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Regional REIT Ltd (RGL)

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Thursday 25 March, 2021

Regional REIT Ltd

Final Results

RNS Number : 4100T
Regional REIT Limited
25 March 2021
 

    25 March 2021

Regional REIT Limited

("Regional REIT", the "Group" or the "Company")

 

2020 Final Results

 

Rent Collection for 2020 Underlines Strength of Business Model

Regional REIT (LSE: RGL), the regional real estate investment specialist focused on building a geographically diverse portfolio of income producing regional UK core and core plus office assets, today announces its full year results for the year ended 31 December 2020.

 

Financial highlights:

 

Income focused - A robust performance and strong level of rent collection during 2020 from a geographically diversified and defensive portfolio coupled with best-in-class active asset management

· EPRA Total return of 36.3% since IPO in November 2015; representing 6.2% annualised returns for shareholders.

· Total rent collection or within terms for 2020 was 98.2%* of rent due, similar to the 99.4% of rent collected for the equivalent period in 2019.

· Rent roll remained stable at £64.2m (2019: £64.3m).

· EPRA EPS of 6.5pps (2019: 7.8pps); IFRS EPS (7.2pps) (2019: 6.6pps)

· Fully covered 2020 dividend of 6.40pps (2019: 8.25pps).

· EPRA NTA per share of 98.6pps (2019: 112.6pps); IFRS NAV 97.5pps (2019: 112.1pps).

· Group's cost of debt decreased to 3.3% (2019: 3.5%).

· Net LTV of 40.8% (2019: 38.9%).

· Weighted average debt duration remains comfortable at 6.4 years (2019: 7.3 years).

· Fair value reduction in the portfolio valuation to £732.4m (2019: £787.9m).

· Adjusted EPRA EPS dividend cover of 102% (2019: 95%).

*As at 12 March 2021, rent collections to 31 December 2020 amounted to 98.2%; actual rent collected 96.1%, monthly rents 0.5% and deals agreed of 1.6%.

 

Operational highlights:

 

A defensive and geographically diversified portfolio - generating attractive dividends through a tumultuous year

 

· Another year of robust trading, demonstrating the strength of our asset management capability and the resilience of our occupier base. As at 31 December 2020, 52% of occupiers were classified as Government designated essential services and were able to continue operations during the lockdown periods with minimal disruption.

· Planned exit of all industrial and retail holdings to focus entirely on the core regional offices which the Asset Manager believes will provide the best return for shareholders over the coming years.

· A diversified portfolio of 153 properties (2019: 160), 1,245 units (2019: 1,251) and 898 occupiers (2019: 904).

· The Group made disposals amounting to £53.4m (net of costs) during 2020. The proceeds from these disposals were recycled into acquiring properties with an aggregate value of £42.4m (before costs), further diversifying our occupier base by standard industrial classification.

· At the period end, 83.5% (2019: 79.9%) of the portfolio by market value was offices and 11.1% (2019: 13.7%) was industrial.

· At the period end, the portfolio valuation split by region was as follows: England 78.3% (2019: 79.5%), Scotland 17.3% (2019: 18.0%) and the balance of 4.4% (2019: 2.5%) was in Wales.

· Increased retention of income to 74.4% (by value) for leases that came up for renewal in 2020, up from 65.9% in December 2019.

· EPRA Occupancy rates remained stable at 89.4% (2019: 89.4%) due to active asset management and our resilient occupier base.

Post period end

· Continued momentum through active asset management, securing £1m of lettings across eight new lease agreements.

· On 25 February 2021, the Company declared the Q4 2020 dividend of 1.50pps would be paid to shareholders on 9 April 2021.

· The Royal Bank of Scotland has agreed to extend the £55.0m facility for one year from June 2024 to June 2025. This will extend the Group's weighted average debt duration to 6.5 years from 6.4 years as at 31 December 2020, with the Group cost of debt remaining unchanged at 3.3%.

Stephen Inglis, CEO of London and Scottish Property Investment Management, the Asset Manager, commented:

"I am very pleased to report that the Company achieved a robust performance in 2020 despite the effects of COVID-19 on working habits. With this in mind, we are pleased to have continued to deliver a strong dividend income for our shareholders, from a portfolio that is well-positioned for the anticipated UK economic recovery.

 

The quality and diversity of our office properties, alongside the strength of the occupier register, were instrumental to this performance. This was evidenced by our strong rent collection with 98.2% of rent due for the year collected. One of our clearest differentiators continues to be our maintained dividend distributions, which are a significant component of total shareholder returns. During the difficult twelve months of 2020, where many REITs cancelled or suspended dividends for a time, we achieved uninterrupted distributions, paying out a total of 6.4pps for 2020, which was fully covered by earnings.

 

We have taken significant steps to capitalise on the changing landscape in our market by tilting the Group's focus to take full advantage of the mispricing that we are seeing in quality regional offices.

 

We look forward to updating shareholders on further progress as we continue to reposition the portfolio to take full advantage of our active pipeline of compelling regional office opportunities."

 

A meeting for  analysts will be held via a conference call facility at  9.30am  (London time, GMT) on Thursday,  25 March 2021 . If you would like the conference call details please contact George Beale at [email protected] or Henry Wilson at [email protected].

 

The presentation slides for the meeting will shortly be available to download from the Investors section of the Group's website at  www.regionalreit.com .

 

Forthcoming Events

19 May 2021  Q1 2021 Trading Update

TBC* Annual General Meeting

16 September 2021  2021 Interim Results Announcement

11 November 2021  Q3 2021 Trading Update

 

Note: all future dates are provisional and subject to change

 

* The Board has made the decision to delay the Company's 2021 Annual General Meeting until later in the year with the hope that shareholders will be able to attend in person.

 

- ENDS - 

 

Enquiries:

Regional REIT Limited

 

 

 

 

Toscafund Asset Management

Tel: +44 (0) 20 7845 6100

Investment Manager to the Group

 

Adam Dickinson, Investor Relations, Regional REIT Limited

 

 

 

London & Scottish Property Investment Management

Tel: +44 (0) 141 248 4155

Asset Manager to the Group

 

Stephen Inglis

 

 

 

Buchanan Communications

Tel: +44 (0) 20 7466 5000

Financial PR

[email protected]

Charles Ryland /Henry Wilson / George Beale

 

 

About Regional REIT

Regional REIT Limited ("Regional REIT" or the "Company") and its subsidiaries (the "Group") is a United Kingdom ("UK") based real estate investment trust that launched in November 2015. It is managed by London & Scottish Property Investment Management Limited, the Asset Manager, and Toscafund Asset Management LLP, the Investment Manager.

Regional REIT's commercial property portfolio is comprised wholly of income producing UK assets and comprises, predominantly of offices located in the regional centres outside of the M25 motorway. The portfolio is geographically diversified, with 153 properties, 898 occupiers as at 31 December 2020, with a valuation of 732.4m.

Regional REIT pursues its investment objective by investing in, actively managing and disposing of regional core and core plus property assets. It aims to deliver an attractive total return to its Shareholders, targeting greater than 10% per annum, with a strong focus on income supported by additional capital growth prospects.

The Company's shares were admitted to the Official List of the UK's Financial Conduct Authority and to trading on the London Stock Exchange on 6 November 2015. For more information, please visit the Group's website at  www.regionalreit.com .

Cautionary Statement

This document has been prepared solely to provide additional information to Shareholders to assess the Group's performance in relation to its operations and growth potential. The document should not be relied upon by any other party or for any other reason. Any forward looking statements made in this document are done so by the Directors in good faith based on the information available to them up to the time of their approval of this document. However, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

ESMA Legal Entity Identifier ("LEI"): 549300D8G4NKLRIKBX73

 

Financial Highlights

Year ending 31 December 2020

 

Income focused - opportunistic buying and strategic selling, coupled with intensive asset management, continues to secure long-term income

 

Portfolio Valuation 

£732.4 million

 

 

IFRS NAV per Share

97.5 pence

EPRA NTA per Share

98.6 pence

Dividend per Share

6.4 pence

 

 

Net Loan to Value Ratio

40.8%

Weighted Average Cost of Debt

3.3%

 

 

Weighted Average Debt Duration

6.4 years

 

Operational Highlights

Year ending 31 December 2020

 

Deliberately diversified portfolio by location and tenant - regions remain strong

 

Properties

153

Units

1,245

Occupiers

898

 

 

Rent Roll

£64.2 million

 

 

Portfolio by region and sector (by value)

 

England & Wales

82.7%

Office

83.5%

 

 

Property acquisitions (before costs)

£42.4 million

Number of properties

5

Property disposal proceeds (net of costs)

£53.4 million

Number of properties

12

 

 

Active management building occupancy by EPRA ERV*

89.4%

 

 

WAULT to expiry 

 5.1 years

WAULT to first break

 3.2 years

 

Performance Highlights

Year ending 31 December 2020

 

The high dividend distributions are a major component of the total return

 

Dividends declared per share:

Pence

2020

6.40

2019

8.25

2018

8.05

2017

7.85

2016

7.65

2015

1.00

 

EPRA

EPRA Total Return attributable to Shareholders since Admission ^

36.3%

EPRA Annual Total Return attributable to Shareholders

  6.2%

 

^Admission: 6 November 2015

 

Member of FTSE All-Share Index since March 2016

Member of FTSE EPRA NAREIT UK Index since June 2016

 

Total EPRA Return (from IPO)

(EPRA NTA and dividend declared)

 

Pence per share

IPO Nov 2015

100

Dec 2015

107.8

Dec 2016

113.2

Dec 2017

119.9

Dec 2018

137.5

Dec 2019

142.9

Dec 2020

136.3

 

Chairman's Statement

 

"We are confident that our geographically diversified portfolio, which offers vibrant spaces for a broad range of occupier types, will create long term shareholder value with a strong yield, particularly as we increasingly focus our strategy towards the regional office sector."

Kevin McGrath , Chairman

 

Overview

Regional REIT performed relatively well during 2020, despite the challenging and unprecedented environment imposed by the COVID-19 pandemic. Our strategy of having a large number of occupiers operating across a range of industries in growth regions outside the M25 motorway has resulted in a defensive portfolio. Our active asset management team continued to maintain strong working relationships with our 898 occupiers (2019: 904), providing support as required. These actions have continued to underpin the robust rent collections of 98.2%* (2019: 99.4%) and EPRA** occupancy rate of 89.4% (2019: 89.4%), which the Company has achieved during the year under review.

 

*As at 12 March 2021, rent collections to 31 December 2020 amounted to 98.2%; actual rent collected 96.1%, monthly rents 0.5% and deals agreed of 1.6%.

 

** Alternative Performance Measures. Details are provided in the Glossary of Terms and the EPRA Performance Measures within the full Annual Report .

 

Whilst 2020 was an eventful year, the Company's rent collection remained strong through-out and resulted in EPRA diluted earnings of 6.5 pence per share ("pps") (2019: 7.8pps). IFRS diluted losses per share were 7.2pps (2019: earnings per share of 6.6pps). The full year 2020 dividend of 6.4pps was fully covered.

 

Our investment portfolio was not immune to the challenges posed by the COVID-19 pandemic, with the overall value of the portfolio reducing to £732.4 million as at 31 December 2020 from £787.9 million as at 31 December 2019. The decrease was predominately due to the uncertain economic backdrop resulting in a reduction in the fair value of the portfolio of £54.8 million, albeit this was an 'unrealised' decline.

 

During the year, the Group made disposals amounting to £53.4 million (net of costs). The proceeds from these disposals were recycled into acquiring properties with an aggregate value of £42.4 million (before costs), further diversifying our occupier base, as well as providing good opportunities to add value through asset management initiatives. Our rolling capital expenditure programme amounted to £8.8 million.

 

Our priorities throughout the year were to maintain occupancy levels, provide safe and vibrant spaces in which our occupiers could thrive and increase our overall occupier and geographic diversification, whilst continuing to source earning enhancing opportunities in the challenging commercial property market.

 

COVID-19 Response

From the onset of the COVID-19 pandemic in early 2020, the Asset Manager reassigned staff to focus upon supporting our occupiers and prioritised cash flow. A full review of all our c. 900 occupiers' financial data was undertaken to ensure the best possible assistance could be provided as required in a timely manner. In addition, increased control reporting was instigated providing actionable data to maintain the robust rent collection which ensured the uninterrupted quarterly dividend.

 

Financial Resources

Importantly in the current environment, the Company continues to be in a financially strong position with an EPRA NTA* of £425.6 million (2019: £485.7 million) and a cash balance of 67.4 million as at 31 December 2020 (2019: £37.3 million), of which £55.0 million is unrestricted (2019: £34.7 million). Our approach to debt management, which is to simplify, extend and engineer flexibility into the debt profile, has ensured that the Company was well positioned for the economic turbulence encountered throughout 2020. These attributes remain evident going forward with no need to refinance until 2024.

 

* In October 2019, EPRA issued new best practice recommendations that replaced EPRA net asset value (NAV) with three new measures of net asset value. The Group has determined that EPRA net tangible assets (NTA) is the most relevant measure hence this is now reported in place of EPRA NAV. Prior year comparatives are stated under the new definition on EPRA NTA.

 

Furthermore, with net borrowings at 40.8%, which is in line with our long-term target of c. 40%, and with our debt facilities maintaining ample headroom against their respective covenants, the Company is in a robust position to withstand any future economic uncertainty.

 

Market Environment

Lambert Smith Hampton1 research notes that 2020 total UK commercial property investment amounted to £38.5 billion, which is 21.9% lower than the 2019 total of £49.3 billion. However, there are signs that investment activity is increasing, with total UK investment in the final quarter of 2020 reaching £12.2 billion, a marked improvement of 50.6% on Q3 and only 5.0% below the five-year quarterly average. The rise in activity in the final months of 2020 indicates renewed confidence in the office market following fears regarding the impact that working from home would have on occupational demand. Cushman & Wakefield2 research highlights that many businesses have now stated that offices remain important despite changing working practices. More details can be found in the Asset Manager's Report of the Annual Report.

 

1 Lambert Smith Hampton, UKIT Q4 2020

2 Cushman & Wakefield, Office Market, Q4 2020

 

Strategy

As announced on 12 November 2020, the Board undertook an internal strategic review of the Company's investment objectives to ensure the maximisation of total Shareholder's returns.

 

The Board is convinced that the supply and demand imbalance of the regional office sector, coupled with the Asset Manager's specialist operating platform and experience, will produce attractive total Shareholder returns over the long-term. For the foreseeable future, the Board decided that the Company would focus its investment solely on properties in the office sector in the main regional centres of the UK outside of the M25 motorway.

 

The Company will in due course seek to exit all other commercial property sector investments, including its industrial and remaining retail assets, and promptly recycle the capital into regional offices, whilst giving due consideration to reducing the borrowing facilities and buying back the Company's shares. This will ensure that the Group is able to maximise its investment objectives of delivering an attractive and sustainable income-focused total return to Shareholders over the long-term.

 

Dividends

The dividend is the major component of total shareholder returns. Over the year under review, the Company declared total dividends of 6.40pps for the year (2019: 8.25 pps), comprising one dividend of 1.90pps and three quarterly dividends of 1.50pps each. This represented a yield of 7.8% at a share price of 82.50pps at the close of 31 December 2020. Since inception, the Company has declared dividends amounting to 39.20pps.

 

It should be highlighted that, looking ahead, there is a clear aspiration by the Board to maintain its record of uninterrupted quarterly dividend payments, especially through this period of continuing uncertainty. This is predicated on the strength of the Company's balance sheet and the strong rent collections received throughout the year.

 

Performance

Since Listing on 6 November 2015, the Company's EPRA Total Return was 36.3% and the annualised EPRA Total Return was 6.2%. The Total Shareholder Return was 20.6%, compared to the FTSE EPRA NAREIT UK Total Return Index, which has generated a return of (5.4%) over the same period.

 

For the year under review, the Company's Total Shareholder Return was (20.7%), versus the return of (15.9%) for the FTSE EPRA NAREIT UK Total Return Index over the same period.

 

In accordance with the management arrangements, the Asset Manager and Investment Manager are each entitled to a 50% share of a performance fee of 15% of the EPRA Total Return in excess of an annual hurdle rate of 8%. A performance fee did not crystallise for the period from 1 January 2020 to 31 December 2020 (2019: none).

 

Integrating a more sustainable approach

We were pleased to launch our commitment to a sustainability strategy in 2020. The Group has always been cognisant of its environmental impact, the importance of a transparent governance structure and its social responsibility. However, the Company has now committed to a more formal approach with the intention to join Global Real Estate Sustainability Benchmark ("GRESB") in 2021. This will be used as a platform from which sustainability policies and actions will be built upon over the coming years.

 

Annual General Meeting

The Company had planned to hold its 2021 Annual General Meeting ("AGM") on Thursday, 19 May 2021. In light of the ongoing COVID-19 situation, in particular the compulsory stay at home measures published by the UK Government on 4 January 2021 currently prohibiting public gatherings of more than two people, the Board has made the decision to delay the Company's 2021 AGM until later in the year with the hope that Shareholders will be able to attend in person. Notice of a revised time and date for the 2021 AGM will be published on our website and by RNS announcement as soon as practicable. The notice of the AGM will be circulated to Shareholders in accordance with the requirements of the Company's Articles of Incorporation.

 

Shareholder and Stakeholder Engagement

Our priority throughout 2020 has pivoted from first and foremost providing vibrant workspaces which are in demand by businesses, to providing assistance to our occupiers to navigate the economic turmoil.

 

I would like to take this opportunity to thank all the asset management teams, from the property management, research, legal, corporate finance, finance to credit control, who transitioned to working from home whilst seamlessly continuing to support our occupiers throughout this challenging period.

 

On 3 November 2020, the Company was pleased to hold its first capital markets webcast, which was well attended by current and potential investors and stakeholders. The webcast of the event can be found on the Company's website at https://www.regionalreit.com/investors/results-and-presentations/2020 .

 

Outlook

The Board continues to be encouraged by the robust level of rent collections which support the investment property capital values and the Company's long-term total return prospects. For the remainder of 2021, the Group is confident of maintaining high rent collections and accelerating the momentum on the asset management initiatives, which should continue to deliver income for our Shareholders.

 

We remain mindful of the challenges to be faced in a structurally evolving property market, which will inevitably continue to be impacted by the COVID-19 pandemic and the aftermath of Brexit. However, our confidence for the long-term remains. It is underpinned by the Group's focus on asset management initiatives to promptly recycle underperforming capital into office opportunities that continue to de-risk the portfolio, whilst increasing the number, quality and quantum of income streams.

 

Kevin McGrath

Chairman

24 March 2021

 

Investment Strategy

 

Investment Strategy

The Group will invest in and, actively manage a portfolio of mainly office properties or debt portfolios secured on such properties located predominantly in the regional centres of the UK outside of the M25 motorway.

 

The Group aims to build a portfolio of interests that, together, offer Shareholders a diversification of investment risk by investing in a range of geographical areas and across a number of high-quality assets and tenants, and through letting properties, where possible, to low-risk tenants.

 

The Group will use gearing, borrowings and other sources of leverage to implement its investment strategy and enhance equity returns.

 

Investment Policy

The Group will invest predominately in office properties that are situated in the UK and outside of the M25 motorway*.

 

The Group may also invest in property portfolios in which up to 50% of the properties (by market value) are situated inside the M25 motorway.

 

In the ordinary course of business, no single property will exceed 10% of the Group's Gross Investment Properties Value at the time of the investment; exceptionally, the Board may consider taking this up to 20%.

 

The normal minimum value for a single property investment is £5m, except where an asset is within a portfolio of properties for which there shall be no such minimum.

 

No more than 20% of the Gross Investment Properties Value shall be exposed to any one tenant or group undertaking of that tenant.

 

Speculative development (properties under construction, but excluding refurbishment, which have not been pre-let) is prohibited. Any other development is restricted to an aggregate maximum of 15% of Gross Investment Properties Value at investment or commencement.

 

Investment Objective

The Investment Objective of the Company is to deliver an attractive total return to Shareholders of greater than 10% per annum, with a strong focus on income from investing in UK commercial property, predominantly in the office sector in major regional centres and urban areas outside of the M25 motorway*.

 

Borrowings

The Group targets a ratio of net borrowings to Gross Investment Properties Value of 40% over the longer term, with a maximum limit of 50%.

 

* The Investment Policy and Objective were amended on 26 October 2020.

 

Asset and Investment Managers' Report

"We are pleased to report that the Company delivered a robust performance in 2020 despite the impact of COVID-19 on all our daily lives and, in turn, the commercial property market. Notwithstanding the challenges presented, we continued to deliver an uninterrupted quarterly dividend, ever mindful of our commitment to our Shareholders.

 

I would like to take this opportunity to thank my focused and hardworking team who adapted and responded seamlessly to assist our occupiers through this most challenging period. Responding to occupiers' needs prior to, and during, this period was key to maintaining strong rent collection of 98.2%* over the course of 2020. As normal life comes into sight, and indicators are anticipating a prompt economic recovery, we view our regional portfolio as well positioned to benefit.

 

Following the Board's strategic review, we continue to move the portfolio to focus on regional offices. We are convinced that in future, regional, high quality offices with affordable rents will continue to see demand from occupiers and, given limited supply, there remains a strong rental growth story. We see a compelling opportunity to further leverage the experience of our asset management platform to unlock value from the regional office sector over the long term, whilst continuing to deliver yield."

Stephen Inglis, CEO of London & Scottish Property Investment Management, Asset Manager.  

 

*As at 12 March 2021, rent collections to 31 December 2020 amounted to 98.2%; actual rent collected 96.1%, monthly rents 0.5% and deals agreed of 1.6%.

 

Highlights from 2020

· Achieved high levels of rent collection. As at 12 March 2021, the rent collections continued to strengthen, with FY 2020 collections increasing to 96.1%, adjusting for monthly rent and agreed collection plans, stands at 98.2%, which is similar to the equivalent date in 2019 when 99.4% had been collected.

· Disposals during 2020 totalled £53.4 million (net of costs), reflecting an average net initial yield of 5.1% (5.6% excluding vacant properties).

· Acquisitions in 2020 totalled £42.4 million (before costs) for five properties, reflecting an average net initial yield of 9.8%.

· Increase of retention of income to 74.4% (by value) for leases that came up for renewal in 2020, up from 65.9% in December 2019.

· Completed 53 new lettings in 2020, totalling 177,883 sq. ft.; when fully occupied, these will provide a gross rental income of c.£2.0 million.

· Average rent by let sq. ft. increased by 2.6% from £10.17 per sq. ft. in December 2019 to £10.44 per sq. ft. in December 2020.

 

Investment Activity in the UK Commercial Property Market

According to research from Lambert Smith Hampton ("LSH")3 in 2020 total investment in the UK commercial property market amounted to £38.5 billion, 24.9% below the five-year average and 21.9% lower than the 2019 volume of £49.3 billion. However, there are signs that investment activity is increasing, with total UK investment in the final quarter of 2020 reaching £12.2 billion, a marked improvement of 50.6% on Q3 and only 5.0% below the five-year quarterly average. The rise in activity in the final months of 2020 indicates renewed confidence in the office market following fears regarding the impact that working from home would have on occupational demand. Cushman & Wakefield research highlights that many businesses have now stated that offices remain important despite changing working practices4.

 

3 Lambert Smith Hampton, UKIT Q4 2020

4 Cushman & Wakefield, Office Market, Q4 2020

 

Following muted investment at the beginning of 2020, the UK regions outside of London attracted £4.5 billion in investment during the final quarter of 2020 - just 1.6% below the five year quarterly average. This brought investment in the second half of 2020 to £8.4 billion, 78.6% higher than the first half of 2020. Annual investment in the regional markets reached £13.0 billion in 2020. LSH research notes that the improvement in investment volumes in Q4 2020 was reflected across the majority of UK regions, with seven of the 11 regions recording a volume higher than their respective five-year quarterly averages.

 

Quarterly Investment Volumes (£bn)

 

Total

2016 Q1

13.24

2016 Q2

10.90

2016 Q3

9.83

2016 Q4

13.13

2017 Q1

12.98

2017 Q2

14.33

2017 Q3

15.77

2017 Q4

16.90

2018 Q1

14.13

2018 Q2

14.07

2018 Q3

17.04

2018 Q4

16.33

2019 Q1

11.26

2019 Q2

8.78

2019 Q3

13.85

2019 Q4

15.45

2020 Q1

13.89

2020 Q2

4.36

2020 Q3

8.09

2020 Q4

12.19

Source: Lambert Smith Hampton Research (February 2021)

 

Overseas investment in the UK property markets accounted for just over half (52.8%) of total investment in 2020 according to data from LSH5. LSH estimate that total overseas investment for 2020 reached £20.4 billion, 14.1% lower than the 10-year average. Overseas investment in Q4 2020 reached £6.5 billion, more than double Q3's level and 9.7% higher than the five-year quarterly average, suggesting that struggles with COVID-19 and Brexit uncertainty have been offset by favourable exchange rates and attractive yields. Figures indicate that Europe, Far East, Middle East and North America were all net investors in the final quarter of 2020.

 

5 CoStar, Investment Volumes, Q4 2019

 

Research from CBRE6 indicates that regional offices have outperformed in comparison to central London offices, delivering superior income returns of 5.9% in 2020 in comparison to central London office returns of 4.1% - a trend that has been witnessed over the past seven years. Total returns in 2020 for regional offices and central London were broadly in-line at 0.6% and 0.7% respectively.

 

6 CBRE Monthly Index, Q4 2020

 

Central London & Regional Office Income Returns (12 months to December 2020)

 

 

Central London Offices

Rest of UK Offices

2014

3.9%

7.8%

2015

3.2%

6.4%

2016

3.3%

6.2%

2017

3.7%

6.4%

2018

3.8%

5.9%

2019

3.8%

5.8%

2020

4.1%

5.9%

Source: CBRE (February 2021)

 

Occupational Demand in the UK Regional Office Market

Avison Young estimates that take-up of office space across nine regional office markets7 totalled 5.6 million sq. ft. in 2020; 36.7% below the level of take-up recorded in 2019, and 33.1% lower than the 10-year average. Both the city centre and out-of-town markets were affected by COVID-19, with a decline in take-up volumes of 38.9% and 32.6%, respectively. Occupational demand was driven by the technology, media & telecoms sector, which accounted for the highest proportion of take-up at 26% in 2020. Following the technology, media & telecoms sector, the insurance & financial sector and the public services, education & health sector accounted for the second and third largest proportion of take-up in the regional cities, accounting for 18% and 9% respectively.

 

According to Savills, there was a rise in availability for regional office stock across nine regional UK markets8, with total availability rising by 18.9% in 2020 to 12.6 million sq. ft.. Despite the uptick in availability and supply the total supply remains 11.3% below the 10-year average. This marks the first year that supply of office stock has increased over the last decade, having gradually fallen each year since 2009. The overall vacancy rate for regional offices ticked upwards from 9.6% in 2019 to 11.4% in 2020 but remains 15.4% below the 10-year average9.

 

7 Nine regional office markets mentioned by Avison Young includes: Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester & Newcastle

8 Savills: The Regional Office Market Overview, Q4 2020

9 Savills: The Regional Office Market Overview, Q4 2020

 

Furthermore, it is estimated that approximately 5.6 million sq. ft. of office space is currently under construction in the Big Nine regional markets, with Manchester, Glasgow and Bristol accounting for 29.9%, 24.4% and 11.1%, respectively. 49.4% of office buildings currently under construction are already pre-let.

 

Regional Demand: Annual Office Take-Up

 

Regional Total

10-year average

2009

 6,256,766

 8,405,305

2010

 6,736,616

 8,405,305

2011

 6,505,505

 8,405,305

2012

 7,043,471

 8,405,305

2013

 7,900,191

 8,405,305

2014

 8,955,458

 8,405,305

2015

 9,537,118

 8,405,305

2016

 8,783,403

 8,405,305

2017

 10,094,299

 8,405,305

2018

 10,728,026

 8,405,305

2019

 8,882,888

 8,405,305

2020

 5,622,693

 8,405,305

Source: Avison Young (February 2021)

 

Regional Supply: Annual Office Supply

 

Regional Total

10-year Average

2009

19,135,027

14,211,989

2010

17,980,865

14,211,989

2011

17,255,549

14,211,989

2012

17,097,330

14,211,989

2013

15,394,964

14,211,989

2014

15,357,235

14,211,989

2015

14,672,187

14,211,989

2016

14,248,602

14,211,989

2017

13,404,442

14,211,989

2018

11,477,265

14,211,989

2019

10,603,600

14,211,989

2020

12,608,720

14,211,989

Source: Savills (February 2021)

 

Rental Growth in the UK Regional Office Market

A lack of availability in the Big Nine regional markets has supported headline rents in 2020, though some rent free periods have moved out slightly, according to research from Avison Young. The CBRE Monthly Index shows that rental value growth held up better for the rest of UK office markets in the 12 months ended December 2020 with modest growth of 0.1%. Conversely, central London offices and all UK property rents have declined by -1.2% and -2.5%, respectively.

 

Colliers International expects this trend to continue in 2021, estimating that average rents in the London office market will see larger declines than the regional markets. However, their research suggests that the majority of rental decline will occur in the first half of 2021, and the sector should stabilise in the second half of the year as workers return to the office following the vaccine rollout and easing of UK Government restrictions.

 

Future Office Demand

Although the COVID-19 pandemic has forced the adoption of alternative ways of working, it can be argued that the pandemic merely accelerated changes that were already occurring in terms of both digital transformation and flexible working. However, in accelerating the working from home trend, the pandemic also highlighted its limitations in terms of collaborative working, training and productivity, to name a few. To date, there has been considerable speculation regarding the future of the office. The office has long provided a place for concentrated work and increasingly a place for collaboration, connection, innovation and social interaction, and the desire for these characteristics has not diminished. Research by JLL found that 70% of employees believe the office environment is more conducive to team building and creative collaboration, with 74% of respondents indicating that they were looking forward to the opportunity to return to the office.

 

The Asset Manager believes that the office will continue to play a vital role in working life, and that going forward, many occupiers will require more space per employee as greater importance is placed on health and wellbeing. The average office space per employee has reduced drastically since the 1990s, with typical densities of just c.85 sq. ft. per employee10. Therefore, de-densification of floorplates will likely take place as offices are transformed to encourage teamworking, innovation and education. Additionally, preferences for increased distance between workstations, more private offices, more defined private space, and a reduction in hot desking, may result in increased demand for space11.

 

10 WSP, Demand for Office Space

11 Brookfield Research, Gensler U.S. Work From Home Survey 2020


Regional REIT's Office Assets

EPRA occupancy of the Group's regional offices rose to 88.6% (2019: 88.4%). A like-for-like comparison of the Group's regional offices' EPRA occupancy, 31 December 2020 versus 31 December 2019, shows occupancy of 88.0% (2019: 88.4%). WAULT to first break was 2.6 years (2019: 3.0 years); like-for-like WAULT to first break of 2.5 years (2019: 3.0 years).

 

Occupier Demand in the UK Industrial Market

Take-up in the final quarter of 2020 reached 14.3 million sq. ft., pushing annual take-up during 2020 to 50.4 million sq. ft.; a 49.7% increase from 2019 levels, 44.8% above the 10-year average and 35.8% above the five-year average12. The increase in take-up throughout 2020 resulted in a 14% fall in availability, with some regions now met with growing shortages of suitable supply. CBRE13 research shows that 49.4% of take-up was within the East Midlands and South East as the M1 corridor remains the most attractive location for occupiers. Following this, Yorkshire & North East, and West Midlands accounted for 20.5% and 13.7% of take-up in 2020, respectively.

 

Occupier demand within the industrial market continues to benefit from growth in online shopping, as online retailing currently accounts for 35.2% of total retail sales in the UK, according to the Office for National Statistics ("ONS")14. This is considerably higher than the 19.5% recorded in January 2020. BNP Paribas Real Estate research shows that online retailers were the most active in terms of take-up throughout 2020, accounting for 37.5% of annual take-up. Following this, 3PL/ Distribution and General Retail accounted for 22.4% and 18.5% of take-up in 2020, respectively15.

 

In terms of development, 8.2 million sq. ft. of speculative development was delivered in 2020. Cushman & Wakefield highlight that just under six million sq. ft of committed speculative development is due to be delivered in 2021 across 43 units.

 

12 Cushman & Wakefield, Industrial Marketbeat Q4 2020

13 CBRE, Market Summary, Q4 2020

14 ONS, Retail Sales, Great Britain, January 2021

15 BNP Paribas, Industrial & Logistics Insider, Q4 2020


Rental Growth in the Industrial Market

Research by BNP Paribas Real Estate illustrates that competition for industrial space led to rental growth in 2020. The research compared data from the monthly MSCI Index for December 2020, which showed rental growth of 2.3% for the 12 months to the end of December 2020, compared to a 2.3% decline for all property types. BNP Paribas Real Estate estimates that rental growth in the industrial market is likely to remain positive during 202116.

 

The Investment Property Forum UK Consensus Forecast, November 2020, anticipates rental growth in the industrial sector of 1.0% in 2021, providing evidence of sustained growth. Additionally, the IPF UK Consensus Forecast predicts 2.2% and 1.8% average rental growth rates respectively for 2022 and 2020/24. In comparison, the IPF UK Consensus Forecast predicts that there will be a decline for the All Property average rents in 2021 of 2.8%.

 

16 Industrial & Logistics Insider Q4 2020


Regional REIT's Industrial Assets

EPRA occupancy of the Group's industrial sites was 94.6% (2019: 95.5%). A like-for-like comparison of the Group's industrial offices' EPRA occupancy as at 31 December 2020 versus 31 December 2019, shows occupancy of 93.4% (2019: 94.5%). WAULT to first break increased to 6.2 years (2019: 5.8 years); like-for-like WAULT to first break of 6.7 years (2019: 7.2 years).

 

Property Portfolio

As at 31 December 2020, the Group's property portfolio was valued at £732.4 million (2019: £787.9 million), with rent roll of £64.2 million (2019: £64.3 million), and an EPRA occupancy of 89.4% (2019: 89.4%).

 

On a like-for-like basis, 31 December 2020 versus 31 December 2019, EPRA occupancy was 88.7% (2019: 89.0%).

 

There were 153 properties (2019: 160) in the portfolio, with 1,245 units (2019: 1,251) and 898 tenants (2019: 904). If the portfolio was fully occupied at Cushman & Wakefield's view of market rents, the rental income would be £76.6 million per annum as at 31 December 2020 (2019: £77.2 million).

 

As at 31 December 2020, the net initial yield on the portfolio was 6.9% (2019: 6.2%), the equivalent yield was 8.8% (2019: 8.3%) and the reversionary yield was 9.4% (2019: 9.1%).

 

Property Portfolio by Sector

Sector

Properties

Valuation

% by valuation

Sq. ft.

Occupancy (EPRA)

WAULT to first break

Gross rental income

Average rent

ERV

Capital rate

Yield (%)

 

 

(£million)

 

(mil)

(%)

(yrs)

(£million)

(£psf)

(£million)

(£psf)

Net initial

Equivalent

Reversionary

Office

115

611.2

83.5

4.7

88.6

2.6

52.9

13.26

64.5

129.10

6.8

8.8

9.6

Industrial

16

81.3

11.1

1.9

94.6

6.2

6.6

3.90

7.4

42.87

7.0

8.1

8.0

Retail

20

30.0

4.1

0.4

93.1

3.7

3.9

9.58

3.9

67.41

9.9

10.8

11.2

Other

2

9.9

1.3

0.1

89.0

14.8

0.9

12.82

0.8

115.03

7.8

9.9

7.3

Total

153

732.4

100.0

7.2

89.4

3.2

64.2

10.44

76.6

102.26

6.9

8.8

9.4

Property Portfolio by Region

Region

Properties

Valuation

% by valuation

Sq. ft.

Occupancy (EPRA)

WAULT to first break

Gross rental income

Average rent

ERV

Capital rate

Yield (%)

 

 

(£million)

 

(mil)

(%)

(yrs)

(£million)

(£psf)

(£million)

(£psf)

Net initial

Equivalent

Reversionary

Scotland

39

127.0

17.3

1.5

86.7

3.6

13.1

10.42

15.0

85.19

8.4

10.1

10.8

South East

31

184.6

25.2

1.3

87.5

2.5

14.9

13.29

18.5

138.64

6.3

8.2

8.9

North East

20

79.8

10.9

0.9

85.8

2.7

6.8

8.81

8.4

87.72

5.9

9.4

9.9

Midlands

28

139.9

19.1

1.5

93.6

3.4

12.6

8.85

13.7

91.80

7.7

8.4

8.9

North West

16

88.9

12.1

1.0

86.9

4.6

6.6

8.36

9.6

87.89

5.5

9.1

9.4

South West

14

80.2

11.0

0.5

96.8

2.4

7.0

15.87

8.0

160.59

6.7

8.3

9.1

Wales

5

32.0

4.4

0.4

93.1

4.6

3.2

9.28

3.4

81.02

8.8

9.0

9.4

Total

153

732.4

100.0

7.2

89.4

3.2

64.2

10.44

76.6

102.26

6.9

8.8

9.4

* Table may not sum due to rounding.

 

Top 15 Investments (market value) as at 31 December 2020

Property

Sector

Anchor tenants

Market value

% of portfolio

Lettable area

EPRA Occupancy

Annualised gross rent

% of gross rental income

WAULT to first break (years)

(£million)

(Sq Ft)

(%)

(£million)

Tay House, Glasgow

Office

Barclays Execution Services Ltd, University of Glasgow

28.0

3.8

156,853

94.2

2.7

4.2

2.0

Genesis Business Park, Woking

Office

Nuvias (UK & Ireland) Ltd, Fernox Ltd, McCarthy & Stone Retirement Lifestyles Ltd, Walk The Walk Worldwide

23.9

3.3

98,359

80.6

1.3

2.1

3.1

Buildings 2 & 3 HBOS Campus, Aylesbury

Office

Bank Of Scotland Plc, Utmost Life and Pensions Ltd, Agria Pet Insurance Ltd

23.5

3.2

140,791

95.7

2.3

3.5

2.4

Hampshire Corporate Park, Eastleigh

Office

Aviva Central Services UK Ltd, National Westminster Bank Plc, Utilita Energy Ltd, Digital Wholesale Solutions Ltd

19.5

2.7

85,422

99.8

1.5

2.4

2.6

800 Aztec West, Bristol

Office

Edvance SAS, The Secretary of State for Defence

19.2

2.6

73,292

100.0

1.5

2.4

2.6

Norfolk House, Smallbrook Queensway, Birmingham

Office

Secretary of State for Communities & Local Government, Spark44 Ltd

18.9

2.6

114,982

97.4

1.6

2.5

1.7

Beeston Business Park, Nottingham

Office/ Industrial

Metropolitan Housing Trust Ltd, SMS Electronics Ltd, Worldwide Clinical Trials Ltd, Heart Internet Ltd

18.0

2.5

215,330

100.0

1.8

2.8

6.3

Road 4 Winsford Industrial Estate, Winsford

Industrial

Jiffy Packaging Ltd

16.3

2.2

246,209

100.0

1.0

1.6

13.8

One & Two Newstead Court, Nottingham

Office

E.ON UK Plc

15.7

2.1

146,262

100.0

1.4

2.2

2.9

Portland Street, Manchester

Office

Darwin Loan Solutions Ltd, New College Manchester Ltd, Mott MacDonald Ltd, Simard Ltd

15.1

2.1

55,787

98.8

0.9

1.5

3.1

Ashby Park, Ashby De La Zouch

Office

Ceva Logistics Ltd, Brush Electrical Machines Ltd, Hill Rom UK Ltd

12.6

1.7

91,034

100.0

1.1

1.8

2.7

Columbus House, Coventry

Office

TUI Northern Europe Ltd (Shell Energy)

12.0

1.6

53,253

100.0

1.4

2.1

3.0

Templeton On The Green, Glasgow

Office

The Scottish Ministers, The Scottish Sports Council, Heidi Beers Ltd, Cornerstone Community Care

11.7

1.6

142,512

89.9

1.2

1.9

3.4

Oakland House, Manchester

Office

Please Hold (UK) Ltd, HSS Hire Service Group Ltd, CVS (Commercial Valuers & Surveyors) Ltd, Rentsmart Ltd

10.8

1.5

160,975

88.1

1.1

1.8

2.9

Chancellor Court, Leeds

Office

St James's Place Wealth Management Group Plc

10.1

1.4

41,666

99.0

0.3

0.5

0.8

Total

 

 

255.2

34.8

1,822,727

95.5

21.3

33.2

3.4

*Table may not sum due to rounding.

 

Top 15 Tenants (share of rental income) as at 31 December 2020

Tenant

Property

Sector

WAULT to first break (years)

Lettable area (Sq Ft)

Annualised gross rent  (£million)

% of Gross rental income

Barclays Execution Services Ltd

Tay House, Glasgow

Administrative and support service activities

0.8

108,386

2.2

3.5

 

Waterfront Business Park, Fleet

 

 

 

 

 

Secretary of State for Communities & Local Government

1 Burgage Square, Wakefield

Public sector

2.4

173,735

2.0

3.2

 

Bennett House, Stoke-On-Trent

 

 

 

 

 

 

Cromwell House, Tritton Road, Lincoln

 

 

 

 

 

 

Norfolk House, Birmingham

 

 

 

 

 

 

Oakland House, Manchester

 

 

 

 

 

 

Waterside Business Park, Swansea

 

 

 

 

 

Bank of Scotland Plc

Buildings 3 HBOS Campus, Aylesbury

Banking

1.4

92,978

1.5

2.3

 

High Street/Bank Street, Dumfries

 

 

 

 

 

E.ON UK Plc

One & Two Newstead Court, Nottingham

Electricity, gas, steam and air conditioning supply

2.9

146,262

1.4

2.2

TUI Northern Europe Ltd (Shell Energy)

Columbus House, Coventry

Professional, scientific and technical activities

3.0

53,253

1.4

2.1

The Scottish Ministers

Calton House, Edinburgh

Public sector

1.6

111,076

1.3

2.1

 

Quadrant House, Dundee

 

 

 

 

 

 

Templeton On The Green, Glasgow

 

 

 

 

 

 

The Courtyard, Falkirk

 

 

 

 

 

Jiffy Packaging Ltd

Road 4 Winsford Industrial Estate, Winsford

Manufacturing

13.8

246,209

1.0

1.6

Edvance SAS

800 Aztec West, Bristol

Electricity, gas, steam and air conditioning supply

2.4

41,285

0.9

1.4

John Menzies Plc

2 Lochside Avenue, Edinburgh

Professional, scientific and technical activities

2.6

43,780

0.9

1.4

The Royal Bank of Scotland Plc

Cyan Building, Rotherham

Banking

0.5

67,458

0.9

1.3

SPD Development Co Ltd

Clearblue Innovation Centre, Bedford

Professional, scientific and technical activities

4.8

58,167

0.8

1.3

Aviva Central Services UK Ltd

Hampshire Corporate Park, Chilworth House, Eastleigh

Other service activities

3.9

42,612

0.8

1.2

James Howden & Company Ltd

Howden Site, Renfrew

Manufacturing

4.1

204,414

0.8

1.2

Odeon Cinemas Ltd

Kingscourt Leisure Complex, Dundee

Information and communication

14.8

41,542

0.7

1.1

The Secretary of State for Defence

800 Aztec West, Bristol

Public sector

3.0

32,007

0.6

1.0

Total

 

 

3.5

1,463,164

17.3

26.9

*Table may not sum due to rounding.

 

Property Portfolio Sector and Region Splits by Valuation and Income

 

By Valuation

As at 31 December 2020, 83.5 % (2019: 79.9%) of the portfolio by market value was offices and 11.1% (2019: 13.7%) was industrial. The balance was made up of retail, 4.1 % (2019: 5.0%) and other, 1.3% (2019: 1.4%). By UK region, as at 31 December 2020, Scotland represented 17.3 % (2019: 18.0%) of the portfolio and England 78.3 % (2019: 79.5%); the balance of 4.4 % (2019: 2.5%) was in Wales. In England, the largest regions were the South East, the Midlands and the North West.

 

By Income

As at 31 December 2020, 82.3 % (2019: 79.7%) of the portfolio by income was offices and 10.3% (2019: 12.4%) was industrial. The balance was made up of retail, 6.0 % (2019: 6.7%), and other, 1.3 % (2019: 1.2%). By UK region, as at 31 December 2020, Scotland represented 20.4 % (2019: 19.9%) of the portfolio and England 74.6 % (2019: 77.2%); the balance of 5.0 % was in Wales (2019: 2.9%). In England, the largest regions were the South East, the Midlands and the South West.

 

Lease Expiry Profile 

The WAULT on the portfolio is 5.1 years (2019: 5.5 years); WAULT to first break is 3.2 years (2019: 3.5 years). As at 31 December 2020, 14.2% (2019: 5.5%) of income was from leases, which will expire within one year, 9.1% (2019: 14.2%) between one and two years, 35.8% (2019: 33.0%) between two and five years and 40.9% (2019: 47.4%) after five years.

 

Lease Expiry Income Profile

% of rent

0-1 years

14.2%

1-2 years

9.1%

2-5 years

35.8%

5+ years

40.9%

Total

100.0%

Source: LSPIM

 

Lease Expiry Income Profile by year

£m

2021

8.9

2022

5.7

2023

7.1

2024

7.2

2025

8.3

2026

4.6

2027

2.9

2028

4.8

2029

5.8

2030+

7.6

Total

62.9

Source: LSPIM

 

Lease expiry to first break income profile by year

£m

2021

16.2

2022

11.3

2023

9.2

2024

10.7

2025

6.8

2026

1.8

2027

0.4

2028

0.8

2029

0.8

2030+

4.9

Total

62.9

Source: LSPIM

 

Tenants by Standard Industrial Classification as at 31 December 2020

As at 31 December 2020, 13.5 % of income was from tenants in the professional, scientific and technical activities sector (2019: 13.0%), 12.9 % from the administrative and support service activities sector (2019: 12.0%), 10.3% from the manufacturing sector (2019: 8.7%), 8.8 % from the public sector (2019: 8.4%) and 8.4 % from the financial and insurance activities (other) sector (2019: 7.2%). The remaining exposure is broadly spread.

 

No tenant represents more than 4% of the Group's rent roll as at 31 December 2020, the largest being 3.5 % (2019: 2.5%).

 

Top 15 Properties

Tay House, Glasgow

Market value (£million)

28.0

 

Sector

Office

 

Annualised gross rent (£million)

2.7

 

Lettable area (Sq. Ft.)

156,853

 

Anchor tenants

Barclays Execution Services Ltd, University of Glasgow

 

EPRA Occupancy (%)

94.2

 

WAULT (years) (to first break)

5.4 (2.0)

 

Landmark Grade A office building offering column free floor plates of 10,000 - 30,000 sq. ft. in Glasgow's city centre. The building underwent an extensive refurbishment during 2008-10 and, in 2016, the first and second floors were comprehensively refurbished.

 

Genesis Business Park, Woking

Market value (£million)

23.9

 

Sector

Office

 

Annualised gross rent (£million)

1.3

 

Lettable area (Sq. Ft.)

98,359

 

Anchor tenants

Nuvias (UK & Ireland) Ltd, Fernox Ltd, McCarthy & Stone Retirement Lifestyles Ltd, Walk The Walk Worldwide

 

EPRA Occupancy (%)

80.6

 

WAULT (years) (to first break)

6.5 (3.1)

 

Business park consisting of eight detached buildings extending in total to 98,359 sq. ft.. Genesis is the premier out of town office park situated approximately one mile from Woking's town centre. It is located within the south west quadrant of London's M25 commuter belt, within five miles of Junction 11.

 

Buildings 2 & 3 HBOS Campus, Aylesbury

Market value (£million)

23.5

 

Sector

Office

 

Annualised gross rent (£million)

2.3

 

Lettable area (Sq. Ft.)

140,791

 

Anchor tenants

Bank Of Scotland Plc, Utmost Life and Pensions Ltd, Agria Pet Insurance Ltd

 

EPRA Occupancy (%)

95.7

 

WAULT (years) (to first break)

3.2 (2.4)

 

Campus of two buildings, including the "Blue Leanie", acquired in March 2016 as part of the larger Rainbow Portfolio. The campus development is situated on the south east corner of the town centre. The property is located approximately 44 miles northwest of central London, 23 miles from Oxford and 15 miles south of Milton Keynes. The property has recently been rebranded as Bear Brook Office Park to appeal to a wider range of potential occupiers.

 

Hampshire Corporate Park, Eastleigh

 

Market value (£million)

19.5

Sector

Office

Annualised gross rent (£million)

1.5

Lettable area (Sq. Ft.)

85,422

Anchor tenants

Aviva Central Services UK Ltd, National Westminster Bank Plc, Utilita Energy Ltd, Digital Wholesale Solutions Ltd

EPRA Occupancy (%)

99.8

WAULT (years) (to first break)

6.5 (2.6)

 

Acquired in January 2015, two office buildings named Chilworth House and Hampshire House. The offices are within one of Chandler's Ford's most prestigious office parks on the south coast. Since acquisition, Hampshire House has undergone an interior and exterior refurbishment as part of the Company's capital expenditure programme. The offices benefit from excellent transport links with Junctions 13 and 14 of the M3 motorway and Junction 5 of the M27 motorway. Southampton International Airport is approximately two miles away and train stations are available in Eastleigh, Southampton Parkway and Chandler's Ford.

 

800 Aztec West, Bristol

 

Market value (£million)

19.2

Sector

Office

Annualised gross rent (£million)

1.5

Lettable area (Sq. Ft.)

73,292

Anchor tenants

Edvance SAS, The Secretary of State for Defence

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

7.8 (2.6)

 

Acquired vacant in January 2016 as part of the Rainbow Portfolio. This property consists of 73,292 sq. ft. of office space consisting of the ground floor and two upper floors with 330 parking spaces on a premier out of town business park to the north west of Bristol's city centre. The property is located within close proximity to the M5 motorway. The building underwent remodelling and refurbishment resulting in revised approach, frontage, and foyer, opening up of floor plates, creation of roof terrace, replacement of all cladding/glazing and replacement of M & E resulting in an EPC improvement from an E to a B energy rating. 

 

Norfolk House, Smallbrook Queensway, Birmingham

 

Market value (£million)

18.9

Sector

Office

Annualised gross rent (£million)

1.6

Lettable area (Sq. Ft.)

114,982

Anchor tenants

Secretary of State for Communities & Local Government, Spark44 Ltd

EPRA Occupancy (%)

97.4

WAULT (years) (to first break)

3.4 (1.7)

 

Acquired in February 2019, Norfolk House occupies a 0.52-acre island site in the centre of Birmingham in close proximity to Birmingham New Street Train Station and adjacent to the Bullring Shopping Centre. The building is split over six floors with 12 retail units on the ground floor level totalling 26,099 sq. ft. and 88,883 sq. ft. of office accommodation on the ground floor and above.

 

Beeston Business Park, Nottingham

 

Market value (£million)

18.0

Sector

Office/ Industrial

Annualised gross rent (£million)

1.8

Lettable area (Sq. Ft.)

215,330

Anchor tenants

Metropolitan Housing Trust Ltd, SMS Electronics Ltd, Worldwide Clinical Trials Ltd, Heart Internet Ltd

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

9.2 (6.3)

 

Acquired in December 2020, Beeston Business Park is located four miles south west of Nottingham's city centre in a prominent location, adjoining Beeston Train Station, offering direct connectivity to London St Pancras International. The park comprises 215,330 sq. ft. across one multi-let office building, three single let industrial buildings, a vacant development plot and sporting fields on a total site area of 26.53 acres. The property is fully let.

 

Road Four Winsford Industrial Estate, Winsford

Market value (£million)

16.3

 

Sector

Industrial

 

Annualised gross rent (£million)

1.0

 

Lettable area (Sq. Ft.)

246,209

 

Anchor tenants

Jiffy Packaging Ltd

 

EPRA Occupancy (%)

100.0

 

WAULT (years) (to first break)

13.8 (13.8)

 

Acquired in August 2014. Let to Jiffy Packaging until 2034, 246,209 sq. ft. industrial asset providing combination of high bay warehouse space, stand-alone industrial unit, offices, yard and car parking. The industrial estate is located on road four in Winsford with the A54 providing access to the M6 motorway. Winsford Railway Station is approximately 0.54 miles from the industrial estate.

 

One & Two Newstead Court, Nottingham

 

Market value (£million)

15.7

Sector

Office

Annualised gross rent (£million)

1.4

Lettable area (Sq. Ft.)

146,262

Anchor tenants

E.ON UK Plc

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

4.6 (2.9)

 

Acquired from receivership in May 2014. Two modern, high quality large office pavilions let to E.ON on an established business park, located north of Nottingham. Road connections are accessed at Junction 27 of the M1 motorway via the A608, providing links to the UK National Motorway Network. The nearest railway station is Nottingham.

 

Portland Street, Manchester

 

Market value (£million)

15.1

Sector

Office

Annualised gross rent (£million)

0.9

Lettable area (Sq. Ft.)

55,787

Anchor tenants

Darwin Loan Solutions Ltd, New College Manchester Ltd, Mott MacDonald Ltd, Simard Ltd

EPRA Occupancy (%)

98.8

WAULT (years) (to first break)

5.2 (3.1)

 

Acquired from receivership in December 2013. Refurbished vacant modern offices behind a retained listed façade consisting of the ground floor and six upper floors extending to 55,787 sq. ft.. Since acquisition, c. £1m has been spent on remedial works. Following successful completion of works, the building re-launched into letting market. The property is located on Portland Street at the junction with Piccadilly. The property is at the epicentre of Manchester's transport infrastructure with adjacent access to the Piccadilly Gardens Bus Station and Metrolink tram and bus station whilst Piccadilly Railway Station is within close proximity.

 

Ashby Park, Ashby De La Zouch

 

Market value (£million)

12.6

Sector

Office

Annualised gross rent (£million)

1.1

Lettable area (Sq. Ft.)

91,034

Anchor tenants

Ceva Logistics Ltd, Brush Electrical Machines Ltd, Hill Rom UK Ltd

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

2.7 (2.7)

 

Acquired in March 2017 from The Conygar Investment Company PLC as part of a larger property portfolio, the property comprises of three detached office buildings constructed in the mid 1990's, with a combined floor area of 91,034 sq. ft. of space. The property is fully let to five occupiers. The location has excellent motorway access. East Midlands Airport is eight miles to the north. The nearest railway station is Burton Upon Trent.

 

Columbus House, Coventry

 

Market value (£million)

12.0

Sector

Office

Annualised gross rent (£million)

1.4

Lettable area (Sq. Ft.)

53,253

Anchor tenants

TUI Northern Europe Ltd (Shell Energy)

EPRA Occupancy (%)

100.0

WAULT (years) (to first break)

3.0 (3.0)

 

Acquired in August 2014. A high specification purpose-built HQ style building in an established and popular business park let on a long-term FRI lease to Tui who have sub-let the entire space to First Utility that provides an underpinning to the rent. The property comprises a purpose-built office building of masonry construction, arranged over three floors. The property is located on Westwood Way, with great transport links to the city and close to the A45, north & southbound.

 

Templeton On The Green, Glasgow

 

Market value (£million)

11.7

Sector

Office

Annualised gross rent (£million)

1.2

Lettable area (Sq. Ft.)

142,512

Anchor tenants

The Scottish Ministers, The Scottish Sports Council, Heidi Beers Ltd, Cornerstone Community Care

EPRA Occupancy (%)

89.9

WAULT (years) (to first break)

6.6 (3.4)

 

Acquired in 2013, the property comprises of a former landmark factory building of traditional brick construction which consists of five buildings offering a varied range of unit sizes. The property is located on Glasgow Green, just off London Road, which is a main thoroughfare to the east of Glasgow's city centre, providing excellent access to local bus routes and train network via the adjacent Bridgeton station.

 

Oakland House, Manchester

 

Market value (£million)

10.8

Sector

Office

Annualised gross rent (£million)

1.1

Lettable area (Sq. Ft.)

160,975

Anchor tenants

Please Hold (UK) Ltd, HSS Hire Service Group Ltd, CVS (Commercial Valuers & Surveyors) Ltd, Rentsmart Ltd

EPRA Occupancy (%)

88.1

WAULT (years) (to first break)

4.2 (2.9)

 

Acquired in March 2016 as part of the larger Wing Portfolio, a 15-storey office block which is prominently located on Talbot Road, one of the main arterial routes in the Old Trafford area of Manchester. The property offers easy access to the city centre with two Metrolink stops within a short walk. Additionally, both the M60 and M602 motorways are within a short distance.

 

Chancellor Court, Leeds

Market value (£million)

10.1

 

Sector

Office

 

Annualised gross rent (£million)

0.3

 

Lettable area (Sq. Ft.)

41,666

 

Anchor tenants

St James's Place Wealth Management Group Plc

 

EPRA Occupancy (%)

99.0

 

WAULT (years) (to first break)

0.8 (0.8)

 

Two self-contained office buildings with combined floor area of 41,666 sq. ft.. Currently being extensively refurbished in order to reposition the property in the local market, the property will shortly be rebranded as The Coachworks. The property comprises two detached office buildings of brick construction arranged over four floors. The property is located on The Calls at its junction with Crown Street, in the south western fringes of Leeds's city centre. The property lies within close proximity to Leeds's Railway Station.

 

Financial Review

 

Net Asset Value

 

In the year ended 31 December 2020, the EPRA NTA of the Group decreased to £425.6 million (IFRS NAV: £420.6 million) from £485.7 million (IFRS NAV: £483.7 million) as at 31 December 2019, equating to a decrease in the diluted EPRA NTA of 14.0pps (IFRS: 14.6pps) to 98.6pps (IFRS: 97.5pps). This is after the dividends declared in the year amounting to 7.45pps.

 

The EPRA NTA decrease of some £60.1 million since 31 December 2019 was predominately due to a £54.8 million revaluation of the property portfolio held at 31 December 2020, after capital expenditure amounting to £8.8 million, the amount of which is yet to be fully captured in the valuation, and a realised loss of £1.1 million on the disposal of investment properties.

 

The investment property portfolio valuation as at 31 December 2020 amounted to £732.4 million (2019: £787.9 million). The decrease over the period is a reflection of the aforementioned unrealised downward revaluation from the prior year end, unrecognised capital expenditure and disposals. Overall, on a like-for-like basis, the portfolio value decreased by 7.2% during the year.

 

The table below sets out the acquisitions, disposals and capital expenditure for the respective periods:

 

 

 

Year ended

 

Year ended

 

 

31 December

2020

31 December

2019

 

 

(£million)

(£million)

Acquisitions

 

 

 

Net (after costs)

45.0

89.9

 

Gross (before costs)

42.4

87.1

 

 

 

 

Disposals

 

 

 

Net (after costs)

53.4

24.3

 

Gross (before costs)

56.4

24.9

 

 

 

 

Capital Expenditure

 

 

 

Net (after dilapidations)

8.8

5.8

 

Gross (before dilapidations)

13.1

8.0

 

 

 

 

 

 

The diluted EPRA NTA per share decreased to 98.6 pps (2019: 112.6pps). The EPRA NTA is reconciled in the table below:

 

 

£million

Pence per share

Opening EPRA NTA (31 December 2019)

485.7

112.6

 

 

 

Net rental and property income

53.3

12.3

Administration and other expenses

(11.3)

(2.6)

Loss on the disposal of investment properties

(1.1)

(0.2)

Change in the fair value of investment properties

(54.8)

(12.7)

Change in value of right of use

(0.2)

(0.0)

EPRA NTA after operating profit

471.6

109.3

Net finance expense

(14.0)

(3.2)

Taxation

0.2

0.0

EPRA NTA before dividends paid

457.8

106.1

Dividends paid

(32.1)

(7.4)

Closing EPRA NTA (31 December 2020)

425.6

98.6

 

Table may not sum due to rounding  

 

Income Statement

Operating profit before gains and losses on property assets and other investments for the year ended 31 December 2020 amounted to £42.0 million (2019: £44.1 million). The Company incurred a loss after finance items and before taxation of £31.2 million (2019: gain £26.3 million). This reduction is predominately the result of two factors: firstly, a loss in the fair value of investment properties over the year as a result of the impact of the COVID-19 pandemic on the property market and secondly a loss on the disposal of investment properties. 2020 included the rent roll for properties held from the 31 December 2019, plus the partial rent roll for properties disposed or acquired during the year.

 

Rental and property income amounted to £ 62.1 million, excluding recoverable service charge income and other similar items (2019: £64.4 million). The decrease was primarily the result of the decrease in the rent roll being held over the year to 31 December 2020.

 

Currently more than 80 % of the rental income is collected within 30 days of the due date and bad debts in the year were £ 1.1 million (2019: £0.5 million).

 

Non-recoverable property costs, excluding recoverable service charge income and other similar costs, amounted to £ 8.8 million (2019: £9.4 million), and the rent roll decreased to £ 64.2 million (2019: £64.3 million).

 

Realised loss on the disposal of investment properties amounted to £1.1 million (2019: gain £1.7 million). These losses were incurred on smaller lot-size vacant properties so to mitigate future on - going operating costs, and to allow the redeployment of under-performing capital. The change in the fair value of investment properties amounted to a loss of £54.8 million (2019: loss of £3.5 million). Net capital expenditure amounted to £8.8 million (2019: £5.8 million). The change in value of right of use asset amounted to a charge of £0.2 million (2019: £0.2 million).

 

Finance expenses amount to £14.1 million (2019: £13.9 million). The increase is primarily due to the drawdown of the available borrowing headroom. On 26 March 2020, the Group drew down £30.7 million from the Santander and Royal Bank of Scotland facilities, ensuring ample liquidity.

 

The EPRA cost ratio, including direct vacancy costs, was 32.4% (2019: 31.6%). The EPRA cost ratio, excluding direct vacancy costs was 19.6% (2019: 18.7%). The ongoing charges for the year ending 31 December 2020 were 4.6% (2019: 4.5%).

 

The EPRA Total Return from 6 November 2015 to 31 December 2020 was 36.3% (2019: 43.0%), an annualised rate of 6.2% pa (2019: 9.0% pa).

 

Dividend

In relation to the year from 1 January 2020 to 31 December 2020, the Company declared dividends totalling 6.40pps (2019: 8.25pps). Since the end of the year, the Company has declared a dividend for the fourth quarter of 2020 of 1.50pps. A schedule of dividends can be found on the Company's website: https://www.regionalreit.com/~/media/Files/R/Regional-Reit/investor-docs/Dividend/regional-reit-dividend-payments-since-launch-q42020-3mar21.pdf

 

Debt Financing and Gearing

Borrowings comprise third-party bank debt which is secured over properties owned by the Group and repayable over the next four to nine years, with a weighted average maturity of 6.4 years (2019: 7.3 years).

 

The Group's borrowing facilities are with the Royal Bank of Scotland, Scottish Widows Limited & Aviva Investors Real Estate Finance, Scottish Widows Limited and Santander UK. Total bank borrowing facilities at 31 December 2020 amounted to £316.2 million (2019: £294.0m) (before unamortised debt issuance costs), with £5.7 million available to be drawn, and in addition to the bank borrowings, the Group has a £50 million 4.5% retail eligible bond which is due for repayment in August 2024. In aggregate, the total debt available at 31 December 2020 amounted to £371.9 million (2019: £371.9 million).

 

To ensure the Group retained ample liquidity following the implementation of the Government COVID-19 regulations, £30.7 million was drawn down on 26 March 2020 from the Santander UK and the Royal Bank of Scotland facilities.

 

At 31 December 2020, the Group's cash and cash equivalent balances amounted to £67.4 million (2019: £37.3 million), of which £55.0 million (2019: £34.7 million) was unrestricted cash.

 

The Group's net loan to value ("LTV") ratio stands at 40.8% (2019: 38.9%) before unamortised costs. The Board continues to target a net LTV ratio of 40%, with a maximum limit of 50%.

 

Debt Profile and LTV Ratios as at 31 December 2020
 

Lender

Original facility

Outstanding debt*

Maturity date

Gross loan to value**

Annual interest rate

 

£'000

£'000

 

 %

 %

 

Royal Bank of Scotland

55,000

52,349

Jun-24

45.7

2.15

over 3 months

£ LIBOR

 

 

 

 

 

 

 

Scottish Widows & Aviva Investors Real Estate Finance

165,000

165,000

Dec-27

47.4

3.28

Fixed

 

 

 

 

 

 

 

Scottish Widows

36,000

36,000

Dec-28

41.0

3.37

Fixed

 

 

 

 

 

 

 

Santander UK

65,870

62,822

Jun-29

39.8

2.20

over 3 months

£ LIBOR

 

321,870

316,171

 

 

 

 

 

 

 

 

 

 

 

Retail eligible bond

50,000

50,000

Aug-24

NA

4.50

Fixed

 

371,870

366,171

 

 

 

 

* Before unamortised debt issue costs

** Based on Cushman and Wakefield property valuations

Table may not sum due to rounding

 

The Managers continue to monitor the borrowing requirements of the Group. As at 31 December 2020, the Group had substantial headroom against its borrowing covenants.

 

The net gearing ratio (net debt to Ordinary Shareholders' equity (diluted)) of the Group was   71.0 % as at 31 December 2020 (2019: 63.4%).

 

Interest cover, excluding amortised costs, stands at 3.4 times (2019: 3.6 times) and including amortised costs, stands at 3.0 times (2019: 3.2 times).

 

Hedging

The Group applies an interest hedging strategy that is aligned to the property management strategy and aims to mitigate interest rate volatility on at least 90% of the debt exposure.

 

 

 

 

31 December 2020

31 December 2019

 

 

 

%

%

Borrowings interest rate hedged

 

 

101.6

108.1

Thereof:

 

 

 

 

Fixed

 

 

68.6

73.0

Swap

 

 

16.5

17.6

Cap

 

 

16.5

17.6

 

 

 

 

 

WACD1

 

 

3.3

3.5

 

 

 

 

 

Table may not sum due to rounding

1 WACD - Weighted Average Effective Interest Rate including the cost of hedging

 

The over hedged position has arisen due to the entire Royal Bank of Scotland and Santander UK facilities, including any undrawn balances, being hedged by interest rate cap derivatives which have no ongoing cost to the Group.

 

Tax

The Group entered the UK REIT regime on 7 November 2015 and all of the Group's UK property rental operations became exempt from UK corporation tax from that date. The exemption remains subject to the Group's continuing compliance with the UK REIT rules.

 

On 9 January 2018, the Company registered for VAT purposes in England.

 

During 2020, the Group recognised a tax credit of £0.2 million (2019: £0.3 million), which comprised tax provisions for the year offset by releases of tax previously provided for in prior years which are now concluded and not payable.

 

Principal Risks and Uncertainties

 

Risk Framework

The Board has overall responsibility for the Company's system of risk management and internal controls and for ensuring their effectiveness. The Board recognises the importance of identifying and actively monitoring its strategic, valuation, tenant, financial, operational, regulatory, environmental risks and any other long-term emerging threats, trends and challenges facing the business. The Audit Committee supports the Board in the management of risk and is responsible for determining the principal risks facing the business and reviewing, at least annually, the effectiveness of the Company's financial control, risk management and internal control processes.

 

Identification, Evaluation and Mitigation

The identification of risk, its evaluation and management is an ongoing process. The Company maintains a detailed and formal matrix of current principal risks, which uses risk scoring to evaluate risks consistently. This allows the risks to be monitored and mitigated as part of a risk management process with the Audit Committee undertaking at a minimum on a six-monthly basis, or more frequently if required, a robust evaluation of these risks facing the Group.  

 

Risks are identified and weighted according to their potential impact on the Company and to their likelihood of occurrence. The Audit Committee uses the risk matrix to prioritise individual risks, allocating scores to each risk for both the likelihood of its occurrence and the severity of its impact. The combined scores 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 as principal risks.

 

While the Board believes that it has a robust framework of internal controls in place, this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate risk.

 

Risk Appetite

Risk appetite will vary over time but the Board is responsible for defining the level and type of risk that the Company takes on in accordance with the strategy. The Board, in conjunction with the Asset Manager and Investment Manager, regularly reviews the risk appetite of the Company in association with the latest information available and the Company is able to assess and respond quickly to new and emerging risks.

 

Emerging Risks

The Board is cognisant of emerging risks defined as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of probability of occurrence and possible effects on the Company. Once emerging risks become sufficiently clear, they may be classed as a principal risk and added to the risk matrix.

 

To help manage emerging risks and discuss other wider matters affecting property, the Board has an annual strategy meeting. The Board considers having a clear strategy is the key to managing and mitigating emerging risk.

 

COVID-19

During 2020, the principal risks and uncertainties faced by the Company were exacerbated by the impact of the Government's reaction to the COVID-19 pandemic. As uncertainty increased, the Board has worked even closer with the Asset Manager, Investment Manager and its third-party suppliers to maintain resilience in the operations of the Company and management of the property portfolio. The primary aim being to preserve and enhance the Company's net income and capital values, meeting all regulatory and stakeholder obligations, whilst looking to the longer term to identify strategic opportunities.

 

This threat has an ongoing effect on many of our principal risks and the Board meet regularly with the Asset and Investment Managers to assess these risks and how they can be managed.

 

The below list, in no particular order, sets out the current identifiable principal and emerging risks, including their impact and the actions taken by the Company to mitigate them. It does not purport to be an exhaustive list of all the risks faced by the Group.

 

Principal Risk  Summary

 

Principal Risk

Evolution of the

trend during the year

 

1. 

Strategic

ó

2. 

Valuation

ó

3. 

COVID-19 

ö

4. 

Economic and political

ó

5. 

Funding

ó

6. 

Tenant

ó

7. 

Financial and tax changes 

ó

8. 

Operational

ö

9. 

Accounting, legal and regulatory

ó

10. 

Environmental and energy efficiency standards

ö

 

1.  Strategic

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD  ó

An inappropriate investment strategy, and/or failure to implement the strategy could result in lower income and capital returns to Shareholders.

· A clearly defined investment strategy which is reviewed annually.

· A defined and rigorous investment appraisal process.

· Acquire portfolios which offer Shareholders. diversification of investment risk by investing in a range of geographical areas and number of properties.

· Supply and demand market information is reviewed continuously to assist in acquisitions and disposals.

· All the above steps are monitored to ensure the strategy is implemented.

 

· The property portfolio remains balanced across a range of geographical areas and large number of investment properties.

 

· Predominately, acquiring office properties in the UK and outside of the M25 motorway. However, the Group may invest in property portfolios in which up to 50% of the properties (by market value) are situated within the M25 motorway.

· The Group continues to purchase properties in the UK outside the M25 motorway.

 

· No single property, in the ordinary course of business, is expected to exceed 10% of the Group's aggregate Investment Properties valuation. However, the Board may, in exceptional circumstances, consider a property having a value of up to 20% of the Group's investment property value at the time of investment.

· Tay House (2019: Tay House) is the highest valued property, which equates to 3.8% (2019: 4.3%) of the Group's investment properties.

 

· No more than 20% of the Group's investment property value shall be exposed to any single tenant or group undertaking of that tenant.

· The Group's largest single tenant exposure is 3.5% (2019: 2.5%) of gross rental income, being Barclays Execution Services Ltd. (2019: Barclays Execution Services Ltd.).

 

· Speculative development (i.e., properties under construction, but excluding any refurbishment works, which have not been pre-let) is prohibited.

· No speculative construction was undertaken during the year under review.

 

· The value of the properties is protected as far as possible by an active asset management programme, which is regularly reviewed against the business plan for each property.

· The Asset Manager continues to actively manage the investment properties in accordance with market conditions and the individual asset programme.

 

 

2.  Valuation

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

The valuation of the Group's portfolio affects its profitability and net assets.

· The Company's external valuer, Cushman & Wakefield, provide independent valuations for all properties on a six-monthly basis in accordance with the RICS Red Book.

· The Audit Committee has the opportunity to discuss the basis of the valuations with the external valuer. The Audit Committee membership includes an experienced chartered surveyor.

· The Asset Manager's experience and extensive knowledge of the property market. The Asset Manager is able to challenge the external valuers' findings.

· The Company's Auditor engages an independent third party to evaluate the Cushman & Wakefield valuation.

 

· Cushman & Wakefield independently provide the valuation for the entire portfolio, valuing each individual asset.

 

3.  COVID-19

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD  ö

The economic disruption resulting from the COVID-19 virus could continue to impact rental income, the ability to access funding at competitive rates, adherence to banking covenants, maintain a progressive dividend policy, and adhere to the HMRC REIT regime requirements, especially if associated restrictions remain in place for a significant period.

 

· The Asset Manager continues to adapt, as required, to support tenants in accessing UK Government financial assistance.

· The Asset Manager, where appropriate, has put in place social distancing measures as advised by the UK Government.

· The property portfolio has been deliberately constituted to ensure a diverse range of tenants by standard industrial classification comprised of 52% of government designated essential services.

· A large proportion of the available borrowing facility headroom was drawn down from Santander UK and the Royal Bank of Scotland ensuring substantial working capital was available.

· Close relationships with lenders ensuring continued dialogue around covenants and ability to access funding as required at competitive rates.

· Initial vetting of all third-party providers with annual due diligence reviews, including the review of business continuity capabilities to minimise when remote working has been necessitated.

· The Group has continued to scrutinise all current risk mitigation approaches employed and to work closely with all parties through this disruptive period.

 

 

4.  Economic and political

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

Significant political events could impact the health of the UK economy, resulting in borrowing constraints, changes in demand by tenants for suitable properties, the quality of the tenants, and ultimately the property portfolio value.

· The Group operates with a sole focus on the UK regions, with no foreign currency exchange exposure. It remains well positioned with a deliberately diverse standard industry classification of tenants generating 898 (2019: 904) income streams which are located in areas of expected economic growth.

· The Board receives advice on macro-economic risks, including Brexit, from the Investment Manager and other advisers and acts accordingly.

 

 

· There remains a risk that property valuations and the occupancy market may be impacted by the post Brexit transition period. 

 

 

5.  Funding

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

The Group may not be able to secure further debt or on acceptable terms, which may impinge upon investment opportunities and the ability to grow the Group.

· The Asset Manager has a Corporate Finance team dedicated to optimising the Group's funding requirements.

· Funding options are constantly reviewed with an emphasis on reducing the weighted average cost of capital and lengthening the weighted average debt to maturity.

· Borrowings are currently provided by a range of institutions with targeted staggered maturities.

· Strong relationships with key long-term lenders.

· Continual monitoring of LTV.

 

· Weighted average debt term decreased to 6.4 years from 7.3 years in 2019.

· Weighted average cost of capital, including hedging costs was 3.3% (2019: 3.5%).

· LTV increased to 40.8% from 38.9% as at 31 December 2019.

Bank reference interest rates may be set to rise accompanying higher inflation.

· Policy of hedging at least 90% of variable interest rate borrowings.

· Borrowings are currently provided by a range of institutions with targeted staggered maturities.

 

· Continued adherence to the hedging policy.

Breach of covenants within the Group's funding structure could lead to a cancellation of debt funding if the Company is unable to service the debt.

· The Asset Manager's Corporate Finance team reviews the applicable covenants on a regular basis and are considered in future operational decisions.

· Compliance certificates and requested reports are prepared as scheduled.  

 

· The Group continues to have substantial headroom against the applicable borrowing covenants.

 

6.  Tenant

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD 

ó

 

Type of tenant and concentration of tenant could result in lower income from reduced lettings or defaults.

· An active asset management programme with a focus on the Asset Manager working with individual tenants to assess any occupational issues and to manage any potential bad debts.

· Diversified portfolio of properties let, where possible, to a large number of low-risk tenants across a wide range of standard industrial classifications throughout the UK.

· Potential acquisitions are reviewed for tenant overlap and potential disposals are similarly reviewed for tenant standard industrial classification concentration.

 

· This risk remains stable in view of the increasing diversification of properties, tenants and geographies in the portfolio.

· The tenant mix and their underlying activity has continued to increasingly diversify, with the number of tenants amounting to 898 at the year-end (2019: 904).

 

A high concentration of lease term maturity and/or break options could result in a more volatile contracted rent roll.

· The portfolio lease and maturity concentrations are monitored by the experienced Asset Manager to minimise concentration.

· There is a focus on securing early renewals and increased lease periods.

· The requirement for suitable tenants and the quality of the tenant is managed by the experienced Asset Manager which maintains close relationships with current tenants and with letting agents.

· The WAULT to first break as at 31 December 2020 was 3.2 years (2019: 3.5 years).

· The largest tenant is 3.5% (2019: 2.5%) of the gross rental income, being Barclays Execution Services Ltd.

· The Asset Management team remains vigilant to the financial wellbeing of our current tenants and continues to liaise with occupiers and agents.

 

 

 

 

7.  Financial and Tax Changes

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

Changes to the UK REIT and non-REIT regimes tax and financial legislation.

· The Board receives advice on these changes where appropriate and will act accordingly.

· Advice is received from several corporate advisers, including tax adviser Grant Thornton UK LLP and the Group adapts to changes as required.

 

8.  Operational

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ö

Business disruption could impinge on the normal operations of the Group.

· The Asset and Investment Managers each have contingency plans in place to ensure there are no disruptions to the core infrastructure which would impinge on the normal operations of the Group. These plans have been implemented in adherence to COVID-19 Government guidelines, with limited disruption to operations.

 

· Both the Asset and Investment Managers annually review their Disaster and Business Continuity Plans.

 

 

· An annual due diligence exercise is carried out on all principal third-party service providers.

· The annual due diligence visits were curtailed due to government restrictions. However, assurances were received as required from third party service providers.

· No concerns were identified.

 

 

· As an externally managed investment Company, there is a continued reliance on the Asset and Investment Managers and other third-party service providers.

 

· Both the Asset and Investment Manager are viable going concerns.

 

· All acquisitions undergo a rigorous due diligence process and all multi-let properties undergo an annual comprehensive fire risk.

· The impact of physical damage and destruction to investment properties is mitigated by ensuring all are covered by a comprehensive building, loss of rent and service charge plus terrorism insurance with the exception of a small number of "self-insure" arrangements covered under leases.

 

· The Asset Manager continues to monitor changes in Health and Safety regulations, including, where required, COVID-19 social distancing measures.

· The Asset Manager reviews the adequacy of insurance cover on an ongoing basis.

Information security and cyber threat resulting in data loss, or negative regulatory, reputational, operational (including GDPR), or financial impact.

· The Asset and Investment Manager each has a dedicated Information Technology team which monitors information security, privacy risk and cyber threats ensuring their respective operations are not interrupted.

· As required the building management systems are reviewed for cyber security risk.

· The Managers review the respective Information Technology polices and the material third party service suppliers on as required basis to ensure they reflect current and possible future threats.

 

9.  Accounting, Legal, and Regulatory

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ó

Changes to accounting, legal and/or regulatory legislation could result in changes to current operating processes.

· Robust processes are in place to ensure adherence to accounting, legal, regulatory requirements, and Listing Rules.

· All contracts are reviewed by the Group's legal advisers.

· The Administrator, in its capacity as Group Accountant, and the Company Secretary attend all Board meetings in order to be aware of all announcements that need to be made.

· All compliance issues are raised with the Financial Adviser.

· The Group continues to receive advice from its corporate advisers and has incorporated changes where required.

· The Administrator and Company Secretary continue to attend all Board meetings and advise on Listing Rule requirements in conjunction with the Corporate Broker and Financial Adviser.

 

Loss of REIT status.

· The HMRC REIT regime requirements are monitored by the Asset and Investment Manager, and external advisors including the Company's tax adviser Grant Thornton UK LLP and its sub-administrator Link Alternative Fund Administrators Limited.

· The Group continues to receive advice from external advisers on any anticipated future changes to the REIT regime.

 

10. Environmental and Energy Efficiency Standards

 

POTENTIAL IMPACT

MITIGATION

MOVEMENT IN THE PERIOD ö

The Group's cost base could be impacted, and management time diverted, due to climate changes and associated legislation.

· The Board receives regular updates on environmental, social, governance and potential legislation changes (e.g. the Government Green Finance Strategy July 2019) from its advisers.

· The Group has engaged an environmental consultancy to assist with achieving the Global Real Industry Sustainability Benchmark (GRESB). This will provide a platform from which improved sustainability activities can be built upon.

 

· Additional attention is currently being devoted in this area to ensure the appropriate approach is applied and embedded in Group activities.

Changes to the environment could impact upon the operations of the Group.

· Property acquisitions undergo a rigorous due diligence process, including an environmental assessment.

· The Asset Manager monitors the portfolio for any detrimental environmental impact, by way of frequent inspections of the properties, and the annual insurance review process.

 

· The rigour of the environmental assessments process continues to be reviewed with the aim of enhancing it.

An Energy Performance Rating of E and below may impact the Group's ability to sell or lease an asset.

· The Group continues to review each property to ensure adherence with Energy Performance Rating requirements.

· The energy efficiency of investment acquisitions is fully considered as part of the due diligence process for the acquisition of a property.

· The Asset Manager is continually reviewing the feasibility of enhancing Energy Performance Ratings to exceed the minimum requirement.

 

Changes to the Principal Risks and Uncertainties

 

The Board, via the Audit Committee, has agreed the movement during the period under review to each of the identified principal risks and uncertainties following review of these risks, having considered the characteristics of these and the economic and geo-political factors. Any impact of these risks to the Company's future strategy is considered on an ongoing basis.

 

Extracts of the Report of the Directors

 

Share Capital

 

As at 31 December 2020, the Company's total issued share capital was 431,506,583 Ordinary Shares (2019: 431,506,583).

 

All of the Company's Ordinary Shares are listed on the premium segment of the London Stock Exchange and each Ordinary Share carries one vote.

 

There is only one class of Ordinary Shares in issue for the Company, in adherence to the REIT requirements. The only other shares the Company may issue are particular types of non-voting restricted preference shares, of which none (2019: none ) are currently in issue.

 

Restrictions on Voting Rights

 

The Company does not have any restrictions on Shareholder voting rights.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report and the Group Financial Statements in accordance with applicable law and regulations.

 

Guernsey company law requires the directors to prepare financial statements for each financial year. The Directors are required under the Listing Rules of the Financial Conduct Authority to prepare the group financial statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. 

 

The financial statements of the Group are required by law to give a true and fair view of the state of the Group's affairs at the end of the financial period and of the profit or loss of the Group for that period and are required by international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union to present fairly the financial position and performance of the Group.

 

In preparing each of the Group financial statements, the Directors are required to:

 

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the group and enable them to ensure that the financial statements comply with the requirements of The Companies (Guernsey) Law 2008 and, as regards the Group financial statements, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. 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 responsible for the maintenance and integrity of the corporate and financial information included on Regional REIT's website.

 

Legislation in the Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE CONSOLIDATED ANNUAL REPORT

 

Each of the Directors, whose names and functions are listed within the full Annual Report , confirms that to the best of each person's knowledge:

 

the financial statements, prepared in accordance with international financial reporting standards   adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the Group and the undertakings included in the consolidation taken as a whole;

 

the Strategic Report, including the Asset and Investment Managers' Report, includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

 

· the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Group's position, performance, business model and strategy.

 

This responsibility statement was approved by the Board of Directors on 24 March 2021 and signed on its behalf by:

 

Kevin McGrath

Chairman

24 March 2021

 

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2020

 

 

 

 

Notes

Year ended

31 December

2020

£'000

 

Year ended 

31 December 

2019 

£'000 

Continuing Operations

 

 

 

 

Revenue

 

 

 

 

Rental and property income

5

75,941

 

75,645

Property costs

6

(22,662)

 

(20,681)

Net rental and property income

 

53,279

 

54,964

Administrative and other expenses

7

(11,329)

 

(10,904)

Operating profit before gains and losses on property assets and other investments

 

 

41,950

 

 

44,060

(Loss)/gain on disposal of investment properties

14

(1,073)

 

1,662

Change in fair value of investment properties

14

(54,793)

 

(3,513)

Change in fair value of right of use assets

27

(195)

 

(194)

Operating (loss)/profit

 

(14,111)

 

42,015

Finance income

9

99

 

155

Finance expenses

10

(14,108)

 

(13,880)

Impairment of goodwill

16

(558)

 

(557)

Net movement in fair value of derivative financial instruments

 

26

 

(2,523)

 

 

 

(1,479)

(Loss)/profit before tax

 

(31,201)

 

26,254

Taxation

11

203

 

257

Total comprehensive (loss)/ income for the year

(attributable to owners of the parent Company)

 

 

(30,998)

 

 

26,511

 

 

 

 

 

 

Total comprehensive income arises from continuing operations.

 

(Losses)/earnings per share - basic and diluted

12

(7.2)p

 

6.6p

 

The notes below are an integral part of these consolidated financial statements.

 

Consolidated Statement of Financial Position

As at 31 December 2020

 

 

 

Notes

31 December

2020

£'000

 

31 December 

 2019 

£'000 

Assets

 

 

 

 

Non-current assets

 

 

 

 

Investment properties

14

732,380

 

787,915

Right of use assets

27

16,156

 

16,351

Goodwill

16

-

 

558

Non-current receivables on tenant loan

17

1,011

 

1,156

 

 

749,547

 

805,980

Current assets

 

 

 

 

Trade and other receivables

18

33,690

 

32,158

Cash and cash equivalents

19

67,373

 

37,248

 

 

101,063

 

69,406

 

 

 

 

 

Total assets

 

850,610

 

875,386

 

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

20

(33,809)

 

(22,153)

Deferred income

21

(14,584)

 

(13,301)

Deferred tax liabilities

22

(690)

 

(736)

 

 

(49,083)

 

(36,190)

Non-current liabilities

 

 

 

 

Bank and loan borrowings

23

(310,692)

 

(287,856)

Retail eligible bonds

25

(49,441)

 

(49,286)

Derivative financial instruments

26

(4,339)

 

(1,816)

Lease liabilities

27

(16,473)

 

(16,510)

 

 

(380,945)

 

(355,468)

 

 

 

 

 

Total liabilities

 

(430,028)

 

(391,658)

 

 

 

 

 

Net assets

 

420,582

 

483,728

 

 

 

 

 

Equity

 

 

 

 

Stated capital

28

430,819 

 

430,819 

(Accumulated losses)/retained earnings

 

(10,237)

 

52,909 

 

 

 

 

 

Total equity attributable to owners of the parent Company

420,582

 

483,728 

 

 

 

 

 

 

Net asset value per share - basic and diluted

29

97.5p

 

112.1p

 

The notes below are an integral part of these consolidated financial statements.

 

These consolidated group financial statements were approved by the Board of Directors and authorised for issue on 24 March 2021 and signed on its behalf by:

 

Kevin McGrath,

Chairman

24 March 2021

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2020

 

 

 

 

Attributable to owners of the parent company

 

 

 

 

 

 

Notes

Stated

capital

£'000

 

Retained earnings/ (Accumulated losses)

£'000

 

 

Total

£'000

 

 

 

 

 

 

 

 

Balance at 1 January 2020

 

 

430,819

 

52,909

 

483,728

Total comprehensive loss

 

 

-

 

(30,998)

 

(30,998)

Dividends paid

 

13

-

 

(32,148)

 

(32,148)

 

 

 

 

 

 

 

 

Balance at 31 December 2020

 

 

430,819

 

(10,237)

 

420,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                     

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2019

 

 

 

 

Attributable to owners of the parent company

 

 

 

Notes

Stated

capital

£'000

 

Retained 

earnings 

£'000 

 

 

Total

£'000

 

 

 

 

 

 

 

 

Balance at 1 January 2019

 

 

370,316

 

59,199

 

429,515

Total comprehensive income

 

 

-

 

26,511

 

26,511

Issue of share capital

 

28

62,500

 

-

 

62,500

Share issue costs

 

28

(1,997)

 

-

 

(1,997)

Dividends paid

 

13

-

 

(32,801)

 

(32,801)

 

 

 

 

 

 

 

 

 

Balance at 31 December 2019

 

 

430,819

 

52,909

 

483,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The notes below are an integral part of these consolidated financial statements.

 

Consolidated Statement of Cash Flows

For the year ended 31 December 2020

 

 

 

 

 

Year ended

31 December

2020

£'000

 

Year ended 

31 December 

2019 

£'000 

Cash flows from operating activities

 

 

 

(Loss)/profit for the year before taxation

(31,201)

 

26,254

- Change in fair value of investment properties

54,793

 

3,513

- Change in fair value of financial derivative instruments

2,523

 

1,479

- Loss/(gain) on disposal of investment properties

1,073 

 

(1,662)

- Change in fair value of right of use assets

195 

 

194 

Impairment of goodwill

558

 

557

Finance income

(99)

 

(155)

Finance expenses

14,108

 

13,880

Increase in trade and other receivables

(2,821)

 

(7,881)

Increase/(decrease) in trade and other payables

7,595

 

(12,416)

Increase in deferred income

1,283

 

2,259

 

 

 

 

 

Cash generated from operations

 

48,007

 

26,022

Finance costs

 

(12,515)

 

(12,165)

Taxation received/(paid)

 

174

 

(839)

 

 

 

 

 

Net cash flow generated from operating activities

 

35,666

 

13,018

 

 

 

 

 

Investing activities

 

 

 

 

Purchase of investment properties

 

(53,759)

 

(49,917)

Sale of investment properties

 

53,428

 

24,294

Interest received

 

101

 

163

Acquisition of subsidiaries, net of cash acquired

 

 

(43,943)

 

 

 

 

 

Net cash flow used in investing activities

 

(230)

 

(69,403)

 

 

 

 

 

Financing activities

 

 

 

 

Proceeds from the issue of shares

 

 

62,500

Share issue costs

 

 

(1,997)

Dividends paid

 

(26,672)

 

(32,534)

Zero Dividend Preference Shareholders repaid

 

 

(39,879)

Bank borrowings advanced

 

39,200

 

22,911

Bank borrowings repaid

 

(17,029)

 

(19,398)

Bank borrowing costs paid

 

(192)

 

(2,168)

Bond issue costs paid

 

-

 

(7)

Lease repayments

 

(618)

 

(618)

 

 

 

 

 

Net cash flow used in financing activities

 

(5,311)

 

(11,190)

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

30,125 

 

(67,575)

Cash and cash equivalents at the start of the year

37,248 

 

104,823 

 

 

 

 

 

Cash and cash equivalents at the end of the year

67,373 

 

37,248 

 

 

 

 

 

 

The notes below are an integral part of these consolidated financial statements.

 

Notes to the Consolidated Financial Statements  

For the year ended 31 December 2020

 

1. Corporate Information

The Group's consolidated financial statements for the year ended 31 December 2020 comprise the results of the Co mpany and its subsidiaries (together constituting the "Group") and were approved by the Board and authorised for issue on 24 March   2021.

 

The Company is a company limited by shares incorporated in Guernsey under The Companies (Guernsey) Law, 2008, as amended (the "Law"). The Company's Ordinary Shares are admitted to the Official List of the Financial Conduct Authority ("FCA") and traded on the London Stock Exchange ("LSE").

 

The Company was incorporated on 22 June 2015 and is registered with the Guernsey Financial Services Commission as a Registered Closed-Ended Collective Investment Scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Schemes Rules 2018.

 

The Company did not begin trading until 6 November 2015 when the shares were admitted to trading on the LSE.

 

The nature of the Group's operations and its principal activities are set out in the Strategic Report within the full Annual Report.

 

The address of the registered office is Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey GY2 4LH.

 

2. Basis of preparation

In accordance with Section 244 of The Companies (Guernsey) Law 2008, the Group confirms that the financial information for the year ended 31 December 2020 are derived from the Group's audited financial statements and that these are not statutory accounts and, as such, do not contain all information required to be disclosed in the financial statements prepared in accordance with International Financial Reporting Standards ("IFRS").

 

The statutory accounts for the year ended 31 December 2020 have been audited and approved, but have not yet been filed. 

 

The Group's audited financial statements for the year ended 31 December 2020 received an unqualified audit opinion and the auditor's report contained no statement under section 263(2) or 263(3) of The Companies (Guernsey) Law 2008. 

 

The financial information contained within this preliminary statement was approved and authorised for issue by the Board on 24 March 2021.

 

2.1 Functional and presentation currency

The financial information is presented in Pounds Sterling, which is also the functional currency, and all values are rounded to the nearest thousand (£'000) pound, except where otherwise indicated.

 

2.2 Going concern

The Directors have carefully considered areas of potential financial risk and have reviewed cash flow forecasts, evaluating a number of scenarios which included extreme downside sensitivities in relation to rental cash collection, no property acquisitions, no elective capital expenditure, REIT regime compliance, and no dividends. A range of scenarios of up to 12 months of nil rental cash collection were considered, and taking into account mitigating management actions, the company had adequate resources to continue is operations. Further effects of the COVID-19 outbreak are documented in the going concern and viability statements above and within principal and emerging risks above .

 

No material uncertainties have been detected which would influence the Group's ability to continue as a going concern for a period of at least 12 months from the approval of these financial statements. The Directors have satisfied themselves that the Group has adequate financial resources to continue in operational existence for this period.

 

Accordingly, the Board of Directors continue to adopt the going concern basis in preparing the financial statements.

 

2.3 Business combinations

At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. For an acquisition of a business where an integrated set of activities are acquired in addition to the property, the Group accounts for the acquisition as a business combination under IFRS 3 Business Combinations ("IFRS 3").

 

Where such acquisitions are not judged to be the acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred tax arises.

 

2.4  New standards, amendments and interpretations

New standards, amendments to standards and interpretations which came into effect for accounting periods starting on or after 1 January 2020 and have had an impact on the financial statements are as follows:

 

Amendments to IFRS 3 'Business Combinations' (effective where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020) - makes amendments to clarify the definition of a business to help companies determine whether an acquisition is of a business or a group of assets. The amendments are expected to result in more acquisitions being accounted for as asset acquisitions. As detailed in note 2.3, careful consideration is given to the accounting treatment for each acquisition. Most acquisitions made by the Group are treated as the acquisition of a group of assets, so the amendments to this standard have not had any impact on the financial statements.

 

Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' (effective for annual periods beginning on or after 1 January 2020) - make amendments to clarify the definition of 'material'. The amendments make IFRSs more consistent but are not expected to have a significant impact on the preparation of the financial statements .

 

Amendments to IFRS16 'Leases' (effective from June 2020 onwards) - were issued in response to the COVID-19 pandemic to address accounting treatment for rent concessions granted to lessees as a direct result of the pandemic. The Group has not received any rent concessions for its long leasehold investment properties and therefore accounting treatment has not been affected.

 

2.5 New standards, amendments and interpretations effective for future accounting periods

A number of new standards, amendments to standards and interpretations are effective for periods beginning on or after 1 January 2021 and have not been applied in preparing these financial statements. These are:

 

Interest Rate Benchmark Reform-Phase 2:

Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments; Recognition and Measurement', IFRS 7 'Financial Instruments: Disclosures', IFRS 4 'Insurance Contracts' and IFRS 16 'Leases' (effective for periods beginning on or after 1 January 2021) These amendments address issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative benchmark interest rate.

 

The Group's borrowings with Royal Bank of Scotland and Santander UK will be transitioning from the London Interbank Offer Rate (LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark by 31 December 2021. There is expected to be negligible cost involved in the borrowing facility transition and the respective hedge instrument amendments.

 

The Directors are currently assessing the impact of the changes in accounting standards but as the Group does not apply hedge accounting, it is anticipated that the accounting standard amendments will not have a significant impact on the preparation of the financial statements.

 

Amendments to IAS 1 'Presentation of Financial Statements' (effective for periods beginning on or after 1 January 2023) - clarifies that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period and not expectations of or actual events after the reporting date. The amendments also give clarification to the definition of settlement of a liability. The amendments are not expected to have a significant impact on the preparation of the financial statements.

 

Amendments to IFRS 3 'Business Combinations' (effective for periods beginning on or after 1 January 2022) - gives clarification on the recognition of contingent liabilities at acquisition and clarifies that contingent assets should not be recognised at the acquisition date. The amendments are not expected to have a significant impact on the preparation of the financial statements.

 

3. Significant accounting judgements, estimates and assumptions

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

 

3.1. Critical accounting estimates and assumptions

The principal estimates that may be material to the carrying amount of assets and liabilities are as follows:

 

3.1.1 Valuation of investment property

The fair value of investment property, which has a carrying value at the reporting date of £ 732,380,000 (31 December 2019: £787,915,000), is determined by independent property valuation experts to be the estimated amount for which a property should exchange on the date of the valuation in an arm's length transaction. Properties have been valued on an individual basis. The valuation experts use recognised valuation techniques applying the principles of both IAS 40 and IFRS 13.

 

The value of the properties has been assessed in accordance with the relevant parts of the current RICS Red Book. In particular, we have assessed the fair value as referred to in VPS4 item 7 of the RICS Red Book. Under these provisions, the term "Fair Value" means the definition adopted by the International Accounting Standards Board ("IASB") in IFRS 13, namely "The price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date". Factors reflected include current market conditions, annual rentals, lease lengths and location. The significant methods and assumptions used by the valuers in estimating the fair value of investment property are set out in note 14.

 

In relation to Brexit, the recently completed negotiations with regards to the terms of the UK's exit from the EU has meant that property market remains uncertain. There is some uncertainty concerning the impact of COVID 19 however the independent valuers note the following in their report.

 

 "The pandemic and the measures taken to tackle COVID-19 continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date property markets are mostly functioning again, with transaction volumes and other relevant evidence at levels where an adequate quantum of market evidence exists upon which to base opinions of value. Accordingly, and for the avoidance of doubt, our valuation is not reported as being subject to 'material valuation uncertainty' as defined by VPS 3 and VPGA 10 of the RICS Valuation - Global Standards. "

 

3.1.2 Fair valuation of interest rate derivatives

In accordance with IFRS 13, the Group values its interest rate derivatives at fair value. The fair values are estimated by the respective counterparties with revaluation occurring on a quarterly basis. The counterparties will use a number of assumptions in determining the fair values, including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate. The carrying value of the derivatives at the reporting date was £ 4,339,000 liability (31 December 2019: £1,816,000 liability). The significant methods and assumptions used in estimating the fair value of the interest rate derivatives are set out in note 26.

 

3.1.3 Leases - the Group as lessee

The Group has a number of leases concerning the long-term lease of land associated with its long leasehold investment properties. Under IFRS16, the Group calculates the lease liability at each reporting date and at the inception of each lease and at 1 January 2019 when the standard was first adopted. The liability is calculated using present value of future lease payments using the Group's incremental borrowing rate as the discount rate. At 31 December 2020, there were 13 leases with the range of the period left to run being 46 and 105 years. The Directors have determined that the discount rate to use in the calculation for each lease is 3.5 % being the Group's weighted average cost of debt at the date of transition.

 

3.1.4 Dilapidation income

The Group recognises dilapidation income in the Group's Statement of Comprehensive Income when the right to receive the income arises. In determining accrued dilapidations, the Group has considered historic recovery rates, while also factoring in expected costs associated with recovery.

 

3.2. Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements:

 

3.2.1 Operating lease contracts - the Group as lessor

The Group has acquired investment properties that are subject to commercial property leases with tenants. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms and minimum lease payments, that it retains all of the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

 

3.2.2 Consolidation of entities in which the Group holds less than 50%

Management considered that up until 9 November 2018, the Group had de facto control of View Castle Limited and its 27 subsidiaries (the "View Castle Sub Group") by virtue of the amended and restated Call Option Agreement dated 3 November 2015. Following a restructure of the View Castle Sub Group, the majority of properties held within the View Castle Sub Group were transferred into two new special purpose vehicles ("SPVs") with two additional properties to be transferred into these SPVs at a later date. A new call option was entered into dated 9 November 2018 with View Castle Limited and five of its subsidiaries (the "View Castle Group"). As per the previous amended and restated Call Option Agreement, under this new option the Group may acquire any of the properties held by the View Castle Group for a fixed nominal consideration. Despite having no equity holding, the Group is deemed to have control over the View Castle Group as the Option Agreement means that the Group is exposed to, and has rights to, variable returns from its involvement with the View Castle Group, through its power to control.

 

3.2.3 Acquisitions of subsidiary companies

For each acquisition, the Directors consider whether the acquisition met the definition of the acquisition of a business or the acquisition of a group of assets and liabilities.

 

A business is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Furthermore, a business consists of inputs and processes applied to those inputs that have the ability to create outputs.

 

The companies acquired in the year have comprised portfolios of investment properties and existing leases with multiple tenants over varying periods, with little in the way of processes acquired. It has therefore concluded in each case that the acquisitions did not meet the criteria for the acquisition of a business as outlined above.

 

3.2.4 Recognition of income

Service charges and other similar receipts are included in net rental and property income gross of the related costs as the Directors consider the Group acts as principal in this respect.

 

4. Summary of significant accounting policies

The accounting policies adopted in this report are consistent with those applied in the financial statements for the year ended 31 December 2019 and have been consistently applied for the year ended 31 December 2020.

 

4.1. Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at the date of the Statement of Financial Position.

 

4.2 Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

 

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets and liabilities acquired, and contingent liabilities assumed, in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred.

 

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.

 

For acquisitions of subsidiaries not meeting the definition of a business, the Group allocates the cost between the individual identifiable assets and liabilities in the Group based on their relative fair values at the date of acquisition. Such transactions or events do not give rise to goodwill.

 

Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated in full. When necessary, amounts reported by subsidiaries have been adjusted to conform to the Group's accounting policies.

 

The excess of the consideration transferred, and the amount of any non-controlling interest in the acquiree over the fair value of the identifiable net assets acquired, is recognised as goodwill.

 

4.2.1. Disposal of subsidiaries

When the Group ceases to have control over an entity, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in the carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

 

4.3. Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined that its chief operating decision-maker is the Board of Directors.

 

After a review of the information provided for management purposes, it was determined that the Group has one operating segment and therefore segmental information is not disclosed in these consolidated financial statements.

 

4.4. Investment property

Investment property comprises freehold or leasehold properties that are held to earn rentals or for capital appreciation, or both, rather than for sale in the ordinary course of business or for use in production or administrative functions.

 

Investment property is recognised, usually, on legal completion, when the risks and rewards of ownership have been transferred and, is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and other costs incurred in order to bring the property to the condition necessary for it to be capable of being utilised in the manner intended. Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair value are included in the Group's Consolidated Statement of Comprehensive Income in the period in which they arise under IAS 40, 'Investment Property'.

 

Additions to investment property include costs of a capital nature only. Expenditure is classified as capital when it results in identifiable future economic benefits, which are expected to accrue to the Group. All other property expenditure is charged in the Group's Consolidated Statement of Comprehensive Income as incurred.

 

Investment properties cease to be recognised when they have been disposed of or withdrawn permanently from use and no future economic benefit is expected. The difference between the net disposal proceeds and the carrying amount of the asset (being the fair value at the start of the financial year) would result in either gains or losses at the retirement or disposal of investment property. Any gains or losses are recognised in the Group's Consolidated Statement of Comprehensive Income in the period of retirement or disposal.

 

4.5. Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group's interest in the fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree plus the amount of the non-controlling interest of the acquiree.

 

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the subsidiaries, or groups of subsidiaries, that is expected to benefit from the synergies of the combination. Each subsidiary or group of subsidiaries to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

 

Goodwill impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of the value in use and the fair value less the costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.

 

4.6. Derivative financial instruments

Derivative financial instruments, comprising interest rate caps and swaps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Group would receive or pay to sell or transfer the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the lender and its counterparties. The gain or loss at each fair value remeasurement date is recognised in the Group's Consolidated Statement of Comprehensive Income.

 

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole.

 

4.7 Financial assets

The Group classifies its financial assets as at fair value through profit or loss or at amortised cost, depending on the purpose for which the asset was acquired. Currently the Group does not have any financial assets which it has classified at fair value through profit or loss.

 

Assets held at amortised cost arise principally from the provision of goods and services (e.g. trade receivables), but also incorporate other financial assets where the objective is to hold these assets in order to collect contractual cash flows which comprise the payment of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost being the effective interest rate method, less provision for impairment.

 

The Group's financial assets comprise 'trade and other receivables', 'tenant loan' and 'cash and cash equivalents'.

 

The tenant loan relates to a loan made to a tenant which is subject to interest. The amount receivable has been recognised at amortised cost using the effective interest method.

 

4.8. Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently carried at amortised cost less provision for impairment. Where the time value of money is material, receivables are carried at amortised cost using the effective interest method. Impairment provisions are recognised based on the expected credit loss model detailed within IFRS 9.

 

The Group recognises a loss allowance for expected credit losses on trade receivables. The loss allowance is based on lifetime expected credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition. The expected credit losses on these financial assets are estimated based on the Group's historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date. Impaired balances are reported net, however, impairment provisions are recorded within a separate provision account with the loss being recognised within administration costs within the Consolidated Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

Lease premiums and other lease incentives provided to tenants are recognised as an asset and amortised over the period from date of lease commencement to termination date.

 

4.9. Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at banks with original maturities of three months or less. Cash also includes amounts held in restricted accounts that are unavailable for everyday use.

 

4.10. Trade payables

Trade payables are initially recognised at their fair value being at their invoiced value inclusive of any VAT that may be applicable. Payables are subsequently measured at amortised cost using the effective interest method.

 

4.11. Bank and other borrowings

All bank and other borrowings (comprising bank loans and retail eligible bonds) are initially recognised at cost net of attributable transaction costs. Any attributable transaction costs relating to the issue of the bank borrowings are amortised through the Group's Statement of Comprehensive Income over the life of the debt instrument on a straight-line basis. After initial recognition, all bank and other borrowings are measured at amortised cost, using the effective interest method.

 

Bank and other borrowings are derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in Group's Consolidated Statement of Comprehensive Income.

 

4.12 Zero Dividend Preference Shares

Zero Dividend Preference Shares ("ZDP Shares") are recognised as liabilities in the Group's Consolidated Statement of Financial Position in accordance with IAS 32 Financial Instruments: Presentation. After initial recognition, these liabilities are measured at amortised cost, which represents the value the liability is recognised at initial recognition, plus the accrued interest entitlement to the date of these financial statements.

 

4.13 Dividends payable to Shareholders

Equity dividends are recognised and accrued from the date declared and when they are no longer at the discretion of the Company.

 

4.14 Rental and property income

Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease terms and is included in gross rental and property income in the Group's Consolidated Statement of Comprehensive Income. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the lease asset and are recognised as an expense over the lease term on the same basis as the lease income.

 

For leases which contain fixed or minimum uplifts, the rental income arising from such uplifts is recognised on a straight-line basis over the lease term.

 

Tenant lease incentives are recognised as a reduction of rental revenue on a straight-line basis over the term of the lease. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.

 

Surrender premiums received from tenants to terminate leases or surrender premises are recognised in the Group's Statement of Comprehensive Income when the right to receive them arises.

 

Dilapidation income is recognised in the Group's Statement of Comprehensive Income when the right to receive it arises.

 

When the Group is acting as an agent, the commission, rather than gross income, is recorded as revenue.

 

Income arising from expenses recharged to tenants is recognised in the year in which the compensation becomes receivable. Service charges and other similar receipts are included in net rental and property income gross of the related costs as the Directors consider the Group acts as principal in this respect.

 

4.15 Property costs

Non recoverable property costs contain service and management charges related to empty properties.

 

Service and management charges are recognised in the accounting period in which the services are rendered.

 

Recoverable property costs contain service charges and other similar costs which are recognised in the accounting period in which the services are rendered.

 

4.16. Interest income

Interest income is recognised as interest accrued on cash balances held by the Group. Interest charged to a tenant on any overdue rental income is also recognised within interest income.

 

4.17. Dividend income

Dividend income is recognised when the right to receive payment is established.

 

4.18. Finance costs

Interest costs are expensed in the period in which they occur. Arrangement fees that a Group entity incurs in connection with bank and other borrowings are amortised over the term of the loan.

 

4.19. Taxation

As the Company is managed and controlled in the UK, it is considered to be tax resident in the UK.

 

The tax currently payable is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current and deferred tax is calculated using tax rates that have been enacted or substantively enacted at the date of the Statement of Financial Position.

 

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group's UK property rental business from UK Corporation Tax. Gains on UK properties are also exempt from tax, provided that they are not held for trading or sold in the three years after completion of development. The Group is otherwise subject to UK Corporation Tax.

 

There are a small number of entities within the Group which fall outside the REIT rules and are subject to UK taxes on profits and property gains.

 

4.20 Deferred tax

Deferred tax is provided in full using the liability method on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates (and tax laws) enacted or substantively enacted at the date of the Statement of Financial Position. A deferred tax asset is recognised only to the extent that it is probable that future profits will be available for offset.

 

The deferred tax liability in relation to investment properties that is measured at fair value is determined assuming that the property will be recovered entirely through sale.

 

Deferred tax has been recognised on the unrealised property valuation gains of properties owned by Group entities which fall outside of the REIT tax rules.

 

The current rate of UK Corporation Tax is 19%.

 

4.21. Stated capital

Stated capital represents the consideration received by the Company for the issue of Ordinary Shares. Ordinary Shares are classed as equity.

 

4.22. Share-based payments

The Group has entered into Performance Fee arrangements with the Asset Manager and Investment Manager which depend on the growth in the net asset value of the Group exceeding a hurdle rate of return over a performance period. The fee will be partly settled in cash and partly in equity and the equity portion is therefore a share-based payment arrangement. The fair value of the obligation is measured at each reporting period, and the cost recognised as an expense. The part of the obligation to be settled in shares is credited to equity reserves. If circumstances change and the fee is no longer settled by the issue of shares, then the amounts previously credited to equity reserves are reversed.

 

4.23 Leased assets

The Group has a number of leases concerning the long-term lease of land associated with its long leasehold investment properties. These leased assets are capitalised as "right of use assets" by recognising the present value of the lease payments as an asset and a financial liability representing the obligation to make future lease payments.

 

Right of use assets are valued at fair value and the change in fair value is recognised in the Consolidated Statement of Comprehensive Income.

 

The associated financial liability is valued at the present value of future lease payments using the Group's incremental borrowing rate. The value of the financial liability is revalued at each reporting date. Lease payments reduce the financial liability and interest on the financial liability is recognised in finance costs.

 

5. Rental and property income

 

 

 

 

 

Year ended

31 December

2020

£'000

 

Year ended

31 December

2019

£'000

 

 

 

 

 

 

Rental income - freehold property

55,382

 

53,404

 

Rental income - long leasehold property

6,695

 

10,989

 

Recoverable service charge income and other similar items

13,864

 

11,252

 

 

 

 

 

 

 

Total

75,941

 

75,645

 

 

 

 

 

               

6. Property costs

 

 

 

 

 

Year ended

31 December 2020

£'000

 

Year ended

31 December

2019

£'000

 

 

 

 

Other property expenses and irrecoverable costs

8,798

 

9,429

Recoverable service charge expenditure and other similar costs

13,864

 

11,252

 

 

 

 

 

Total

22,662

 

20,681

 

Property costs represent direct operating expenses which arise on investment properties that generate rental income.

 

7. Administrative and other expenses

 

 

 

 

 

Year ended

31 December

2020

£'000

 

Year ended

31 December

2019

£'000

 

 

 

 

Investment management fees

2,577

 

2,356

Property management fees

2,266

 

2,280

Asset management fees

2,579

 

2,356

Directors' remuneration (see note 8)

255

 

255

Administration fees

634

 

746

Legal and professional fees

1,674

 

2,107

Marketing and promotion

69

 

96

Other administrative costs (including bad debts)

1,257

 

657

Bank charges

18

 

51

 

 

 

 

 

 

 

 

 

Total

11,329

 

10,904

 

 

 

 

 

 

Services provided by the Company's Auditor and its associates

The Group has obtained the following services from the Company's Auditor and its associates:

 

 

 

Year ended

31 December

2020

£'000

 

Year ended

31 December

2019

£'000

 

 

 

 

Fees payable to the Company's auditor for the audit of the Company's annual accounts*

 

105

 

 

83

Fees payable to the group's auditor and its associates for the audit of the Company's subsidiaries

 

105

 

 

114

Total fees payable for audit services

210

 

197

Fees payable to the group's auditor and its associates for other services:

 

 

 

Audit-related services

26

 

26

Corporate finance services

-

 

80

 

 

 

 

 

Total fees payable to the group's auditor and its associates

236

 

303

 

*The current year charge includes fees of £20,000 in respect of additional audit work required for the 2019 audit due to the COVID-19 pandemic.

 

8. Directors' remuneration

Key management comprises the Directors of the Company. A summary of the Directors' emoluments is set out in the Directors' Remuneration Report.

 

 

 

 

 

Year ended

31 December

2020

£'000

 

 

Year ended

31 December

2019

£'000

 

 

 

 

Directors' fees

231

 

228

Employers National Insurance contributions

24

 

27

 

 

 

 

 

Total

255

 

255

 

 

 

 

 

9. Finance income

 

 

 

 

Year ended

31 December

2020

£'000

 

 

Year ended

31 December

2019

£'000

 

 

 

 

Interest income

99

 

155

 

 

 

 

 

Total

99

 

155

 

 

 

 

 

 

10. Finance expenses

 

 

 

 

 

Year ended

31 December

2020

£'000

 

 

Year ended

31 December

2019

£'000

 

 

 

 

Interest payable on bank borrowings

10,257

 

9,904

Accrued capital entitlement on ZDP Shares

-

 

60

Amortisation of loan arrangement fees

857

 

912

Amortisation of ZDP Share acquisition costs

-

 

3

Bond interest

2,250

 

2,250

Bond issue costs amortised

155

 

157

Bond expenses

8

 

11

Lease interest

581

 

583

 

 

 

 

 

Total

14,108

 

13,880


11. Taxation

 

 

Year ended

31 December

2020

£'000

 

 

Year ended 

31 December 

2019 

£'000 

 

 

 

 

Corporation tax credit

(157)

 

(359)

(Decrease)/increase in deferred tax creditor

(46)

 

102 

 

 

 

Total

(203)

 

(257)

 

 

 

The current tax charge is reduced by the UK REIT tax exemptions. The tax charge for the year can be reconciled to the (loss)/profit in the Statement of Comprehensive Income as follows:

 

 

Year ended

31 December

2020

£'000

 

Year ended 

31 December 

2019 

£'000 

(Loss)/profit before taxation

(31,201)

 

26,254 

 

 

 

UK Corporation Tax rate

19%

 

  19%

Theoretical tax at UK Corporation Tax rate

(5,928)

 

4,988 

Effects of:

 

 

 

Revaluation of investment property

10,410

 

668 

Permanent differences

(363)

 

(556) 

Profits from the tax-exempt business

(4,276)

 

(5,459) 

Deferred tax movement

(46)

 

102 

Total

(203)

 

 (257) 

 

Permanent differences are the differences between an entity's taxable profits and its results as stated in the financial statements. These arise because certain types of income and expenditure are non-taxable or disallowable, or because certain tax charges or allowances have no corresponding amount in the financial statements.

 

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group's UK property rental business from corporation tax. Gains on UK properties are also exempt from tax, provided they are not held for trading or sold in the three years after completion of development. The Group is otherwise subject to UK corporation tax and UK income tax.

 

As a REIT, Regional REIT Ltd is required to pay PIDs equal to at least 90% of the Group's exempted net income. To retain UK REIT status, there are a number of conditions to be met in respect of the principal company of the Group, the Group's qualifying activity and its balance of business. The Group continues to meet these conditions.

 

UK corporation tax and UK income tax arise on entities which form part of the Group consolidated accounts but do not form part of the REIT group.

 

Due to the Group's REIT status and its intention to continue meeting the conditions required to obtain approval in the foreseeable future, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments held by entities within the REIT group.

 

No deferred tax asset has been recognised in respect of losses carried forward due to the unpredictability of future taxable profits.

 

12. Earnings per share

Earnings per share amounts are calculated by dividing (losses)/profits for the year attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the year.

 

The calculation of basic and diluted earnings per share is based on the following:

 

 

 

 

 

Year ended

31 December

2020

£'000

 

Year ended

31 December

2019

£'000

Calculation of earnings per share

 

 

 

Net (loss)/profit attributable to Ordinary Shareholders

(30,998)

 

26,511

Adjustments to remove:

 

 

 

Changes in value of investment properties

54,793

 

3,513

Changes in fair value of interest rate derivatives and financial assets

2,523

 

1,479

Loss/(gain) on disposal of investment property

1,073

 

(1,662)

Impairment of goodwill

558

 

557

Deferred tax (credit)/charge

(46)

 

102

Close out costs on borrowings and derivatives

-

 

487

 

 

 

 

 

EPRA net profit attributable to Ordinary Shareholders

27,903

 

30,987

 

Add performance fee

-

 

-

 

 

 

 

Company specific adjusted earnings figure

27,903

 

30,987

 

 

 

 

Weighted average number of Ordinary Shares

431,506,583

 

398,867,828

(Loss)/earnings per share - basic and diluted

(7.2)p

 

6.6p

EPRA earnings per share - basic and diluted

6.5p

 

7.8p

Company specific adjusted earnings per share - basic and diluted

6.5p

 

7.8p

 

 

 

 

 

 

 

13. Dividends

 

 

 

 

 

Year ended

31 December

2020

£'000

 

 

Year ended 

31 December 

2019 

£'000 

 

 

 

 

Dividend of 2.55 (2019: 2.50) pence per Ordinary Share

for the period 1 October 2019 - 31 December 2019

 

11,004

 

 

9,321

Dividend of 1.90 (2019: 1.90) pence per Ordinary Share

for the period 1 January 2020- 31 March 2020

 

8,198

 

 

7,084

Dividend of 1.50 (2019: 1.90) pence per Ordinary Share

for the period 1 April 2020 - 30 June 2020

 

6,473

 

 

8,198

Dividend of 1.50 (2019: 1.90) pence per Ordinary Share

for the period 1 July 2020 - 30 September 2020

 

6,473

 

 

8,198

 

 

 

 

 

 

 

32,148

 

32,801

 

 

 

 

 

 

On 27 February 2020, the Company announced a dividend of 2.55 pence per share in respect of the period 1 October 2019 to 31 December 2019. The dividend payment was made on 9 April 2020 to Shareholders on the register as at 6 March 2020.

 

On 21 May 2020, the Company announced a dividend of 1.90 pence per share in respect of the period 1 January 2020 to 31 March 2020. The dividend payment was made on 17 July 2020 to Shareholders on the register as at 5 June 2020.

 

On 26 August 2020, the Company announced a dividend of 1.50 pence per share in respect of the period 1 April 2020 to 30 June 2020. The dividend payment was made on 16 October 2020 to Shareholders on the register as at 4 September 2020.

 

On 12 November 2020, the Company announced a dividend of 1.50 pence per share in respect of the period 1 July 2020 to 30 September 2020. The dividend payment was made on 8 January 2021 to Shareholders on the register as at 20 November 2020.

 

On 25 February 2021, the Company announced a dividend of 1.50 pence per share in respect of the period 1 October 2020 to 31 December 2020. The dividend will be paid on 9 April 2021 to Shareholders on the register as at 5 March 2021. The financial statements do not reflect this dividend.

 

The Board intends to pursue a progressive dividend policy and continue to pay quarterly dividends. However, in view of ongoing circumstances, the Company reserves the right to review future dividend payments.

 

14. Investment properties

In accordance with International Accounting Standard, IAS 40, 'Investment Property', investment property has been independently valued at fair value by Cushman & Wakefield Chartered Surveyors, an accredited independent valuer with recognised and relevant professional qualifications and with recent experience in the locations and categories of the investment properties being valued. The valuations have been prepared in accordance with the Red Book and incorporate the recommendations of the International Valuation Standards Committee which are consistent with the principles set out in IFRS 13.

 

In relation to Brexit, the recently completed negotiations with regards to the terms of the UK's exit from the EU has meant that the property market remains uncertain. There is some uncertainty concerning the impact of COVID 19 however the independent valuers note the following in their report.

 

 "The pandemic and the measures taken to tackle COVID-19 continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date property markets are mostly functioning again, with transaction volumes and other relevant evidence at levels where an adequate quantum of market evidence exists upon which to base opinions of value. Accordingly, and for the avoidance of doubt, our valuation is not reported as being subject to 'material valuation uncertainty' as defined by VPS 3 and VPGA 10 of the RICS Valuation - Global Standards. "

 

The valuations are the ultimate responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the Board.

 

All corporate acquisitions during the year have been treated as properties purchased rather than business combinations.

 

Group

 

Movement in investment properties for the year ended 31 December 2020

 

 

Freehold Property

£'000

 

Long Leasehold Property

£'000

 

 

 

Total

£'000

 

 

 

 

 

 

 

Valuation at 1 January 2020

 

697,908

 

90,007

 

787,915

Property additions - acquisitions

 

44,956

 

-

 

44,956

Property additions - subsequent expenditure

 

8,446

 

357

 

8,803

Property disposals

 

(47,035)

 

(6,393)

 

(53,428)

(Loss)/gain on the disposal of investment properties

(1,128)

 

55

 

(1,073)

Change in fair value during the year

 

(43,715)

 

(11,078)

 

(54,793)

 

 

 

 

 

 

 

 

 

Valuation at 31 December 2020

 

659,432

 

72,948

 

732,380

 

Movement in investment properties for the year ended 31 December 2019

 

 

 

 

 

 

 

Valuation at 1 January 2019

 

625,020

 

93,355

 

718,375

Property additions- acquisitions

 

89,920

 

-

 

89,920

Property additions - subsequent expenditure

 

5,527

 

238

 

5,765

Property disposals

 

(24,003)

 

(291)

 

(24,294)

Gain/(loss) on the disposal of investment properties

 

1,679

 

(17)

 

1,662

Change in fair value during the period

 

(235)

 

(3,278)

 

(3,513)

 

 

 

 

 

 

 

Valuation at 31 December 2019

 

697,908

 

90,007

 

787,915

 

The net book value of properties disposed of during the year amounted to £54,501,000 (2019: £22,623,000).

 

The historic cost of the properties is £ 759,705,000   (31 December 2019: £751,638,000).

 

Bank borrowings are secured by charges over investment properties held by certain asset-holding subsidiaries. The banks also hold charges over the shares of certain subsidiaries and any intermediary holding companies of those subsidiaries. The value of investment properties secured at 31 December 2020 was £705,130,000 (31 December 2019: £748,715,000).

 

The following table provides the fair value measurement hierarchy for investment property:

 

 

 

 

 

Date of valuation:

 

 

 

Total

£'000

 

Quoted active prices

(level 1)

£'000

Significant observable inputs

(level 2)

£'000

Significant unobservable inputs

 (level 3)

£'000

 

 

 

 

 

31 December 2020

732,380

-

-

732,380

 

 

 

 

 

 

 

 

 

 

31 December 2019

787,915

-

-

787,915

 

 

 

 

 

 

The hierarchy levels are defined in note 31 .

 

It has been determined that the entire investment properties portfolio should be classified under the level 3 category. The table below shows the movement in the year on the level 3 category:

 

 

 

Year ended

31 December

2020

£'000

 

 

Year ended

31 December

2019

£'000

Balance at the start of the year

 

787,915

 

718,375

Additions

 

53,759

 

95,685

Disposals

 

(53,428)

 

(24,294)

(Loss)/gain on the disposal of investment properties

(1,073)

 

1,662

Change in fair value during the year

 

(54,793)

 

(3,513)

 

 

 

 

 

Balance at the end of the year

 

732,380

 

787,915 

 

 

 

 

 

The determination of the fair value of the investment properties held by each consolidated subsidiary requires the use of estimates such as future cash flows from investment properties, which take into consideration lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, any environmental matters and the overall repair and condition of the property, and discount rates applicable to those assets. Future revenue streams comprise contracted rent (passing rent) and estimated rental value after the contract period. In calculating ERV, the potential impact of future lease incentives to be granted to secure new contracts is taken into consideration. All these estimates are based on local market conditions existing at the reporting date.

 

As at 31 December 2020, the estimated fair value of each property has been primarily derived using comparable recent market transactions on arm's length terms and, assessed in accordance with the relevant parts of the RICS Valuation - Global Standards and the RICS Valuation UK National Supplement.

 

Techniques used for valuing investment properties

The following descriptions and definitions relate to valuation techniques and key observable inputs made in determining the fair values: -

 

Valuation technique: market comparable method

Under the market comparable method (or market approach), a property fair value is estimated based on comparable transactions in the market.

 

Observable input: market rental

The rent at which space could be let in the market conditions prevailing at the date of valuation range: £ 9,000- £3,092,291 per annum (2019: £ 6,000 - £ 3,092,291 per annum).

 

Observable input: rental growth

The estimated average increase in rent is based on both market estimations and contractual agreements.

 

Observable input: net initial yield

The initial net income from a property at the date of purchase, expressed as a percentage of the gross purchase price including the costs of purchase range: 0.00%- 25.64 % (2019: 0.00%-28.70%).

 

Unobservable inputs:

The significant unobservable inputs (level 3) are sensitive to changes in the estimated future cash flows from investment properties such as increases and decreases in contracted rents, operating expenses and capital expenses, plus transactional activity in the real estate market.

 

As set out within the significant accounting estimates and judgements, the Group's property portfolio valuation is open to judgement and is inherently subjective by nature, and actual values can only be determined in a sales transaction.

 

15. Investment in subsidiaries

List of subsidiaries which are 100% owned and controlled by the Group

 

Country of incorporation

Ownership

%

 

 

 

Blythswood House LLP (in liquidation)

United Kingdom

100%

Regional Commercial MIDCO Ltd

Jersey

100%

RR Aspect Court Ltd

Jersey

100%

RR Bristol Ltd

Jersey

100%

RR Hounds Gate Ltd

Jersey

100%

RR Rainbow (Aylesbury) Ltd

Jersey

100%

RR Rainbow (North) Ltd

Jersey

100%

RR Rainbow (South) Ltd

Jersey

100%

RR Range Ltd

Jersey

100%

RR Sea Dundee Ltd

United Kingdom

100%

RR Sea Hanover Street Ltd

United Kingdom

100%

RR Sea Lamont I Ltd

Jersey

100%

RR Sea Lamont II Ltd

Jersey

100%

RR Sea Lamont III Ltd

Jersey

100%

RR Sea St. Helens Ltd

United Kingdom

100%

RR Sea Stafford Ltd

United Kingdom

100%

RR Sea Strand Ltd

United Kingdom

100%

RR Sea TAPP Ltd

Guernsey

100%

RR Sea TOPP Bletchley Ltd

Guernsey

100%

RR Sea TOPP I Ltd

Guernsey

100%

RR UK (Central) Ltd

Jersey

100%

RR UK (Cheshunt) Ltd

Jersey

100%

RR UK (South) Ltd

Jersey

100%

RR UK (Port Solent) Ltd

Jersey

100%

RR Wing Portfolio Ltd

Jersey

100%

Smallbrook Queensway Limited  

Jersey

100%

Quay West Estate Company Limited 

United Kingdom

100%

Tay Properties Ltd

Jersey

100%

TCP Arbos Ltd

Jersey

100%

TCP Channel Ltd

Jersey

100%

Tosca Chandlers Ford Ltd

Jersey

100%

Tosca Garnet Ltd

Jersey

100%

Tosca Glasgow II Ltd

United Kingdom

100%

Tosca Midlands Ltd

Jersey

100%

Tosca North East Ltd

Jersey

100%

Tosca North West Ltd

Jersey

100%

Tosca Scotland Ltd

Jersey

100%

RR Star Ltd

Jersey

100%

Tosca South West Ltd

Jersey

100%

Tosca Swansea Ltd

Jersey

100%

Tosca Thorpe Park Ltd

Jersey

100%

Tosca UK CP II Ltd

Jersey

100%

Tosca UK CP Ltd

Jersey

100%

Tosca Victory House Ltd

Jersey

100%

Tosca Winsford Ltd

Jersey

100%

Toscafund Bennett House Ltd

Jersey

100%

Toscafund Bishopgate Street Ltd

Jersey

100%

Toscafund Blythswood Ltd

Jersey

100%

Toscafund Brand Street Ltd

Jersey

100%

Toscafund Chancellor Court Ltd

Jersey

100%

Toscafund Crompton Way Ltd

Jersey

100%

RR Falcon Ltd

Jersey

100%

Toscafund Glasgow Ltd

Jersey

100%

Toscafund Harvest Ltd

Jersey

100%

Toscafund Milburn House Ltd

Jersey

100%

Toscafund Minton Place Ltd

Jersey

100%

Toscafund Newstead Court Ltd

Jersey

100%

Toscafund Portland Street Ltd

Jersey

100%

Toscafund St Georges House Ltd

Jersey

100%

Toscafund St James Court Ltd

Jersey

100%

Toscafund Strathclyde BP Ltd

Jersey

100%

Toscafund Wallington Ltd

Jersey

100%

Toscafund Welton Road Ltd

Jersey

100%

Toscafund Westminster House Ltd

Jersey

100%

Toscafund Sheldon Court Ltd

Jersey

100%

RR Skylar Ltd

Jersey

100%

 

All of the above entities have been included in the Group's consolidated financial statements.

 

By virtue of an Amended and Restated Call Option Agreement dated 3 November 2015, the Directors consider that the Group has control of View Castle Limited and its subsidiaries (the "View Castle Group").

 

Under this option, the Group has the ability to acquire any of the properties held by the View Castle Group by issuing an option notice for a nominal consideration of £1. The recipient of the option notice will be obliged to convey its title within one month after receipt of the option notice.

 

Despite having no equity holding, the Group controls the View Castle Group as the option agreement has the effect that the Group is exposed to, and has rights to, variable returns from its involvement with the View Castle Group through its power to control.

 

The companies which make up the View Castle Group are as follows:

 

List of subsidiaries that are controlled by the Group:

 

 

Country of incorporation

Effective

Ownership

%

 

 

 

Castlestream Ltd

United Kingdom

100%

Caststop Ltd (in liquidation)

United Kingdom

100%

Credential (Baillieston) Ltd (in liquidation)

United Kingdom

100%

Credential (Greenock) Ltd

United Kingdom

100%

Credential (Wardpark North) Ltd

United Kingdom

100%

Credential (Wardpark South) Ltd (in liquidation)

United Kingdom

100%

Credential Bath Street Ltd (in liquidation)

United Kingdom

100%

Credential Charring Cross Ltd (in liquidation)

United Kingdom

100%

Credential Estates Ltd

United Kingdom

100%

View Castle Ltd

United Kingdom

100%

Credential Residential Finance Ltd (in liquidation)

United Kingdom

100%

Credential Tay House Ltd (in liquidation)

United Kingdom

100%

Hamiltonhill Estates Ltd (in liquidation)

United Kingdom

100%

Lilybank Church Ltd (in liquidation)

United Kingdom

100%

Lilybank Terrace Ltd (in liquidation)

United Kingdom

100%

Old Mill Studios Ltd (in liquidation)

United Kingdom

100%

Old Rutherglen Road Ltd

United Kingdom

100%

Rocket Unit Trust

Jersey

100%

Squeeze Newco (Elmbank) Ltd (in liquidation)

United Kingdom

100%

Squeeze Newco 2 Ltd

United Kingdom

100%

The Legal Services Centre Ltd

United Kingdom

100%

View Castle (Properties) Ltd

United Kingdom

100%

View Castle (Milton Keynes) Ltd

United Kingdom

100%

 

All of the above entities have been included in the Group's consolidated financial statements up to 31 December 2020.

 

Business Combinations

There have been no new business combinations entered into in the financial year.

 

16. Goodwill

 

 

 

31 December

2020

£'000

 

31 December 

2019 

£'000 

Group

 

 

 

At start of year

558

 

1,115

Impairment

(558)

 

(557)

 

 

 

 

At end of year

-

 

558

 

 

 

 

 

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured at fair value is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the Group's Statement of Comprehensive Income.

 

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed. As at 31 December 2020 the goodwill has been fully impaired to a nil value.

 

17. Non-current receivables

Non-current receivables on tenant loans

 

 

31 December

2020

£'000

 

31 December

2019

£'000

 

 

 

 

At start of year

1,348

 

1,926

Amounts repaid in the year

(145)

 

(578)

 

 

 

 

At end of year

1,203

 

1,348

 

 

 

 

 

           

 

Asset due within 1 year (note 18)

192

 

  192

Asset due after 1 year

1,011

 

1,156

 

 

 

 

 

1,203

 

1,348

 

 

 

 

 

During 2016, the Group entered into a loan agreement with a tenant for £1,926,000. The loan is subject to interest of 4% above the base rate of the Bank of Scotland on late payments and is repayable in instalments over ten years.

 

18. Trade and other receivables

 

 

 

31 December

2020

£'000

 

31 December

2019

£'000

 

 

 

 

Gross amount receivable from tenants

11,768

 

8,206

Less provision for impairment

(1,458)

 

(891)

 

 

 

 

Net amount receivable from tenants

10,310

 

7,315

Current receivables - tenant loans (note 17 )

192

 

192

Value added tax

-

 

1,415

Income tax

52

 

70

Other receivables

1,458

 

6,385

Prepayments

21,678

 

16,781

 

 

 

 

 

33,690

 

32,158

 

 

 

 

 

           

The maximum exposure to credit risk at the reporting date is the carrying value of the amounts disclosed above. The Group does not hold any collateral as security.

 

The aged analysis of trade receivables that are past due but not impaired was as follows:

 

 

 

 

31 December

2020

£'000

 

31 December

 2019

£'000

 

 

 

 

< 30 days

6,000

 

4,369

30-60 days

915

 

1,055

> 60 days

4,853

 

2,782

 

 

 

 

 

11,768

 

8,206

Less provision for impairment

(1,458)

 

(891)

 

 

 

 

 

10,310

 

7,315

 

 

 

 

The Directors consider the fair value of receivables equals their carrying amount.

 

The table above shows the aged analysis of trade receivables included in the table above which are past due but not impaired. These relate to tenants for whom there is no recent history of default.

 

Provision for impairment of trade receivables movement as follows:

 

 

 

31 December

2020

£'000

 

31 December

2019

£'000

 

 

 

 

At start of year

891

 

1,115

Provision for impairment in the year

1,787

 

562

Receivables written off as uncollectable

(719)

 

(537)

Unused provision reversed

(501)

 

(249)

 

 

 

 

At end of year

1,458

 

891

 

 

 

 

 

           

 

Other categories within trade and other receivables do not include impaired assets.

 

19. Cash and cash equivalents

 

 

 

31 December

2020

£'000

 

31 December

2019

£'000

Group

 

 

 

Cash held at bank

54,958

 

34,731

Restricted cash held at bank

12,415

 

2,517

 

 

 

 

 

At end of year

67,373

 

37,248

 

 

 

 

Restricted cash balances of the Group comprise:

· £ 10,752,000 (2019: £124,000) of funds held in blocked bank accounts which are controlled by the Group's lenders and are released to free cash once certain loan conditions are met. The restricted funds arose on net proceeds from investment property disposals and were released after the year end.

· £ 1,663,000 (2019: £2,312,000) of funds which represent tenants' rental deposits.

· £ nil (2019: £81,000) is held in other locked accounts.

 

All restricted cash balances will be available before 31 March 2021.

 

In addition, £7,462,000 (2019 £4,225,000) of cash funds represent service charge income received from tenants for settlement of future service charge expenditure. These amounts are not analysed as restricted balances.

 

20. Trade and other payables

 

 

 

31 December

2020

£'000

 

31 December

2019

£'000

 

 

 

 

Withholding tax due on dividends paid

572

 

1,569

Dividends announced but not paid

6,473

 

-

Trade payables

2,262

 

3,650

Other payables

11,205

 

8,544

Value added tax

3,662

 

-

Accruals

9,635

 

8,390

 

 

 

 

At end of year

33,809

 

22,153

 

 

 

 

 

           

Other payables principally include rent deposits held and service charge costs.

 

21. Deferred income

Deferred rental income represents rent received in advance from tenants.

 

22. Deferred tax liabilities

 

 

 

31 December

2020

£'000

 

31 December

2019

£'000

 

 

 

 

 

 

Deferred tax

690

 

736

 

 

 

 

 

 

 

690

 

736

 

 

 

 

 

 

The movement on deferred tax liability is shown below:

 

 

 

At start of year

736

 

634

Deferred tax on the valuation of investment properties

(46)

 

102

 

 

 

 

At end of year

690

 

736

 

 

 

 

 

23. Bank and loan borrowings

Bank borrowings are secured by charges over investment properties held by certain asset-holding subsidiaries. The banks also hold charges over the shares of certain subsidiaries and any intermediary holding companies of those subsidiaries. Any associated fees in arranging the bank borrowings unamortised as at the year end are offset against amounts drawn on the facilities as shown in the table below:

 

 

 

 

31 December

2020

£'000

 

31 December 

 2019 

£'000 

 

 

 

 

Bank borrowings drawn at start of year

294,000

 

290,487

Bank borrowings drawn

39,200

 

22,911

Bank borrowings repaid

(17,029)

 

(19,398)

 

 

 

 

Bank borrowings drawn at end of year

316,171

 

294,000

Less: unamortised costs at start of year

(6,144)

 

(4,888)

Less: loan issue costs incurred in the year

(192)

 

(2,168)

Add: loan issue costs amortised in the year

857

 

912

 

 

 

 

At end of year

310,692

 

287,856

 

 

 

 

Maturity of bank borrowings

 

 

 

Repayable within 1 year

-

 

-

Repayable between 1 to 2 years

-

 

-

Repayable between 2 to 5 years

52,349

 

48,584

Repayable after more than 5 years

263,822

 

245,416

Unamortised loan issue costs

(5,479)

 

(6,144)

 

 

 

 

 

310,692

 

287,856

 

 

 

 

As detailed in note 25, the Group has £50,000,000 retail eligible bonds in issue.

 

The table below lists the Group's borrowings.

 

Lender

 

Original facility

 

Outstanding debt*

 

Maturity

date

Gross

loan to value**

 

Annual interest rate

 

Amortisation

 

£'000

£'000

 

%

 

 

 

 

 

 

 

 

 

Royal Bank of Scotland

55,000

52,349

Jun -24

 

45.7%

2.15% over 3mth £ LIBOR

Mandatory prepayment

Scottish Widows Ltd & Aviva Investors Real Estate Finance

165,000

165,000

Dec-27

47.4%

3.28% Fixed

None

Scottish Widows Ltd

36,000

36,000

Dec-28

41.0%

3.37% Fixed

None

Santander UK

65,870

62,822

Jun-29

39.8%

2.20% over 3mth £ LIBOR

Mandatory prepayment

 

 

 

 

 

 

 

Total bank borrowings

 

321,870

 

316,171

 

 

 

 

 

Retail eligible bond

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

 

 

Total

371,870

366,171

 

 

 

 

 

 

 

 

 

 

 

LIBOR = London Interbank Offered Rate (Sterling)

MP = Mandatory prepayment

* Before unamortised debt issue costs

** Based upon Cushman & Wakefield property valuations

 

The weighted average term to maturity of the Group's debt at the period end was 6.4 years (31 December 2019: 7.3 years). The weighted average interest rate payable by the Group on its debt portfolio, excluding hedging costs, as at the period end was 3.1 % (31 December 2019: 3.4%).

 

The Group weighted average interest rate, including the retail eligible bonds and hedging costs at the period end, amounted to 3.3 % per annum (31 December 2019: 3.5% per annum).

 

The Group has been in compliance with all of the financial covenants relating to the above facilities as applicable throughout the year covered by these consolidated financial statements. Each facility has distinct covenants which generally include: historic interest cover, projected interest cover, LTV cover and debt service cover. A breach of agreed covenant levels would typically result in an event of default of the respective facility, giving the lender the right, but not the obligation, to declare the loan immediately due and payable. Where a loan is repaid in these circumstances, early repayment fees will apply, which are generally based on a percentage of the loan repaid or calculated with reference to the interest income foregone by the lenders as a result of the repayment.

 

As shown in note 26, the Group uses a combination of interest rate swaps and fixed rate bearing loans to hedge against cash flow interest rate risks. The Group's exposure to interest rate volatility is minimal.

 

In line with recent announcements from the Bank of England and the FCA, the Royal Bank of Scotland and Santander UK borrowings will be transitioning from the London Interbank Offer Rate (LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark by 31 December 2021. There is expected to be negligible cost involved in the borrowing facility transition and the respective hedge instrument amendments.

 

24. Zero dividend preference shares

 

 

 

 

31 December

2020

£'000

 

31 December

 2019

£'000

 

 

 

 

At start of year

-

 

39,816

Amortisation of acquisition costs

-

 

3

Accrued capital entitlement

-

 

60

Repayment

-

 

(39,879)

 

 

 

 

At end of year

-

 

-

 

 

 

 

 

The Group entity, Regional REIT ZDP PLC, had 30,000,000 zero dividend preference shares ("ZDP shares") in issue, which were listed on the London Stock Exchange (LSE: RGLZ). The ZDP shares were issued at 100 pence per share. The ZDP shares had an entitlement to receive a fixed cash amount on 9 January 2019, being the maturity date, but did not receive any dividends or income distributions. Additional capital accrued to the ZDP shares on a daily basis at a rate equivalent to 6.5% per annum, resulting in a final capital entitlement of 132.9 pence per share, which was paid on 9 January 2019.  

 

25. Retail Eligible Bonds

The Company has in issue £50,000,000 4.5% Retail Eligible Bonds with a maturity date of 6 August 2024. These unsecured Bonds are listed on the London Stock Exchange ORB platform.

 

 

 

 

31 December

2020

£'000

 

31 December 

 2019 

£'000 

 

 

 

 

Bond principal at start of year

50,000

 

50,000

Unamortised issue costs at start of year

(714)

 

(864)

Issue costs

-

 

(7)

Amortisation of issue costs

155

 

157

 

 

 

 

At end of year

49,441

 

49,286

 

 

 

 

 

 

26. Derivative financial instruments

Interest rate caps and swaps are in place to mitigate the interest rate risk that arises as a result of entering into variable rate borrowings.

 

 

 

31 December

2020

£'000

 

31 December 

 2019 

£'000 

Group

 

 

 

Fair value at start of year

(1,816)

 

(337)

Revaluation in the year

(2,523)

 

(1,479)

 

 

 

 

 

Fair value at end of year

(4,339)

 

(1,816)

 

 

 

 

 

The calculation of fair value of interest rate caps and swaps is based on the following calculation: the notional amount multiplied by the difference between the swap rate and the current market rate and then multiplied by the number of years remaining on the contract and discounted.

 

The table below details the hedging and swap notional amounts and rates against the details of the Group's loan facilities.

 

Lender

 

Original Facility

 

Outstanding Debt

 

Maturity

Date

 

Annual Interest rate

 

Notional Amount

 

 

Rate

 

£'000

£'000

 

%

£'000

%

 

 

 

 

 

 

 

Royal Bank of Scotland

55,000

52,349

Jun-24

2.15% over

3 months £ LIBOR

£27,500

£27,500

1.26%

1.26%

Scottish Widows Ltd. & Aviva Investors Real Estate Finance

 

 

 

 

165,000

 

 

 

 

165,000

 

 

 

 

Dec-27

 

 

 

 

3.28% Fixed

 

 

 

 

n/a

 

 

 

 

n/a

Scottish Widows Ltd

 

36,000

 

36,000

 

Dec-28

 

3.37% Fixed

 

n/a

 

n/a

Santander UK

65,870

62,822

Jun-29

2.20% over

3 months £ LIBOR

£32,935

£32,935

1.45%

1.45%

 

 

 

 

 

 

 

Total

321,870

316,171

 

 

 

 

LIBOR = London Interbank Offered Rate (Sterling)

 

As at 31 December 2020, the swap notional arrangements were £ 60.44 m (31 December 2019: £60.50m) and the cap notional arrangements amounted to £60.44m (31 December 2019: £60.50m).

The Group weighted average effective interest rate was 3.3 % (31 December 2019: 3.5 %) inclusive of hedging costs.

 

The maximum exposure to credit risk at the reporting date is the fair value of the derivative liabilities.

 

It is the Group's target to hedge at least 90% of the total debt portfolio using interest rate derivatives and fixed-rate facilities. As at the year end, the total proportion of hedged debt equated to 101.8 % (31 December 2019: 109.5%), as shown below. The over hedged position has arisen as a result of the full RBS and Santander facilities (including headroom) being hedged but that the excess relates to Interest Rate Caps which have no ongoing cost for the Group.

 

 

 

31 December

2020

£'000

 

31 December

 2019

£'000

 

 

 

 

Total bank borrowings

316,171

 

294,000

 

 

 

Notional value of interest rate caps and swaps

120,870

 

121,000

Value of fixed rate debts

201,000

 

201,000

 

 

 

 

 

321,870

 

322,000

 

 

 

 

Proportion of hedged debt

101.8%

 

109.5%

 

 

 

 

 

 

The Group has not adopted hedge accounting.

 

27. Leases

As from 1 January 2019, the Group has adopted IFRS16 accounting treatment as described in note 2.4.

 

 

 

Right of use asset

31 December

2020

£'000

 

31 December

 2019

£'000

 

 

 

 

At start of year

16,351

 

-

Value recognised at 1 January 2020

-

 

16,545

Fair value movement

(195)

 

(194)

 

 

 

 

 

 

16,156

 

16,351

 

 

 

Lease liability

31 December

2020

£'000

 

31 December

 2019

£'000

 

 

 

 

At start of year

16,510

 

-

Value recognised at 1 January 2020

-

 

16,545

Lease payments

(618)

 

(618)

Interest charges