ranging from very unlikely to almost certain) and the severity of its impact (ranging from minimal to highly significant). The combined scores for both the gross risks and net risks are then colour coded, applying a traffic light system of green, amber and red to emphasise those posing the greatest threats to the Company. Those with the highest gross rating in terms of impact are highlighted as top risks within the matrix and are defined here as principal risks.
The Risk Committee, with the help of the Investment Manager's extensive research resources and market intelligence, surveys the full risk landscape of the Company in order to identify increasing and emerging risks to which the Company may be exposed in the future. In particular, the Risk Committee questions which parts of the Company's business may be vulnerable to disruption, including but not limited to the business models of its key tenants and its outsourced third party suppliers. The Risk Committee not only reviews the existing portfolio of investments but also ensures that risk is considered in the case of each property acquisition and disposal.
The Risk Committee works closely with the Audit Committee to examine the effectiveness of the risk management systems and internal control systems upon which the Company relies to reduce risk. This monitoring covers all material controls, including financial, operational and compliance controls. All risks and mitigating measures are reviewed by the Risk Committee at least quarterly, and any significant changes to the Risk Matrix are presented to the Board.
Principal Risks
The Company's assets consist of direct investments in UK commercial property. Its risks are therefore principally related to the commercial property market in general and also to each specific property in the portfolio. Risks to the Company fall broadly under the following six categories:
Strategy (Risk: A)
Management may fail to execute a clear corporate strategy successfully and the strategic objectives and performance of the fund, both absolute and relative, may become unattractive or irrelevant to its investors.
Investment & Asset Management (Risks: B & C)
Ill-judged property investment decisions and associated redevelopment and refurbishment may lead to health and safety dangers and environmental issues, including climate change, and ultimately to poor investment returns.
Financial (Risks: D, E, F & G)
Macro-economic changes (e.g. levels of GDP, employment, inflation and interest rate movements), political changes (e.g. new legislation and regulation), structural changes (e.g. disruptive technology, demographics) or global events (e.g. pandemics, wars, terrorist attacks, oil price disruption) can all impact the commercial property market, both its capital value and income generation, its liquidity and access to finance and the underlying businesses of its tenants. This risk encompasses real estate market risk, interest rate risk, liquidity risk and credit risk, all of which are covered in more detail in note 18 to the accounts.
Operations (Risks: H&I)
Poor service and inadequate control processes at the Company's outsourced suppliers may lead to disruption, error and fraud, and increasingly cyberattacks. The Company's key service providers are the Investment Manager, the Company Secretary, the Managing Agent, the Valuer and the Registrar and are assessed at least annually through the Management Engagement Committee, or more often during times of stress.
Regulation (Risk: J)
Failure to comply with applicable regulation and legislation could lead to financial penalties and withdrawal of necessary permissions by governing authorities. Changes to existing regulations could also result in suboptimal performance of the Company.
Stakeholder Engagement (Risk: K)
Failure to communicate effectively and consistently with the Company's key stakeholders, in particular shareholders and tenants, could prevent the Company from understanding and responding to their needs and concerns.
Emerging Risks
Emerging risks have been identified by the Risk Committee through a process of evaluating which of the principal risks have increased materially in the year and/or through market intelligence are expected to grow significantly. Any such emerging risks are likely to cause disruption to the business model. If ignored, they could impact the Company's financial performance and future prospects. Alternatively, if recognised, they could provide opportunities for transformation.
COVID-19
The overarching emerging risk that was identified at the beginning of 2020 was COVID-19, the global pandemic that has since impacted all areas of society in the UK and abroad. It has now fully emerged, causing significant loss of life and global economic disruption. While remarkable progress has been made in developing and rolling out effective vaccines, offering the prospect of a return to more normal times, there is still considerable uncertainty about the repercussions of evolving variants of the virus and potential setbacks on the road to recovery. The emerging risk is now COVID-19's legacy such as the resulting economic damage and possible permanent structural changes to the way that we work, live and consume.
COVID-19 has affected to differing degrees all areas of risk to which the Company is exposed, but particularly those relating to strategic risk, macroeconomic risk, gearing risk, credit risk and accounting and valuation risk. COVID-19's impact and the Company's response are provided in more detail in the Commentary section of each of the following risk descriptions.
Brexit
Brexit was also identified as an emerging risk in our previous annual report as the UK's relationship with Europe following its withdrawal from the European Union was still under negotiation. An eleventh hour deal was agreed at year end but much of the detail relating to the terms of trade, particularly in the service industries, still has to be finalised and the full impact of Brexit on the economy, our tenants and on the UK commercial property market is still unclear (Risk D).
Technology
Technology is changing the processes and habits of businesses and consumers which in turn is impacting occupiers' future requirements for property and leading to greater disparity in the performance of different property sectors. The decline of physical retailing and the increase in on-line shopping has been further accelerated by social distancing measures in response to COVID-19. This has created challenging conditions for many traditional retailers and their landlords, with increased tenant defaults, reduced rents and empty buildings in this sector. In addition, the increased use of video conferencing by businesses may facilitate a more permanent shift to home working and could also redefine the need for office space in the future. Robotics and automation are also altering the specifications for industrial buildings.
The principal risks, including their impact and the actions taken by the Company to mitigate them, are provided below. The Changes to Risk (Increased, Decreased or No Change) all relate to any material change since 1 June 2020 when the 2019 Annual Report was signed off and the impact of COVID-19 had already started to emerge.
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Risk A - Strategic Risks: Widening Discount and Continuation Vote |
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Risks & Impact |
The Company's strategic objectives and performance, both absolute and relative, could become unattractive to investors leading to a widening of the share price's discount to net asset value, and potentially a continuation vote. An inappropriate investment strategy could lead to an erosion of shareholder value and a fall in income. This could include poor decisions on purchases and sales, sector allocation, tenant selection, levels of borrowing or inadequate consideration of ESG etc. |
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Mitigation |
· The Company's strategy and objectives are regularly reviewed by the Board to ensure they remain appropriate, effective and sustainable. · The Board receives regular presentations from research analysts on both the general economy but also the property market in particular to identify structural shifts and threats, so the Board can adapt the Company's strategy if necessary. · The NAV and share price are constantly monitored and regular analysis of the Company's performance is reviewed by the Board and compared with the Company's benchmark and its peer group. · Cash flow projections are prepared by the Investment Manager and reviewed at least quarterly by the Board. · Regular contact is maintained with shareholders and the Company's broker. |
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Commentary |
· COVID-19 caused considerable market uncertainty and declining property values and revenues, particularly in those sectors most severely impacted by the pandemic, namely retail, leisure and hospitality. This resulted in a fall in the Company's net asset value and a widening of its discount from 1.1% to 20.4% at year end. · The number of transactions effected in the property market overall was limited in the year by social distancing restrictions and general market uncertainty and disruption. Nonetheless, the Company continued to execute its investment strategy with two purchases and five sales in 2020. · The property market has become even more polarised as a result of COVID-19 with increased demand for property in the industrial sector, particularly distribution and warehousing and with an oversupply of retail premises. This trend supports the Company's evolving strategy of investment in "future fit" properties in the modern economy that can adapt and benefit from these current structural shifts in society. · Shareholders overwhelmingly supported the Company's periodic continuation vote held in March 2020, with the next periodic continuation vote scheduled to be held in 2027 and seven yearly thereafter. · In addition, a continuation vote may be required if, after 18 March 2022 (being the second anniversary of the Company's most recent continuation vote), the shares trade at a discount of over 5 per cent for a continuous period of 90 dealing days or more. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 The severity and duration of the direct impact of COVID-19 and its after- effects on the future prospects for the UK real estate sector and hence the Company's ongoing strategy still remain uncertain. |
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See below for details of the current discount control policy. |
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Risk B - Investment and Asset Management Risks: Health & Safety |
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Risks & Impact |
The Company could fail to identify, mitigate or manage major Health & Safety issues potentially leading to injury, loss of life, litigation and the ensuing financial & reputational damage. |
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Mitigation |
· Health & Safety checks are included as a key part of due diligence for any new property acquisition. · For existing multi-tenancy properties the Group's Managing Agent (Jones Lang LaSalle) is responsible for managing and monitoring Health & Safety matters of each building. · The Investment Manager monitors on an ongoing basis all identified Health & Safety issues with strict deadlines for resolution by the Managing Agent. · The Investment Manager also engages S2 Partnership Limited who provide an independent Health & Safety review and fire risk assessment of all multi-let properties on an annual basis. · The Risk Committee reviews the Company's Health & Safety performance quarterly. · For developments a process of due diligence and subsequent monitoring seek to ensure appropriate high standards in design procurement and delivery, requiring the professional management of building works and site safety by contracted parties. |
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Commentary |
· COVID-19 increased focus on the safety and well-being of employees, tenants and their customers within the Company's buildings. · The Investment Manager worked closely with the Managing Agent to ensure that each multi-let property operated securely, following advice and complying with all the government restrictions relating to COVID-19. · New procedures were introduced to ensure that tenants and their customers could return safely to the Company's multi-let buildings when permitted. · All annual independent H&S audits for multi-let properties due in 2020 were completed by S2 Partnership Ltd with minimal interruption and delays. · No other major Health & Safety issues were noted in the year. · Following the discovery of a World War II explosive device at the Company's student accommodation development site at Exeter, the developer followed all established procedures and protocols, including notification of the relevant authorities ensuring the safety of all stakeholders involved in the project and the wider community. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020
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See below for further information on the Group's Health & Safety policy. |
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Risk C - Investment and Asset Management Risks: Environmental |
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Risks & Impact |
Properties could be negatively impacted by an extreme environmental event (e.g. flooding) or the Company's own asset management activities could create environmental damage. Failure to achieve environmental targets could contribute to climate change, adversely affecting the Company's reputation and resulting in penalties and increased costs. Legislative changes relating to sustainability could affect the viability of asset management initiatives. |
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Mitigation |
· The Company considers its impact on the environment and its local communities in all its activities and works in partnership with its key stakeholder groups - investors, occupiers, suppliers and communities - to ensure that all parties share responsibility to achieve a more sustainable property performance. · In-depth research is undertaken on each property at acquisition with a detailed environmental survey. · The Investment Manager employs its own proprietary research framework, the ESG Impact Dial, which assesses four major forces: Environment & Climate, Governance & Engagement, Demographics & Technology and Infrastructure. · Measuring, monitoring and targeting environmental performance is built into the Company's investment process and supplier agreements. · Each property's annual business plan captures environmental objectives for the coming year and an action plan is created and shared with the Managing Agent and directly appointed Engineering/Sustainability and Waste Management Consultants. Performance against asset level ESG objectives is part of all regular scheduled meetings with them. · EPC rating benchmarks have been set to ensure compliance with Minimum Energy Efficiency Standards (MEES). |
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Commentary |
· The rapid emergence of COVID-19 as an unanticipated global disaster has concentrated attention more acutely on other imminent dangers such as climate change and the need for urgent response. Tenants and shareholders now have greater expectations of their landlords to address environmental issues and to set measurable targets and to report progress against them regularly. · The Company has achieved Sector Leader status in the Global Real Estate Sustainability Benchmark ("GRESB") as a top performer in ESG (environmental, social and governance) coming second in the management score within Europe/Listed peer group. It was awarded an 'A' score for Public Disclosure and an EPRA "Gold" rating for European Sustainability Best Practice Recommendations in 2020, compared to sector average of B. · A full review of EPC ratings across the Group's portfolio has been undertaken with now only one unit rated as below standard. A strategy has been put in place to improve this sub-par rating before any new lease is granted. · A number of asset management initiatives are underway to consider the feasibility of installing solar panels at some of the Company's properties. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 |
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See below for further information on the Group's ESG policy and the Company's separate ESG publication "Dialling Up the Integration of ESG" on the Company's website. |
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Risk D - Financial Risks: Macroeconomic |
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Risks & Impact |
Macroeconomic changes (e.g. levels of GDP, employment, inflation, interest rate movements), political changes (e.g. Brexit, new legislation), structural changes (e.g. new technology, demographics) or global events (pandemics, wars, terrorist attacks, oil price disruption) could negatively impact commercial property values and the underlying businesses of tenants (market risk and credit risk). This may be reflected in a decline in the Net Asset Value per share and earnings per share of the Company. Falls in the value of investments could also result in breaches of loan covenants and solvency issues. |
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Mitigation |
· The Aberdeen Standard Investments Research team takes into account macroeconomic conditions when collating property forecasts. This research is fed into the Investment Manager's decisions on purchases and sales and sector allocations. · The portfolio is UK based and diversified across a number of different sectors and regions of the UK and also has a wide and diverse tenant base to reduce any risk concentration where possible. · There is a wide range of lease expiry dates within the portfolio in order to minimise concentrated re-letting risk. · The Company is lowly geared with 25% limit on overall gearing. · The Company has limited exposure to speculative development and this is generally only undertaken on a pre-let basis. · Rigorous portfolio reviews are undertaken by the Investment Manager and presented to the Board on a regular basis. · Annual asset plans are developed for each property, ensuring that inherent value can be realised through active asset management. · Individual investment decisions are subject to robust risk versus return evaluation and approval. Each potential investment is scrutinised and rigorously assessed, taking into account of location, legal title, local market dynamics, physical and environmental conditions and the quality and soundness of the projected income stream. · Every building has comprehensive insurance to cover both the property itself and injury to associated third parties. |
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Commentary |
· The outlook for the UK economy and the UK real estate market is still uncertain, while the spread of COVID-19 has not yet been effectively controlled within the UK borders. A range of vaccines has been successfully developed more quickly than originally anticipated, giving greater optimism now of economic recovery but it is still difficult to predict its timing or the extent of lasting economic damage. · The Bank of England and UK government have continued to provide significant monetary and fiscal stimulus to insulate the economy but the UK GDP still shrunk by 9.9% in 2020. Quarterly GDP may remain volatile in the face of further lockdowns and economic output unlikely to return to pre- pandemic levels until 2022 at the earliest. · Portfolio continues to be diversified with investments in the four main commercial property sectors and across a number of geographical regions, but now with a higher weighting to the industrial sector, particularly logistics and distribution, which has benefitted from the pandemic and outperformed the other sectors. · 183 tenancies at the year end with top ten tenants accounting for 35.1% of annualised rental income. However, consumer facing businesses have suffered particularly from the intermittent "lockdowns" imposed by government and this has hampered some tenants' ability to pay rent in the short term. · Net gearing of 6.4% at year end. Occupancy rate of 93.5% at year end.
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 For longer than might originally have been anticipated, COVID-19 has continued to impact both the UK and the wider global economy due to intermittent waves of renewed infection and the emergence of new variants of the virus. This has resulted in further domestic and international "lockdowns" extending into 2021 which may continue as a pattern for the foreseeable future. The UK has formally withdrawn from the EU, and some of the political and economic uncertainty removed, but the long term impact on UK commerce and hence the Company's tenants is still unclear. |
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See further details on risk in note 18 to the accounts. |
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Risk E - Financial Risks: Gearing |
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Risks & Impact |
An inappropriate level of gearing, magnifying investment losses in a declining market, could result in breaches of loan covenants and threaten the Company's liquidity and solvency. An inability to secure adequate borrowing with appropriate tenor and competitive rates could also negatively impact the Company. |
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Mitigation |
· Gearing is restricted to a maximum of 25% of gross assets. This low gearing limit means that the Company should, barring exceptional circumstances, have adequate resources to service and repay its debt. · The Company's diversified, prime UK commercial property portfolio, underpinned by its strong tenant base, should provide sufficient value and income in a challenging market to meet the Company's future liabilities. · The Company's relatively modest level of gearing attracts competitive terms and interest rates from lenders for the Company's loan facilities. · The Investment Manager has relationships with multiple funders and wide access to different sources of funding on both a fixed and variable basis. · Financial modelling is undertaken and stress tested annually as part of Company's viability assessment, whenever new debt facilities are being considered and whenever unusual events occur. · Loan covenants are continually monitored and reported to the Board at least quarterly and also reviewed as part of the disposal process of any secured property. |
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Commentary |
· COVID-19's disruption on the property market, with declining capital values in some business segments and reduced rental income, increased the risk in general of potential loan covenant breaches and refinancing risk for property companies with short term debt. · At year end the Group had two fully drawn fixed rate facilities with different expiry dates (April 2027 & February 2031 and a weighted maturity profile of 8.2 years), with an overall blended interest of 2.88% per annum. · The Company also has an undrawn committed revolving credit facility, on a floating rate basis, providing flexibility to make timely acquisitions when opportunities arise. Interest rates are likely to remain low for longer as a result of very accommodative monetary policy of the Bank of England in response to COVID-19. · At year end, gross gearing was 15.1% and net gearing (after deducting cash) was 6.4%, relatively low for its peer group. · During COVID-19, the Group's bank covenants have been regularly monitored and stress tested under different value and revenue scenarios. Despite the recent fall in rental income receipts and some property valuations, there is considerable headroom before any loan covenants would be breached. · Over £418 million of property remains unencumbered, providing additional cushion if needed. · The Company benefits from good long term relationships with supportive lenders and has engaged in constructive dialogue with them during this period. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 The outstanding balance drawn on the revolving credit facility was repaid during the year from the proceeds of property sales, which has reduced both gross and net gearing at year end. |
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See further details on risk in note 18 to the accounts. |
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Risk F - Financial Risks: Liquidity |
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Risks & Impact |
The Company may be unable to dispose of property assets in order to meet its financial commitments or obtain funds when required for asset acquisition or payment of expenses or dividends. Investments in property are generally illiquid, in that they may be difficult to sell quickly and may have to be sold at a discount to the recorded valuation. Company's shares could become illiquid due to lack of investor demand, market events or regulatory intervention and the Company's shareholders may be unable to sell their shares due to lack of liquidity in the market. |
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Mitigation |
· The Company has a diversified portfolio of good quality, marketable properties. · The Company had significant capital resources at year end, increased from the prior year, following several disposals. · The closed ended structure of the Company ensures that it is not a forced seller of assets. · The Company is listed on the London Stock Exchange and a component of the FTSE 350 Index made up of the largest 350 companies in the UK by market capitalisation. · Financial commitments are limited by the Company's relatively low level of gearing. · Liquidity risk is managed on an ongoing basis by the Investment Manager and reviewed at least quarterly by the Board. · Cash is placed in liquid deposits and accounts with a high credit rating. |
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Commentary |
· Real estate market liquidity has decreased as a result of COVID-19 but nonetheless the Company implemented its investment strategy by completing 5 sales and 2 purchases during 2020. · Having a closed ended structure, the Company was better able to withstand market movements as it is not subject to investor redemptions and forced property disposals. · All financial commitments were comfortably met during the year. · £ 1.7m in value of shares on average were traded daily in 2020 highlighting the ongoing liquidity of the Company's shares. · Shareholders are able to sell their shares in a highly regulated and liquid secondary market. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 |
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See further details on risk in note 18 to the accounts. |
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Risk G - Financial Risks: Credit Risk of Tenants |
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Risks & Impact |
Income might be adversely affected by macroeconomic factors. Financial difficulties could cause tenants to default on their rents and could lead to vacant properties. This might result in falling dividend cover for the Company and potential dividend cuts. |
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Mitigation |
· Dividend cover is forecast and considered at each Board meeting. · The property portfolio has a balanced mix of tenants and reflects diversity across business sectors, limiting reliance on a single tenant or industry. · The Group has 183 tenants, with the top 10 tenants representing 35.1% of the Company's contracted rental income, and no single tenant accounting for more than 5.4% · Rigorous due diligence is undertaken on all prospective tenants and their financial performance continues to be monitored during their lease. · Rent collection from tenants is closely monitored so that early warning signs can be detected. · Contingency plans are put in place where tenants with financial difficulties have been identified. · Board approval is necessary for any material lettings. |
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Commentary |
· As anticipated, COVID-19's intermittent lockdowns have affected some tenants' ability to pay their rent. In particular, retail and leisure have been severely impacted by COVID-19, but some businesses in other sectors have also suffered depending on their business models, customers, workforce and suppliers. · For the four key rent invoicing dates for quarterly payment in advance in 2020 (March, June, Sept, Dec 2020) 83% of rent had been collected by the end of January 2021. · Investment managers have engaged closely with all tenants to understand better their financial positions and where possible have responded to requests for rental assistance. This has resulted in some rent deferrals, monthly payment plans and, in some instances, commercial regear arrangements with rent free periods in return for longer leases. · Retail sector continues to be of concern with further administrations in this sector in the last 12 months and more likely to follow the longer the pandemic continues. · Ongoing reduction in Company's retail holdings which now represent 17% of the portfolio at the year end. · The Company has added £4.8 million to its bad debt provision to cover ultimate non-payment of rent by some tenants but still continues its concerted efforts to recover outstanding amounts due. · In anticipation of income shortfalls and reduced dividend cover, quarterly dividends during the financial year of 2020 were reduced by 50% to conserve cash, with a 5th interim top up dividend declared to meet REIT requirements. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 Although further tenant defaults may occur, the longer the pandemic continues, the Company has already made prudent provisioning. |
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See further details on risk in note 18 to the accounts on and also the accounting policy for provision for bad debts in note 1(b) and note 12.
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Risk H - Operational Risks: Service Providers |
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Risks & Impact |
Poor performance and/or inadequate procedures at key service providers i.e. Investment Manager, Company Secretary, Managing Agent, Registrar, could lead to errors, fraud and non-compliance with their contractual agreements and/or with relevant legislation. Failings in their data management processes and disaster recovery and business continuity plans, including cyber security safeguards, could lead to financial loss and business disruption for the Company. |
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Mitigation |
· The Company has a strong control culture that is also reflected in its partnerships with suppliers. · All investment decisions are subject to a formal approval process with specified authority limits. · All third party service providers are carefully selected for their expertise, reputation and financial standing. Service level agreements are negotiated with all material suppliers and regularly monitored to ensure that pre- agreed standards are met. · Suppliers' business continuity and disaster recovery plans, including safeguards against cyber-crime, are also regularly examined. · The Management Engagement Committee ("MEC") formally reviews all key service providers once a year and whenever necessary during times of stress. · Assurance reports on internal controls (ISAE 3402 reports) for both the Investment Manager and the Managing Agent are received and reviewed annually. |
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Commentary |
· COVID-19 initially caused significant disruption as key service providers had to put their business continuity plans into practice quickly and adapt to working remotely from their business premises. · The Investment Manager updated the Board on a regular basis on its own contingency arrangements and has demonstrated its operational resilience throughout. · Key service providers notified the Investment Manager promptly of the impact on their operations caused by COVID-19. Their ability to conduct business effectively has been monitored regularly by the Investment Manager. Service quality has been maintained despite the restrictions and no material issues of concern have been raised. · Section 172 statement provides details on the Company's collegial approach to stakeholders. No material issues noted from the reviews of service providers in the year. · Key service providers have not changed during 2020. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 |
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Risk I - Operational Risks: Accounting and Valuation |
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Risks & Impact |
Accounting records and financial statements could be incorrect or incomplete or fail to comply with current accounting standards. In particular property valuations, income and expenses could be calculated and recorded inaccurately. Limited transactions in the property market could hinder price discovery and could result in out of date valuations. |
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Mitigation |
· All properties within the portfolio are independently valued by CBRE Limited on a quarterly basis and their year-end valuations recorded in the Company's accounts. This is a rigorous assessment process to which the Investment Manager also contributes information. · CBRE, the independent valuer, is required to carry out a physical inspection of each property at least annually (not all properties could be inspected in 2020 due to COVID-19). · The Property Valuation Committee reviews thoroughly each quarter this independent valuation process. · Accounting control and reconciliation processes are in place at the Investment Manager. These are subject to regular independent assessment for their suitability and operating effectiveness by an external auditor. · Financial statements are subject to a year end audit by Deloitte LLP. |
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Commentary |
· Due to COVID-19 CBRE included a material uncertainty clause in their quarterly valuations in March and June which was then subsequently removed in September and December. · The existing Managing Agent (JLL) took over responsibility for the collection of rent and service charges from the Investment Manager in Q1 2020. This process is operating smoothly with a high level of communication and collaboration between both parties. |
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Change |
NET RISK: DECREASED RISK FROM JUNE 2020 Material uncertainty existing in relation to property valuations in the interim accounts 30 June 2020 has now been removed. There is no material uncertainty in relation to the 31 December 2020 valuation included in these financial statements.
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See further details on valuations in note 1(h) and note 10 to the accounts. |
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Risk J - Regulatory Risks: Regulation Change |
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Risks & Impact |
The Company could fail to comply with existing legislation or adapt to new or future regulation. In particular, the Company could fail to comply with REIT legislation and ultimately lose its REIT status, thereby incurring substantial tax penalties and reducing the amounts available for distribution to shareholders. Other key relevant legislation and regulations also include the Stock Exchange Listing Rules, Guernsey Company Law and Guernsey Registry requirements. |
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Mitigation |
· The Board receives regular updates on relevant regulatory changes from its professional advisors. · The highest corporate governance standards are required from all key service providers and their reputation and performance are reviewed at least annually by the Management Engagement Committee. · The Company has appointed experienced external tax advisors to advise on tax compliance matters. · Processes have been put in place to ensure ongoing compliance with REIT rules following the Company's conversion to a REIT on 1 July 2018. · The Board reviews quarterly a REIT dashboard confirming compliance with REIT regulations. |
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Commentary |
· In order to comply with the REIT rules concerning Property Income Distributions (PIDs), a fifth top up dividend of 0.531 pence per share will be paid on 21 May 2021. · The government's ongoing withdrawal of forfeiture in favour of commercial property tenants during the pandemic may have encouraged a small minority of tenants to withhold rent and avoid engagement with the Investment Manager. The vast majority of tenants, however, continued to pay rent or agreed rent concessions. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 |
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Risk K - Stakeholder Engagement Risks: Communication |
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Risks & Impact |
A communication breakdown with key stakeholders, particularly shareholders and tenants, could prevent the Company from understanding and responding to their needs and concerns. When required to fulfil certain reporting requirements, the Company could fail to communicate with regulatory authorities about its major shareholders. As a result the Company could potentially suffer financial penalties and reputational damage. |
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Mitigation |
· A high degree of engagement is maintained with both shareholders and tenants. · The Investment Manager regularly meets with shareholders and periodically, the Chair of the Board, also meets shareholders. · Quarterly Board reports include detailed shareholder analysis, written and verbal reports from JP Morgan Cazenove, the Company's Corporate Broker, and feedback from shareholder and analyst meetings where appropriate. · The Investment Manager works closely with tenants to understand better their needs and to remodel and refurbish buildings to fit their evolving requirements. This helps to reduce the risk of vacant properties. · The Company receives professional advice on its reporting obligations regarding major shareholders to ensure that it complies with regulations. |
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Commentary |
· Communication with all stakeholders has increased considerably as a result of COVID-19 and has been a priority for the Company. · Although many meetings with shareholders and analysts could not be held face to face, extensive use was made of virtual meetings and presentations to ensure clear messaging of strategy and to provide accurate and timely updates. · The continuation vote was overwhelmingly passed in March 2020. · Investment Managers have continued to visit properties when possible to engage with tenants. · Once restrictions are lifted the Board of Directors will resume visiting properties again, as part of a rolling programme to visit all properties over a three year period. · Section 172 report highlights the collaborative nature of interaction between the Company and it key stakeholders. |
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Change |
NET RISK: NO SIGNIFICANT CHANGE IN RISK FROM JUNE 2020 |
Viability Statement
The Board considers viability as part of its ongoing programme of monitoring risk and also has considered this in light of the ongoing COVID-19 pandemic. The Board continues to consider five years to be a reasonable time horizon over which to review the continuing viability of the Company.
The Board also considers viability over the longer term, in particular to key points outside this time frame, such as the due dates for the repayment of long-term debt. In addition, the Board considers viability in relation to continuation votes. A periodic continuation vote held in March 2020 was passed with the next one scheduled for 2027 and seven yearly thereafter. In addition, under the discount control policy of the Company, a continuation vote may be required if the Company's shares trade at a discount of over 5% for a continuous period of 90 dealing days or more beginning after the date of the second anniversary of the Company's most recent continuation vote. The secondary anniversary of the most recent continuation vote is 18 March 2022. Further details on this are set out in the Report of the Directors. This specific risk is assessed in light of the Company's most recent continuation vote which was passed with 99.9% of shareholders voting for continuation based on a 76% turnout. In addition, feedback from shareholders in the last 12 months has not given rise to any concerns over future continuation votes should they arise.
The Board has considered the nature of the Group's assets and liabilities and associated cash flows both in a normal environment and also in relation to the current environment as impacted by COVID-19. The Board has determined that five years is a reasonable timescale over which the performance of the Group can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company's viability.
The Board has also carried out a robust assessment of the principal and emerging risks faced by the Group. The main risks which the Board considers will affect the business model, future performance, solvency, and liquidity, are tenant failure leading to a fall in dividend cover, macroeconomic uncertainty and ongoing discounts leading to continuation votes. These risks along with other reported risks have also been considered in relation to the COVID-19 pandemic. The Board takes any potential risks to the ongoing success of the Group, and its ability to perform, very seriously and works hard to ensure that risks are consistent with the Group's risk appetite at all times.
In assessing the Group's viability, the Board has carried out thorough reviews of the following:
· Detailed NAV, cash resources and income forecasts, prepared by the Company's Investment Manager, for a five year period under both normal and stressed conditions and also forecast conditions relating to the COVID-19 pandemic;
· The Group's ability to pay its operational expenses, bank interest, tax and dividends over a five year period;
· Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover;
· Demand for the Company's shares and levels of premium or discount at which the shares trade to NAV;
· Views of shareholders;
· The valuation and liquidity of the Group's property portfolio, the Investment Manager's portfolio strategy for the future and the market outlook; and
· The potential for a further continuation vote in 2022 should the Company's discount remain at over 5% for 90 business days following the two year anniversary of the previous continuation vote (18 March 2020).
Despite the uncertainty in the UK regarding both the COVID-19 pandemic and also the impact of Brexit, the Board has a reasonable expectation, based on the information at the time of writing, that the Group will be able to continue in operation and meet its liabilities as they fall due over the next five years. This assessment is based on the results of the reviews mentioned above and also the overwhelming support of shareholders for the Company's continuation.
Approach to ESG
The Company adopts the Investment Manager's policy and approach to integrating ESG and this has been used as the basis for establishing the Company's ESG objectives.
The Investment Manager views ESG as a fundamental part of its business. Whilst real estate investment provides valuable economic benefits and returns for investors it has - by its nature - the potential to affect environmental and social outcomes, both positively and negatively.
The Investment Manager's approach is underpinned by the following three over-arching principles:
Transparency, Integrity and Reporting:
Being transparent in the ways in which our Investment Manager communicate and discusses strategy, approach and performance with investors and stakeholders.
Capability and Collaboration:
Drawing together and harnessing the capabilities and insights of our platforms, with those of our investment, supply chain and industry partners.
Investment Process and Asset Management:
Integrating ESG into decision making, governance, underwriting decisions and asset management approach. This includes the identification and management of material ESG risks and opportunities across the portfolio.
Of particular focus is responding to climate change, both in terms of resilience to climate impacts and in reducing emissions from the Company's activities. The Investment Manager has recently published a framework for achieving net-zero greenhouse gas emissions across the real estate assets it manages and the Company will be among the first to start this process.
EPRA Sustainability Best Practice Recommendations Guidelines
The Company have adopted the 2017 EPRA Sustainability Best Practice Recommendations Guidelines (sBPR) to inform the scope of indicators reported against. UKCM has reported against all EPRA sBPR indicators that are material to the Company. Additional data not required by the EPRA sBPR is also reported where it is believed to be relevant (e.g. like-for-like greenhouse gas emissions).
A full outline of the scope of reporting and materiality review in relation to EPRA sBPR indicators is included in the full Annual Report.
Operational Performance Summary
The investment Manager has processes in place to ensure operational sustainability performance is monitored and actions are implemented to drive continual improvement. The effect of COVID-19 on occupancy has had an impact on energy consumption and greenhouse gas emissions. It is unfortunately not possible to fully disaggregate this impact from improvement measures undertaken at assets. The performance figures for 2020 should be viewed in this context.
Like-for-like landlord-obtained electricity consumption reduced year-on-year across the Company's assets by 8%. Landlord gas consumption increased slightly due to consumption at vacant units. This resulted in a 10% reduction in like-for-like greenhouse gas emissions associated with landlord-procured energy.
2020 GRESB Assessment
The GRESB Assessment is the leading global sustainability benchmark for real estate vehicles. The Company has been submitted to GRESB since 2014. In the 2020 assessment, the Company achieved a score of 67 and a two star rating. The 2020 GRESB assessment represented a major overhaul of the benchmark which affected certain types of portfolio more than others and means comparisons with previous years are not possible. Our focus on ESG, and in particular on improving coverage of tenant data, will help improve the Company's GRESB score in future years.
Health & Safety Policy
Alongside these environmental principles the Company has a health & safety policy which demonstrates commitment to providing safe and secure buildings that promote a healthy working environment and a customer experience that supports a healthy lifestyle. The Company, through the Investment Manager and Managing Agent, manages and controls health & safety risks as systematically as any other critical business activity using technologically advanced systems and environmentally protective materials and equipment. By achieving a high standard of health & safety performance, the Company aims to earn the confidence and trust of tenants, customers, employees, shareholders and society at large.
Bribery & Ethical Policy
It is the Company's Policy to prohibit and expressly forbid the offering, giving or receiving of a bribe in any circumstances. This includes those instances where it may be perceived that a payment, given or received, may be a bribe. The Company has adopted this Anti-Bribery and Corruption Policy to ensure robust compliance with The UK Bribery Act 2010. The Company has made relevant enquiries of its Investment Manager and has received assurances that appropriate anti-bribery and corruption policies have been formulated and communicated to its employees. In addition the Board has adopted an ethical policy which highlights the need for ethical considerations to be considered in the acquisition and management of both new and existing properties.
STAKEHOLDER ENGAGEMENT
Board's Obligations under section 172 of the Companies Act
This section explains how the Directors have promoted the success of the Company for the benefit of its members as a whole during the financial year to 31 December 2020, taking into account the likely long term consequences of decisions, the need to foster relationships with all stakeholders and the impact of the Company's operations on the environment, in accordance with the provisions of the AIC Code on Corporate Governance.
The role of the REIT Board
The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are Shareholders, the Investment Manager, Tenants, Service Providers, Debt Providers and the Environment and the Community. The Board considers relations with stakeholders very seriously and has cited Stakeholder Engagement as one of the Company's principal risks. The mitigating actions to address the Stakeholder Engagement risk are set out the risk section.
The Board, which comprises six independent non-executive directors, whose skills and experience are set out in the Annual Report, retains responsibility for taking all decisions relating to the Group's investment objective and policy, dividend policy, gearing, corporate governance and strategy.
The Board delegates management functions to the Investment Manager and, either directly or through the Investment Manager, the Company employs key suppliers to provide services in relation to property management, health & safety, valuation, legal and tax requirements, auditing, depositary obligations and share registration, amongst others. The Board regularly reviews the performance of the Investment Manager, and its other service providers, to ensure they manage the Company and its stakeholders effectively and that their continued appointment is, over the long term, in the best interests of the Shareholders as a whole.
The Board seeks to maintain a constructive working relationship with its stakeholders and prides itself on its transparent and collegiate culture. The Board operates in a manner which is supportive, yet challenging, of the Investment Manager and its other service providers, with the goal of overseeing the Company's activities on behalf of all stakeholders.
As set out in the Board of Directors' Report, the Board reviews its performance annually to ensure it is meeting its obligations to stakeholders. The evaluation helps the Board to determine whether they have sufficiently discharged their duties and responsibilities over the course of the financial year. Engagement with key stakeholders is considered formally as part of the annual evaluation process.
OUR STAKEHOLDERS' INTERESTS
Shareholders
· Attractive and sustainable level of income, earnings and dividends
· Potential for capital and income growth
· Diversification of portfolio
· Execution of investment objective
· Responsible capital allocation and dividend policy
· Value for money - low ongoing charges
· Liquidity in the Company's shares
Investment Manager
· Productive working relationship with the Board
· Clear and sustainable investment objective and policy
· Collaboration with all stakeholders
Tenants
· Positive working relationship with the Board and the Investment Manager
· refurbished to meet their requirements
· A focus on the community, health & safety and the environment
Service Providers
· Productive working relationship with the Company
· Strong internal controls
· Collaboration
Debt Providers
· Responsible portfolio management
· Compliance with loan covenants
Environment and Community
· Sustainable investment policy
· Community engagement and socio-economic benefit
· A focus on consumption, emissions and resource efficiency
HOW WE ENGAGE WITH OUR STAKEHOLDERS
The Board considers its stakeholders at every Board meeting and receives feedback on the Investment Manager's interactions with the Company's Shareholders, tenants and service providers. The Board also engages directly with its stakeholders.
Shareholders
Shareholders are key stakeholders and the Board places great importance on communication with them. The Board's primary focus is to promote the long term success of the Company for the benefit of its Shareholders as a whole. The Board oversees the delivery of the investment objective, policy and strategy, as agreed by the Company's Shareholders. The Board welcomes all Shareholder's views and aims to act fairly between all Shareholders. The Investment Manager and Company's Broker regularly meet with Shareholders, and prospective Shareholders, to discuss Company initiatives and seek feedback. The views of Shareholders are discussed by the Board at every Board meeting, and action taken to address any Shareholder concerns. The Investment Manager provides regular updates to Shareholders and the market through the Annual Report, Interim Report, Quarterly Net Asset Value announcements and Company Factsheets.
The Chair meets with key Shareholders at least annually, and other Directors are available to meet Shareholders as required. This allows the Board to hear feedback directly from Shareholders. During the financial year to 31 December 2020, the Investment Manager, undertook several virtual meetings with large Shareholders to provide reports on the progress of the Company and receive feedback, which was then provided to the full Board. Shareholders are also invited to vote on the continuation of the Company at regular intervals and the Board encourages Shareholders to participate in this vote.
The Annual General Meeting ("AGM") of the Company and also the annual and interim results presentations provide a forum, both formal and informal, for Shareholders to meet and discuss issues with the Directors and Investment Manager of the Company. The Board would ordinarily encourage as many Shareholders as possible to attend the Company's AGM to engage directly with the Board.
The Board has been monitoring closely the ongoing impact of the COVID-19 pandemic upon the arrangements for the Company's upcoming AGM on Friday, 18 June 2021. At the time of writing, elements of the National Lockdown remain in place and shareholder attendance at AGMs is not legally permissible. Therefore, in order to provide certainty, whilst encouraging and promoting interaction and engagement with the Company's shareholders, the Board has decided that the AGM will be a closed meeting with the minimum representation attending to form a quorum . However, the Manager will record a Question & Answer session, responding to any shareholder questions, submitted to the Board in advance of the AGM. The Q&A will be published to the Company's website in early June 2021.
Following the Q&A, shareholders will still have time during which to submit their proxy votes prior to the AGM. Shareholders are encouraged to submit questions in advance of the Q&A by email to:
commercial.property@aberdeenstandard.com.
The Board encourages all shareholders to lodge their proxy votes in advance of the AGM.
Investment Manager
The Chair's Statement and Investment Manager's Review detail the key investment decisions taken during the year and subsequently. The Investment Manager has continued to manage the Company's assets in accordance with the mandate provided by Shareholders, with the oversight of the Board. The Company regularly reviews its performance against its investment strategy by reference to its rolling five year business plan to ensure it remains fit for purpose. The Board undertakes an annual strategy meeting to test itself and ensure the Company is positioned well for the future delivery of its objective for its stakeholders. The Board receives presentations from the Investment Manager at every Board meeting to help it to exercise effective oversight of the Investment Manager and the Company's Strategy. The Board formally reviews the performance of the Investment Manager at least annually.
Tenants
Prior to COVID-19, Board members regularly visited properties and, where appropriate, engaged with tenants directly to enhance their understanding of each property and the tenants' requirements. Following the outbreak of COVID-19 Directors were unable to visit any properties given the COVID-19 travel restrictions but will resume visits as and when travel regulations allow.
The day to day management of the portfolio and tenant interaction is delegated to the Investment Manager. The Investment Manager takes a proactive approach to its relationship with tenants, working closely alongside them to understand their needs through regular communication, visits to properties and collaboration on projects. The Investment Manager reports on its engagement with tenants at every Board meeting.
The Company's Investment Manager has worked closely with tenants to understand their needs during the crisis. The Board firmly believes that by helping tenants now and building better relationships the Company will have better occupancy over future months and years, which will in turn benefit the Company's cash flow.
Service Providers
The Board seeks to maintain constructive relationships with the Company's suppliers either directly or through the Investment Manager with regular communications and meetings. On behalf of the Company's Shareholders, the Management Engagement Committee conducts annual reviews of the Company's Service Providers and their respective fees to ensure they are performing in line with Board expectations and provide value for money.
Debt Providers
The Company maintains a positive working relationship with its debt providers, Barclays Bank plc and Barings Real Estate Advisers, and provides regular updates on business activity and compliance with its loan covenants. The Company has an overall flexible debt profile to allow it to move quickly to take advantage of any attractive opportunities that may occur in the present uncertain economic environment.
Environment and Community
The Board and the Investment Manager are committed to investing in a responsible manner. There are a number of geopolitical, technological, social and demographic trends underway in the developed world that can, and do, influence real estate investments - many of these changes fall under the umbrella of the Environment and Community, or ESG, considerations. As a result, the Investment Manager fully integrates ESG factors into its investment decision making and governance process.
The Board has adopted the Investment Manager's ESG Policy and associated operational procedures and is committed to environmental management in all phases of the investment process. The Company aims to invest responsibly, to achieve environmental and social benefits alongside returns. By integrating ESG factors into the investment process, the Company aims to maximise the performance of the assets and minimise exposure to risk. For more information on the Company's approach to ESG please see the Company's separate ESG document available on the Company's website "Dialling Up the Integration of ESG".
Specific examples of stakeholder consideration during 2020
While the importance of giving due consideration to the Company's stakeholders is not new, and is considered during every Board decision, the Board were particularly mindful of stakeholder considerations during the following strategic decisions undertaken during the financial year to 31 December 2020.
Continuation Vote
In accordance with its commitment to consulting shareholders about the continuation of the Company on a regular basis, the Company published a circular and held an EGM to consider the continuation of the Company on 18 March 2020.
This vote was passed with over 74% of the total share capital being voted and 99.9% of those who voted voting for the continuation of the Company.
Payment of the Company's Dividend
As set out in the Chair's Statement, the Company continued to pay interim dividends during the year despite the economic impact of COVID-19. The Company was not immune to the impact of the pandemic, most notably in relation to rent collection, as some tenants were constrained in their ability to trade during lockdowns. The Board agreed that exercising prudence was important during the uncertainty but also recognised the importance of dividends to its shareholders, both large and small, who are reliant on the income, particularly during the peak of COVID-19 when a number of companies had cancelled their distributions. As a result, the Board agreed to maintain the interim dividend at a reduced rate of 0.46 pence per share during the financial year and has announced its intention to pay a 5th top-up 2020 dividend in May 2021, in line with REIT legislation to pay at least 90% of the 'property income' for the year.
The Board also agreed to reduce their own fees by 20% from 1 April 2020 to 31 December 2020 and continue to keep all other costs and capital expenditure commitments under review.
Implementation of Expanded Investment Policy and Objective
Under the guidance of the Board, the Investment Manager continued to implement the expanded investment policy and objective by gaining exposure to alternative commercial property sectors. In June 2020, the Company completed the sale of its last City of London office and, in December 2020, announced acquisitions of an ASDA supermarket in Torquay and purpose built student accommodation in Edinburgh on top of the ongoing funding of a student accommodation site in Exeter. The Board believes that, in executing the extended investment policy and objective, the Investment Manager has access a wider spectrum of commercial property assets and provides the flexibility to maintain an attractive and diversified portfolio for the benefit of all shareholders.
Example of Tenant Interaction During 2020
COVID-19 has resulted in a number of businesses coming under pressure as the pandemic has resulted in reduced, or in some cases, no trading activity at all. The Company has worked closely with tenants to agree rental deferments, rent free periods in exchange for amended lease terms (generally an extension of leases) and, in some extreme cases, rental write offs (generally with the smallest tenants who have no means of paying). An example of this is highlighted across.
Leisure Operator at The Rotunda, Kingston Upon Thames
Our tenant approached us early in the pandemic to explain that they were unable to trade during lockdown but had furloughed staff and applied for a government loan. Our tenant paid the March 2020 invoice for the second quarter rent in advance and we provided a rent free period for the following third quarter. When the business was allowed to open gradually during the summer of 2020, our tenant paid their rent for the final quarter, despite only limited numbers of visitors due to restrictions and the subsequent adverse impact on its turnover. Now that another lockdown has been introduced, the business has closed and UKCM worked closely with the business to ensure an equitable solution was reached which would help the business survive the current lockdown constraints and be able to commence rental obligations in the future.
Approval of Strategic Report
As set out above, the Board considers the long term consequences of its decisions on its stakeholders to ensure the long term sustainability of the Company.
The Strategic Report of the Company comprises Financial and Property Highlights, Performance Summary, Chair's Statement, Investment Manager Review, Portfolio Information and Strategic Overview incorporating the risk management and stakeholder overview section.
The Strategic Report was approved by the Board on 22 April 2021.
Ken McCullagh
Director
EXTRACT FROM REPORT OF DIRECTORS
Annual General Meeting
At the AGM to be held on 18 June 2021, the following resolutions will be proposed:
Dividend policy
It is the Directors' intention in line with the Company's investment objective to pay an attractive level of dividend income to shareholders on a quarterly basis. The Directors intend to set the level of dividend after taking into account the long term income return of the Property Portfolio, the diversity and covenant strength of the tenants and the length of the leases of the Properties as well as solvency of the Company.
Dividends on the ordinary shares are expected to be paid in four instalments quarterly in respect of each financial year in February, May, August and November. All dividends will be in the form of property income distribution, ordinary dividends or a mixture of both and paid as interim dividends.
Resolution 2, which is an ordinary resolution, seeks approval of the Company's dividend policy to continue to pay four quarterly interim dividends with the ability to pay further interim dividends should the need arise i.e. to comply with the REIT rules.
Disapplication of Pre-emption Rights
Resolution 12 gives the Directors, for the period until the conclusion of the Annual General Meeting in 2021 or, if earlier, on the expiry of 15 months from the passing of resolution 12, the necessary authority either to allot securities or sell shares held in treasury, otherwise than to existing shareholders on a pro-rata basis, up to an aggregate nominal amount of £32,485,312. This is equivalent to approximately 10 per cent of the issued ordinary share capital of the Company as at 22 April 2021. There are no shares currently held in treasury.
The Directors will allot new shares pursuant to this authority only if they believe it is advantageous to the Company's shareholders to do so and the issue price of new shares will be at a premium to the latest published net asset value per share.
Directors' Authority to Buy Back Shares
The current authority of the Board granted to it by shareholders at the 2020 AGM to buy back shares in the Company expires at the end of the AGM to be held in 2021. The Board intends to renew such authority to buy back shares up to 14.99 per cent of the number of ordinary shares in issue. This special resolution (resolution 13), if approved, will enable the Company to buy back up to 194,781,928 shares based on the current number of shares in issue (excluding any treasury shares). Any buy back of ordinary shares will be made subject to Guernsey law and within guidelines established from time to time by the Board, which will take into account the income and cashflow requirements of the Company, and the making and timing of any buy backs will be at the absolute discretion of the Board.
Purchases of ordinary shares will only be made through the market for cash at prices below the prevailing published net asset value of an ordinary share (as last calculated, adjusted downwards for the amount of any dividend declared by the Company upon the shares going ex-dividend), where the Directors believe such purchases will enhance shareholder value. Such purchases will also only be made in accordance with the rules of the UK Listing Authority which provide that the price to be paid must not be more than the higher of (i) five per cent above the average of the middle market quotations for the ordinary shares for the five business days before the purchase is made and (ii) the higher of the last independent trade and the highest current independent bid on the London Stock Exchange. The minimum price (exclusive of expenses) that may be paid is 25 pence a share.
The Company may retain any shares bought back as treasury shares for future re-issue, or transfer, or may cancel any such shares. During the period when the Company holds shares as treasury shares, the rights and obligations in respect of those shares may not be exercised or enforced by or against the Company. The maximum number of shares that can be held as treasury shares by the Company is 10 per cent of the aggregate nominal value of all issued ordinary shares. Ordinary shares held as treasury shares will only be re-issued, or transferred at prices which are not less than the published net asset value of an ordinary share.
It is the intention of Directors that the share buy back authority may be used to purchase ordinary shares in the Company, (subject to the income and cash flow requirements of the Company) if the level of discount represents an opportunity that will generate risk adjusted returns in excess of that which could be achieved by investing in real estate opportunities at a particular time.
The discount control policy of the Company provides that in the event that the share price discount to prevailing published NAV (as last calculated, adjusted downwards for the amount of any dividend declared by the Company upon the shares going ex-dividend) is more than 5 per cent for 90 dealing days or more, following the second anniversary of the Company's most recent continuation vote, the Directors will convene an Extraordinary General Meeting ("EGM") to be held within three months to consider an ordinary resolution for the continuation of the Company. If this continuation resolution is not passed, the Directors will convene a further extraordinary general meeting to be held within six months of the first EGM to consider the winding up of the Company or a reconstruction of the Company which offers all shareholders the opportunity to realise their investment. If any such continuation resolution is passed, this discount policy, save in respect of share buy backs, would not apply for a period of two years thereafter. The last continuation vote was held on 18 March 2020.
Auditors
Deloitte LLP has expressed its willingness to continue in office as the Company's auditor and a resolution proposing its re-appointment will be put to the AGM.
So far as each of the Directors is aware, there is no relevant audit information of which the Company's auditor is unaware, and each has taken all the steps he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
Recommendations
The Directors believe that the resolutions to be proposed at the Annual General Meeting are in the best interests of the Company and its shareholders as a whole, and recommend that shareholders vote in favour of the resolutions, as the Directors intend to do in respect of all their own beneficial shareholdings.
Statement Regarding the Annual Report and Accounts
Following a detailed review of the Annual Report and Accounts by the Audit Committee, full details of which can be found in the Audit Committee Report, the Board consider that when taken as a whole, it is fair, balanced and understandable and provides the transparency necessary for shareholders to assess the Company's position and performance, business model and strategy.
The Board welcomes views from shareholders and company analysts on the Annual Report & Accounts and, where practical, will incorporate any suggestions that will improve the document. Shareholders are invited to correspond directly with the Board at: commercial.property@aberdeenstandard.com .
Approved by the Board on 22 April 2021.
Ken McCullagh
Director
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable Guernsey law and those International Financial Reporting Standards ("IFRS") as have been adopted by the European Union. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority.
The Directors are required to prepare Group financial statements for each financial year which give a true and fair view of the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those Group financial statements the Directors are required to:
· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;
· state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and
· prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies (Guernsey) Law 2008. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for ensuring that the Group complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority which, with regard to corporate governance, require the Group to disclose how it has applied the principles, and complied with the provisions, of the AIC Code on Corporate Governance applicable to the Group.
We confirm that to the best of our knowledge:
· the Group financial statements, prepared in accordance with the IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and comply with the Companies Law;
· that in the opinion of the Board, the Annual Report & Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Group's position and performance, business model and strategy; and
· the Strategic Report includes a fair review of the progression and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.
On behalf of the Board
Ken McCullagh
Director
22 April 2021
|
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME |
|
|||
|
For the year ended 31 December 2020 |
||||
|
|
|
Year ended |
Year ended |
|
|
|
Notes |
31 December 2020 £'000 |
31 December 2019 £'000 |
|
|
REVENUE |
|
|
|
|
|
Rental income |
2 |
64,656 |
71,754 |
|
|
Service charge income |
3 |
6,500 |
6,234 |
|
|
(Losses) on investment properties and disposal of subsidiaries |
10 |
(45,485) |
(43,094) |
|
|
Interest income |
|
236 |
238 |
|
|
Total income |
|
25,907 |
35,132 |
|
|
|
|
|
|
|
|
EXPENDITURE |
|
|
|
|
|
Investment management fee |
4 |
(8,063) |
(8,700) |
|
|
Direct property expenses |
5 |
(4,845) |
(4,226) |
|
|
Service charge expenses |
5 |
(6,500) |
(6,234) |
|
|
Other expenses |
5 |
(8,584) |
(5,222) |
|
|
Total expenditure |
|
(27,992) |
(24,382) |
|
|
Operating (Loss)/Profit before finance costs |
|
(2,085) |
10,750 |
|
|
|
|
|
|
|
|
FINANCE COSTS |
|
|
|
|
|
Finance costs |
6 |
(8,197) |
(8,359) |
|
|
Loss on derecognition of interest rate swap |
|
- |
(703) |
|
|
Total Finance Costs |
|
(8,197) |
(9,062) |
|
|
|
|
|
|
|
|
Net (Loss)/profit from ordinary activities before taxation |
|
(10,282) |
1,688 |
|
|
Taxation on profit on ordinary activities |
7 |
- |
(45) |
|
|
Net (loss)/profit for the year |
|
(10,282) |
1,643 |
|
|
OTHER COMPREHENSIVE INCOME TO BE RECLASSIFIED TO PROFIT OR LOSS |
|
|
|
|
|
Gain arising on effective portion of interest rate swap |
14 |
- |
703 |
|
|
(Loss) arising on effective portion of interest rate swap |
14 |
- |
(1) |
|
|
Other comprehensive income |
|
- |
702 |
|
|
|
|
|
|
|
|
Total comprehensive (deficit)/income for the year |
|
(10,282) |
2,345 |
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
9 |
(0.79)p |
0.13p |
|
|
|
|
|
|
|
|
EPRA earnings per share (excluding non-recurring tax items) |
9 |
2.71p |
3.50p |
|
All of the losses and total comprehensive deficit for the year is attributable to the owners of the Company. All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of this statement.
|
CONSOLIDATED BALANCE SHEET |
|
|
|||
|
As at 31 December 2020 |
|
||||
|
|
|
Year ended |
Year ended |
|
|
|
|
Notes |
31 December 2020 £'000 |
31 December 2019 £'000 |
|
|
|
NON-CURRENT ASSETS |
|
|
|
||
|
Investment properties |
10 |
1,172,812 |
1,309,541 |
||
|
Interest rate swap |
14 |
- |
- |
||
|
|
|
1,172,812 |
1,309,541 |
||
|
|
|
|
|
||
|
CURRENT ASSETS |
|
|
|
||
|
Investment properties held for sale |
10 |
10,000 |
48,850 |
||
|
Trade and other receivables |
12 |
47,432 |
30,262 |
||
|
Cash and cash equivalents |
|
122,742 |
48,984 |
||
|
|
|
180,174 |
128,096 |
||
|
Total assets |
|
1,352,986 |
1,437,637 |
||
|
|
|
|
|
||
|
CURRENT LIABILITIES |
|
|
|
||
|
Trade and other payables |
13 |
(28,161) |
(23,046) |
||
|
Interest rate swap |
14 |
- |
- |
||
|
|
|
(28,161) |
(23,046) |
||
|
|
|
|
|
||
|
NON-CURRENT LIABILITIES |
|
|
|
||
|
Bank loan |
14 |
(197,849) |
(247,447) |
||
|
Interest rate swap |
14 |
- |
- |
||
|
|
|
(197,849) |
(247,447) |
||
|
Total liabilities |
|
(226,010) |
(270,493) |
||
|
Net assets |
|
1,126,976 |
1,167,144 |
||
|
REPRESENTED BY |
|
|
|
||
|
Share capital |
15 |
539,872 |
539,872 |
||
|
Special distributable reserve |
|
572,392 |
567,075 |
||
|
Capital reserve |
|
14,712 |
60,197 |
||
|
Revenue reserve |
|
- |
- |
||
|
Interest rate swap reserve |
|
- |
- |
||
|
Equity shareholders' funds |
|
1,126,976 |
1,167,144 |
||
|
Net asset value per share |
16 |
86.7p |
89.8p |
||
|
EPRA Net asset value per share |
16 |
86.7p |
89.8p |
||
|
|
|
|
|
||
The accompanying notes are an integral part of this statement.
The accounts and following notes were approved and authorised for issue by the Board of Directors on 22 April 2021 and signed on its behalf by:
Ken McCullagh
Director
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020
|
|
|
Share Capital |
Special Distributable Reserve |
Capital Reserve |
Revenue Reserve |
Interest Rate Swap Reserve |
Equity shareholders' funds |
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
At 1 January 2020 |
|
539,872 |
567,075 |
60,197 |
- |
- |
1,167,144 |
|
Net Loss for the year |
|
- |
- |
- |
(10,282) |
- |
(10,282) |
|
Other comprehensive income |
|
- |
- |
- |
- |
- |
- |
|
Total comprehensive income |
|
- |
- |
- |
(10,282) |
- |
(10,282) |
|
Dividends paid |
8 |
- |
- |
- |
(29,886) |
- |
(29,886) |
|
Transfer in respect of losses on investment property |
10 |
- |
- |
(45,485) |
45,485 |
- |
- |
|
Transfer from special distributable reserve |
- |
|
5,317 |
- |
(5,317) |
- |
- |
|
As 31 December 2020 |
539,872 |
572,392 |
14,712 |
- |
- |
1,126,976 |
|
For the year ended 31 December 2019
|
|
|
Share Capital |
Special Distributable Reserve |
Capital Reserve |
Revenue Reserve |
Interest Rate Swap Reserve |
Equity shareholders' funds |
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
At 1 January 2019 |
|
539,872 |
570,158 |
103,291 |
- |
(702) |
1,212,619 |
|
Net Profit for the year |
|
- |
- |
- |
1,643 |
- |
1,643 |
|
Other comprehensive income |
|
- |
- |
- |
- |
702 |
702 |
|
Total comprehensive income |
|
- |
- |
- |
1,643 |
702 |
2,345 |
|
Dividends paid |
8 |
- |
- |
- |
(47,820) |
- |
(47,820) |
|
Transfer in respect of losses on Investment property |
10 |
- |
- |
(43,094) |
43,094 |
- |
- |
|
Transfer from special distributable reserve |
- |
(3,083) |
- |
3,083 |
- |
- |
|
|
As 31 December 2019 |
539,872 |
567,075 |
60,197 |
- |
- |
1,167,144 |
|
The accompanying notes are an integral part of this statement.
CONSOLIDATED CASH FLOW STATEMENT |
| ||
For the year ended 31 December 2020 | |||
|
| Year ended
| Year ended |
|
Notes | 31 December 2020 £'000 | 31 December 2019 £'000 |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
Net(Loss) / Profit for the year before taxation |
| (10,282) | 1,688 |
Adjustments for: |
|
|
|
Losses on investment properties | 10 | 45,485 | 43,094 |
Movement in lease incentives | 10 | (4,805) | (5,180) |
Movement in provision for bad debts | 12 | (4,784) | (236) |
Increase in operating trade and other receivables |
| (7,582) | (1,081) |
Increase / (Decrease) in operating trade and other payables |
| 5,321 | (13,503) |
Finance costs | 6 | 8,197 | 8,359 |
Loss on derecognition of interest rate swap | 14 | - | 702 |
Cash generated by operations |
| 31,550 | 33,843 |
Tax paid |
| (293) | (1,779) |
Net cash inflow from operating activities |
| 31,257 | 32,064 |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
Purchase of investment properties | 10 | (24,669) | - |
Sale of investment properties | 10 | 158,194 | 46,250 |
Capital expenditure | 10 | (3,570) | (14,692) |
Net cash inflow from operating activities |
| 129,955 | 31,558 |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
Facility fee charges from bank financing |
| (864) | (2,092) |
Dividends paid | 8 | (29,886) | (47,820) |
Bank loan repaid |
| (50,000) | - |
Bank loan interest paid |
| (6,704) | (7,344) |
Payments under interest rate swap arrangement |
| - | (184) |
Swap breakage costs |
| - | (703) |
Net cash outflow from financing activities |
| (87,454) | (58,143) |
|
|
|
|
Net increase in cash and cash equivalents |
| 73,758 | 5,479 |
|
|
|
|
Opening cash and cash equivalents |
| 48,984 | 43,505 |
|
|
|
|
Closing cash and cash equivalents |
| 122,742 | 48,984 |
REPRESENTED BY |
|
|
|
Cash at bank |
| 39,599 | 25,453 |
Money market funds |
| 83,143 | 23,531 |
|
| 122,742 | 48,984 |
The accompanying notes are an integral part of this statement.
Notes to the Accounts
1. ACCOUNTING POLICIES
A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.
(a) Basis of Accounting
The consolidated accounts have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (the IASB), interpretations issued by the IFRS Interpretations Committee that remain in effect, and to the extent that they have been adopted by the European Union, applicable legal and regulatory requirements of Guernsey law and the Listing Rules of the UK Listing Authority.
The audited Consolidated Financial Statements of the Group have been prepared under the historical cost convention as modified by the measurement of investment property and derivative financial instruments at fair value. The consolidated financial statements are presented in pound sterling.
The Directors have considered the basis of preparation of the accounts given the COVID-19 pandemic and believe that it is still appropriate for the accounts to be prepared on the going concern basis.
(b) Significant accounting judgements, estimates and assumptions
The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that affect the amounts recognised in the financial statements. However, uncertainty about these judgements, assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future. In applying the Group's accounting policies, there were no critical accounting judgements.
Key estimation uncertainties
Fair value of investment properties: Investment property is stated at fair value as at the balance sheet date as set out in note 1(h) and note 10 to these accounts.
The determination of the fair value of investment properties requires the use of estimates such as future cash flows from the assets and unobservable inputs such as capitalisation rates. The estimate of future cash flows includes consideration of the repair and condition of the property, lease terms, future lease events, as well as other relevant factors for the particular asset. These estimates are based on local market conditions existing at the balance sheet date.
Provision for bad debts are also a key estimation uncertainty. These are measured with reference to amounts included as income at the year end but not yet collected. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward-looking information. Due to the impact of COVID-19 on collection rates, there has been a significant increase in our assessed credit risk.
Each individual rental income debtor is reviewed to assess whether it is believed there is a probability of default and expected credit loss given the knowledge and intelligence of the individual tenant and an appropriate provision made.
(c) Basis of Consolidation
The consolidated accounts comprise the accounts of the Company and its subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.
The Jersey Property Unit Trusts ("JPUTS") are all controlled via voting rights and hence those entities are consolidated.
(d) Functional and Presentation currency
Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Company and its subsidiaries operate ("the functional currency") which is pounds sterling. The financial statements are also presented in pounds sterling. All figures in the financial statements are rounded to the nearest thousand unless otherwise stated.
(e) Revenue Recognition
Rental income, excluding VAT, arising from operating leases (including those containing stepped and fixed rent increases) is accounted for in the Consolidated Statement of Comprehensive Income on a straight line basis over the lease term. Lease premiums paid and rent free periods granted, are recognised as assets and are amortised over the non-cancellable lease term.
Non-rental service charge income is recognised in the period where the non-rental service charge income is received.
Interest income is accounted on an accruals basis and included in operating profit.
(f) Expenses
Expenses are accounted for on an accruals basis. The Group's investment management and administration fees, finance costs and all other expenses are charged through the Consolidated Statement of Comprehensive Income.
(g) Taxation
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation are periodically evaluated and provisions established where appropriate.
Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the directors consider that the Group will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.
(h) Investment Properties
Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period during which the expenditure is incurred and included within the book cost of the property.
After initial recognition, investment properties are measured at fair value, with the movement in fair value recognised in the Consolidated Statement of Comprehensive Income and transferred to the Capital Reserve. Fair value is based on the external valuation provided by CBRE Limited, chartered surveyors, at the Balance Sheet date. The assessed fair value is reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or minimum lease payments.
On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve.
Recognition and derecognition occurs when the significant risks and rewards of ownership of the properties have transferred between a willing buyer and a willing seller.
Investment property is transferred to current assets held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. For this to be the case, the property must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property and its sale must be highly probable.
The Group has entered into forward funding agreements with third party developers in respect of certain properties. Under these agreements the Group will make payments to the developer as construction progresses. The value of these payments is assessed and certified by an expert. Investment properties are recognised for accounting purposes upon completion of contract. Properties purchased under forward funding contracts are recognised at certified value to date.
Management considers each property transaction separately, with an assessment carried out to determine whether the transaction represents an asset acquisition or business combination. In making its judgement on whether the acquisition of property through the purchase of a corporate vehicle represents an asset acquisition or business combination, management consider whether the integrated set of assets and activities acquired contain both input and processes along with the ability to create outputs.
(i) Operating Lease Contracts
The Group has entered into commercial property leases on its investment property portfolio.
The Group as lessor
When the Group acts as a lessor, it determines at lease commencement whether each lease is a finance lease or an operating lease. The Group has assessed all leases where it acts as a lessor, based on an evaluation of the terms and conditions of the arrangements, and has determined that the Group retains all the significant risks and rewards of ownership of these properties therefore, the leases are accounted for as operating leases. Where the Group does not retain all the significant risks and rewards of ownership these leases would be classified as finance leases.
Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.
The Group as intermediate lessor
When the Group is an intermediate lessor, it accounts for its interest in the head lease and the sub-lease separately. The Group has assessed all leases where it acts as an intermediate lessor, based on an evaluation of the terms and conditions of the arrangements, and has identified that all head leases have low value at the lease commencement date.
The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets. The Group classifies the sub-leases as operating leases and accounts for the lease payments on a straight-line basis over the lease terms.
(j) Share Issue Expenses
Incremental external costs directly attributable to the issue of shares that would otherwise have been avoided are written off to capital reserves.
(k) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment of business being property investment in the United Kingdom. The Directors are of the opinion that the four property sectors analysed throughout the financial statements constitute this single segment, and are not separate operating segments as defined by IFRS 8 Operating Segments.
(l) Cash and Cash Equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value.
(m) Trade and Other Receivables
Trade receivables are recognised initially at their transaction price unless they contain a significant financing component, when they are recognised at fair value. Trade receivables are subsequently measured at amortised cost using the effective interest method.
Other receivables are initially recognised at fair value plus any directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.
The Group loss allowance is based on expected credit loss as calculated using the "provision matrix" approach and a forward-looking component based on individual tenant profiles. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full. The Group writes off trade receivables when there is reasonable expectation of recovery.
(n) Trade and Other Payables
Rental income received in advance represents the pro-rated rental income invoiced before the year end that relates to the period post the year end. VAT payable is the difference between output and input VAT at the year end. Other payables are accounted for on an accruals basis and include amounts which are due for settlement by the Group as at the year end and are generally carried at the original invoice amount. An estimate is made for any services incurred at the year end but for which no invoice has been received.
(o) Reserves
Share Capital
This represents the proceeds from issuing ordinary shares.
Special Distributable Reserve
The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey law, including the buyback of shares and the payment of dividends. Dividends can be paid from all of the below listed reserves.
Capital Reserve
The following are accounted for in this reserve:
· gains and losses on the disposal of investment properties;
· increases and decreases in the fair value of investment properties held at the year end.
Revenue Reserve
Any surplus arising from the net profit on ordinary activities after taxation and payment of dividends is taken to this reserve, with any deficit charged to the special distributable reserve.
Interest Rate Swap Reserve
Any surplus/deficit arising from the marked to market valuation of the swap instrument is credited/charged to this account.
Treasury Share Reserve
This represents the cost of shares bought back by the Company and held in Treasury. The balance within this reserve is currently nil.
(p) Interest-bearing borrowings
All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of arrangement costs associated with the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.
On maturity, bank loans are recognised at par, which is equivalent to amortised cost. Bank loans redeemed before maturity are recognised at amortised cost with any charges associated with early redemptions being taken to the Statement of Comprehensive Income.
(q) Derivative financial instruments
The Group used derivative financial instruments to hedge its risk associated with interest rate fluctuations.
Derivative instruments are initially recognised in the Balance Sheet at their fair value split between current and non-current. Fair value is determined by reference to market values for similar instruments. Transaction costs are expensed immediately.
Gains or losses arising on the fair value of cash flow hedges in the form of derivative instruments are taken directly to Other Comprehensive Income. Such gains and losses are taken to a reserve created specifically for that purpose, described as the Interest Rate Swap Reserve in the Balance Sheet
On termination the unrealised gains or losses arising from cash flow hedges in the form of derivative instruments, initially recognised in Other Comprehensive Income, are transferred to profit or loss.
The Group considers its interest rate swap qualifies for hedge accounting when the following criteria are satisfied:
· The instrument must be related to an asset or liability;
· It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa;
· It must match the principal amounts and maturity date of the hedged item; and
· As a cash flow hedge the forecast transaction (incurring interest payable on the bank loan) that is subject to the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect the profit or loss. The effectiveness of the hedge must be capable of reliable measurement and must be assessed as highly effective on an ongoing basis throughout the financial reporting periods for which the hedge was designated.
If a derivative instrument does not satisfy the Group's criteria to qualify for hedge accounting that instrument will be deemed as an ineffective hedge.
Should any portion of an ineffective hedge be directly related to an underlying asset or liability, that portion of the derivative instrument should be assessed against the Group's effective hedge criteria to establish if that portion qualifies to be recognised as an effective hedge.
Where a portion of an ineffective hedge qualifies against the Group's criteria to be classified as
an effective hedge that portion of the derivative instrument shall be accounted for as a separate and effective hedge instrument and treated as other comprehensive income.
Gains or losses arising on any derivative instrument or portion of a derivative instrument which is deemed to be ineffective will be recognised in profit or loss. Gains and losses, regardless of whether related to effective or ineffective hedges, are taken to a reserve created specifically for that purpose described in the balance sheet as the Interest Rate Swap Reserve.
(r) New standards, amendments and interpretation
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2020 and have been adopted by the Group. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below:
· Amendments to IFRS 3, Business Combinations - The IASB published an amendment to the requirements of IFRS 3 in relation to whether a transaction meets the definition of a business combination. The amendment clarifies the definition of a business, as well as provides additional illustrative examples, including those relevant to the real estate industry. A significant change in the amendment is the option for an entity to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the business combination guidance is required. This will be relevant where the value of the acquired entity is concentrated in one property, or a group of similar properties. The amendment is effective for periods beginning on or after 1 January 2020 with earlier application permitted. There will be no impact on transition since the amendments are effective for business combinations for which the acquisition date is on or after the transition date.
There are no other IFRS's or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.
Annual Improvements to IFRS
The Group has made no adjustments to its financial statements in relation to IFRS Standards detailed in the annual Improvements to IFRS 2018-2020 Cycle (effective for annual reporting periods beginning on or after 1 January 2022). The Group will consider these amendments in due course to see if they will have any impact on the Group.
2. RENTAL INCOME
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Rental income | 64,656 | 71,754 |
3. SERVICE CHARGE INCOME
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Servicechargeincome | 6,500 | 6,234 |
The Group's managing agents Jones Lang LaSalle manage service charge accounts for all the Group's properties and also bill all rents due from 1 March 2020.
Service charges on rented properties are detailed in note 5 Service charge expenses, are recharged to tenants.
The service charge paid by the Group in respect of void units was £0.8 million (2019: £1.2 million) and is included within note 5 Direct Property Expenses.
4. INVESTMENT MANAGEMENT FEES
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Investmentmanagementfee | 8,063 | 8,700 |
The Group's Investment Manager is Aberdeen Standard Fund Managers Limited.
The Investment Manager received an aggregate annual fee from the Group at an annual rate of 0.60 (2019: 0.60) per cent of the Total Assets.
In 2020, the Company paid the Investment Manager £240,000 (2019: £240,000) for marketing services which is included in other expenses. The Investment Management agreement is terminable by either of the parties to it on 12 months' notice.
5. EXPENSES
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
|
Direct Property Expenses | 4,845 | 4,226 |
|
Service charge expenses | 6,500 | 6,234 |
|
OTHER EXPENSES |
|
| |
Professional fees (including valuation fees) | 2,919 | 3,981 | |
Movement in bad debt provision | 4,784 | 236 | |
Directors' fees and expenses | 272 | 350 | |
Marketing fee | 240 | 240 | |
Administration and company secretarial fees | 85 | 85 | |
Regulatory fees |
| 240 | |
Auditor's remuneration for: | 156 |
| |
Statutory audit | 128 | 90 | |
Non audit services | - | - | |
| 8,584 | 5,222 | |
6. FINANCE COSTS
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Interest on principal loan amount | 6,952 | 7,170 |
Amounts payable in respect of interest rate swap arrangement |
- |
30 |
Facility fees | 842 | 588 |
Amortisation of loan set up fees | 403 | 571 |
| 8,197 | 8,359 |
7. TAXATION
| Year ended | Year ended |
| 31 December 2020 | 31 December 2019 |
| £'000 | £'000 |
NET PROFIT FROM ORDINARY ACTIVITIES BEFORE TAX | (10,282) | 1,688 |
UK Corporation tax at a rate of 19 per cent (2019: 19%) | (1,953) | 321 |
Effect of: |
|
|
Capital losses/(gains) on Investment properties not taxable | 8,642 | 8,188 |
UK REIT exemption on net income | (6,689) | (8,509) |
Income not taxable | - | - |
Intercompany loan interest | - | - |
Expenditure not allow for tax purposes | - | - |
Total current tax charge | - | - |
Net movement in deferred tax asset | - | - |
Net under accrual of tax from previous year | - | 45 |
Total tax charge | - | 45 |
The Group migrated tax residence to the UK and elected to be treated as a UK REIT with effect from 1 July 2018. As a UK REIT, the income profits of the Group's UK property rental business are exempt from corporation tax as are any gains it makes from the disposal of its properties, provided they are not held for trading or sold within three years of completion of development. The Group is otherwise subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group's UK property rental business. There are a number of other conditions that also are required to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the period and the Board intends to conduct the Group's affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary differences relating to the property rental business or income tax losses previously built up.
The Company owns five Guernsey tax exempt subsidiaries, UK Finance Holdings Limited (UKFH), UK Commercial Property GP Limited (GP), UK Commercial Property Holdings Limited (UKCPH), UK Commercial Property Estates Limited (UKCPEL) and UK Commercial Property Estates Holdings Limited (UKCPEH). GP and UKCPH are partners in a Guernsey Limited Partnership ("the Partnership"). UKCFH and UKCPH own two JPUTS. UKCPEL and UKCPEH also own two JPUTS. The Company and its Guernsey subsidiaries have obtained exempt company status in Guernsey so that they are exempt from Guernsey taxation on income arising outside Guernsey and bank interest receivable in Guernsey.
In the prior year there was a net under-accrual of income tax of £78,000 and a net over-accrual of £33,000 of corporation tax resulting in an overall tax charge of £45,000.
The components of the tax charge in the consolidated income statement are as follows:
RECONCILIATION OF CURRENT CORPORATION AND INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT | Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Income Tax charge in the year | - | - |
Adjustment in respect of prior year under provision of income tax | - | 78 |
Adjustment in respect of prior year over provision of corporation tax | - | (33) |
| - | 45 |
8. DIVIDENDS
DIVIDENDS ON ORDINARY SHARES | Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Interim dividends paid per ordinary share: |
|
|
2019 Fourth interim: property income dividend ("PID") of 0.506p and Ordinary dividend ("Non PID") of 0.414p paid 28 February 2020 (2018 Fourth interim: PID of 0.775p, Non-PID of 0.145p) | 11,955 | 11,955 |
2020 First interim: PID of 0.46p paid 31 May 2020 (2019 First interim: PID of 0.92p) | 5,977 | 11,955 |
2020 Second interim: PID of 0.46p paid 30 August 2020 (2019 Second interim: PID of 0.92p) | 5,977 | 11,955 |
2020 Third interim: PID of 0.46p paid 29 November 2020 (2019 Third interim: PID 0.658p and Non PID 0.262p) | 5,977 | 11,955 |
| 29,886 | 47,820 |
A fourth interim PID of 0.46p was paid on 26 February 2021 to shareholders on the register on 12 February 2021. Although this payment relates to the year ended 31 December 2020, under International Financial Reporting Standards it will be accounted for in the year ending 31 December 2021.
A fifth interim dividend for 2020 of 0.531p per share was declared on 23 April 2021 and is payable in May 2021.
9. BASIC AND DILUATED EARNINGS PER SHARE
| Year ended 31 December 2020
| Year ended 31 December 2019
|
Weighted average number of shares | 1,299,412,465 | 1,299,412,465 |
Net (Loss)/Profit (£) | (10,281,506) | 1,643,000 |
Basic and diluted Earnings per share (pence) | (0.79) | 0.13 |
EPRA earnings per share (pence)1 | 2.71 | 3.50 |
1 A breakdown of the calculation is detailed in the table A. EPRA Earnings in the Annual Report.
As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical. Earnings per share are based on the net profit of the year divided by the weighted average number of Ordinary Shares in issue during the period.
10. INVESTMENT PROPERTIES
FREEHOLD AND LEASEHOLD PROPERTIES | Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Opening valuation | 1,358,391 | 1,430,851 |
Purchase at cost | 24,669 | - |
Capital expenditure | 3,570 | 14,692 |
(Loss)/Gain on revaluation to market value | (39,187) | (15,172) |
Disposals at prior year valuation | (159,826) | (66,800) |
Lease incentive movement | (4,805) | (5,180) |
Total fair value at 31 December | 1,182,812 | 1,358,391 |
Less: reclassified as held for sale | (10,000) | (48,850) |
Fair value as at 31 December | 1,172,812 | 1,309,541 |
(LOSSES) ON INVESTMENT PROPERTIES AT FAIR VALUE COMPRISE |
|
|
Valuation (losses) | (39,187) | (15,172) |
Movement in provision for lease incentives | (4,805) | (5,180) |
(Loss) on disposal | (1,493) | (22,742) |
| (45,485) | (43,094) |
(LOSS) ON INVESTMENT PROPERTIES SOLD |
|
|
Original cost of investment properties | (161,109) | (93,300) |
Sale proceeds less sales costs | 158,194 | 46,250 |
(Loss) on investment properties sold | (2,915) | (47,050) |
Recognised in previous periods | (8,623) | (26,500) |
Recognised in current period | 5,708 | (20,550) |
| (2,915) | (47,050) |
Given the objectives of the Group and the nature of its investments, the Directors believe that the Group has only one asset class, that of Commercial Property.
CBRE Limited, (the "Property Valuer") completed a valuation of Group investment properties as at 31 December 2020 on the basis of fair value in accordance with the requirements of the Royal Institution of Chartered Surveyors (RICS) 'RICS Valuation - Global Standards 2017 (the 'Red Book'). For most practical purposes there would be no difference between Fair Value (as defined in IFRS 13) and Market Value. The Property Valuer, in valuing the portfolio, is acting as an 'External Valuer', as defined in the Red Book, exercising independence and objectivity. The Property Valuer's opinion of Fair Value has been primarily derived using comparable recent market transactions in order to determine the price that would be received to sell an asset in an orderly transaction between market participants at the valuation date. The fair value of these investment properties amounted to £1,206,780,000 (2019: £1,377,890,000).
The difference between the fair value and the value per the consolidated balance sheet at 31 December 2020 consists of accrued income relating to the pre-payment for rent-free periods recognised over the life of the lease totalling £24,304,000 (2019: £19,499,000) which is separately recorded in the accounts as a current asset. In addition a balance of £336,000 has been offset against the lease incentive representing the reduction in the lease incentive provided for as part of the provision for bad debts giving a net lease incentive balance of £23,968,000.
The Group has entered into leases on its property portfolio as lessor (See note 19 for further information).
· No one property accounts for more than 15 per cent of the gross assets of the Group.
· All leasehold properties have more than 60 years remaining on the lease term.
· There are no restrictions on the realisability of the Group's investment properties or on the remittance of income or proceeds of disposal.
However, the Group's investments comprise UK commercial property, which may be difficult to realise.
The property portfolio's fair value as at 31 December 2020 has been prepared adopting the following assumptions:
· That, where let, the Estimated Net Annual Rent (after void and rent free period assumptions) for each property, or part of a property, reflects the terms of the leases as at the date of valuation. If the property, or parts thereof, are vacant at the date of valuation, the rental value reflects the rent the Property Valuer considers would be obtainable on an open market letting as at the date of valuation.
· The Property Valuer has assumed that, where let, all rent reviews are to be assessed by reference to the estimated rental value calculated in accordance with the terms of the lease. Also there is the assumption that all tenants will meet their obligations under their leases and are responsible for insurance, payment of business rates, and all repairs, whether directly or by means of a service charge.
· The Property Valuer has not made any adjustments to reflect any liability to taxation that may arise on disposal, nor any costs associated with disposals incurred by the owner.
· The Property Valuer assumes an initial yield in the region of 2.64 to 8.65 per cent, based on market evidence. For the majority of properties, the Property Valuer assumes a reversionary yield in the region of 3.37 to 10.14 per cent.
· The Property Valuer takes account of deleterious materials included in the construction of the investment properties in arriving at its estimate of Fair Value when the Investment Manager advises of the presence of such materials.
The majority of the leases are on a full repairing basis and as such the Group is not liable for costs in respect of repairs or maintenance to its investment properties.
The following disclosure is provided in relation to the adoption of IFRS 13 Fair Value Measurement. All properties are deemed Level 3 for the purposes of fair value measurement and the current use of each property is considered the highest and best use. There have been no transfers from Level 3 in the year. The fair value of completed investment property is determined using a yield methodology. Under this method, a property's fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset's life including an exit or terminal value. As an accepted method within the income approach to valuation, this method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, an appropriate, market derived discount rate (capitalisation rate) is applied to establish the present value of the cash inflows associated with the real property.
The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related void or rent free periods, re-letting, redevelopment, or refurbishment. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of property. In the case of investment properties, periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net cash inflows, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Set out below are the valuation techniques used for each property sector plus a description and quantification of the key unobservable inputs relating to each sector. There has been no change in valuation technique in the year.
Sector | Fair Value at 31 December 2019 (£m) | Valuation Techniques techniques | Unobservable inputs | Range (weighted average) |
Industrial | 685.4 | Yieldmethodology | Annualrentpersqft Capitalisationrate | £5-£16(£8) 3.8%-6.7%(4.8%) |
Office | 167.7 | Yieldmethodology | Annualrentpersqft Capitalisationrate | £16-£57(£20) 3.3%-8.7%(5.3%) |
Retail | 199.6 | Yieldmethodology | Annualrentpersqft Capitalisationrate | £16-£265(£27) 3.6%-7.7%(5.7%)
|
Alternatives | 130.1 | Yieldmethodology | Annualrentpersqft Capitalisationrate | £0-£25(£15) 5.5%-6.3%(5.8%) |
Sensitivity analysis
The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of investment property, which could be caused by a number of factors, including Brexit. The movement of 50 basis points is based on past observed data.
Sector | Assumption | Movement | Effect on valuation |
Industrial | Capitalisation rate | + 50 basis points − 50 basis points | Decrease£73.3million Increase£92.7million |
|
|
|
|
Office | Capitalisation rate | + 50 basis points − 50 basis points | Decrease £15.6 million Increase £19.1 million |
|
|
|
|
Retail | Capitalisation rate | + 50 basis points − 50 basis points | Decrease £15.6 million Increase £18.8 million |
|
|
|
|
Alternatives | Capitalisation rate | + 50 basis points − 50 basis points | Decrease £9.4 million Increase £10.8 million |
|
|
|
|
Investment property valuation process
The valuations of investment properties are performed quarterly on the basis of valuation reports prepared by independent and qualified valuers and reviewed by the Property Valuation Committee of the Company.
These reports are based on both:
· Information provided by the Investment Manager such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Investment Manager's financial and property management systems and is subject to the Investment Manager's overall control environment.
· Assumptions and valuation models used by the valuers - the assumptions are typically market related, such as yields. These are based on their professional judgment and market observation.
The information provided to the valuers and the assumptions and valuation models used by the valuers are reviewed by the Investment Manager. This includes a review of fair value movements over the period.
Asset held for sale
At the current year end, the asset held for sale is; 140-146 Kings Road, London. The asset is shown at fair value in the Balance Sheet as a held for sale asset and included within the investment property table shown in this note. At the prior year end, there were two assets held for sale, Portsmouth Motor Park and Broadbridge Retail Park.
11. SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued share capital of UK Commercial Property Estates Holdings Limited (UKCPEH), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPEH Limited owns 100 per cent of the issued share capital of UK Commercial Property Estates Limited, a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPEH also owns 100% of Brixton Radlett Property Limited and UK Commercial Property Estates (Reading) Limited, both UK companies, whose principal business is that of investment and property companies.
The Company owns 100 per cent of the issued ordinary share capital of UK Commercial Property Finance Holdings Limited (UKCFH), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCFH owns 100 per cent of the issued share capital of UK Commercial Property Nominee Limited, a company incorporated in Guernsey whose principal business is that of a nominee company. UKCFH owns 100 per cent of the issued ordinary share capital of UK Commercial Property Holdings Limited (UKCPH), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income.
UKCPT Limited Partnership, (GLP), is a Guernsey limited partnership, whose principal business is to hold and manage investment properties for rental income. UKCPH and GP, have a partnership interest of 99 and 1 per cent respectively in the GLP. The GP is the general partner and UKCPH is a limited partner of the GLP.
In addition, the Group controls four Jersey Property Unit Trusts ("JPUTs) namely Junction 27 Retail Unit Trust, St George's Leicester Unit Trust, Kew Retail Park Unit Trust and Rotunda Kingston Property Unit Trust. The principal business of the Unit Trusts is that of investment in property.
As at 31 March 2021, Brixton Radlett Property Limited, UK Commercial Property Estates (Reading) Limited, the GP, Nominee and the Limited Partnership were all placed in the hands of liquidators as part of a solvent liquidation process.
12. TRADE AND OTHER RECEIVABLES
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Rents receivable | 20,634 | 3,306 |
Lease incentives | 24,304 | 19,499 |
Other debtors and prepayments | 2,494 | 7,457 |
| 47,432 | 30,262 |
Provision for bad debts as at 31 December 2019/2018 |
955 |
719 |
Movement in the year | 4,784 | 236 |
Provision for bad debts as at 31 December 2020/2019 | 5,739 | 955 |
The ageing of these receivables is as follows:
| 2020 £'000 | 2019 £'000 |
Less than 6 months | 2,725 | 781 |
Between 6 and 12 months | 2,192 | 86 |
Over 12 months | 822 | 88 |
| 5,739 | 955 |
Other debtors include tenant deposits of £2,518,000 (2019: £3,281,000)
All other debtors are due within one year. No other debts past due are impaired in either year.
If the provision for bad debts increased by £1 million then the Company's earnings and net asset value would decrease by £1 million. If the provision for bad debts decreased by £1 million then the Company's earnings and net asset value would increase by £1 million.
13. TRADE AND OTHER PAYABLES
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Rental income received in advance | 13,512 | 14,023 |
Investment Manager fee payable | 1,993 | 2,129 |
Income tax payable | - | 293 |
Other payable | 12,656 | 6,601 |
| 28,161 | 23,046 |
Other payables include tenant deposits of £2,518,000 (2019: £3,281,000), bank loan interest payments of £1,645,712 (2019: £1,080,000) and transaction cost accrual of £482,000 (2019: £550,000). During the financial year 2020 the Group outsourced its rent collection to property manager JLL. As a result in this change of operational process VAT is now only paid over to HMRC when rents are received as opposed to invoiced. As at the financial year end 2020 this amounted to £4,375,630 (2019: Debtor of £2,000). The Group's payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
14. BANK LOAN AND INTEREST RATE SWAPS
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Total facilities available | 350,000 | 350,000 |
Drawn down: |
|
|
Barclays facility | - | 50,000 |
Barings facility | 200,000 | 200,000 |
Set up costs incurred | (6,628) | (6,628) |
Accumulated amortisation of set up costs | 4,477 | 4,045 |
Accrued variable interest rate on bank loan | - | 30 |
Total due | 197,849 | 247,447 |
Movements in bank loan and interest rates swaps arising from financing activities | At 1 Jan 2020 | Cash flows | Changes in fair value | Other changes | At 31 Dec 2020 |
| £'000 | £'000 | £'000 | £'000 | £'000 |
Bank Loan | 247,447 | (50,000) | - | 402 | 197,849 |
(i) Barclays Facility
The Group has a £150 million revolving credit facility ("RCF"), maturing in April 2024, with Barclays Bank plc at a margin of 1.70 per cent above LIBOR. The RCF was taken out by UKCPEH and is cancellable at any time. The RCF was initially taken out by UKCPEL as a £50 million RCF in April 2015 at a margin of 1.50 per cent above LIBOR and was increased and extended in February 2019. The drawndown amount of £50 million was repaid in full on 3 November 2020. The RCF has a non-utilisation fee of 0.68 per cent per annum (0.60 per cent per annum prior to February 2019) charged on the proportion of the RCF not utilised on a pro-rata basis. As at 31 December 2020, £150 million (2019: £100 million) remained unutilised. The RCF is secured on some of the property portfolio held by UKCPEH. Under bank covenants related to the RCF, UKCPEH is to ensure that at all times:
· The loan to value percentage does not exceed 60 per cent.
· Interest cover at the relevant payment date is not less than 175 per cent and projected over the course of the proceeding 12 months is not less than 175 per cent.
UKCPEH met all covenant tests during the year for the RCF.
In 2019, the Group had a five year £150 million facility, maturing in April 2020. This was repaid in February 2019 along with the associated interest rate swap. The cost of closing out the swap was £703,000 and there were no repayment fees on the loan term facility.
(ii) Barings Facility
The Group has a £100 million facility, maturing in April 2027, with Barings Real Estate Advisers, a member of the MassMutual Financial Services Group. The loan was taken out by UKCFH. As at 31 December 2020, the facility was fully drawn (31 December 2019: Fully drawn). The bank loan is secured on the portfolio of seven properties held within UKCFH. Under bank covenants related to the loan UKCFH is to ensure that at all times:
· The loan to value percentage does not exceed 75 per cent.
· Interest cover at the relevant payment date and also projected over the course of the proceeding 12 months is not less than 200 per cent.
UKCFH met all covenant tests during the year for this facility.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 3.03 per cent per annum. There are no interest rate swaps in place relating to this facility.
The Group took out a second £100 million facility in February 2019, maturing in February 2031, with Barings Real Estate Advisers. The loan was taken out by UKCFH. As at 31 December 2020, the facility was fully drawn (31 December 2019: Fully drawn). The bank loan is secured on the portfolio of seven properties held within UKCFH. This facility has the same covenants as the 2027 facility outlined across. UKCFH met all covenant tests during the year for this facility.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 2.72 per cent per annum. There are no interest rate swaps in place relating to this facility.
Swap Instruments
During the prior year the Group had in place an interest rate swap instrument totalling £150 million which was deemed to be an effective hedge as per note 1(q). The swap was closed out in February 2019 as part of the Groups refinance at a cost of £703,000.
15. SHARE CAPITAL ACCOUNTS
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
SHARE CAPITAL |
|
|
Opening balance | 539,872 | 539,872 |
Share capital as at 31 December 2020 | 539,872 | 539,872 |
Number of shares in issue and fully paid at the year end being 1,299,412,465 (2019: 1,299,412,465) of 25p each.
Ordinary shareholders participate in all general meetings of the Company on the basis of one vote for each share held. The Articles of Association of the Company allow for an unlimited number of shares to be issued, subject to restrictions placed by AGM resolutions. There are no restrictions on the shares in issue.
16. NET ASSET VALUE PER SHARE
| Year ended 31 December 2020 | Year ended 31 December 2019 |
|
|
|
Ordinary Shares | 1,299,412,465 | 1,299,412,465 |
Net assets (£'000) | 1,126,976 | 1,167,144 |
NAV per share (pence) | 86.7 | 89.8 |
EPRA Net asset value per share (pence)1 | 86.7 | 89.8 |
1 A breakdown of the calculation is detailed in the Annual Report.
17. RELATED PARTY TRANSACTIONS
No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of the Group.
Aberdeen Standard Fund Managers Limited, as the Manager of the Group from 10 December 2018, previously Standard Life Investments (Corporate Funds) Limited, received fees for their services as investment managers. Further details are provided in note 4. The total management fee charged to the Statement of Comprehensive Income during the year was £8,062,742 (2019: £8,700,000) of which £1,993,455 (2019: £2,129,000) remained payable at the year end. The Investment Manager also received £240,000 (£200,000 plus VAT) for marketing services incurred during the year of which nil (2019: £240,000) remained payable at the year end.
The Directors of the Company are deemed as key management personnel and received fees for their services. Total fees for the year were £272,226 (2019: £350,385) none of which remained payable at the year end (2019: nil). As a result of COVID-19, Directors reduced their fees by 20% from 1 April 2020-31 December 2020.
The Group invests in the Aberdeen Standard Investments Liquidity Fund which is managed by Aberdeen Standard Investments Limited. As at 31 December 2019 the Group had invested £83.1 million in the Fund (2019: £23.5 million). No additional fees are payable to Aberdeen Standard Investments as a result of this investment.
18. FINANCIAL INSTRUMENTS AND INVESTMENT PROPERTIES
The Group's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio. Consistent with that objective, the Group holds UK commercial property investments. The Group's financial instruments consist of cash, receivables and payables that arise directly from its operations and loan facilities and swap instruments. The main risks arising from the Group's financial instruments are credit risk, liquidity risk, market risk and interest rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and remained unchanged during the year.
Fair value hierarchy
The following table shows an analysis of the fair values of investment properties recognised in the balance sheet by level of the fair value hierarchy:
· Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
· Level 2 Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.
· Level 3 Use of a model with inputs that are not based on observable market data.
31 December 2020 | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total fair value £'000 |
Investment properties | - | - | 1,206,780 | 1,206,780 |
31 December 2019 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total fair value £'000 |
Investment properties | - | - | 1,377,890 | 1,377,890 |
The lowest level of input is the underlying yield on each property which is an input not based on observable market data.
The following table shows an analysis of the fair value of bank loans recognised in the balance sheet by level of the fair value hierarchy:
31 December 2020 | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total fair value £'000 |
Bank loans | - | 220,484 | - | 220,484 |
31 December 2019 | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total fair value £'000 |
Bank loans | - | 261,589 | - | 261,589 |
The lowest level of input is the interest rate applicable to each borrowing as at the balance sheet date which is a directly observable input.
The following table shows an analysis of the fair values of financial instruments and trade receivables and payables recognised at amortised cost in the balance sheet by level of the fair value hierarchy:
31 December 2020 | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total fair value £'000 |
Trade and other receivables | - | 47,432 | - | 47,432 |
Trade and other payables | - | 28,161 | - | 28,161 |
31 December 2019 | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total fair value £'000 |
Trade and other receivables | - | 30,262 | - | 30,262 |
Trade and other payables | - | 23,046 | - | 23,046 |
The lowest level of input is the three month LIBOR yield curve which is a directly observable input.
The carrying amount of trade and other receivables and payables is equal to their fair value, due to the short-term maturities of these instruments. Expected maturities are estimated to be the same as contractual maturities.
The fair value of investment properties is calculated using unobservable inputs as described in note 10.
The fair value of the bank loans are estimated by discounting expected future cash flows using the current interest rates applicable to each loan.
There have been no transfers between levels in the year for items held at fair value.
Real Estate Risk
The Group has identified the following risks associated with the real estate portfolio:
· The cost of any development schemes or asset management activity may increase if there are delays in the planning process. The Group uses advisers who are experts in the specific planning requirements in the scheme's location in order to reduce the risks that may arise in the planning process;
· A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of the associated property (see also credit risk overleaf). To reduce this risk, the Group reviews the financial status of all prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees;
· The exposure of the fair values of the portfolio to market and occupier fundamentals such as tenants' financial position.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the maturity of the Group's financial assets was:
Financial Assets 2020 | 3 months or less | More than 3 months but less than one year | More than one year |
Total |
| £'000 | £'000 | £'000 | £'000 |
Cash | 122,742 | - | - | 122,742 |
Rent receivable | 20,634 | - | - | 20,634 |
Other debtors | 2,494 | - | - | 2,494 |
| 145,870 | - | - | 145,870 |
Financial Assets 2019 | 3 months or less | More than 3 months but less than one year | More than one year |
Total |
| £'000 | £'000 | £'000 | £'000 |
Cash | 48,984 | - | - | 48,984 |
Rent receivable | 3,306 | - | - | 3,306 |
Other debtors | 7,457 | - | - | 7,457 |
| 59,747 | - | - | 59,747 |
In the event of default by a tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate and minimise the impact of defaults by tenants and provides for rent due by tenants that are assessed to be unlikely to pay through the process set out in the Annual Report.
The Company has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 31 December 2020 is £20,634,000 (2019: £3,306,000). The Group holds rental deposits of £2,518,000 (2019: £3,281,000) as potential collateral against tenant arrears/defaults. All tenant deposits are in line with market practice. There is no residual credit risk associated with the financial assets of the Group. Other than those included in the provision for bad debts, no financial assets past due are impaired. COVID-19 has impacted the ability of tenants to pay rents and hence the credit risk associated with rent receivables has increased in the year. As a result the provision for bad debts has also increased to reflect this with a provision of £5.739 million as at 31 December 2020 (2019: £955,000).
All of the cash is placed with financial institutions with a credit rating of A or above. £83.1 million (2019: £23.5 million) of the year end cash balance is held in the Aberdeen Standard Investments Liquidity Fund, which is a money market fund and has a triple A rating. Bankruptcy or insolvency of a financial institution may cause the Group's ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Investment Manager would move the cash holdings to another financial institution subject to restrictions under the loan facilities.
Fair value of trade receivables and payables are materially equivalent to their amortised cost.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in realising assets or otherwise aising funds to meet financial commitments. While commercial properties are not immediately realisable, the Group has sufficient cash resources to meet liabilities.
The Group's liquidity risk is managed on an ongoing basis by the Investment Manager investing in a diversified portfolio of prime real estate and placing cash in liquid deposits and accounts. This is monitored on a quarterly basis by the Board. In certain circumstances, the terms of the Group's bank loan entitles the lender to require early repayment, and in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected.
As at 31 December 2020 the cash balance was £122,742,000 (2019: £48,984,000).
At the reporting date, the contractual maturity of the Group's liabilities, which are considered to be the same as expected maturities, was:
Financial Liabilities 2020 | 3 months or less | More than 3 months but less than one year | More than one year |
Total |
| £'000 | £'000 | £'000 | £'000 |
Bank loans | 1,438 | 4,313 | 241,400 | 247,151 |
Other creditors | 26,515 | - | - | 26,515 |
| 27,953 | 4,313 | 241,400 | 273,666 |
Financial Liabilities 2019 | 3 months or less | More than 3 months but less than one year | More than one year |
Total |
| £'000 | £'000 | £'000 | £'000 |
Bank loans | 51,734 | 4,332 | 245,248 | 301,314 |
Other creditors | 21,882 | - | - | 21,882 |
| 73,616 | 4,332 | 245,248 | 323,196 |
The amounts in the table are based on contractual undiscounted payments.
Interest rate risk
The cash balance as shown in the Balance Sheet, is its carrying amount and has a maturity of less than one year.
Interest is receivable on cash at a variable rate ranging from 0.2 per cent to 0.6 per cent at the year end and deposits are re-priced at intervals of less than one year.
An increase of 1 per cent in deposit interest rates as at the reporting date would have increased the reported profit by £1.2 million (2019: increased the reported profit by £490,000). A decrease of 1 per cent would have reduced the reported profit by £1.2 million (2019: decreased the reported profit by £490,000). The effect on equity is nil (excluding the impact of a change in retained earnings as a result of a change in net profit).
Interest rate risk arises on the interest payable on the RCF only, as the interest payable on the other facilities are at fixed rates. At 31 December 2020, the draw down on the RCF was Nil (2019: £50 million) so an increase of 1% of the three month LIBOR would have no effect on the reported profit (2019: £500,000). A decrease of 1% of the three month LIBOR would have no impact on the reported profit (2019: £500,000). Assumptions are based on the RCF being undrawn for the full year (2019: £50 million), based on the exposure to interest rates at the reporting date, and all other variables being constant.
The other financial assets and liabilities of Group are non-interest bearing and are therefore not subject to interest rate risk.
Foreign Currency Risk
There was no foreign currency risk as at 31 December 2020 or 31 December 2019 as assets and liabilities of the Group are maintained in pounds Sterling.
Capital Management Policies
The Group considers that capital comprises issued ordinary shares, net of shares held in treasury, and long-term borrowings. The Group's capital is deployed in the acquisition and management of property assets meeting the Group's investment criteria with a view to earning returns for shareholders which are typically made by way of payment of regular dividends. The Group also has a policy on the buyback of shares which it sets out in the Directors' Authority to Buy Back Shares section of the Directors' Report.
The Group's capital is managed in accordance with its investment policy which is to hold a diversified property portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing properties. The Group will principally investing four commercial property sectors: office, retail, industrial and alternatives. The Group is permitted to invest up to 15 per cent of its Total Assets in indirect property funds and other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investments, in cash deposits, gilts and money market funds.
The Group monitors capital primarily through regular financial reporting and also through a gearing policy. Gearing is defined as gross borrowings divided by total assets less current liabilities. The Group's gearing policy is set out in the Investment Policy section of the Report of the Directors. The Group is not subject to externally imposed regulatory capital requirements but does have banking covenants on which it monitors and reports on a quarterly basis. Included in these covenants are requirements to monitor loan to value ratios which is calculated as the amount of outstanding debt divided by the market value of the properties secured. The Group's Loan to value ratio is shown below. The Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan arrangements in the year to 31 December 2020.
| Year ended 31 December 2020 | Year ended 31 December 2019 |
| £'000 | £'000 |
Carryingamountofinterest-bearingloansandborrowings | 197,849 | 247,447 |
External valuation of completed investment property and assets held for sale (excluding lease incentive adjustment) | 1,206,780 | 1,377,890 |
Loan to value ratio | 16.4% | 18.0% |
The Group's capital balances are regarded as the Group's equity and net debt.
19. CAPITAL COMMIMTMENTS
The Group had contracted capital commitments as at 31 December of £49.1 million in relation to the developments of two student accommodation properties at Edinburgh and Exeter. The Company has agreed to forward fund a new 230-bed development in Edinburgh, with completion expected for the start of the 2022/23 academic year. The land was acquired for £6.5 million post year end with an additional capped funding commitment of £22.6 million. The Company is also forward funding a student residential development in Central Exeter, with completion expected to match the start of the 2022/23 academic with estimated development costs of £20 million still to be incurred.
20. LEASE ANALYSIS
The Group leases out its investment properties under operating leases.
The future income under non-cancellable operating leases, based on the unexpired lease length at the year end was as follows (based on total rentals):
| Year ended 31 December 2020 £'000 | Year ended 31 December 2019 £'000 |
Lessthanoneyear | 63,452 | 65,529 |
Betweenoneandfiveyears | 220,052 | 225,886 |
Overfiveyears | 405,926 | 325,175 |
Total | 689,430 | 616,590 |
The largest single tenant at the year end accounted for 5.4 per cent (2019: 6.6 per cent) of the annualised rental income at 31 December 2020. The unoccupied property expressed as a percentage of annualised total rental value was 6.5 per cent (2019: 7.9 per cent) at the year end. The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.
21. EVENTS AFTER BALANCE SHEET DATE
In January 2021, the Company paid £6.5 million for land in relation to the student accommodation development at Edinburgh.
In February/March 2021 the Company sold Hartshead House Sheffield for £17 million and Kew Retail Park for £41 million.
On 26 February 2021 the Company paid a property income dividend of 0.46p per share to shareholders on the register at 12 February 2021.
A fifth interim dividend of 0.531p per share has been announced as set out in the Chair's statement which is payable in May 2021.
This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2020. The statutory accounts for the year ended 31 December 2020 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in May 2021 and will be available by download from the Company's webpage (www.ukcpreit.co.uk).
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
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