AEW UK REIT PLC
Announcement of Full Year Results for the year ended 31 March 2020
AEW UK REIT PLC (the 'Company') which holds a diversified portfolio of 35 commercial investment properties throughout the UK, is pleased to publish its full year results for the year ended 31 March 2020.
Summary Highlights
- Net Asset Value ('NAV')** of £147.86 million and of 93.13 pence per share ('pps') as at 31 March 2020 (31 March 2019:£149.46 million and 98.61 pps)
- Rental income generated was £17.42 million (year ended 31 March 2019: £17.18 million)
- Operating profit before fair value changes of £14.47 million (year ended 31 March 2019: £13.52 million)
- Profit before tax ('PBT')* of £3.65 million and EPS of 2.40 pps (year ended 31 March 2019: £15.54 million and of 10.26 pps)
- EPRA Earnings Per Share ('EPRA EPS')* of 8.67 pps (year ended 31 March 2019: 8.07 pps)
- Total dividends of 8.00 pps declared (year ended 31 March 2019: 8.00 pps) with a dividend cover of 108.38%
- Cash balances totalling £9.87 million as at 31 March 2020 (31 March 2019: £2.13 million) having raised gross proceeds of £7.00 million via a share placing in February 2020. Following the disposal of 2 Geddington Road, Corby the Company had a cash balance of £27.28 million as at 19 June 2020
- The portfolio delivered strong results relative to the MSCI/AREF PFI Balanced Funds Quarterly Property Index, outperforming with a total return of 3.5% largely driven by the portfolio's high yielding assets, which generated a strong income return of 8.2% over the year
- The portfolio has a high weighting towards the industrial sector which has maintained its position as one of the most resilient market sectors, both in terms of occupational and investment market sentiment
- Since the year-end the Company disposed of 2 Geddington Road, Corby, for gross proceeds of £18.80 million delivering an IRR in excess of 30%
Mark Burton, Chairman of AEW UK REIT, commented: "We are pleased with the overall performance of the Company, which, for a second consecutive year, has improved its performance in EPRA EPS, while also achieving a dividend of 8 pence per share. The end of the financial year saw the outbreak of COVID-19 and the focus of the Board and Investment Manager has been on minimising the impact on the Company and stakeholders. We believe the Company's assets are strategically placed to continue to provide investors with robust performance over the medium and long term. The Board is encouraged by the fact that, despite the uncertainty that has been caused by the outbreak of COVID-19, a number of ongoing asset management transactions are currently being negotiated by the Manager whose active management style is a principal feature of the Company's strategy seeking to maximise both income and capital returns to shareholders. With a number of these key discussions ongoing it is hoped that further value can be added."
Financial Highlights
* Net Asset Value ('NAV')* of £147.86 million and of 93.13 pence per share ('pps') as at 31 March 2020 (31 March 2019: £149.46 million and 98.61 pps).
* Operating profit before fair value changes of £14.47 million for the year (year ended 31 March 2019: £13.52 million).
* Profit before tax ('PBT')* of £3.65 million and EPS of 2.40 pps for the year (year ended 31 March 2019: £15.54 million and of 10.26 pps).
* EPRA Earnings Per Share ('EPRA EPS')* for the year of 8.67 pps (year ended 31 March 2019: 8.07 pps).
* Total dividends of 8.00 pps declared for the year (year ended 31 March 2019: 8.00 pps).
* Shareholder Total Return* for the year of -17.89% (year ended 31 March 2019: 5.44%).
* The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 68.20 pps as at 31 March 2020 (31 March 2019: 92.80 pps).
* As at 31 March 2020, the Company had drawn £51.50 million (31 March 2019: £50.00 million) of a £60.00 million (31 March 2019: £60.00 million) term credit facility with the Royal Bank of Scotland International Limited ('RBSi') and was geared to 27.21% of the Gross Asset Value ('GAV')* (31 March 2019: 25.30%) (see note 21 of the Financial Statements below).
* The Company held cash balances totalling £9.87 million as at 31 March 2020 (31 March 2019: £2.13 million) having raised gross proceeds of £7.00 million via a share placing in February 2020. Following the disposal of 2 Geddington Road, Corby, the Company had a cash balance of £27.28 million as at 19 June 2020.
Property Highlights
* As at 31 March 2020, the Company's property portfolio had a valuation of £189.30 million across 35 properties (31 March 2019: £197.61 million across 35 properties) as assessed by the valuer# and a historical cost of £197.12 million (31 March 2019: £196.86 million).
* The Company acquired no properties during the year (year ended 31 March 2019: one property for £6.93 million). The Company made no disposals during the year (year ended 31 March 2019: two full disposals and two part disposals for gross sales proceeds of £6.80 million).
* The portfolio had an EPRA Vacancy Rate** of 3.68% as at 31 March 2020 (31 March 2019: 2.99%).
* Rental income generated in the year under review was £17.42 million (year ended 31 March 2019: £17.18 million). The number of tenants as at 31 March 2020 was 91 (31 March 2019: 95).
* EPRA Net Initial Yield ('NIY')** of 8.26% as at 31 March 2020 (31 March 2019: 7.62%).
* Weighted Average Unexpired Lease Term ('WAULT')* of 4.26 years to break (31 March 2019: 4.87 years) and 5.55 years to expiry (31 March 2019: 6.10 years).
* Post year-end, in May 2020, the Company disposed of 2 Geddington Road, Corby, for gross proceeds of £18.80 million.
* Post year-end, in June 2020, the Company completed a 15 year renewal lease with the Secretary of State for Communities and Local Government at its Solihull office, Sandford House. The agreement documents the increase of rental income from the property by 30%.
* As at the date of this report, 84% of the rent due for the March 2020 quarter has been collected.
* See KPIs below for definition of alternative performance measures.
** See Glossary in the full Annual Report and Financial Statements for definition of alternative performance measures.
# The valuation figure is reconciled to the fair value under IFRS in Note 10.
Chairman's Statement
Overview
I am pleased to present the audited annual results of AEW UK REIT plc for the year ended 31 March 2020. As at 31 March 2020, the Company owned a diversified portfolio of 35 commercial investment properties throughout the UK with a value of £189.30 million.
The Company has improved its performance in terms of EPRA EPS for a second consecutive year; increasing from 8.07 pence for the prior year to 8.67 pence for the year under review. However, the end of this financial year brought an unprecedented period of uncertainty to the UK and global markets, which is ongoing as at the date of this report, as a result of the outbreak of COVID-19. This has negatively impacted the fair value of the Company's investment properties, which fell by £9.44 million during the year and consequently the Company's NAV per share, which fell by 5.56% for the year. The Company's shares are also trading at a discount to NAV, having briefly traded at a premium to NAV at the start of 2020, prior to the COVID-19 outbreak.
As a result of the pandemic, the primary focus of the Board and Investment Manager has recently been on minimising the impact of COVID-19 on the Company and its stakeholders. Business continuity measures in place are allowing the Board, the Investment Manager and the Company's service providers to continue to operate effectively. Immediately prior to the publication of this report, the Company had collected 84% of the rents due on 25 March 2020, however we are expecting collection rates to fall again for the June quarter, as tenants have been adversely affected by the period of lockdown. Amounts that remain outstanding are being pursued or are the matter of ongoing engagement between the Manager and the tenant. There are some tenants who are experiencing difficulties in the current environment and the Company is sympathetic to their situation. In these cases, the Company has agreed a payment plan where rental amounts can be fully recovered by the Company over coming periods. Unfortunately, there are a few larger tenants who have significant financial resources and the ability to pay who are refusing to do so or enter into dialogue. The Company shall be pursuing these tenants when legally able to do so and charging the full default interest rates per the lease agreements. To date, the Company has not granted any rent free periods to tenants where asset management gains were not also made.
Although the full impact of COVID-19 on the UK economy and real estate market is yet to become clear, the Board considers the Company to be well positioned to withstand this period of uncertainty due to its cash resources and levels of headroom in respect of its loan covenants. The Board also considers that the Company's assets are strategically placed to continue to provide investors with robust performance over medium and long term horizons. This is expected to be the case due to the portfolio's high weighting towards the industrial sector which, despite the recent lockdown period, has maintained its position as one of the most resilient market sectors, both in terms of occupational and investment market sentiment. Furthermore, the Manager's value investment style which focuses on exploiting mispriced investment opportunities that are trading below their long term fundamental value is considered to create a defensive position in respect of capital preservation.
The Board is encouraged by the fact that, despite the uncertainty that has been caused by the outbreak of COVID-19, there are a number of ongoing asset management transactions currently being negotiated by the Manager, as evidenced by the 15 year lease renewal to the Secretary of State for Communities and Local Government that has now completed at the Company's premises in Solihull. The renewal documented a 30% increase in passing rent and is expected to result in significant value increase for the asset when the portfolio is revalued at the end of this month. The successful conclusion of this business plan at the current time, following on from the profitable sale of Corby in May, both highlight the durability of the Company's strategy during more volatile markets. The Board feels that the recent completion of these asset management transactions is a credit to the Investment Manager's active management style which is a principal feature of the Company's strategy. With a number of asset management discussions still ongoing it is hoped that both income and capital returns to shareholders can be maximised further.
Since the year-end the Company has disposed of 2 Geddington Road, Corby, for gross proceeds of £18.80 million. The Board considers that the profitable sale represents a positive outcome to the Manager's business plan for the asset, particularly given wider market conditions at the time. The sale has delivered to the Company an IRR in excess of 30% due in part to the asset's net income yield of 10% against its purchase price produced throughout its hold period. Proceeds from the sale leave the company well placed to take advantage of investment opportunities that may arise over coming weeks and months as a result of the current economic environment.
The Company raised gross capital proceeds of £7.00 million in February 2020 which has contributed to a healthy cash balance of £9.87 million as at 31 March 2020. This has since risen to £27.28 million as at 19 June 2020 following the aforementioned disposal.
AEW UK REIT plc Property Performance vs. Benchmark for 12 months to 31 March 2020
The Company's portfolio has again delivered strong results relative to the MSCI/AREF PFI Balanced Funds Quarterly Property Index ('the Benchmark'), outperforming the Benchmark with a total return of 3.5%. Total return was largely driven by the portfolio's high yielding assets generating a strong income return of 8.2% over the year. While capital growth was negative overall, the portfolio is defensively positioned in terms of geographical diversification and composition by sector. As at 31 March 2020, the portfolio valuation comprised just 12.4% of its value in retail assets and 7.8% in leisure which has helped to limit the potential downside arising from events that are affecting the wider economy and these sectors in particular.
The Company's consistent income returns have enabled it to continue to pay quarterly dividends of 2.00 pence per share throughout the year, meeting its target of 8.00 pence per share per annum. Dividends were fully covered by the Company's EPRA EPS of 8.67 pence.
The Investment Manager's active approach to asset management has resulted in a vacancy rate of just 3.68% which has been maintained below 4% for seven consecutive quarters up to and including the quarter ended 31 March 2020. However, given the problems that tenants are generally experiencing we are expecting vacancy rates to increase in the coming year.
The Company's share price was 68.20 pence per share as at 31 March 2020 (31 March 2019: 92.80 pence per share), representing a 26.77% discount to NAV. This reflects the declines experienced in the equity markets in general and specifically in real estate as a result of the COVID-19 outbreak.
Financial Results Summary
|
Year ended
31 March 2020
|
Year ended
31 March 2019
|
Operating profit before fair value changes (£'000)
|
14,472
|
13,524
|
Operating profit (£'000)
|
5,072
|
17,226
|
Profit before tax (£'000)
|
3,652
|
15,544
|
Earnings Per Share (basic and diluted) (pence)
|
2.40
|
10.26
|
EPRA Earnings Per Share (basic and diluted) (pence)
|
8.67
|
8.07
|
Ongoing Charges (%)
|
1.34
|
1.40
|
Net Asset Value per share (pence)
|
93.13
|
98.61
|
EPRA Net Asset Value per share (pence)
|
93.12
|
98.51
|
Financing
The Company has a £60.00 million loan facility, of which it had drawn a balance of £51.50 million as at 31 March 2020 (31 March 2019: £60.00 million facility; £50.00 million drawn), producing the following measures of gearing.
|
Year ended
31 March 2020
%
|
Year ended
31 March 2019
%
|
Loan to NAV
|
34.83
|
33.45
|
Gross Loan to GAV
|
27.21
|
25.30
|
Net Loan to GAV (deducts cash balance from the outstanding loan value)
|
21.99
|
24.37
|
The unexpired term of the facility was 3.6 years as at 31 March 2020 (31 March 2019: 4.6 years). The loan incurs interest at 3 month LIBOR +1.4%, which equated to an all-in rate of 2.10% as at 31 March 2020 (31 March 2019: 2.32%).
The Company is protected from a significant rise in interest rates and, as at the year end, had interest rate caps in effect with a combined notional value of £36.51 million (31 March 2019: £36.51 million), with £26.51 million capped at 2.50% and £10.00 million capped at 2.00%, resulting in the loan being 71% hedged (31 March 2019: 73%). These interest rate caps are effective until 19 October 2020. The Company has additional interest rate caps covering the remaining period of the loan from 20 October 2020 to 23 October 2023. After the year-end, the Company replaced its existing caps covering this period, which capped the interest rate at 2.0% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.0% on a notional value of £51.50 million. The Company paid a premium of £62,968.
During October 2019, the Company announced that it had completed an amendment to its loan facility, increasing the 'Loan to NAV' covenant from 45% to 55% (subject to certain conditions). There were no changes to the margin currently charged under the facility. The long term gearing target remains 25% or less of GAV, however the Company can borrow up to 35% of GAV in advance of an expected capital raise or asset disposal. The Board and Investment Manager will continue to monitor the level of gearing and may adjust the target gearing according to the Company's circumstances and perceived risk levels.
Subsequent to the year-end, on the 26 May 2020, the Company announced that it had obtained consent from its lender, RBS International, to waive the interest cover tests within its loan agreement for July and October with the next proposed test date being January 2021. The lender also conveyed a willingness to review the position again in December based on circumstances prevailing. The Board considers this to have been prudent action in the current market environment.
Dividends
The Company has continued to deliver on its target of paying dividends of 8.00 pence per share per annum. During the year, the Company declared and paid four quarterly dividends of 2.00 pence per Ordinary Share, in line with its target, which were fully covered by the Company's EPRA EPS of 8.67 pence. It remains the Company's longer-term intention to continue to pay dividends in line with its dividend policy, however the outlook is highly uncertain in the short term given the current outbreak of COVID-19. In determining future dividend payments, regard will be had to the circumstances prevailing at the relevant time, as well as the Company's requirement, as a UK REIT, to distribute at least 90% of its distributable income annually, which will remain a key consideration.
Outlook
The Board and Investment Manager are pleased with the strong income returns delivered to shareholders to date. The Company has met its dividend target of 8.00 pps for the year, which was 108.38% covered by EPRA EPS. The outlook for the UK economy and real estate market still faces huge uncertainty and it is likely that the Company will see further reduced levels of rent collection in the near term, as tenants continue to feel the impact of lockdown restrictions on their cash flows. However, the Company is well placed to withstand these circumstances due to its healthy cash position and borrowing covenant headroom, as well as its diversified portfolio and low exposure to retail. It is hoped that the easing of lockdown measures will allow many businesses to resume some level of operations and kick start the economic recovery, eventually providing conditions to enable further growth of the Company. In the meantime, the Board will monitor closely the developing situation in consideration of the Company's strategy and the Investment Manager will be working closely with tenants in order to minimise impact on the Company's income profile.
Finally, I would like to remind investors that the Company will hold a continuation vote at the Annual General Meeting ('AGM') to be held on 9 September 2020. Under the provision of the Company's Articles, the Board will propose an ordinary resolution that the Company continues its business as presently constituted. Together with my fellow Board members, and the Investment Manager, I would like to express my ongoing belief in the Company's Strategy and to express the confidence that we have for its future performance for the various reasons that are discussed herewith. The Board, as set out later within this report, therefore welcomes shareholder attendance at the AGM if it is appropriate to do so in light of current circumstances.
Mark Burton
Chairman
22 June 2020
Business Model and Strategy
Introduction
The Company is a real estate investment company listed on the premium segment of the Official List of the FCA and traded on the London Stock Exchange's Main Market. As part of its business model and strategy, the Company has, and intends to maintain, UK REIT status. HM Revenue and Customs has acknowledged that the Company has met the necessary qualifying conditions to conduct its affairs as a UK REIT and the Company intends to continue to do so.
Investment Objective
The investment objective of the Company is to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom.
Investment Policy
In order to achieve its investment objective, the Company invests in freehold and leasehold properties across the whole spectrum of the commercial property sector (office properties, industrial/warehouse properties, retail warehouses and high street retail) to achieve a balanced portfolio with a diversified tenant base.
Investment Restrictions
The Company invests and manages its assets with the objective of spreading risk through the following investment restrictions:
- the value of no single property, at the time of investment, will represent more than 15.00% of GAV;
- the Company may commit up to a maximum of 10.00% of its NAV (measured at the commencement of the project) to development activities;
- the value of properties, measured at the time of each investment, in any one of the following sectors: office properties, retail warehouses, high street retail and industrial/warehouse properties will not exceed 50.00% of GAV. The 50.00% sector limit may be increased to 60.00% as part of the Investment Manager's efficient portfolio management whereby the Investment Manager determines it appropriate to pursue an attractive investment opportunity which could cause the 50.00% sector limit to be exceeded on a short-term basis pending a repositioning of the portfolio through a sale of assets or other means;
- investment in unoccupied and non-income producing assets will, at the time of investment, not exceed 20.00% of NAV;
- the Company may commit up to a maximum of 10.00% of the NAV (at the time of investment) in the AEW UK Core Property Fund (the 'Core Fund'). The Company disposed of its last remaining units in the Core Fund in May 2017 and it is not the current intention of the Directors to invest in the Core Fund;
- the Company will not invest in other closed-ended investment companies; and
- if the Company invests in derivatives for the purposes of efficient portfolio and cash management, the total notional value of the derivatives at the time of investment will not exceed, in aggregate, 35.00% of GAV.
The Directors currently intend, at all times, to conduct the affairs of the Company so as to enable the Group to qualify as a REIT for the purposes of Part 12 of the Corporation Tax Act 2010 ('CTA') (and the regulations made thereunder).
The Company will at all times invest and manage its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy and will not, at any time, conduct any trading activity which is significant in the context of the business of the Company as a whole.
In the event of a breach of the investment policy and investment restrictions set out above, the Directors upon becoming aware of such breach will consider whether the breach is material, and if it is, notification will be made to a Regulatory Information Service.
Any material change to the investment policy or investment restrictions of the Company may only be made with the prior approval of shareholders.
Our Strategy
As the ramifications of COVID-19 become clearer, it is possible that our strategy might adapt with prevailing market conditions, but for now we continue to follow our successful strategy since inception as below:
The Company exploits what it believes to be the compelling relative value opportunities currently offered by pricing inefficiencies in smaller commercial properties let on shorter occupational leases. The Company supplements this core strategy with asset management initiatives to upgrade buildings and thereby improve the quality of income streams. In the current market environment, the focus is to invest in properties which:
- typically have a value, on investment, of between £2.50 million and £15.00 million;
- have initial net yields, on investment, of typically between 7.5-10%;
- achieve across the whole portfolio an average weighted lease term of between three to six years remaining;
- achieve, across the whole portfolio, a diverse and broad spread of tenants; and
- have potential for asset management initiatives to include refurbishment and re-lettings.
The Company's strategy is focused on delivering enhanced returns from the smaller end (up to £15.00 million) of the UK commercial property market. The Company believes that there are currently pricing inefficiencies in smaller commercial properties relative to the long-term pricing resulting in a significant yield advantage, which the Company aims to exploit.
How we add value
An Experienced Team
The investment management team averages 20 years working together, reflecting stability and continuity.
Value Investing
The Investment Manager's investment philosophy is based on the principle of value investing. The Investment Manager looks to acquire assets with an income profile coupled with underlying characteristics that underpin long-term capital preservation. As value managers, the Investment Manager looks for assets where today's pricing may not correspond to long-term fundamentals.
Active Asset Management
The Investment Manager has an in-house team of dedicated asset managers with a strong focus on active asset management to enhance income and add value to commercial properties.
Strategy in Action
Driving rental growth
Queen Square, Bristol
- A letting completed during February 2020 proves a new high rental tone for the building of £27.14 per sq ft, a 55% increase above the previous passing rent for the suite.
- The building has an occupancy level of 100% (54% at purchase in December 2015). During this time, growth of 66% has been achieved in value and 18% in income.
Maintaining high occupancy levels
Diamond Business Park, Wakefield
- Since purchase in early 2018, occupancy level has increased from 82% to 92%.
- Four lettings were completed during 2019 creating income of £125,000 per annum.
- Passing rent has increased by 9% during the year.
Lengthening income streams to boost net asset value
Brockenhurst Crescent, Walsall
- During September 2019, the Company completed a new lease extending the income stream from 3 to 8 years.
- The rent remained the same with the concession of only 9 months rent free.
- Valuation uplift of 3% was recorded on completion.
Driving income levels above estimated rental value
Knowles Lane, Bradford
- In September 2019, the Company documented the settlement of a rent review representing a 14% increase on the previous rent and which was also ahead of the valuer's estimated rental value.
Key Performance Indicators
KPI AND DEFINITION
|
RELEVANCE TO STRATEGY
|
TARGET
|
PERFORMANCE
|
1. EPRA NIY
A representation to the investor of what their initial net yield would be at a predetermined purchase price after taking account of all associated costs, e.g. void costs and rent free periods.
|
EPRA NIY is in line with the Company's target dividend yield meaning that, after costs, the Company should have the ability to meet its target dividend through property income.
|
7.50 - 10.00%
|
8.26%
at 31 March 2020 (31 March 2019: 7.62%)
|
2. True Equivalent Yield
The average weighted return a property will produce according
to the present income and ERV assumptions, assuming the income is
received quarterly in advance.
|
A True Equivalent Yield profile in line with the Company's target dividend yield shows that, after costs, the Company should have the ability to meet its proposed dividend through property income.
|
7.50 - 10.00%
|
8.04%
at 31 March 2020 (31 March 2019: 7.94%)
|
3. Reversionary Yield
The expected return the property will
provide once rack-rented.
|
A Reversionary Yield profile that is in line with an Initial Yield profile shows a potentially sustainable income stream that can be used to meet dividends past the expiry of a property's current leasing arrangements.
|
7.50 - 10.00%
|
7.90%
at 31 March 2020 (31 March 2019: 7.75%)
|
4. WAULT to expiry
The average lease term remaining to
expiry across the portfolio, weighted
by contracted rent.
|
The Investment Manager believes that current market conditions present an opportunity whereby assets with a shorter unexpired lease term are often mispriced. It is also the Investment Manager's view that a shorter WAULT is useful for active asset management as it allows the Investment Manager to engage in direct negotiation with tenants rather than via rent review mechanisms.
|
> 3 years
|
5.55 years
at 31 March 2020 (31 March 2019: 6.10 years)
|
5. WAULT to break
The average lease term remaining to
break, across the portfolio weighted
by contracted rent.
|
The Investment Manager believes that current market conditions present an opportunity whereby assets with a shorter unexpired lease term are often mispriced. As such, it is in line with the Investment Manager's strategy to acquire properties with a WAULT that is generally shorter than the benchmark. It is also the Investment Manager's view that a shorter WAULT is useful for active asset management as it allows the Investment Manager to engage in direct negotiation with tenants rather than via rent review mechanisms.
|
> 3 years
|
4.26 years
at 31 March 2020 (31 March 2019: 4.87 years)
|
6. NAV
NAV is the value of an entity's assets
minus the value of its liabilities.
|
Provides stakeholders with the most relevant information on the fair value of the assets and liabilities of the Company.
|
Increase year
on year
|
£147.86 million
at 31 March 2020 (31 March 2019: £149.46 million)
|
7. Leverage (Loan to GAV)
The proportion of our property portfolio that is funded by borrowings.
|
The Company utilises borrowings to enhance returns over the medium term. Borrowings will not exceed 35% of GAV (measured at drawdown) with a long-term target of 25% or less of GAV.
|
25% long term
and 35% in
advance of
a disposal or
capital raise
|
27.21%
at 31 March 2020 (31 March 2019: 25.30%)
|
8. Vacant ERV
The space in the property portfolio which is currently unlet, as a
percentage of the total ERV of the portfolio.
|
The Company's aim is to minimise vacancy of the properties. A low level of structural vacancy provides an opportunity for the Company to capture rental uplifts and manage the mix of tenants within a property.
|
< 10.00%
|
3.68%
at 31 March 2020 (31 March 2019: 2.99%)
|
9. Dividend
Dividends declared in relation to the year. The Company targets a dividend of 8.00 pence per Ordinary Share per annum. However, given the current COVID-19 situation, regard will be had to the circumstances prevailing at the relevant time in determining dividend payments.
|
The dividend reflects the Company's ability to deliver a sustainable income stream from its portfolio.
|
8.00 pps
|
8.00 pps
for the year ended 31 March 2020 (year ended 31 March 2019: 8.00 pps)
|
10. Ongoing Charges
The ratio of total administration and operating costs expressed as a percentage of average NAV throughout the year.
|
The Ongoing Charges ratio provides a measure of total costs associated with managing and operating the Company, which includes the management fees due to the Investment Manager. The Investment Manager presents this measure to provide investors with a clear picture of operational costs involved in running the Company.
|
< 1.50%
|
1.34%
for the year ended 31 March 2020 (year ended 31 March 2019: 1.40%)
|
11. Profit before tax ('PBT')
PBT is a profitability measure which considers the Company's profit before the payment of income tax.
|
The PBT is an indication of the Company'sfinancial performance for the year in which its strategy is exercised.
|
8.00 pps
|
£3.65 million/2.40 pps
for the year ended 31 March 2020 (year ended 31 March 2019: £15.54 million/10.26 pps)
|
12. Shareholder Total Return
The percentage change in the share price assuming dividends are reinvested to purchase additional Ordinary Shares.
|
This reflects the return seen by shareholders on their shareholdings through share price movements and dividends received.
|
8.00%
|
-17.89%
for the year ended 31 March 2020 (year ended 31 March 2019: 5.44%)
|
13. EPRA EPS
Earnings from core operational activities. A key measure of a company's underlying operating results from its property rental business and an indication of the extent to which current dividend payments are supported by earnings. See note 8 of the Financial Statements.
|
This reflects the Company's ability to generate earnings from the portfolio which underpins dividends.
|
8.00 pps
|
8.67 pps
for the year ended 31 March 2020 (year ended 31 March 2019: 8.07 pps)
|
Investment Manager's Report
Economic Outlook
The current outlook for the global and UK economy is heavily dependent on ever-changing assumptions made about the COVID-19 pandemic and related government policies. As such it is difficult to forecast with any degree of certainty and the reliance placed on any forecasts should be limited. KPMG forecasts published in May 2020 expect the UK economy to contract by 7.2% in 2020, recovering in 2021 with GDP growth reaching 6.1%. These forecasts predict a W-shaped recession with a relatively fast recovery, with economic activity and property values expected to be approaching normal levels by mid to late 2021.
However, some forecasts predict a deeper and more prolonged downside and a weaker recovery. This is highly dependent on developments in containing the spread of the virus, which could include finding a vaccine.
Property Outlook
It is expected that UK commercial property investment volumes will fall to levels last seen during the 2008 financial crisis during Q2 and Q3 of 2020. The full impact of the current crisis is yet to become clear; but the recovery in the UK commercial property investment market will likely mirror that of the UK economy. Thereafter we expect certain characteristics of the market to return, potentially more forcefully than before. These include a polarisation of the market between the best and worst performing sectors, with occupier demand being driven by structural forces as much as by the health of the economy in general. A clear example of this has been the growth of online retail at the expense of physical stores, which has seen a divergence in the capital values of the retail and industrial warehousing sectors.
Sector Outlook
Industrial
The sector has seen continued growth for a number of years thanks to the trend towards online shopping and therefore the increased need for warehousing and logistics units. This shift is expected to continue at an even faster pace than predicted prior to the pandemic as a result of social distancing forcing a change in shoppers' habits. This is being seen particularly in the grocery sector where growth of c 30% is expected in 2020 and has led to most grocery retailers needing to occupy additional warehouse space. Current changes to shopper behaviour are expected to lead to increased take up of online sales, as a percentage of total sales, over the medium to long term in all retail sectors which should lead to an increase in demand for warehousing.
In terms of emerging trends, there is an expectation that the UK will begin to see an increase in localised production as a result of supply chain disruption seen during the pandemic. This could further increase demand for industrial accommodation but, unlike the above, would lead to increased take up outside of the currently favoured logistics sector in favour of more traditional manufacturing accommodation which has seen a decline in total stock over recent years.
The industrial sector represents the portfolio's largest sector holding, with 48.18% of the valuation, which leaves the Company well-placed to benefit from structural changes going forward. Our focus is on assets with low capital values in locations with good accessibility from the national motorway network.
Total return for the year from our industrial assets was 4.7%, slightly below benchmark, as the strong income return of 8.1% was offset by negative capital growth.
Office
The office sector on the whole has proven to be resilient, providing solid income and global flows of investment into the UK. We consider that development in most UK cities outside London has already peaked, which should help to maintain stable rental growth. However, the sector could see longer term structural changes as a result of the current lockdown. A prolonged period of working from home could lead to businesses changing to adopt more flexible working practices and reducing office space, putting pressure on the office market, especially for serviced office operators, and increasing the potential for office-to-residential conversions where viable.
Our office assets represent the second largest sector holding, with 23.72% of the valuation. The focus has been on strong, regional centres and a preference for town or city centres rather than business park locations with weak surrounding amenity where demand has generally not kept up. This was the second strongest performing sector within the portfolio for the year relative to the benchmark, thanks to key asset management transactions adding significant capital value, achieving outperformance of 7.1%.
Alternatives
This is a sector in which AEW UK as Investment Manager have significant expertise and, up until the commencement of the current period of uncertainty, had continued to see compelling opportunities. The Company's alternatives holding comprises assets within the leisure and car parking sectors that have seen selected due to their defensive, value protection characteristics as well as their high income yield. As such, even if some occupation levels are negatively impacted as a result of the current pandemic, as is expected in the leisure sector, the value of assets held in these sectors is expected to be below their long term assessment of worth, particularly when considering their value for alternative uses.
Assets held in alternative sectors comprise 15.74% of the 31 March 2020 valuation, of which 7.8% is within the leisure sector. As a whole, our alternatives assets provided the best return relative to the Benchmark over the year, achieving outperformance of 7.3%, which was driven by an income return of 9.3%.
Retail
The retail sector had been facing difficulties before the outbreak of COVID-19, due to the changing habits of consumers, namely the adoption of online shopping in preference to visiting outlets. These changes in shopping habits could well be accelerated by the outbreak and although we might see a surge in footfall once lockdown restrictions are lifted, this is unlikely to halt the long-term structural decline in the sector. Over time we expect to see opportunities for conversion of redundant retail space into alternative uses and consider our retail assets to be well positioned, with the majority located in town and city centres where there is healthy demand for competing uses.
Retail represents the portfolio's smallest sector holding, with just 12.36% of the valuation, which somewhat mitigates the risk associated with the sector at a portfolio level. Our retail assets have performed weakly relative to the Benchmark, as strong Central London retail performance underpins the Benchmark performance to a great extent. The Company's strictly regional holdings have suffered significant valuation losses associated with the negative sentiment in the sector.
Asset Management
The Company completed the following material asset management transactions during the year:
- Eastpoint Business Park, Oxford - During May 2019 a lease renewal was completed with Innovista International on a 3,000 sq ft office suite. The lease, which runs for a three year term, provides for a rent of £30,000 per annum and a tenant incentive equivalent to six months rent free.
- Diamond Business Park, Wakefield - In June 2019, the Company completed a new letting to tenant CB Imports on 23,000 sq ft of industrial accommodation at this multi-let estate. The lease runs for a three year term and provides a rent of £79,750 per annum. No rental incentives were granted.
Within the estate, three other lettings were completed during the year producing a total rental income of £41,750 per annum. This includes a February 2020 letting that the Company completed with Texlogistics Ltd at a rent of £33,250 per annum. The lease provides a five year term certain and no rental incentives were granted.
Since purchase in early 2018, occupancy level has increased from 82% to 92%. Passing rent per sq ft has increased by 14%.
- Brockhurst Crescent, Walsall - In September 2019, the Company completed the simultaneous surrender and re-letting of Unit 1, Brockhurst Crescent, Walsall. The rent received from the Industrial property will continue unchanged at £231,728 per annum however, the new lease provides for a term of eight years, compared to three years remaining under the previous lease. The incoming tenant will benefit from a nine month rent free period.
- Knowles Lane, Bradford - In September 2019, the Company settled a rent review at this industrial property documenting a new passing rent of £182,500. This represents a 14% increase on the previous rent and which was ahead of the valuer's estimated rental value at the date of signing.
- Cranbourne House, Basingstoke - In September 2019, a lease extension for a term of six months was completed with HFC Prestige Manufacturing in Basingstoke. Due to the short extension period, a rental level was agreed 46% ahead of the previous passing rent. The tenant has now agreed terms in principle with the Company for a further lease renewal.
- Fargate, Sheffield - Following the CVA of Paperchase in early 2019, the tenant remains in full occupation of the 3,000 sq ft store and did not action a break option in October 2019. H Samuel renewed occupation of their 2,400 sq ft unit in September 2019 at nil rent but with a rolling break actionable by both landlord and tenant.
- Lockwood Court, Leeds - During December 2019, the Company completed a new lease with tenant Harrogate Spring Water for a 10 year term on the 187,700 sq ft industrial unit. The new lease provides for a rent of £603,340 and mirrors the terms previously in place with tenant LWS Yorkshire Ltd, a logistics provider to Harrogate Spring Water. The new lease provides the Company with a significantly stronger tenant counterparty.
- 225 Bath Street, Glasgow - In January 2020, the Company completed a new letting of 6,700 sq ft to SPS Doorguard Ltd. The lease provides a 10 year term with a tenant break option at year five and a rent of £92,250 per annum. The lease was granted with 18 months rent free.
Within the same building the Company has been made aware of tenant Sedgwick's intention to vacate the premises in August 2020. Sedgwick currently occupy 21,100 sq ft and pay an annual rent of £284,275 per annum. We are exploring alternative uses for the building including student accommodation and residential.
- 40 Queen Square, Bristol - During February 2020 a new letting of 1,300 sq ft was completed with existing tenant Candide Ltd. The letting of the un-refurbished suite proves a new high rental tone for the building of £27.14 per sq ft, 55% higher than the previous level of passing rent on this suite. The lease provides for a term of five years at a rent of £34,250 per annum with an incentive of half rent payable for the first 12 month period.
- Oak Park, Droitwich - In March 2020, the Company completed a lease renewal with tenant Egbert Taylor on 101,000 sq ft of industrial accommodation in this West Midlands location. The renewal takes the tenant's weighted average unexpired lease term from three years to five years at a combined rent of £500,000 per annum over two leases. We are exploring potential for higher value alternative uses on the site and as such, the new leases contain a landlord only break option every 18 months in order to provide access to the site if this is required in order to maximise value.
- Pearl Assurance House, Nottingham - In March 2020, a reversionary lease was completed with Lakeland Ltd on a 4,300 sq ft retail unit fronting Wheeler Gate in the heart of Nottingham City Centre. The new lease provides a c. six year term. The lease also documents the rebasing of Lakeland's rent from £155,000 per annum to £90,000 per annum in line with its estimated rental value.
- 2 Geddington Road, Corby - On 22 May 2020, the Company disposed of its asset at 2 Geddington Road, Corby, for gross proceeds of £18.80 million, delivering an IRR in excess of 30%.
- Sandford House, Solihull - During June 2020, the Company completed a 15 year renewal lease with its existing tenant, the Secretary of State for Communities and Local Government. The agreement documents the increase of rental income from the property by 30% as well as providing for five yearly open market rent reviews and a tenant break option at year 10. The tenant intends to carry out a full refurbishment of the property over coming weeks requiring no capital payment by the Company either by way of refurbishment cost or capital incentive to the tenant. In addition, no rent free incentive has been granted to the tenant. Throughout its hold period the Company has so far received a net income yield from the asset in excess of 9% per annum against its purchase price of £5.4 million.
Financial Results
The Company's Net Asset Value as at 31 March 2020 was £147.86 million or 93.13 pps (31 March 2019: £149.46 million or 98.61 pps). This is a decrease of 5.48 pps or 5.56% over the year, with the underlying movement in NAV set out in the table below:
|
PPS
|
NAV as at 1 April 2019
|
98.61
|
Change in fair value of investment property
|
(6.14)
|
Change in fair value of derivatives
|
(0.09)
|
Income earned for the year
|
11.70
|
Expenses and net finance costs for the year
|
(3.02)
|
Dividends paid
|
(8.00)
|
Issue of equity (net of costs)
|
0.07
|
NAV as at 30 September 2019
|
93.13
|
EPRA earnings per share for the year was 8.67 pps which, based on dividends paid of 8.00 pps, reflects a dividend cover of 108.38%.
Financing
As at 31 March 2020, the Company had a £60.0 million loan facility with RSBi, in place until October 2023, the details of which are presented below:
|
31 March 2020
|
31 March 2019
|
Facility
|
£60.00 million
|
£60.00 million
|
Drawn
|
£51.50 million
|
£50.00 million
|
Gearing (Loan to GAV)
|
27.21%
|
25.30%
|
Gearing (Loan to NAV)
|
34.83%
|
33.45%
|
Interest rate
|
2.10% all-in
(LIBOR + 1.4%)
|
2.32% all-in
(LIBOR + 1.4%)
|
Notional Value of Loan Balance Hedged
|
70.9%
|
73.0%
|
On 9 October 2019, the Company announced that it had completed an amendment to its loan facility to increase the hard loan to NAV covenant from 45% to 55% (subject to certain conditions), although the target gearing remains as set out in the Prospectus. The margin charged under the facility will be determined by the Company's Loan to NAV ratio as follows:
Loan to NAV
|
Margin (%)
|
< 40%
|
1.40
|
40 - 45%
|
2.50
|
> 45% or at the Company's request*
|
2.00
|
* in these circumstances, certain conditions must be met, including the provision of security over a certain value of the Company's assets.
The margin in effect has remained at 1.40% throughout the year.
Financial covenants
In April 2020, the Company reported the following in respect of its borrowing covenant tests:
|
Limit
|
31 March 2020
|
31 March 2019
|
Loan to NAV
|
<55%
|
34.83%
|
33.45%
|
Historical Interest Cover Ratio
|
<5:1
|
7.0
|
10.7
|
Projected Interest Cover Ratio
|
<5:1
|
10.1
|
11.1
|
|
Property
|
Sector
|
Region
|
Market Value
Range (£m)
|
|
Top ten:
|
|
|
|
1.
|
2 Geddington Road, Corby
|
Other (Car parking)
|
East Midlands
|
10.0 - 15.0
|
2.
|
40 Queen Square, Bristol
|
Offices
|
South West
|
10.0 - 15.0
|
3.
|
Eastpoint Business Park, Oxford
|
Offices
|
South East
|
10.0 - 15.0
|
4.
|
London East Leisure Park, Dagenham
|
Other (Leisure)
|
Greater
London
|
10.0 - 15.0
|
5.
|
Gresford Industrial Estate, Wrexham
|
Industrial
|
Wales
|
7.5 - 10.0
|
6.
|
225 Bath Street, Glasgow
|
Offices
|
Scotland
|
7.5 - 10.0
|
7.
|
Lockwood Court, Leeds
|
Industrial
|
Yorkshire and
Humberside
|
5.0 - 7.5
|
8.
|
Sanford House, Solihull
|
Offices
|
West Midlands
|
5.0 - 7.5
|
9.
|
Langthwaite Grange Industrial Estate, South Kirkby
|
Industrial
|
Yorkshire and Humberside
|
5.0 - 7.5
|
10.
|
Storeys Bar Road, Peterborough
|
Industrial
|
Eastern
|
5.0 - 7.5
|
The Company's top 10 properties listed above comprise 49.7% of the total value of the portfolio.
|
Property
|
Sector
|
Region
|
Market Value
Range (£m)
|
11.
|
Apollo Business Park, Basildon
|
Industrial
|
Eastern
|
5.0 - 7.5
|
12.
|
Sarus Court Industrial Estate, Runcorn
|
Industrial
|
North West
|
5.0 - 7.5
|
13.
|
Barnstaple Retail Park
|
Retail Warehouse
|
South West
|
5.0 - 7.5
|
14.
|
Euroway Trading Estate, Bradford
|
Industrial
|
Yorkshire and
Humberside
|
5.0 - 7.5
|
15.
|
Above Bar Street, Southampton
|
Standard Retail
|
South East
|
5.0 - 7.5
|
16.
|
Brockhurst Crescent, Walsall
|
Industrial
|
West Midlands
|
5.0 - 7.5
|
17.
|
Oak Park, Droitwich
|
Industrial
|
West Midlands
|
<5.0
|
18.
|
Excel 95, Deeside
|
Industrial
|
Wales
|
<5.0
|
19.
|
Diamond Business Park, Wakefield
|
Industrial
|
Yorkshire and
Humberside
|
<5.0
|
20.
|
Commercial Road, Portsmouth
|
Standard Retail
|
South East
|
<5.0
|
21.
|
Odeon Cinema, Southend
|
Other (Leisure)
|
Eastern
|
<5.0
|
22.
|
Pearl Assurance House, Nottingham
|
Standard Retail
|
East Midlands
|
<5.0
|
23.
|
Walkers Lane, St. Helens
|
Industrial
|
North West
|
<5.0
|
24.
|
Cedar House, Gloucester
|
Offices
|
South West
|
<5.0
|
25.
|
Cranbourne House, Basingstoke
|
Industrial
|
South East
|
<5.0
|
26.
|
Brightside Lane, Sheffield
|
Industrial
|
Yorkshire and
Humberside
|
<5.0
|
27.
|
Magham Road, Rotherham
|
Industrial
|
Yorkshire and
Humberside
|
<5.0
|
28.
|
Pipps Hill Industrial Estate, Basildon
|
Industrial
|
Eastern
|
<5.0
|
29.
|
Bank Hey Street, Blackpool
|
Standard Retail
|
North West
|
<5.0
|
30.
|
Eagle Road, Redditch
|
Industrial
|
West Midlands
|
<5.0
|
31.
|
Clarke Road, Milton Keynes
|
Industrial
|
South East
|
<5.0
|
32.
|
Knowles Lane, Bradford
|
Industrial
|
Yorkshire and
Humberside
|
<5.0
|
33.
|
Vantage Point, Hemel Hempstead
|
Offices
|
Eastern
|
<5.0
|
34.
|
Moorside Road, Salford
|
Industrial
|
North West
|
<5.0
|
35.
|
Fargate and Chapel Walk, Sheffield
|
Standard Retail
|
Yorkshire and
Humberside
|
<5.0
|
Top 10 Tenants as at 31 March 2020
|
Tenant
|
Sector
|
Property
|
Passing
Rental
Income
(£'000)
|
% of
Portfolio
Total
Passing
Rental
Income
|
|
|
|
|
|
|
1.
|
GEFCO UK Limited
|
Industrial
|
2 Geddington Road, Corby
|
1,320
|
7.6
|
2.
|
Plastipak UK Limited
|
Industrial
|
Gresford Industrial Estate, Wrexham
|
883
|
5.1
|
3.
|
The Secretary of State
|
Government body
|
Sandford House, Solihull and Cedar House, Gloucester
|
832
|
4.8
|
4.
|
Ardagh Glass Limited
|
Industrial
|
Langthwaite Industrial Estate, South Kirkby
|
676
|
3.9
|
5.
|
Mecca Bingo Limited
|
Leisure
|
London East Leisure Park, Dagenham
|
625
|
3.6
|
6.
|
Harrogate Spring Water
|
Industrial
|
Lockwood Court, Leeds
|
603
|
3.5
|
7.
|
HFC Prestige Manufacturing
|
Industrial
|
Cranbourne House, Basingstoke
|
600
|
3.5
|
8.
|
Odeon Cinemas
|
Leisure
|
Odeon Cinema, Southend
|
535
|
3.1
|
9.
|
Sports Direct
|
Retail
|
Barnstaple Retail Park and Bank Hey Street, Blackpool
|
525
|
3.0
|
10.
|
Wyndeham Peterborough Limited
|
Industrial
|
Storeys Bar Road, Peterborough
|
525
|
3.0
|
The Company's top 10 tenants, listed above, represent 41.1% of the total passing rental income of the portfolio.
Approximately £2.94 million of the Company's current contracted income stream is subject to an expiry or break within the 12 month period commencing 1 April 2020. Of this amount, £1.1 million (38%) is already subject to an agreed renewal in principle with a further £1.3 million (44%) where we are currently engaged in active renewal discussions and where tenants are expected to remain in occupation subject to agreeing final lease terms. We expect to engage further tenants in renewal discussion throughout the period. To date, tenants that have served notice to vacate within this period and have made clear that they intend to do so amount to c. £0.49 million (17%), the majority of which is attributed to Sedgwick in Glasgow (as noted in the Asset Management section) where the Company is exploring redevelopment for alternative use.
Alternative Investment Fund Manager ('AIFM')
AEW UK Investment Management LLP is authorised and regulated by the FCA as a full-scope AIFM and provides its services to the Company.
The Company has appointed Langham Hall UK Depositary LLP ('Langham Hall') to act as the depositary to the Company, responsible for cash monitoring, asset verification and oversight of the Company.
Information Disclosures under the AIFM Directive
Under the AIFM Directive, the Company is required to make disclosures in relation to its leverage under the prescribed methodology of the Directive.
Leverage
The AIFM Directive prescribes two methods for evaluating leverage, namely the 'Gross Method' and the 'Commitment Method'. The Company's maximum and actual leverage levels are as per below:
|
31 March 2020
|
31 March 2019
|
Leverage Exposure
|
Gross Method
|
Commitment
Method
|
Gross
Method
|
Commitment
Method
|
Maximum Limit
|
140%
|
140%
|
140%
|
140%
|
Actual
|
128%
|
135%
|
132%
|
134%
|
In accordance with the AIFM Directive, leverage is expressed as a percentage of the Company's exposure to its NAV and adjusted in line with the prescribed 'Gross' and 'Commitment' methods. The Gross method is representative of the sum of the Company's positions after deducting cash balances and without taking into account any hedging and netting arrangements. The Commitment method is representative of the sum of the Company's positions without deducting cash balances and taking into account any hedging and netting arrangements. For the purposes of evaluating the methods above, the Company's positions primarily reflect its current borrowings and NAV.
Remuneration
The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD. AIFMD Remuneration Code Staff includes the members of the AIFM's Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members of staff that exert material influence on the AIFM's risk profile or the AIFs it manages.
Staff are remunerated in accordance with the key principles of the firm's remuneration policy, which include
- promoting sound risk management;
- supporting sustainable business plans;
- remuneration being linked to non-financial criteria for Control Function staff;
- incentivise staff performance over long periods of time;
- award guaranteed variable remuneration only in exceptional circumstances; and
- having an appropriate balance between fixed and variable remuneration.
As required under section 'Fund 3.3.5.R(5)' of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff for the year ended 31 December 2019.
|
Year ended
31 December 2019
|
Total remuneration paid to employees during financial year:
|
|
a) remuneration, including, where relevant, any carried interest paid by the AIFM
|
£2,920,641
|
b) the number of beneficiaries
|
29
|
|
|
The aggregate amount of remuneration of the AIFM Remuneration Code staff, broken down by:
|
|
a) senior management
|
£738,634
|
b) members of staff
|
£2,182,007
|
|
Fixed
remuneration
|
Variable
remuneration
|
Total
remuneration
|
|
|
|
|
Senior management
|
£658,634
|
£80,000
|
£738,634
|
Staff
|
£1,542,947
|
£639,060
|
£2,182,007
|
Total
|
£2,201,581
|
£719,060
|
£2,920,641
|
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
AEW UK Investment Management LLP
22 June 2020
Principal Risks and Uncertainties
The Company's assets consist primarily of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.
The Board has overall responsibility for reviewing the effectiveness of the system of risk management and internal control which is operated by the Investment Manager. The Company's ongoing risk management process is designed to identify, evaluate and mitigate the significant risks the Company faces.
Twice each year, the Board undertakes a risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness of the Investment Manager and other service providers' risk management and internal control processes.
The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
An analysis of the principal risks and uncertainties is set out below. This does not purport to be exhaustive as some risks are not yet known and some risks are currently not deemed material but could turn out to be material in the future.
Principal risks and their potential impact
|
How risk is managed
|
Risk assessment
|
|
|
|
REAL ESTATE RISKS
|
|
1. Property market
Any property market recession or future deterioration in the property market could, inter alia, (i) cause the Company to realise its investments at lower valuations; and (ii) delay the timings of the Company's realisations. These risks could have a material adverse effect on the ability of the Company to achieve its investment objective.
|
The Company has investment restrictions in place to invest and manage its assets with the objective of spreading and mitigating risk.
|
Probability: High
Impact: High
Movement: Increase
|
2. Property valuation
Property and property-related assets are inherently difficult to value due to the individual nature of each property.
There may be an adverse effect on the Company's profitability, the NAV and the price of Ordinary Shares in cases where properties are sold whose valuations have previously been materially overstated.
The report of the valuer on the property valuations as at 31 March 2020 contains a material valuation uncertainty clause due to COVID-19 and its unknown impact at that point in time as shown in note 10 of the financial statements.
|
The Company uses an independent external valuer (Knight Frank LLP) to value the properties at fair value in accordance with accepted RICS appraisal and valuation standards.
|
Probability: High
Impact: Low to Moderate
Movement: Increase
|
3. Tenant default
Failure by tenants to fulfil their rental obligations could affect the income that the properties earn and the ability of the Company to pay dividends to its shareholders.
|
Comprehensive due diligence is undertaken on all new tenants. Tenant covenant checks are carried out on all new tenants where a default would have a significant impact.
Asset management team conducts ongoing monitoring and liaison with tenants to manage potential bad debt risk.
|
Probability: High
Impact: High
Movement: Increase
|
4. Asset management initiatives
Asset management initiatives, such as refurbishment works, may prove to be more extensive, expensive and take longer than anticipated. Cost overruns may have a material adverse effect on the Company's profitability, the NAV and the share price.
|
Costs incurred on asset management initiatives are closely monitored against budgets and reviewed in regular presentations to the Investment Management Committee of the Investment Manager.
|
Probability: Low
Impact: Low
Movement: No change
|
5. Due diligence
Due diligence may not identify all the risks and liabilities in respect of an acquisition (including any environmental, structural or operational defects) that may lead to a material adverse effect on the Company's profitability, the NAV and the price of the Company's Ordinary Shares.
|
The Company's due diligence relies on work (such as legal reports on title, property valuations, environmental and building surveys) outsourced to third parties who have expertise in their areas. Such third parties have professional indemnity cover in place.
|
Probability: Low
Impact: Moderate
Movement: No change
|
6. Fall in rental rates
Rental rates may be adversely affected by general UK economic conditions and other factors that depress rental rates, including local factors relating to particular properties/locations (such as increased competition).
Any fall in the rental rates for the Company's properties may have a material adverse effect on the Company's profitability, the NAV, the price of the Ordinary Shares and the Company's ability to meet interest and capital repayments on any debt facilities.
|
The Company builds a diversified property and tenant base with subsequent monitoring of concentration to individual occupiers (top 10 tenants) and sectors (geographical and sector exposure).
The Investment Manager holds quarterly meetings with its Investment Strategy Committee and regularly meets the Board of Directors to assess whether any changes in the market present risks that should be addressed in the Company's strategy.
|
Probability: Moderate to High
Impact: Moderate to High
Movement: Increase
|
FINANCIAL RISKS
|
|
7. Breach of borrowing covenants
The Company has entered into a term credit facility.
Material adverse changes in valuations and net income may lead to breaches in the LTV and interest cover ratio covenants.
|
The Company monitors the use of borrowings on an ongoing basis through weekly cash flow forecasting and quarterly risk monitoring to monitor financial covenants.
|
Probability: Low to Moderate
Impact: High
Movement: No change
|
8. Interest rate rises
The Company's borrowings through a term credit facility are subject to interest rate risk through changing LIBOR rates. Any increases in LIBOR rates may have an adverse effect on the Company's ability to pay dividends.
|
The Company uses interest caps on a significant notional value of the loan to mitigate the adverse impact of possible interest rate rises.
The Investment Manager and Board of Directors monitor the level of hedging and interest rate movements to ensure that the risk is managed appropriately.
|
Probability: Moderate to High
Impact: Low
Movement: Decrease
|
9. Availability and cost of debt
The term credit facility expires in October 2023. In the event that RBSi does not renew the facility, the Company may need to sell assets to repay the outstanding loan. Any increase in the financing costs of the facility on renewal would adversely impact on the Company's profitability.
|
The Company maintains a good relationship with the bank providing the term credit facility.
The Company monitors the projected usage and covenants of the credit facility on a quarterly basis.
|
Probability: Low to Moderate
Impact: High
Movement: Increase
|
CORPORATE RISKS
|
|
10. Use of service providers
The Company has no employees and is reliant upon the performance of third party service providers.
Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company.
|
The performance of service providers in conjunction with their service level agreements is monitored via regular calls and face-to-face meetings and the use of key performance indicators, where relevant.
|
Probability: Moderate Impact: Moderate
Movement: Increase
|
11. Dependence on the Investment Manager
The Investment Manager is responsible for providing investment management services to the Company.
The future ability of the Company to successfully pursue its investment objective and investment policy may,
among other things, depend on the ability of the Investment Manager to retain its existing staff and/or to recruit individuals of similar experience and calibre.
|
The Investment Manager has endeavoured to ensure that the principal members of its management team are suitably incentivised.
|
Probability: Moderate Impact: Moderate to High
Movement: Increase
|
12. Ability to meet objectives
The Company may not meet its investment objective to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom.
Poor relative total return performance may lead to an adverse reputational impact that affects the Company's ability to raise new capital.
|
The Company has an investment policy to achieve a balanced portfolio with a diversified asset and tenant base. The Company also has investment restrictions in place to limit exposure to potential risk factors. These factors mitigate the risk of fluctuations in returns.
|
Probability: High
Impact: High
Movement: Increase
|
TAXATION RISKS
|
|
13. Company REIT status
The Company has a UK REIT status that provides a tax-efficient corporate structure.
If the Company fails to remain a REIT for UK tax purposes, its profits and gains will be subject to UK corporation tax.
Any change to the tax status or UK tax legislation could impact on the Company's ability to achieve its investment objectives and provide attractive returns to shareholders.
|
The Company monitors REIT compliance through the Investment Manager on acquisitions; the Administrator on asset and distribution levels; the Registrar and Broker on shareholdings and the use of third-party tax advisers to monitor REIT compliance requirements.
|
Probability: Low
Impact: High
Movement: No change
|
14. POLITICAL/ECONOMIC RISKS
|
|
Political and macroeconomic events present risks to the real estate and financial markets that affect the Company and the business of its tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently following the EU referendum vote (Brexit) in June 2016.
|
The Board considers the impact of political and macroeconomic events when reviewing strategy.
|
Probability: High
Impact: High
Movement: Increase
|
EMERGING RISKS
|
|
|
The economic disruption arising from the COVID-19 virus could impact rental income receipts from tenants, the ability to access funding at competitive rates, maintain the Company's dividend policy and its adherence to the HMRC REIT regime, particularly if the UK government restrictions are in place for a prolonged period.
|
The Manager is in close contact with tenants. The Manager has put in place social distancing measures as advised by the UK government. The Manager has maintained a close relationship with RBSi to ensure continuing dialogue around covenants.
|
Probability: Definite
Impact: High
Movement: This was an unprecedented and unforeseen risk. The Company continues to work closely with all parties through this disruptive period.
|
Stakeholder Engagement
s172 Statement
The Directors' overarching duty is to promote the success of the Company for the benefit of its shareholders, having regard to the interests of its stakeholders, as set out in section 172 of the Companies Act 2006 (the 'Act'). The Directors have considered each aspect of this section of the Act and consider that the information set out below is particularly relevant in the context of the Company's business as an externally managed investment company which does not have any employees or suppliers.
We set out in the table below our key stakeholders, the nature of their relationship with the Company and Board, their key interests and how we engage with those stakeholders.
Our relationships with stakeholders are factored into Board discussions and decisions made by the Board will consider the impact on the stakeholders, in accordance with s172 of the Act.
Stakeholder
|
Interests
|
Engagement
|
Investors
Our shareholders are impacted directly by the financial performance of the Company through dividends and share price movements.
They also play an important role in monitoring the governance of the Company.
|
- Sustainable growth of the Company and achieving target returns
- Good relationship with the Company and Board
- Effective structure and control
Framework
- Impact of the Company on the wider community and environment
- Reputation of the Company
|
- AGM, Annual Report, regulatory announcements
- Quarterly update report and other key information published on the website
- Roadshows, meetings and
presentations via the Investment Manager
|
Service providers
Key functions of the Company are outsourced to third-party suppliers, including investment management, property management, administration,
company secretarial, registrar, depositary and legal services. It is important to develop strong long-term working relationships with these providers to enhance the efficiency of the Company's operations, as well as that of the providers themselves.
|
- Relationship with the Company and Board
- Fair contract terms and service-level agreements
- Reputation of the Company
- The Company's performance and long-terms prospects
|
- Effective and regular communication
- Service-level agreements
- Formal tender processes where appropriate
|
Tenants
The Company's strategy in relation to its individual assets will directly affect the tenants in occupation of those assets.
|
- Good communication and relationship with the Company as landlord
- Fair lease terms
- Long term strategy for the asset in line with the objectives of the tenant's activities
|
- Site visits and face to face meetings through the Investment Manager
- Formal negotiations
- Ongoing communication through the property manager
|
The wider community and environment
The Company's physical real estate assets have a direct impact on their local communities depending on their primary use and on the environment through their emissions and energy usage.
|
- Impact of properties and their business plans on the local economy
- Impact of properties on the attractiveness and appeal of the local area
- Energy efficiency and greenhouse gas emissions
|
- Publishing of Sustainability Disclosure Report and Greenhouse Gas Emissions Statement
- GRESB reporting
- Communication with local authorities via Investment Manager
|
Approval
The Strategic Report has been approved and signed on behalf of the Board by:
Mark Burton
Chairman
22 June 2020
Extract from the Directors Report
Directors
Mark Burton, non-executive Chairman
Bimaljit ("Bim") Sandhu, non-executive Director
Katrina Hart, non-executive Director
Going Concern
The Directors have made an assessment of the Company's ability to continue as a going concern, which takes into consideration the uncertainty surrounding the outbreak of COVID-19, as well as the Company's cash flows, financial position, liquidity and borrowing facilities.
As at 31 March 2020, the Company had a cash balance of £9.87 million and has subsequently disposed of one property, Geddington Road, Corby, for gross proceeds of £18.80 million, providing further liquidity.
The Company had sufficient headroom against its borrowing covenants when last reported in April 2020, which can be found in the Investment Manager's Report above. The Company reported a Loan to NAV of 34.8%, so had room for a £33.4 million fall in NAV before reaching the maximum Loan to NAV of 45% per the covenant. This limit can be increased to 55% when the option is exercised by the Company and certain conditions are met, which would allow for a further £20.8 million fall in NAV i.e. a total fall of £54.2 million. The Company also passed its most recent interest cover ratio ('ICR') test, reporting on the quarter to 31 March 2020. A waiver of the next two tests for the quarters to 30 June and 30 September 2020 has been successfully negotiated with RBSi, as a result of conditions in the wider economic environment. This will be reviewed again in relation to the test covering the quarter to 31 December 2020 and beyond as required.
The Company benefits from a secure, diversified income stream from a tenancy profile which is not overly reliant on any one tenant or sector. As at the date of this report, 84% of the rent due for the March 2020 quarter has been collected..
Taking this into consideration, the Directors have reviewed a number of scenarios over 12 months, including an extreme, but plausible, downside scenario which makes the following assumptions:
* Failure of 25% to 30% of tenants (by passing rent);
* Collection of c.50% of remaining rents on the quarter date, with remaining collection deferred for three quarters;
* No new lettings or renewals, other than those where terms have already been agreed;
* A 25% fall in valuations;
* No new acquisitions or disposals;
* 3-month GBP LIBOR at 0.5%; and
* Passing of the continuation vote in September 2020.
The Company's cash resources available of £27.28 million (as at 19 June 2020) are sufficient to cover any losses incurred in the above scenario over the 12 month assessment period and surplus cash available could be used to manage the Company's gearing, maintaining a Loan to NAV ratio below 40% and therefore the margin at 1.4%. Details of the margin charged under the facility can be found in the Investment Manager's Report above. The Company's cash flow can also be managed through the adjustment of dividend payments and reduction of outflows on capital expenditure and acquisitions.
In the above scenario, the Company is forecast to pass its ICR tests for the quarters to December 2020 and March 2021, albeit with marginal headroom, assuming that a portion of the debt would have to be repaid in order to keep the margin at 1.4%. The Directors are confident that further waivers of the ICR test could be extended throughout the assessment period should economic conditions not improve and have had informal discussions with the lender in this respect. In the unlikely event that the Company were to breach its ICR covenant, it has the ability to 'cure' the breach by placing cash on account with the bank. In the extremely unlikely event that the full balance of the facility was called in, the Company has certain more attractive assets with long leases and good quality tenants which could be realised at, or close to, valuation. The Company could then continue to operate un-geared.
As such, having assessed the worst case plausible scenario for the assessment period, the Directors are not aware of any material uncertainties in relation to the Company's ability to continue in operation for a period of 12 months from the date of approval of these financial statements. Given the Company's substantial cash balance and headroom against its borrowing covenants, the Directors believe that the Company is well placed to manage its financing and business risks, including those associated with COVID-19, and the Board is of the opinion that the going concern basis adopted in the preparation of the Annual Report is appropriate.
Viability Statement
The Directors have also assessed the prospects of the Company over a period longer than the 12 months required by the 'Going Concern' provisions. The Board has considered the nature of the Company's assets, liabilities and associated cash flows, and has determined that five years up to 31 March 2025 is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to assess the Company's viability.
Considerations in support of the assessment of the Company's viability over a five-year period include:
- the current unexpired term under the Company's debt facility stands at 3.6 years, meaning that financing is secure for the majority of the period under consideration;
- the Company's property portfolio has a WAULT of 5.55 years to expiry, representing a secure income stream for the period under consideration;
- the Company benefits from a portfolio which is diversified in terms of sector and location, mitigating the risk of tenant default during the period;
- most leases contain a five-year rent review pattern and therefore an assessment over five years allows the Directors to assess the impact of the portfolio's reversion arising from rent reviews.
In assessing the Company's viability, the Board has carried out a thorough review of the Company's business model, including future performance, REIT compliance, liquidity, dividend cover and banking covenant tests over a five year period.
The business model is subject to annual sensitivity analysis, which involves flexing a number of key assumptions underlying the forecasts both individually and in aggregate for normal and stressed conditions. The five year review also considers whether financing facilities will be renewed as required.
The following scenarios were tested, both individually and combined, in an effort to represent a severe but plausible scenario, which might reasonably be expected to arise as a result of the outbreak of COVID-19, amongst other factors:
- portion of rent written off completely
- fall in portfolio valuation
- increased periods of vacancy
Based on the result of this analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.
Subsidiary Company
Details of the Company's subsidiary, AEW UK REIT 2015 Limited, can be found in Note 17 to the Financial Statements.
Financial Risk Management
The financial risk management objectives and policies can be found in Note 20 to the Financial Statements.
Share Capital
Share Issues
At a general meeting held on 12 September 2018, the Company was granted authority to allot up to (i) 250 million Ordinary Shares of £0.01 each in the capital of the Company and/or (ii) 250 million convertible redeemable preference shares ('C Shares') of £0.01 each in the capital of the Company pursuant to a potential Share Issuance Programme. The Company published its Prospectus in relation to the Share Issuance Programme on 1 March 2019.
At the AGM held on 12 September 2019, the Company was granted the authority to allot Ordinary Shares up to an aggregate nominal amount of £151,558 on a non pre-emptive basis. No Ordinary Shares have been allotted under this authority and the authority will expire at the conclusion of the 2020 AGM.
On 26 February 2020, the Company successfully raised gross proceeds of £7 million under the Company's Placing Programme which expired on 28 February 2020. 7,216,495 new Ordinary Shares were issued and allotted at a price of 97 pence per Ordinary Share.
As at 31 March 2020, the Company had 158,774,746 Ordinary Shares in issue.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information in a single identifiable section of the annual report or a cross reference table indicating where the information is set out. The Directors confirm that there are no disclosures required in relation to Listing Rule 9.8.4.
Related Party Transactions
Related party transactions during the year ended 31 March 2020 can be found in Note 22 to the Financial Statements.
Post Balance Sheet Events
Post balance sheet events can be found in Note 24 to the Financial Statements.
The Directors' Report has been approved by the Board of Directors and signed on its behalf by:
Mark Burton
Chairman
22 June 2020
Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and applicable law.
Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable, relevant and reliable;
- state whether they have been prepared in accordance with IFRS as adopted by the EU;
- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
- the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
We consider the Annual Report and the Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
Mark Burton
Chairman
22 June 2020
Non-statutory Accounts
The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 March 2020 but is derived from those accounts. Statutory accounts for the year ended 31 March 2020 will be delivered to the Registrar of Companies in due course. The Independent Auditor has reported on those accounts; its report was (i) unqualified, (ii) did not include a reference to any matters to which the Independent Auditor drew attention by way of emphasis without qualifying its report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Independent Auditor's Report can be found in the Company's full Annual Report and Financial Statements on the Company's website.
Financial Statements
Statement of Comprehensive Income
for the year ended 31 March 2020
|
Notes
|
Year ended
31 March
2020
£'000
|
Year ended
31 March
2019
£'000
|
Income
|
|
|
|
Rental and other income
|
3
|
17,790
|
17,183
|
Property operating expenses
|
4
|
(1,326)
|
(1,462)
|
Net rental and other income
|
|
16,464
|
15,721
|
|
|
|
|
|
|
|
|
Other operating expenses
|
4
|
(1,877)
|
(2,075)
|
Directors' remuneration
|
5
|
(115)
|
(122)
|
Operating profit before fair value changes
|
|
14,472
|
13,524
|
|
|
|
|
Change in fair value of investment properties
|
10
|
(9,444)
|
4,184
|
Realised gain/(loss) on disposal of investment properties
|
|
44
|
(482)
|
Operating profit
|
|
5,072
|
17,226
|
|
|
|
|
Finance expense
|
6
|
(1,420)
|
(1,682)
|
Profit before tax
|
|
3,652
|
15,544
|
Taxation
|
7
|
-
|
-
|
Profit after tax
|
|
3,652
|
15,544
|
Other comprehensive income
|
|
-
|
-
|
Total comprehensive income for the year
|
|
3,652
|
15,544
|
Earnings per share (pps) (basic and diluted)
|
8
|
2.40
|
10.26
|
The notes below form an integral part of these financial statements.
Statement of Changes in Equity
for the year ended 31 March 2020
For the year ended
31 March 2020
|
Notes
|
Share capital
£'000
|
Share
premium
account
£'000
|
Capital
reserve and
retained
earnings*
£'000
|
Total capital
and reserves
attributable to
owners of the
Company
£'000
|
|
|
|
|
|
|
Balance at 1 April 2019
|
|
1,515
|
49,770
|
98,171
|
149,456
|
|
|
|
|
|
|
Total comprehensive income
|
|
-
|
-
|
3,652
|
3,652
|
Ordinary shares issued
|
18/19
|
72
|
6,928
|
-
|
7,000
|
Share issue costs
|
19
|
-
|
(120)
|
-
|
(120)
|
Dividends paid
|
9
|
-
|
-
|
(12,125)
|
(12,125)
|
Balance at 31 March 2020
|
|
1,587
|
56,578
|
89,698
|
147,863
|
|
|
|
|
|
|
For the year ended
31 March 2019
|
Notes
|
Share capital
£'000
|
Share
premium
account
£'000
|
Capital
reserve and
retained
earnings
£'000
|
Total capital
and reserves
attributable to
owners of the
Company
£'000
|
|
|
|
|
|
|
Balance at 1 April 2018
|
|
1,515
|
49,768
|
94,751
|
146,034
|
|
|
|
|
|
|
Total comprehensive income
|
|
-
|
-
|
15,544
|
15,544
|
Share issue costs
|
19
|
-
|
2
|
-
|
2
|
Dividends paid
|
9
|
-
|
-
|
(12,124)
|
(12,124)
|
Balance at 31 March 2019
|
|
1,152
|
49,770
|
98,171
|
149,456
|
* The capital reserve has arisen from the cancellation of part of the Company's share premium account and is a distributable reserve.
The notes below form an integral part of these financial statements.
Statement of Financial Position
as at 31 March 2020
|
Notes
|
31 March 2020
£'000
|
31 March 2019
£'000
|
|
|
|
|
Assets
|
|
|
|
Non-Current Assets
|
|
|
|
Investment property
|
10
|
187,042
|
196,129
|
|
|
187,042
|
196,129
|
Current Assets
|
|
|
|
Receivables and prepayments
|
11
|
7,351
|
4,469
|
Other financial assets held at fair value
|
12
|
14
|
162
|
Cash and cash equivalents
|
|
9,873
|
2,131
|
|
|
17,238
|
6,762
|
Total Assets
|
|
204,280
|
202,891
|
Non-Current Liabilities
|
|
|
|
Interest bearing loans and borrowings
|
13
|
(51,047)
|
(49,476)
|
Lease obligations
|
15
|
(635)
|
(636)
|
|
|
(51,682)
|
(50,112)
|
Current Liabilities
|
|
|
|
Payables and accrued expenses
|
14
|
(4,687)
|
(3,275)
|
Lease obligations
|
15
|
(48)
|
(48)
|
|
|
(4,735)
|
(3,323)
|
Total Liabilities
|
|
(56,417)
|
(53,435)
|
Net Assets
|
|
147,863
|
149,456
|
Equity
|
|
|
|
Share capital
|
18
|
1,587
|
1,515
|
Share premium account
|
19
|
56,578
|
49,770
|
Capital reserve and retained earnings
|
|
89,698
|
98,171
|
Total capital and reserves attributable to equity holders
|
|
147,863
|
149,456
|
Net Asset Value per share (pps)
|
8
|
93.13pps
|
98.61 pps
|
The financial statements were approved by the Board on 22 June 2020 and signed on its behalf by:
Mark Burton
Chairman
AEW UK REIT plc (Company number: 09522515)
The notes below form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 31 March 2020
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Cash flows from operating activities
|
|
|
Profit before tax
|
3,652
|
15,544
|
|
|
|
Adjustment for non-cash items:
|
|
|
Finance expenses
|
1,420
|
1,682
|
Loss/(gain) from change in fair value of investment property
|
9,444
|
(4,184)
|
Realised (gain)/loss on disposal of investment properties
|
(44)
|
482
|
Increase in other receivables and prepayments
|
(2,882)
|
(1,318)
|
Increase in other payables and accrued expenses
|
1,424
|
587
|
Net cash flow generated from operating activities
|
13,014
|
12,793
|
Cash flows from investing activities
|
|
|
Purchase of and additions to investment properties
|
(358)
|
(7,945)
|
Disposal of investment properties
|
44
|
6,629
|
Net cash used in investing activities
|
(314)
|
(1,316)
|
Cash flows from financing activities
|
|
|
Proceeds from issue of ordinary share capital
|
7,000
|
-
|
Share issue costs
|
(120)
|
(32)
|
Loan drawdown
|
1,500
|
-
|
Arrangement loan facility fee paid
|
(39)
|
(294)
|
Premiums for interest rate caps
|
-
|
(531)
|
Finance costs
|
(1,174)
|
(1,076)
|
Dividends paid
|
(12,125)
|
(12,124)
|
Net cash used in financing activities
|
(4,958)
|
(14,057)
|
Net increase/(decrease) in cash and cash equivalents
|
7,742
|
(2,580)
|
Cash and cash equivalents at start of the year
|
2,131
|
4,711
|
Cash and cash equivalents at end of the year
|
9,873
|
2,131
|
|
|
|
Notes to the Financial Statements
for the year ended 31 March 2020
1. Corporate information
AEW UK REIT plc (the 'Company') is a closed ended Real Estate Investment Trust ('REIT') incorporated on 1 April 2015 and domiciled in the UK. The registered office of the Company is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
The Company's Ordinary Shares were listed on the Official List of the FCA and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015.
The nature of the Company's operations and its principal activities are set out in the Strategic Report above.
2. Accounting policies
2.1 Basis of preparation
These financial statements are prepared and approved by the Directors in accordance with IFRS and interpretations issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU IFRS').
These financial statements have been prepared under the historical cost convention, except for investment property and interest rate derivatives that have been measured at fair value.
The financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000), except when otherwise indicated.
The Company is exempt by virtue of Section 402 of the Companies Act 2006 from the requirement to prepare group financial statements. These financial statements present information solely about the Company as an individual undertaking.
New standards, amendments and interpretations
The following new standards and amendments to existing standards have been published and approved
by the EU. The Company has applied the following standards from 1 April 2019, with the year ended 31 March 2020 being the first year end reported under the standards:
- IFRS 16 Leases. In January 2016, the IASB published the final version of IFRS 16 Leases. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leasing arrangements. The new standard results in almost all leases held as lessee being recognised on the balance sheet, as the distinction between operating and finance leases is removed. However, IFRS 16 has not impacted operating leases held by the Company where the Company is lessor.
Under IFRS 16, where the Company is lessee, it now recognises the right-to-use asset in the Consolidated Statement of Financial Position at the present value of future lease payments cash flows.
In addition, a financial liability is also recognised in the Consolidated Statement of Financial Position which is valued at the present value of future lease payments cash flows.
A reconciliation of the presentation under IFRS 16 versus IAS 17 has not been presented, as there was
an immaterial impact on the net assets. There were no new lease liabilities arising during the year. Accordingly, comparative amounts have not been restated.
The following have been considered, but have had no impact on the Company for the reporting period:
- Amendments to IFRS 9;
- IFRIC 23, Uncertainty over Income Tax Treatments;
- Amendments to IAS 28 Long Term Interests in Associates and Joint Ventures; and
- Amendments to IAS 19 Plan Amendment, Curtailment or Settlement.
The following new standards and amendments to existing standards have been published and approved by the EU, and are mandatory for the Company's accounting periods beginning after 1 April 2020 or later periods:
- Definition of Material - amendments to IAS 1 and IAS 8;
- Annual improvements to IFRS 2015-2017 Cycle: amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs;
- IFRS 17 - Insurance Contracts; and
- Revised Conceptual Framework for financial reporting: The IASB has issued a revised Conceptual Framework for future standard setting decisions. No changes will be made to any of the current standards.
The Company does not expect the adoption of new accounting standards issued but not yet effective to have a significant impact on its financial statements.
2.2 Significant accounting judgements and estimates
The preparation of financial statements in accordance with EU IFRS requires the Directors of the Company to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. 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 in the future.
There are not considered to be any judgements which have a significant effect on the amounts recognised in the financial statements, however, there is an estimate that will have a significant effect on the amounts recognised in the financial statements:
i) Valuation of investment property
The Company's investment property is held at fair value as determined by the independent valuer on the basis of fair value in accordance with the internationally accepted RICS Appraisal and Valuation Standards.
2.3 Segmental information
In accordance with IFRS 8, the Company is organised into one main operating segment being investment in property in the UK.
2.4 Going concern
The Directors have made an assessment of the Company's ability to continue as a going concern, which takes into consideration the uncertainty surrounding the outbreak of COVID-19, as well as the Company's cash flows, financial position, liquidity and borrowing facilities.
As at 31 March 2020, the Company had a cash balance of £9.87 million and has subsequently disposed of one property, Geddington Road, Corby, for gross proceeds of £18.80 million, providing further liquidity.
The Company had sufficient headroom against its borrowing covenants when last reported in April 2020, which can be found in the Investment Manager's Report above. The Company reported a Loan to NAV of 34.8%, so had room for a £33.4 million fall in NAV before reaching the maximum Loan to NAV of 45% per the covenant. This limit can be increased to 55% when the option is exercised by the Company and certain conditions are met, which would allow for a further £20.8 million fall in NAV i.e. a total fall of £54.2 million. The Company also passed its most recent interest cover ratio ('ICR') test, reporting on the quarter to 31 March 2020. A waiver of the next two tests for the quarters to 30 June and 30 September 2020 has been successfully negotiated with RBSi, as a result of conditions in the wider economic environment. This will be reviewed again in relation to the test covering the quarter to 31 December 2020 and beyond as required.
The Company benefits from a secure, diversified income stream from a tenancy profile which is not overly reliant on any one tenant or sector. As at the date of this report, 84% of the rent due for the March 2020 quarter has been collected.
Taking this into consideration, the Directors have reviewed a number of scenarios over 12 months, including an extreme, but plausible, downside scenario which makes the following assumptions:
* Failure of 25% to 30% of tenants (by passing rent);
* Collection of c.50% of remaining rents on the quarter date, with remaining collection deferred for three quarters;
* No new lettings or renewals, other than those where terms have already been agreed;
* A 25% fall in valuations;
* No new acquisitions or disposals;
* 3-month GBP LIBOR at 0.5%; and
* Passing of the continuation vote in September 2020.
The Company's cash resources available of £27.28 million (as at 19 June 2020) are sufficient to cover any losses incurred in the above scenario over the 12 month assessment period and surplus cash available could be used to manage the Company's gearing, maintaining a Loan to NAV ratio below 40% and therefore the margin at 1.4%. Details of the margin charged under the facility can be found in the Investment Manager's Report above. The Company's cash flow can also be managed through the adjustment of dividend payments and reduction of outflows on capital expenditure and acquisitions.
In the above scenario, the Company is forecast to pass its ICR tests for the quarters to December 2020 and March 2021, albeit with marginal headroom, assuming that a portion of the debt would have to be repaid in order to keep the margin at 1.4%. The Directors are confident that further waivers of the ICR test could be extended throughout the assessment period should economic conditions not improve and have had informal discussions with the lender in this respect. In the unlikely event that the Company were to breach its ICR covenant, it has the ability to 'cure' the breach by placing cash on account with the bank. In the extremely unlikely event that the full balance of the facility was called in, the Company has certain more attractive assets with long leases and good quality tenants which could be realised at, or close to, valuation. The Company could then continue to operate un-geared.
As such, having assessed the worst case plausible scenario for the assessment period, the Directors are not aware of any material uncertainties in relation to the Company's ability to continue in operation for a period of 12 months from the date of approval of these financial statements. Given the Company's substantial cash balance and headroom against its borrowing covenants, the Directors believe that the Company is well placed to manage its financing and business risks, including those associated with COVID-19, and the Board is of the opinion that the going concern basis adopted in the preparation of the Annual Report is appropriate.
2.5 Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below.
a) Presentation currency
These financial statements are presented in Sterling, which is the functional and presentational currency
of the Company. The functional currency of the Company is principally determined by the primary economic environment in which it operates. The Company did not enter into any transactions in foreign currencies during the year.
b) Revenue recognition
i) Rental income
Rental income receivable under operating leases is recognised on a straight-line basis over the term of the lease. Rental income is invoiced in advance, except for contingent rental income, which is calculated based off prior turnover and is recognised when it is raised. Any modification to an operating lease is accounted for as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease. Any lease incentive existing on a modified lease will then be spread evenly over the new remaining life of the lease.
Rent adjustments based on open market estimated rental values are only recognised once the review has been finalised.
Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Statement of Comprehensive Income when the right to receive them arises.
Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.
ii) Deferred income
Deferred income is any rental income that has been invoiced to the tenant but relates to future periods, it is reported as a current liability on the Statement of Financial Position.
c) Dividend income
Dividend income is recognised in profit or loss on the date the entity's right to receive a dividend is established.
d) Financing income and expenses
Financing income comprises interest receivable on funds invested. Financing expenses comprise interest and other costs incurred in connection with the borrowing of funds. Interest income and interest payable are recognised in profit or loss as they accrue, using the effective interest method.
e) Investment property
Property is classified as investment property when it is held to earn rentals or for capital appreciation or both. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes and professional fees to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in profit or loss.
Investment properties are valued by the independent valuer on the basis of a full valuation with physical inspection at least once a year. Any valuation of an immovable by the independent valuer must be undertaken in accordance with the current issue of RICS Valuation - Professional Standards (the 'Red Book').
The determination of the fair value is based upon the income capitalisation approach. This approach involves applying capitalisation yields to current and future rental streams net of income voids arising from vacancies or rent-free periods and associated running costs. These capitalisation yields and estimated rental values are based on comparable property and leasing transactions in the market using the valuer's professional judgement and market observation. Other factors taken into account in the valuations include the tenure of the property, tenancy details, capital values of fixtures and fittings, environment matter and the overall repair and condition of the property.
For the purposes of these financial statements, the assessed fair value is:
- reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives; and
- increased by the carrying amount of leasehold obligations.
Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal.
The profit on disposal is determined as the difference between the net sales proceeds and the carrying amount of the asset at the commencement of the accounting period plus capital expenditure in the period.
Any gains or losses on the retirement or disposal of investment property are recognised in the profit or loss in the year of retirement or disposal.
f) Investments in subsidiaries
AEW UK REIT 2015 Limited is the subsidiary of the Company. The subsidiary was dormant during the current and previous reporting period. The investment in the subsidiary is stated at cost less impairment and shown in note 17.
The Company has taken advantage of the exemption as permitted by Section 405 of the Companies Act 2006, therefore the subsidiary is not consolidated as its inclusion is not material for the purposes of giving a true and fair view.
g) Investment property held for sale
Investment property is classified as held for sale when it is being actively marketed at year end and it is highly probable that the carrying amount will be recovered principally through a sale transaction within 12 months.
Investment property classified as held for sale is included within current assets within the Statement of Financial Position and measured at fair value.
h) Derivative financial instruments
Derivative financial instruments, comprising interest rate caps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Company would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Company and its counterparties. Premiums payable under such arrangements are initially capitalised into the Statement of Financial Position.
The Company 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. Changes in fair value of interest rate derivatives are recognised within finance expenses in profit or loss in the period in which they occur.
i) Cash and cash equivalents
Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and short-term deposits with an original maturity of three months or less.
j) Receivables
Rent and other receivables are initially recognised at fair value and subsequently at amortised cost. Impairment provisions are recognised based upon an expected credit loss model. The Company has made an assessment of expected credit losses at each period end, using the simplified approach where a lifetime expected loss allowance is always recognised over the expected life of the financial instrument. Any adjustment is recognised in profit or loss as an impairment gain or loss.
Expected credit losses are assessed based on the Company's historical credit loss experience, adjusted for factors which are specific to the tenant and current and forecast economic conditions in general. If confirmation is received that a trade receivable will not be collected, the carrying value of the asset will be written off against the associated impairment provision.
k) Capital prepayments
Capital prepayments are made for the purpose of acquiring future property assets and held as receivables within the Statement of Financial Position. When the asset is acquired, the prepayments are capitalised as a cost of purchase. Where a purchase is not successful, these costs are expensed within profit or loss as abortive costs in the period.
l) Other payables and accrued expenses
Other payables and accrued expenses are initially recognised at fair value and subsequently held at amortised cost.
m) Rent deposits
Rent deposits represent cash received from tenants at inception of a lease and are subsequently transferred to the rent agent to hold on behalf of the Company.
n) Interest bearing loans and borrowings
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowing costs are amortised over the lifetime of the facilities through profit or loss.
When the lifetime of a floating rate facility is extended, and this is considered to be a non-substantial modification, the effective interest rate is revised to reflect changes in market rates of interest.
o) Provisions
A provision is recognised in the Statement of Financial Position when the Company has a present legal or constructive obligation as a result of a past event, that can be reliably measured and is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
p) Dividend payable to shareholders
Equity dividends are recognised when they become legally payable.
q) Share issue costs
The costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity.
r) Leases
Leases where the Company is lessee are capitalised at the lease commencement, at present value of the minimum lease payments, and held as both a right-to-use asset and a liability within the Statement of Financial Position.
s) Taxes
Corporation tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case, it is recognised in equity.
As a REIT, the Company is exempt from corporation tax on the profits and gains from its investments, provided it continues to meet certain conditions as per REIT regulations.
Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Current tax is expected tax payable on any non-REIT taxable income for the period, using tax rates applicable in the period.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax that is provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the period end date.
t) European Public Real Estate Association
The Company has adopted European Public Real Estate Association ('EPRA') best practice recommendations, which it expects to broaden the range of potential institutional investors able to invest
in the Company's Ordinary Shares. For the year to 31 March 2020, audited EPS and NAV calculations under EPRA's methodology are included in note 8 and further unaudited measures are included below.
u) Capital and reserves
Share capital
Share capital is the nominal amount of the Company's ordinary shares in issue.
Share premium
Share premium relates to amounts subscribed for share capital in excess of nominal value less associated issue costs of the subscriptions.
Capital reserve
The capital reserve represents the cancelled share premium less dividends paid from this reserve. This is a distributable reserve.
Retained earnings
Retained earnings represent the profits of the Company less dividends paid from revenue profits to date. Unrealised gains on the revaluation of investment properties contained within this reserve are not distributable until they crystallise on the sale of the investment property. The cumulative unrealised losses contained within this reserve at 31 March 2020 is £10.76m (31 March 2019: £1.32m).
- Revenue
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Rental income received
|
|
|
Dilapidation income received
|
17,418
|
17,179
|
Other property income
|
372
|
-
|
Total revenue
|
-
|
4
|
|
17,790
|
17,183
|
Rent receivable under the terms of the leases is adjusted for the effect of any incentives agreed.
- Expenses
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Property operating expenses
|
1,326
|
1,462
|
Other operating expenses
|
|
|
Investment management fee
|
1,308
|
1,302
|
Auditor remuneration
|
106
|
98
|
Prospectus drafting costs
|
-
|
181
|
Other operating costs
|
463
|
494
|
Total other operating expenses
|
1,877
|
2,075
|
Total operating expenses
|
3,203
|
3,537
|
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Audit
|
|
|
Statutory audit of Annual Report and Financial Statements
|
82
|
75
|
|
82
|
75
|
Non-audit
|
|
|
Review of Interim Report
|
24
|
23
|
Renewal of Company's Prospectus
|
-
|
31
|
|
-
|
54
|
Total fees paid to KPMG LLP
|
106
|
129
|
Percentage of total fees attributed to non-audit services
|
23%
|
42%
|
- Directors' remuneration
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Directors' fees
|
107
|
114
|
Tax and social security
|
8
|
8
|
Total remuneration
|
115
|
122
|
|
|
|
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report in the Full Annual Report and Financial Statements.
There are no other members of key management personnel other than the Directors.
- Finance expenses
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Interest payable on loan borrowings
|
1,108
|
1,103
|
Amortisation of loan arrangement fee
|
110
|
127
|
Agency fee payable on loan borrowings
|
-
|
3
|
Commitment fees payable on loan borrowings
|
54
|
54
|
|
1,272
|
1,287
|
Charge in fair value of interest rate derivatives
|
148
|
395
|
Total
|
1,420
|
1,682
|
|
|
|
- Taxation
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Total tax comprises
|
|
|
|
|
|
Analysis of tax charge in the year
|
|
|
Profit before tax
|
3,652
|
15,544
|
Theoretical tax at UK corporation tax standard rate of 19.00% (2019: 19.00%)1
|
694
|
2,953
|
Adjusted for:
|
|
|
Exempt REIT income
|
(2,488)
|
(2,257)
|
Non taxable investment profit
|
1,786
|
(704)
|
Unrealised management expenses not recognised
|
8
|
8
|
Total tax charge
|
-
|
-
|
|
|
|
Factors that may affect future tax charges
Due to the Company's status as a REIT and the intention to continue meeting the conditions required to obtain approval as a REIT in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
1 The Corporation Tax rate will remain at 19% for the next financial year as announced in the 2020 budget rather than being reduced to 17% as previously announced.
- Earnings per share and NAV per share
|
Year ended
31 March 2020
|
Year ended
31 March 2019
|
Earnings per share:
|
|
|
Total comprehensive income (£'000)
|
3,652
|
15,544
|
Weighted average number of shares
|
152,208,919
|
151,558,251
|
Earnings per share (basic and diluted) (pence)
|
2.40
|
10.26
|
|
|
|
EPRA earnings per share:
|
|
|
Total comprehensive income (£'000)
|
3,652
|
15,544
|
Adjustment to total comprehensive income:
|
|
|
Change in fair value of investment properties (£'000)
|
9,444
|
(4,184)
|
Realised (gain)/loss on disposal of investment properties (£'000)
|
(44)
|
482
|
Change in fair value of interest rate derivatives (£'000)
|
148
|
395
|
Total EPRA Earnings (£'000)
|
13,200
|
12,237
|
EPRA earnings per share (basic and diluted) (pence)
|
8.67
|
8.07
|
NAV per share:
|
|
|
Net assets (£'000)
|
147,863
|
149,456
|
Ordinary Shares
|
158,774,746
|
151,558,251
|
NAV per share (pence)
|
93.13
|
98.61
|
EPRA NAV per share:
|
|
|
Net assets (£'000)
|
147,863
|
149,456
|
Adjustments to net assets:
|
|
|
Other financial assets held at fair value (£'000)
|
(14)
|
(162)
|
EPRA NAV (£'000)
|
147,849
|
149,294
|
EPRA NAV per share (pence)
|
93.12
|
98.51
|
|
|
|
Earnings per share (EPS) amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As at 31 March 2020, EPRA NNNAV was equal to IFRS NAV and, as such, a reconciliation between the two measures has not been presented.
- Dividends paid
Dividends paid during the period
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Represents four interim dividends of 2.00 pps each
|
12,125
|
12,124
|
Dividends relating to the period
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
Represents four interim dividends of 2.00 pps each
|
12,269*
|
12,124
|
Dividends paid during the period relate to Ordinary Shares only.
* Dividends relating to the period has increased due to the issue of new shares in February 2020, therefore the fourth interim dividend at 2.00pps was increased.
- Investments
10.a) Investment property
|
31 March 2020
|
|
|
Investment
property
freehold
£'000
|
Investment
property
leasehold
£'000
|
Total
£'000
|
31 March
2019
Total
£'000
|
UK investment property
|
|
|
|
|
As at beginning of the year
|
159,080
|
38,525
|
197,605
|
192,342
|
Purchases and capital expenditure in the year
|
363
|
(5)
|
358
|
7,590
|
Disposals in the year
|
-
|
-
|
-
|
(7,053)
|
Revaluation of investment properties
|
(12,043)
|
3,380
|
(8,663)
|
4,726
|
Valuation provided by Knight Frank
|
147,400
|
41,900
|
189,300
|
197,605
|
Adjustment to fair value for lease incentive debtor
|
|
|
(2,941)
|
(2,160)
|
Adjustment for finance lease obligations*
|
|
|
683
|
684
|
Total investment property
|
|
|
187,042
|
196,129
|
|
|
|
|
|
Gain/(loss) on disposal of the investment property
|
|
|
|
|
Net proceeds from disposals of investment property during the year
|
|
|
44
|
6,629
|
Carrying value at date of sale
|
|
|
‑
|
(7,053)
|
Lease incentives amortised in current year
|
|
|
-
|
(58)
|
Gain/(loss) realised on disposal of investment property
|
|
|
44
|
(482)
|
|
|
|
|
|
Change in fair value of investment property
|
|
|
|
|
Change in fair value before adjustments for lease incentives
|
|
|
(8,663)
|
4,726
|
Adjustment for movement in the year:
|
|
|
|
|
in value of lease incentive debtor
|
|
|
(781)
|
(542)
|
|
|
|
(9,444)
|
4,184
|
|
|
|
|
|
* Adjustment in respect of minimum payment under head leases separately included as a liability within the Statement of Financial Position
Valuation of investment property
Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.
The valuation of the Company's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards (incorporating the International Valuation Standards).
The determination of the fair value is based upon the income capitalisation approach. This approach involves applying capitalisation yields to current and future rental streams net of income voids arising from vacancies or rent-free periods and associated running costs. These capitalisation yields and estimated rental values are based on comparable property and leasing transactions in the market using the valuer's professional judgement and market observation. Other factors taken into account in the valuations include the tenure of the property, tenancy details, capital values of fixtures and fittings, environmental matter and the overall repair and condition of the property.
The report of the valuer on the property valuations as at 31 March 2020 contains the following material valuation uncertainty clause due to COVID-19 and its unknown impact at that point in time.
"The outbreak of COVID-19, declared by the World Health Organisation as a "Global Pandemic" on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. In the UK, market activity is being impacted in all sectors.
As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. Our valuations are therefore reported on the basis of 'material valuation uncertainty' per VPGA 10 of the RICS Valuation - Global Standards. Consequently, less certainty - and a higher degree of caution - should be attached to our valuations than would normally be the case.
Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuations under frequent review."
10.b) Fair value measurement hierarchy
The following table provides the fair value measurement hierarchy for investments:
|
Quoted prices in active markets (Level 1)
£'000
|
Significant observable inputs
(Level 2)
£'000
|
Significant unobservable inputs
(Level 3)
£'000
|
Total
£'000
|
Assets measured at fair value
|
|
|
|
|
31 March 2020
Investment property
|
-
|
-
|
187,042
|
187,042
|
31 March 2019
Investment property
|
-
|
-
|
196,129
|
196,129
|
Explanation of the fair value hierarchy:
Level 1 - Quoted prices for an identical instrument in active markets;
Level 2 - Prices of recent transactions for identical instruments and valuation techniques using observable market data; and
Level 3 - Valuation techniques using non-observable data.
There have been no transfers between Level 1 and Level 2 during either period, nor have there been any transfers in or out of Level 3.
Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property are:
1) ERV
2) Equivalent yield
Increases/(decreases) in the ERV (per sq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the discount rate/yield in isolation would result in a lower/(higher) fair value measurement.
The significant unobservable inputs used in the fair value measurement, categorised within Level 3 of the fair value hierarchy of the portfolio of investment property are as follows:
Class
|
Fair Value
£'000
|
Valuation
Technique
|
Significant
Unobservable Inputs
|
Range
|
31 March 2020
|
|
|
|
|
Investment property*
|
189,300
|
Income capitalisation
|
ERV
Equivalent yield
|
£0.50 - £105.00
5.71% - 10.54%
|
|
|
|
|
|
31 March 2019
|
|
|
|
|
Investment Property*
|
197,605
|
Income capitalisation
|
ERV
Equivalent yield
|
£1.00 - £127.00
5.87% - 10.25%
|
* Valuation per Knight Frank LLP.
Where possible, sensitivity of the fair values of Level 3 assets are tested to changes in unobservable inputs against reasonable alternatives.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at the end of the reporting period.
With regards to investment property, gains and losses for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, prior to adjustment for rent free debtor and rent guarantee debtor where applicable, are recorded in profit or loss.
The carrying amount of the assets and liabilities, detailed within the Statement of Financial Position, is considered to be the same as their fair value.
|
Change in ERV
|
Change in equivalent yield
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Sensitivity analysis
|
+5%
|
-5%
|
+5%
|
-5%
|
31 March 2020
Resulting fair value of investment property
|
197,146
|
180,075
|
179,906
|
199,956
|
31 March 2019
Resulting fair value of investment property
|
205,803
|
189,720
|
187,352
|
208,707
|
|
Change in ERV
|
Change in equivalent yield
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Sensitivity analysis
|
+10%
|
-10%
|
+10%
|
-10%
|
31 March 2020
Resulting fair value of investment property
|
205,933
|
171,723
|
171,241
|
211,640
|
31 March 2019
Resulting fair value of investment property
|
215,108
|
181,156
|
179,876
|
219,000
|
|
Change in ERV
|
Change in equivalent yield
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Sensitivity analysis
|
+15%
|
-15%
|
+15%
|
-15%
|
31 March 2020
Resulting fair value of investment property
|
214,777
|
163,364
|
163,327
|
224,687
|
31 March 2019
Resulting fair value of investment property
|
223,971
|
172,984
|
172,210
|
231,633
|
Given the current volatility in the property market, the above levels of sensitivity of unobservable inputs are considered to demonstrate plausible scenarios in the near future and a reasonable resulting range of movement in valuation.
- Receivables and prepayments
|
31 March 2020
£'000
|
31 March 2019
£'000
|
Receivables
|
|
|
Rent debtor
|
2,579
|
1,438
|
Allowance for expected credit losses
|
(190)
|
(39)
|
Rent agent float account
|
1,486
|
92
|
Dilapidations receivable
|
372
|
-
|
Other receivables
|
115
|
420
|
|
4,362
|
1,911
|
|
|
|
Lease incentive debtor
|
2,941
|
2,160
|
|
7,303
|
4,071
|
|
|
|
Prepayments
|
|
|
Property related prepayments
|
16
|
4
|
Other prepayments
|
32
|
394
|
|
48
|
398
|
Total
|
7,351
|
4,469
|
|
|
|
The aged debtor analysis of receivables is as follows:
|
31 March 2020
£'000
|
31 March 2019
£'000
|
Less than three months
|
4,317
|
1,911
|
Between three and six months
|
45
|
-
|
Between six and twelve months
|
-
|
-
|
Total
|
4,362
|
1,911
|
- Interest rate derivatives
|
31 March 2020
£'000
|
31 March 2019
£'000
|
At the beginning of the year
|
162
|
26
|
Interest rate cap premium paid
|
-
|
531
|
Changes in fair value of interest rate derivatives
|
(148)
|
(395)
|
At the end of the year/period
|
14
|
162
|
The Company is protected from a significant rise in interest rates as it currently has interest rate caps in effect with a combined notional value of £36.51 million (31 March 2019: £36.51 million), with £26.51 million capped at 2.50% and £10.00 million capped at 2.00%, resulting in the loan being 71% hedged (31 March 2019: 73%). These interest rate caps are effective until 19 October 2020. The Company has additional interest rate caps covering the remaining period of the loan from 20 October 2020 to 23 October 2023. After the year-end, the Company replaced its existing caps covering this period, which capped the interest rate at 2.0% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.0% on a notional value of £51.50 million. The Company paid a premium of £62,968.
Fair value hierarchy
The following table provides the fair value measurement hierarchy for interest rate derivatives:
Valuation
|
Quoted prices in
active markets
(Level 1)
£'000
|
Significant
observable input
(Level 2)
£'000
|
Significant
unobservable
inputs
(Level 3)
£'000
|
Total
£'000
|
31 March 2020
|
-
|
14
|
-
|
14
|
31 March 2019
|
-
|
162
|
-
|
162
|
The fair value of these contracts are recorded in the Statement of Financial Position as at the year end.
There have been no transfers between Level 1 and Level 2 during the period, nor have there been any transfers between Level 2 and Level 3 during the year.
The carrying amount of all assets and liabilities, detailed within the Statement of Financial Position, is considered to be the same as their fair value.
- Interest bearing loans and borrowings
|
Bank borrowings
|
|
31 March 2020
£'000
|
31 March 2019
£'000
|
At the beginning of the year/period
|
50,000
|
50,000
|
Bank borrowings drawn in the year
|
1,500
|
-
|
Interest bearing loans and borrowings
|
51,500
|
50,000
|
|
|
|
Unamortised loan arrangement fees
|
(453)
|
(524)
|
At the end of the year
|
51,047
|
49,476
|
Repayable between 2 and 5 years
|
51,500
|
50,000
|
Undrawn facility at the year end
|
8,500
|
10,000
|
Total facility
|
60,000
|
60,000
|
|
|
|
The Company has a £60.00 million (31 March 2019: £60.00 million) credit facility with RBSi of which £51.50 million (31 March 2019: £50.00 million) has been utilised as at 31 March 2020.
Under the terms of the Prospectus, the Company has a target gearing of 25% Loan to GAV, but can borrow up to 35% Loan to GAV in advance of a capital raise or asset disposal. As at 31 March 2020, the Company's gearing was 27.21% Loan to GAV (31 March 2019: 25.30%).
Under the terms of the loan facility, the Company can draw up to 35% Loan to NAV at drawdown. As at 31 March 2020, the Company could draw a further £0.25 million up to the maximum 35% (31 March 2019: £2.31 million).
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these financial statements.
|
31 March 2020
|
31 March 2019
|
Facility
|
£60.00 million
|
£60.00 million
|
Drawn
|
£51.50 million
|
£50.00 million
|
Gearing (Loan to GAV)
|
27.21%
|
25.30%
|
Gearing (Loan to NAV)
|
34.83%
|
33.45%
|
Interest rate
|
2.10% all-in
(LIBOR + 1.4%)
|
2.32% all-in
(LIBOR + 1.4%)
|
Notional value of Loan Balance Hedged
|
70.9%
|
73.0%
|
On 9 October 2019, the Company announced that it had completed an amendment to its loan facility to increase the hard loan to NAV covenant from 45% to 55% (subject to certain conditions), although the target gearing remains as set out in the Prospectus. There are no changes to the margin currently charged under the facility. Upcoming LIBOR reforms have been considered and their impact on the Company is expected to be immaterial, so no further disclosures have been added.
Reconciliation to cash flows from financing activities
|
Bank borrowings
|
|
31 March 2020
£'000
|
31 March 2019
£'000
|
|
|
|
Balance at the beginning of the year
|
49,476
|
49,643
|
|
|
|
Changes from financing cash flows
|
|
|
Loan drawdown
|
1,500
|
-
|
Loan arrangement fees
|
(39)
|
(294)
|
Total changes from financing cash flows
|
1,461
|
(294)
|
|
|
|
Other changes
|
|
|
Amortisation of loan arrangement fees
|
110
|
127
|
Interest expense
|
1,108
|
1,103
|
Interest paid
|
(1,120)
|
(1,021)
|
Changes in loan interest payable
|
(12)
|
82
|
Total other changes
|
110
|
127
|
Balance at the end of the year
|
51,047
|
49,476
|
|
|
|
- Payables and accrued expenses
|
31 March 2020
£'000
|
31 March 2019
£'000
|
Deferred income
|
2,906
|
1,137
|
Accruals
|
814
|
1,189
|
Other creditors
|
967
|
949
|
Total
|
4,687
|
3,275
|
|
|
|
- Lease obligations as lessee
Leases as lessee are capitalised at the lease's commencement at the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
The following table analyses the minimum lease payments under non-cancellable leases:
|
31 March 2020
£'000
|
31 March 2019
£'000
|
Within one year
|
48
|
48
|
After one year but not more than five years
|
159
|
160
|
More than five years
|
476
|
476
|
Non-Current
|
635
|
636
|
Total
|
683
|
684
|
|
|
|
16. Guarantees and commitments
As at 31 March 2020, there were capital commitments of nil (31 March 2019: £210,588).
Lease commitments - as lessor
The Company has entered into commercial property leases on its investment property portfolio. These non-cancelable leases have a remaining term of between zero and 24 years.
Future minimum rentals receivable under non-cancellable operating leases as at 31 March 2020 are as follows:
|
31 March 2020
£'000
|
31 March 2019
£'000
|
Within one year
|
15,325
|
16,387
|
After one year but not more than five years
|
37,828
|
41,304
|
More than five years
|
24,596
|
29,513
|
Total
|
77,749
|
87,204
|
During the year ended 31 March 2020 there were contingent rents totalling £188,872 (year ended 31 March 2019: £67,591) recognised as income.
17. Investment in subsidiary
The Company has a wholly-owned subsidiary, AEW UK REIT 2015 Limited:
Name and company number
|
Country of registration
and incorporation
|
Principal activity
|
Ordinary Shares held
|
AEW UK REIT 2015 Limited
(Company number 09524699)
|
England and Wales
|
Dormant
|
100%
|
AEW UK REIT 2015 Limited is a subsidiary of the Company incorporated in the UK on 2 April 2015. At 31 March 2020, the Company held one share, being 100% of the issued share capital. AEW UK REIT 2015 Limited is dormant and the cost of the subsidiary is £0.01 (31 March 2019: £0.01). The registered office of AEW UK REIT 2015 Limited is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
18. Issued share capital
|
31 March 2020
|
31 March 2019
|
|
£'000
|
Number of Ordinary Shares
|
£'000
|
Number of Ordinary Shares
|
Ordinary Shares (nominal value £0.01 per share) authorised, issued and fully paid
|
|
|
|
|
At the beginning of the year
|
1,515
|
151,558,251
|
1,515
|
151,558,251
|
Issued on admission to trading on the London Stock Exchange on 28 February 2020
|
72
|
7,216,495
|
-
|
-
|
At the end of the year
|
1,587
|
158,774,746
|
1,515
|
151,558,251
|
19. Share premium account
|
31 March
2020
£'000
|
31 March
2019
£'000
|
The share premium relates to amounts subscribed for share capital in excess of nominal value:
|
|
|
Balance at the beginning of the year
|
49,770
|
49,768
|
Issued on admission to trading on the London Stock Exchange on
28 February 2020
|
6,928
|
-
|
Share issue cost (paid and accrued)
|
(120)
|
2
|
Balance at the end of the year
|
56,578
|
49,770
|
20. Financial risk management objectives and policies
20.1 Financial assets and liabilities
The Company's principal financial assets and liabilities are those derived from its operations: receivables and prepayments, cash and cash equivalents and payables and accrued expenses. The Company's other principal financial liabilities are interest bearing loans and borrowings, the main purpose of which is to finance the acquisition and development of the Company's property portfolio.
Set out below is a comparison by class of the carrying amounts and fair value of the Company's financial instruments that are carried in the financial statements.
|
31 March 2020
|
31 March 2019
|
|
Book Value
£'000
|
Fair Value
£'000
|
Book Value
£'000
|
Fair Value
£'000
|
Financial assets
|
|
|
|
|
Receivables1
|
4,362
|
4,362
|
1,911
|
1,911
|
Cash and cash equivalents
|
9,873
|
9,873
|
2,131
|
2,131
|
Other financial assets held at fair value
|
14
|
14
|
162
|
162
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
Interest bearing loans and borrowings
|
51,047
|
51,500
|
49,476
|
50,000
|
Payables and accrued expenses2
|
1,532
|
1,532
|
1,923
|
1,923
|
Financial lease obligations
|
683
|
683
|
684
|
684
|
1 Excludes lease incentive debtor & prepayments.
2 Excludes tax, VAT liabilities and deferred income.
Interest rate derivatives are the only financial instruments classified as fair value through profit and loss. All other financial assets and financial liabilities are measured at amortised cost. All financial instruments were designated in their current categories upon initial recognition.
Fair value measurement hierarchy has not been applied to those classes of asset and liability stated above which are not measured at fair value in the financial statements. The difference between the fair value and book value of these items is not considered to be material.
20.2 Financing management
The Company's activities expose it to a variety of financial risks: market risk, real estate risk, credit risk and liquidity risk.
The Company's objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Company's activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls.
The principal risks facing the Company in the management of its portfolio are as follows:
Market price risk
Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Company diversifies its portfolio geographically in the United Kingdom and across property sectors.
The disciplined approach to the purchase, sale and asset management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee of the Investment Manager meets twice monthly and reserves the ultimate decision with regards to investment purchases or sales. In order to monitor property valuation fluctuations, the Investment Manager meets with the independent external valuer on a regular basis. The valuer provides a property portfolio valuation quarterly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every quarter.
Real estate risk
The Company is exposed to the following risks specific to its investment property:
Property investments are illiquid assets and can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the investment property difficult and inexact.
No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date.
There can be no certainty regarding the future performance of any of the properties acquired for the Company. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty.
Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments.
There are additional risks in vacant, part vacant, redevelopment and refurbishment situations, although these are not prospective investments for the Company.
Credit risk
Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Company by failing to meet a commitment it has entered into with the Company.
It is the Company's policy to enter into financial instruments with reputable counterparties. All cash deposits are placed with an approved counterparty, The Royal Bank of Scotland International Limited.
In respect of property investments, in the event of a default by a tenant, the Company will suffer a rental shortfall and additional costs concerning re-letting the property. The Investment Manager monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.
The table below shows the Company's exposure to credit risk:
|
As at
31 March 2020
£'000
|
As at
31 March 2019
£'000
|
Receivables (excluding incentives and prepayments)
|
4,362
|
1,911
|
Cash and cash equivalents
|
9,873
|
2,131
|
Total
|
14,235
|
4,042
|
Liquidity risk
Liquidity risk arises from the Company's management of working capital, the finance charges and principal repayments on its borrowings. It is the risk that the Company will encounter difficulty in meeting its financial obligations as they fall due, as the majority of the Company's assets are investment properties and therefore not readily realisable. The Company's objective is to ensure it has sufficient available funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Company's financial liabilities based on contractual undiscounted payments:
31 March 2020
|
On
demand
£'000
|
< 3
months
£'000
|
3-12
months
£'000
|
1-5
years
£'000
|
> 5
years
£'000
|
Total
£'000
|
Interest bearing loans and borrowings
|
-
|
270
|
811
|
54,203
|
-
|
55,284
|
Payables and accrued expenses
|
-
|
1,532
|
-
|
-
|
-
|
1,532
|
Lease obligation
|
-
|
-
|
51
|
205
|
4,256
|
4,512
|
|
-
|
1,802
|
862
|
54,408
|
4,256
|
61,328
|
|
|
|
|
|
|
|
31 March 2019
|
On
demand
£'000
|
<3
months
£'000
|
3-12
months
£'000
|
1-5
years
£'000
|
> 5
years
£'000
|
Total
£'000
|
Interest bearing loans and borrowings
|
-
|
290
|
877
|
54,145
|
-
|
55,312
|
Payables and accrued expenses
|
-
|
1,923
|
-
|
-
|
-
|
1,923
|
Finance lease obligation
|
-
|
-
|
51
|
205
|
4,307
|
4,563
|
|
-
|
2,213
|
928
|
54,350
|
4,307
|
61,798
|
21. Capital management
The primary objectives of the Company's capital management are to ensure that it continues to qualify for UK REIT status and complies with its banking covenants.
To enhance returns over the medium term, the Company utilises borrowings on a limited recourse basis for each investment or all or part of the total portfolio. The Company's policy is to target a borrowing level of 25% loan to GAV and it can borrow up to a maximum of 35% loan to GAV in advance of a capital raise or asset disposal. It is currently anticipated that the level of total borrowings will typically be at the level of 25% of GAV (measured at drawdown).
Alongside the Company's borrowing policy, the Directors intend, at all times, to conduct the affairs of the Company so as to enable the Company to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder). The REIT status compliance requirements include: 90% distribution test, interest cover ratio, 75% assets test and the substantial shareholder rule, all of which the Company remained compliant with in this reporting year.
The monitoring of the Company's level of borrowing is performed primarily using a Loan to GAV ratio, which is calculated as the amount of outstanding debt divided by the total valuation of investment property. The Company Loan to GAV ratio at the year end was 27.21% (31 March 2019: 25.30%).
Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. During the year under review, the Company did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreements.
22. Transactions with related parties
As defined by IAS 24 Related Parties Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
For the year ended 31 March 2020, the Directors of the Company are considered to be the key management personnel. Details of amounts paid to Directors for their services can be found within note 5, Directors' remuneration and the Director's remuneration report in the Full Annual Report and Financial Statements.
AEW UK Investment Management LLP is the Company's Investment Manager and has been appointed as AIFM. Under the terms of the Investment Management Agreement, the Investment Manager is responsible for the day-to-day discretionary management of the Company's investments subject to the investment objective and investment policy of the Company and the overall supervision of the Directors.
The Investment Manager is entitled to receive a quarterly management fee in respect of its services calculated at the rate of one-quarter of 0.9% of the prevailing NAV (excluding uninvested proceeds from fundraisings).
During the year, the Company incurred £1,308,301 (31 March 2019: £1,302,153) in respect of investment management fees and expenses, of which £311,683 (31 March 2019: £328,323) was outstanding as at 31 March 2020.
23. Segmental information
Management has considered the requirements of IFRS 8 'operating segments'. The source of the Company's diversified revenue is from the ownership of investment properties across the UK. Financial information on a portfolio basis is provided to senior management of the Investment Manager and the Directors, which collectively comprise the chief operating decision maker. The properties are managed on a portfolio basis and the chief operating decision maker assesses performance and makes resource allocation decisions at the portfolio level (being the total investment property portfolio held by the company). Therefore, the Company is considered to be engaged in a single segment of business, being property investment and in one geographical area, the United Kingdom.
24. Events after reporting date
Dividend
On 20 April 2020, the Board declared its fourth interim dividend of 2.00pps in respect of the period from 1 January 2020 to 31 March 2020. This was paid on 29 May 2020, to shareholders on the register as at 1 May 2020. The ex-dividend date was 30 April 2020.
Property sales
On 22 May 2020, the Company disposed of its asset at 2 Geddington Road, Corby, for gross proceeds of £18.80 million, delivering an IRR in excess of 30%.
Interest Rate Caps
After the year-end, the Company replaced it existing caps covering the period from October 2020 to October 2023, which capped the interest rate at 2.0% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.0% on a notional value of £51.50 million. The Company paid a premium of £62,968.
Solihull
In June 2020, the Company completed a 15 year renewal lease with the Secretary of State for Communities and Local Government at is Solihull office, Sandford House. The agreement documents the increase of rental income from the property by 30%.
EPRA Unaudited Performance Measures
Detailed below is a summary table showing the EPRA performance measures of the Company
All EPRA performance measures have been calculated in line with EPRA Best Practices Recommendations Guidelines which can be found at www.epra.com.
MEASURE AND DEFINITION
|
PURPOSE
|
PERFORMANCE
|
1. EPRA Earnings
Earnings from operational activities.
|
A key measure of a company's underlying operating results and an indication of the extent to which current dividend payments are supported by earnings.
|
£13.20 million/8.67 pps
EPRA earnings for year to
31 March 2020 (31 March 2019: £12.24 million/8.07 pps)
|
2. EPRA NAV
Net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business.
|
Makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy.
|
£147.85 million/93.12 pps
EPRA NAV as at 31 March
2020 (31 March 2019:
£149.29 million/98.51 pps)
|
3. EPRA NNNAV
EPRA NAV adjusted to include the fair values of:
(i) financial instruments;
(ii) debt; and
(iii) deferred taxes.
|
Makes adjustments to EPRA NAV to provide stakeholders with the most relevant information on the current fair value of all the assets and liabilities within a real estate company.
|
£147.86 million/93.13 pps
EPRA NNNAV as at 31 March
2020 (31 March 2019:
£149.46 million/98.61 pps)
|
4.1 EPRA NIY
Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs.
|
A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of portfolio X compares with portfolio Y.
|
8.26%
EPRA NIY as at 31 March 2020 (31 March 2019: 7.62%)
|
4.2 EPRA 'Topped-Up' NIY
This measure incorporates an adjustment to the EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives such as discounted rent periods and step rents).
|
A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of portfolio X compares with portfolio Y.
|
8.66%
EPRA 'Topped-Up' NIY
as at 31 March 2020 (31 March
2019: 8.58%)
|
5. EPRA Vacancy Rate
ERV of vacant space divided by ERV of the whole portfolio.
|
A 'pure' (%) measure of investment property space that is vacant, based on ERV.
|
3.68%
EPRA ERV as at 31 March 2020 (31 March 2019: 2.99%)
|
6. EPRA Cost Ratio
Administrative and operating costs (including and excluding costs of direct vacancy) divided by gross rental income.
|
A key measure to enable meaningful measurement of the changes in a company's operating costs.
|
18.75%
EPRA Cost Ratio (including direct vacancy costs) as at 31 March 2020 (31 March 2019: 21.04%)
13.76%
EPRA Cost Ratio (excluding direct vacancy costs) as at 31 March 2020 (31 March 2019: 15.81%)
|
7. EPRA Capital Expenditure
Property which has been held at both the current and comparative balance sheet dates for which there has been no significant development.
|
Is used to illustrate change in comparable capital values.
|
£0.29 million for the year ended 31 March 2020 (31 March 2019: £0.40 million)
|
8. EPRA Like-for-like Rental Growth
Net income generate by assets which were held by the Company throughout both the current and comparable periods
which there has been no significant development which materially impacts upon income.
|
Is used to illustrate change in comparable income values.
|
£0.29 million/1.71% for the year
ended 31 March 2020 (31 March 2019: -£1.05 million/-9.54%)
|
Calculation of EPRA Net Initial Yield ('NIY') and 'topped-up' NIY
|
Year ended
31 March
2020
£'000
|
Year ended
31 March
2019
£'000
|
Investment property - wholly-owned
|
189,300
|
197,605
|
Allowance for estimated purchasers' costs at 6.8%
|
12,872
|
13,437
|
Grossed-up completed property portfolio valuation (B)
|
202,172
|
211,042
|
|
|
|
Annualised cash passing rental income
|
17,361
|
16,725
|
Property outgoings
|
(670)
|
(651)
|
Annualised net rents (A)
|
16,691
|
16,074
|
|
|
|
Rent from expiry of rent-free periods and fixed uplifts
|
826
|
2,023
|
|
|
|
'Topped-up' net annualised rent (C)
|
17,517
|
18,097
|
|
|
|
EPRA NIY (A/B)
|
8.26%
|
7.62%
|
EPRA 'topped-up' NIY (C/B)
|
8.66%
|
8.58%
|
EPRA NIY basis of calculation
EPRA NIY is calculated as the annualised net rent, divided by the grossed-up value of the completed property portfolio valuation.
The valuation of the grossed-up completed property portfolio is determined by the Company's external valuers as at 31 March 2020, plus an allowance for estimated purchaser's costs. Estimated purchaser's costs are determined by the relevant stamp duty liability, plus an estimate by our valuers of agent and legal fees on notional acquisition. The net rent deduction allowed for property outgoings is based on the Company's valuers' assumptions on future recurring non-recoverable revenue expenditure.
In calculating the EPRA 'topped-up' NIY, the annualised net rent is increased by the total contracted rent from expiry of rent-free periods and future contracted rental uplifts.
Calculation of EPRA Vacancy Rate
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
|
|
|
Annualised potential rental value of vacant premises (A)
|
641
|
522
|
Annualised potential rental value for the complete property portfolio (B)
|
17,420
|
17,484
|
|
|
|
EPRA Vacancy Rate (A/B)
|
3.68%
|
2.99%
|
Calculation of EPRA Cost Ratios
|
Year ended
31 March 2020
£'000
|
Year ended
31 March 2019
£'000
|
|
|
|
Administrative/operating expense per IFRS income statement
|
3,319
|
3,660
|
Less: ground rent costs
|
(66)
|
(58)
|
EPRA costs (including direct vacancy costs) (A)
|
3,253
|
3,602
|
|
|
|
Direct vacancy costs (see Glossary in full Annual Report for further details)
|
(865)
|
(895)
|
EPRA costs (excluding direct vacancy costs) (B)
|
2,388
|
2,707
|
|
|
|
Gross rental income less ground rent costs (C)
|
17,352
|
17,121
|
|
|
|
EPRA Cost Ratio (including direct vacancy costs) (A/C)
|
18.75%
|
21.04%
|
EPRA Cost Ratio (excluding direct vacancy costs) (B/C)
|
13.76%
|
15.81%
|
The Company has not capitalised any overhead or operating expenses in the accounting years disclosed above.
Only costs directly associated with the purchase or construction of properties as well as all subsequent value-enhancing capital expenditure are capitalised.
Company Information
Share Register Enquiries
The register for the Ordinary Shares is maintained by Computershare Investor Services PLC. In the event of queries regarding your holding, please contact the Registrar on +44 (0)370 707 1341 or email: web.queries@computershare.co.uk.
Changes of name and/or address must be notified in writing to the Registrar, at the address shown below. You can check your shareholding and find practical help on transferring shares or updating your details at www.investorcentre.co.uk. Shareholders eligible to receive dividend payments gross of tax may also download declaration forms from that website.
Share Information
|
|
Ordinary £0.01 Shares
|
158,774,746
|
SEDOL Number
|
BWD2415
|
ISIN Number
|
GB00BWD24154
|
Ticker/TIDM
|
AEWU
|
Share Prices
The Company's Ordinary Shares are traded on the premium segment of the Main Market of the London Stock Exchange.
Frequency of NAV publication:
The Company's NAV is released to the London Stock Exchange on a quarterly basis and is published on the Company's website.
Annual and Half-Yearly Reports
Copies of the Annual and Half-Yearly Reports are available from the Company's website.
Financial Calendar
9 September 2020
|
Annual General Meeting
|
30 September 2020
|
Half-year end
|
November 2020
|
Announcement of half-yearly results
|
31 March 2021
|
Year end
|
June 2021
|
Announcement of annual results
|
Dividends
The following table summarises the amounts distributed to equity shareholders in respect of the period:
|
£
|
Interim dividend for the period 1 April 2019 to 30 June 2019
(payment made on 30 August 2019)
|
3,031,165
|
Interim dividend for the period 1 July 2019 to 30 September 2019 (payment made on 29 November 2019)
|
3,031,165
|
Interim dividend for the period 1 October 2019 to 31 December 2019
(payment made on 28 February 2020)
|
3,031,165
|
Interim dividend for the period 1 January 2020 to 31 March 2020
(payment made on 29 May 2020)
|
3,175,495
|
|
|
Total
|
12,268,990
|
|
|
Directors
Mark Burton (Non-executive Chairman)
Katrina Hart (Non-executive Director)
Bimaljit (''Bim'') Sandhu (Non-executive Director)
Registered Office
6th Floor
65 Gresham Street
London
EC2V 7NQ
Investment Manager and AIFM
AEW UK Investment Management LLP
33 Jermyn Street
London
SW1Y 6DN
Tel: 020 7016 4880
Website: www.aewuk.co.uk
Property Manager
Mapp
180 Great Portland Street
London
W1W 5QZ
Corporate Broker
Liberum
Ropemaker Place
25 Ropemaker Street
London
EC2Y 9LY
Legal Adviser
Gowling WLG (UK) LLP
4 More London Riverside
London
SE1 2AU
Depositary
Langham Hall UK LLP
8th Floor
1 Fleet Place
London
EC4M 7RA
Administrator
Link Alternative Fund Administrators Limited
Beaufort House
51 New North Road
Exeter
EX4 4EP
Company Secretary
Link Company Matters Limited
6th Floor
65 Gresham Street
London
EC2V 7NQ
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS13 8AE
Auditor
KPMG LLP
15 Canada Square
Canary Wharf
London
E14 5GL
Valuer
Knight Frank LLP
55 Baker Street
London
W1U 8AN
Copies of the Annual Report and Financial Statements and the Notice of AGM
Printed copies of the Annual Report will be sent to shareholders shortly and will be available on the Company's website.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ('NSM') and will be available for inspection at https://www.fca.org.uk/markets/primary-markets/regulatory-disclosures/national-storage-mechanism.
LEI: 21380073LDXHV2LP5K50
END