REG-abrdn Property Income Trust Limited: Annual Results - December 2023
30/04/2024 07:15
abrdn Property Income Trust Limited
(an authorised closed-ended investment company incorporated in Guernsey with
registration number 41352)
LEI Number: 549300HHFBWZRKC7RW84
(The “Company” or “API”)
30 April 2024
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023
The Company's Annual Report and Accounts for the year ended 31 December 2023
and the Notice of the Annual General Meeting will shortly be available to view
on the Company's corporate website at
https://www.abrdnpit.co.uk/en-gb/literature. The Documents have also been
submitted to the National Storage Mechanism and are available for inspection
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. Hard copies will
be posted to shareholders shortly.
PERFORMANCE SUMMARY
Earnings, Dividends & Costs 31 December 2023 31 December 2022
IFRS Earnings per share (p) (2.17) (13.11)
EPRA earnings per share (p) (excl capital items & swap movements) * 2.83 2.94
Dividends paid per ordinary share (p) 4.0 4.0
Dividend Cover (%) ** 71 73
Dividend Cover excluding non-recurring items (%) 82 97
Dividend Yield (%) *** 7.5 6.4
FTSE All-Share Real Estate Investment Trusts Index Yield (%) 4.5 4.6
FTSE All-Share Index Yield (%) 4.0 3.6
Ongoing Charges **
As a % of average net assets including direct property costs 2.5 2.2
As a % of average net assets excluding direct property costs 1.2 1.1
Capital Values & Gearing 31 December 2023 31 December 2022 Change %
Total assets (£million) 456.1 444.9 2.5
Net asset value per share (p) (note 21) 78.2 84.8 (7.8)
Ordinary Share Price (p) 53.0 62.4 (15.1)
(Discount)/Premium to NAV (%) (32.2) (26.4)
Loan-to-value (%) ** 30.8 22.6
Total Return 1 year % return 3 year % return 5 year % return 10 year % return
NAV ^ (3.0) 8.8 8.0 101.2
Portfolio 0.7 12.6 15.9 99.4
AIC Property Direct – UK Commercial (weighted average) NAV Total Return (0.8) 10.9 18.2 73.6
Share Price ^ (8.2) 6.6 (11.7) 35.2
AIC Property Direct – UK Commercial (weighted average) Share Price Total Return (1.3) 6.8 5.1 22.0
FTSE All-Share Real Estate Investment Trusts Index 11.6 (1.1) 8.3 35.5
FTSE All-Share Index 7.9 28.1 37.7 68.2
Property Returns & Statistics (%) 31 December 2023 31 December 2022
Portfolio income return 5.3 4.4
MSCI Benchmark income return 4.6 4.1
Portfolio total return 0.7 (8.8)
MSCI Benchmark total return (1.5) (8.9)
Void rate 7.6 9.8
* Calculated as profit for the period before tax (excluding capital items &
swaps costs) divided by weighted average number of shares in issue in the
period. EPRA stands for European Public Real Estate Association.
** As defined and calculated under API’s Alternative Performance Measures
(as detailed in the full Annual Accounts which can be found via the following
link: https://www.abrdnpit.co.uk/en-gb/literature)
*** Based on dividend paid of 4.0p and the share price at 31 December 2023 of
53.0p.
^ Assumes re-investment of dividends excluding transaction costs.
Sources: abrdn, MSCI
CHAIR’S STATEMENT
Background
Despite grappling with global uncertainties, ranging from geopolitical
tensions to the persistent shadow of COVID-19, the UK economy exhibited
commendable resilience during 2023. A notable feature of the economic
landscape in 2023 was the resurgence of inflationary pressures, fuelled by a
combination of factors including supply chain disruptions, rising energy
prices and wage pressures. The Bank of England responded decisively to these
challenges, implementing measured adjustments to monetary policy in an effort
to temper inflation while supporting economic growth. As we sit here in
April 2024, it would appear that this fine balance has been well judged with a
meaningful recession avoided, and inflation on a downwards trajectory.
Corporate Activity
During the second half of 2023 the Board undertook a strategic review. This
review was prompted by the Board’s concerns, as well as those of some
shareholders about the Company’s size, the lack of liquidity in its shares,
the discount to NAV and uncovered dividend. The outcome of this review,
following interest from other listed REITs, was that the Board recommended to
shareholders that they vote in favour of a proposed merger with Custodian REIT
for the reasons outlined in various announcements to shareholders during the
first quarter of 2024.
The Company’s Court Meeting and General Meeting were both held on 27 March
2024, with the proportions of API Shares voting in favour of the proposed
merger being below the minimum threshold required. Prior to this date, the
Board explained to shareholders that if the proposed merger was rejected, it
would take the necessary actions to put the Company into a managed and orderly
wind-down. As such, following the vote, the Board announced that it intended
to take steps to implement a Managed Wind-Down subject to the approval of the
Company’s Shareholders at an upcoming Extraordinary General Meeting (EGM) on
28 May 2024. The outcome of this meeting is not guaranteed and will be known
only after publication of this report. Hence the Annual Report has been
prepared with a material uncertainty in relation to its going concern despite
the Boards belief that all present and future commitments will be met in
full. Further information on the Board’s assessment can be found in Note
2.1 of the Financial Statements below.
UK Real Estate Market
After the challenges of the second half of 2022 and the resultant market
re-pricing, 2023 saw some stabilisation with a marked improvement in real
estate total returns, albeit these remained marginally negative. Throughout
the year there was an expectation of a peak in interest rates followed swiftly
by the beginnings of a period of rate cuts. However, this failed to
materialise due to inflation levels remaining stubbornly elevated. The
uncertainty around inflation, interest rates and debt costs contributed to
weakened investor sentiment which resulted in significantly reduced investment
activity. According to CBRE, investment volumes in the UK were down 30.2%
when compared to 2022 with some sectors being more impacted than others.
This was most notable within the office sector, which persists in its
underperformance with the main driver being a continuation of outward yield
movement negatively impacting capital values. Whilst there was limited
transactional evidence in the sector, the transactions that did occur painted
a weakening picture. There was a stark divergence in value movement across
regions with, as an example, London’s West End significantly outperforming
the South East, albeit both still returning negative total returns.
Confidence in the sector has not recovered to pre-COVID levels, from either an
investor or occupier perspective and this is depressing demand and negatively
impacting values.
From an occupational perspective, demand continues to focus on prime or
“best-in-class” assets, characterised by those with high levels of amenity
and a strong emphasis on environmental and sustainable credentials.
Following a review of the Company’s office portfolio a number of years ago,
the Board and Investment Manager have progressed initiatives to maximise
amenity at all of the office assets within the confines of the specific
buildings. This has positioned the Company’s assets favourably within
their respective market and is evidenced by the good letting activity over the
year. It does, however, remain a focus of the Investment Manager to continue
to reduce the Company’s exposure to this sector, and this is evidenced by
the sale of 15 Basinghall Street in London which completed in March 2024.
In contrast to the performance of the office sector, the industrial sector has
recovered from the sharp pricing correction in late 2022 and early 2023 to
return to being the top-performing sector according to the MSCI Quarterly
Index. With the outward pressure on yields abating, and positive rental
growth continuing, the sector posted a total return of 4.1% for the year.
Whilst tenant demand remains robust and development levels low, the overall
vacancy rate within the sector is starting to rise. The increase is muted,
and the overall vacancy level remains below historic averages, but this is
perhaps the beginning of affordability having an impact on demand for some
occupiers. Expectations are that there will continue to be positive rental
growth within the sector, albeit at more muted levels than we have seen in
recent years. Both the Board and the Investment Manager continue to have
conviction around the portfolio’s significant exposure to the industrial
sector being a source of performance going forwards.
The retail sector outperformed on a total return basis, showing commendable
resilience largely led by a higher relative income return. The sector does,
however, continue to demonstrate a wide divergence of returns between the
sub-sectors bookended by High Street at the lower end and Retail Warehousing
at the higher. The inflationary pressures on household incomes have impacted
discretionary spending, with the discount and value retailers being the
beneficiaries. This divergence reinforces the Company’s strategy of
focusing its retail portfolio predominantly in retail warehousing let to
discount retailers.
Environmental, Social and Governance (ESG) factors are now an ever-present
consideration for investors and occupiers alike. The Board’s
Sustainability Committee oversees the work that the Company undertakes in this
area, demonstrating the importance that the Board places on this area. As an
example, the Company has taken great strides over recent years in the
installation of on-site renewable energy in the form of roof-mounted
photovoltaic panels. Recent elevated energy costs have brought significant
focus on the benefits of on-site renewable energy for occupiers, so the
Company’s work in this area will be a significant benefit going forward.
Portfolio and Corporate Performance
The NAV total return for the year was -3.0%. The real estate investment
portfolio returned 0.7%, which outperformed the MSCI Quarterly Property Index
benchmark return of -1.5% over the same period. The Company’s portfolio has
outperformed the Index over 1, 3, 5 and 10 years.
The share price total return for the year at -8.2% was a disappointment.
Similarly to 2022, the share price traded persistently at a high discount to
NAV throughout the year. Whilst the Board had utilised buybacks in previous
years, repeating this would have required additional borrowings at
unattractive interest rates so was not deemed a suitable option. The
discount level was one of the main reasons behind the Board undertaking a
review of the Company’s future.
IFRS earnings improved from -13.11p per share to -2.17p for 2023 reflecting
the stabilisation in property valuation moves compared to last year. EPRA
earnings per share decreased from 2.94p to 2.83p per share, a decrease of
3.7%.
Rent Collection
Following the disruption of COVID, collection rates have returned to where we
would expect with the fourth quarter sitting at 99.4% and the year as a whole
at 99.7%. This continued recovery in collection rates led to a further
reversal in bad debt provisions which contributed £213,048 (or 0.06p per
share) to performance. The diversified nature of the tenant mix within the
portfolio should mitigate the risk of individual tenant failure.
Financial Resources
The Company continues to be in a strong financial position with unutilised
financial resources of £25m available in the form of its revolving credit
facilities (“RCF”) net of existing cash and financial commitments.
As at the year end the Company had a Loan-to-Value (“LTV”) ratio of 30.8%,
which sits within the Board’s target range.
Dividends
The Board has maintained the annual dividend of 4p per share for 2023.
Dividend cover (excluding non-recurring costs) was 82% for 2023, reflecting a
decrease from 97% in 2022 (also excluding non-recurring items). Dividend cover
for Q4 2023 was 83% demonstrating progress towards full cover.
Annual General Meeting (“AGM”)
The Annual General Meeting (“AGM”) will be held at 2.00pm on Tuesday 13
August 2024 at 18 Bishops Square, London E1 6EG. The AGM has been deferred
from its typical June date to grant shareholders the opportunity to assess the
progress of the proposed Managed Wind-Down if voted for at the upcoming EGM.
The Board looks forward to welcoming shareholders in person where they will
have the opportunity to put questions to the Board and/or the Manager.
Shareholders are also invited to submit questions by email to
property.income@abrdn.com
Outlook
Looking ahead to 2024, there is cautious optimism around the trajectory for UK
real estate returns. At a macro level, the downward trajectory of inflation
will hopefully continue and lead to some confidence returning to the market
alongside interest rate cuts. Increased investor demand should strengthen
the market for good quality real estate assets in the right areas of the
market with appropriate ESG credentials.
At a property market level, there is an expectation of continued rental growth
in the industrial sector as well as the retail warehouse sector where vacancy
rates have been falling. Both these sectors are areas of the market in which
the Company has positioned itself with good levels of exposure, indicating
continued positive performance for the portfolio.
29 April 2024
James Clifton-Brown
INVESTMENT MANAGER’S REPORT
Market Review
One of the defining aspects of the UK commercial real estate market in 2023
was the low volume of investment transactions. It is worth remembering that
capital values fell by around 20% in the second half of 2022 as inflation took
hold and interest rates started to rise. Interest rate expectations have
defined sentiment over the course of 2023 with capital valuation declines more
muted over the period, averaging nearly 1.5% per quarter. As discussed below
this fall was driven by the office sector, whilst industrial and retail
warehouse values appear to have broadly stabilised.
For several years now sector allocation has played an important part in the
performance of a UK diversified property portfolio. This has transitioned from
retail underperforming to offices underperforming, and for a short period in
between when industrials underperformed (the 4th quarter 2022 derating of low
yielding assets hitting industrials very hard). Sector divergence is likely to
remain elevated but much more nuanced in the future, with Environmental,
Social and Governance (ESG) factors having a major influence on performance.
Returns in the direct UK real estate market in 2023 were negative, driven by
continued declines in capital values. The all Property capital index decline
in 2023 was 5.7% (compared to 2022’s decline of 12.8%). Total return was
-1.0% in 2023 compared to -9.1% in 2022. The listed sector is often considered
to be more forward looking than the direct market, and the REIT sector ended
2023 buoyantly, with the FTSE EPRA Nareit UK Index providing a total return of
10.7% for 2023, significantly outperforming the FTSE All-Share Index’s 7.9%
over the same period. The positivity in the REIT sector was most noticeable in
the 4th quarter of 2023, as sentiment towards the outlook for inflation and
interest rates became much more positive. Some of those gains have however
been given back over the first quarter of 2024 as the timing of interest rate
cuts seems to be being pushed back.
Industrial
Following a sharp sector-wide repricing in the 12 months to June 2023, the
industrial market rebounded, posting a positive annual total return of 4.1% by
the end of the year according to the MSCI Quarterly Index. Indeed, as yields
stabilised, capital value growth levelled out on an annual basis across all
Industrials at -0.4%. London and the Southeast posted total returns of 3.2%
and 4.0%, respectively, and all regions posted positive returns on an annual
basis. Rental growth has decelerated from the near-parabolic levels seen in
2022 as levels of supply and demand rebalance. In terms of demand, national
take-up over 2023 declined 40% year-on-year to 29.1m sq ft according to
Savills, though this represents a 12% increase over pre-Covid levels.
Manufacturing, food retailers, and third-party logistics operators (‘3PL’)
led take-up figures at 24%, 17%, and 15%, respectively. Similarly, overall
investment volumes reached £9.4 billion according to Real Capital Analytics
(RCA), down from the £15.8bn seen over 2022, and nearer to the long-term
average.
Availability rose across the UK during 2023 as occupiers recalibrated their
immediate requirements for space, although units over 200,000 sq ft are in
notable short supply with the greatest need in the South East for 3PLs. Rental
values within this sub-sector of the market will likely continue to be
squeezed higher as costs remain too high to justify Build-to-Suit space and
demand for e-commerce captures more of the post-Covid retail sales market.
Market rental growth is still expected to return positive values in the near
term across all industrial, albeit at a slower pace than recent years due to
incoming supply. With consumer confidence rising and the prospect of rate cuts
feeding through in the second half of 2024, occupiers will likely feel more
confident in bringing forward expansion plans as the economy improves.
Offices
The office sector continues to underperform, delivering an annual total return
of -10.2% to December 2023 according to the MSCI Quarterly Index. Weakening
capital values led this decline, accelerating in their deterioration over 2023
as the Bank of England raised interest rates to 15-yr highs to quell
inflationary pressure. This helped increase the polarisation of performance in
the office market between regions. Indeed, London West End offices
substantially outperformed its peers at -2.4% compared to -13.9% and -15.4%
for the City of London and wider Southeast offices, respectively. Market
rental value growth provides a similar story, with Midtown and West End
offices leading the pack at 4.8% and 4.4%, respectively, compared to 2.4% for
all offices.
As has been the trend post-Covid, concealed within these figures is an
occupational story of sustained flight to best-in-class quality, particularly
for assets with sustainability credentials and amenities. Outdated and out of
fashion stock is experiencing both the highest levels of vacancy and greatest
outward yield shifts. A dwindling pipeline due to rising interest rates and
elevated construction costs will only reinforce this trend over the medium
term as occupiers embrace flexible working strategies and undesirable offices
struggle to reduce vacancies.
Retail
The retail sector posted a total annual return of -0.1% to December 2023
according to the MSCI Quarterly Index, beating all property returns of -1.0%.
This proved to be a year of two halves as retail outperformed the all property
index over the first six months of 2023, seeing a relatively robust total
return of 2.2%. This trend reversed in the 2nd half of the year as cost of
living pressures cemented themselves, with West End standard retail and South
East retail warehouses posting -1.7% and -2.5%, respectively. Despite a
slowdown, retail has performed well in the context of the significant rebasing
seen over 2022. Much of this recovery was influenced by strong performance
within the high-yielding shopping centres and resilient retail warehousing
sub-sectors, with the latter posting consistent month-on-month rental growth
over the year.
Much of the relative performance within the retail warehousing sub-sector
comes from the continued resilience of discount retailers. Value supermarkets
and discount homeware brands have benefited significantly from consumers under
sustained cost of living pressures. This is evident within ONS retail sales
data through the widening divergence between retail sales values and volumes
as consumers increasingly spend more for less. Furthermore, as value operators
look to expand further, a limited pipeline of suitable properties should
support further rental growth in this sub-sector.
Market Outlook 2024
We expect the UK real estate market to bottom out in 2024 and start to improve
in the latter part of the year and into 2025. A catalyst for an improvement in
the fortunes for UK real estate will be the start of the interest rate cutting
cycle, matched with lower prices, and the prospect of a far more positive real
estate yield margin.
While the macro environment will continue to dominate in 2024, sector
allocation will remain crucial. Polarisation in performance from both a sector
and asset-quality perspective will remain a key differentiator for
performance. Real estate refinancing poses a risk to our outlook in 2024, but
we believe that the risk is more heavily skewed towards the office sector,
given the amount of outstanding debt and lack of appetite for lending to this
sector.
Sectors that benefit from longer-term growth drivers, such as the industrial
and logistics sector, will continue to garner the most interest from
investors. It is unlikely that there will be a material change in investor
sentiment towards the office sector, but more attractively priced
re-positioning opportunities will emerge over the course of 2024, with debt
re-capitalisation and funds working through redemptions the most likely source
of value. However, underwriting assumptions, particularly around capital
expenditure, are crucial. Long income assets now look more attractively
priced, and we anticipate there will be some good buying opportunities in this
area of the market in 2024.
Purchases:
The Company made two purchases during the year, both occurring early in the
year. Knowsley, Villiers Road – was a site purchase for a speculative
logistics development that completed in the first quarter although the
contract was exchanged the previous summer. The purchase was conditional on
a satisfactory planning consent. Further details of the development are
given below. Welwyn Garden City, Morrisons, is a supermarket purchased for
£18.29m reflecting a yield of 6.4%. The purchase was a sale and leaseback
with Morrisons giving a 25-year lease with CPI linked rent reviews (annual for
the first 5 years). The asset combines a long-term income with a high
yield.
Development:
The Company completed the development of its speculative logistics unit in
Knowsley in late December 2023. The unit is built to a high specification,
and we are confident that a letting will be achieved reasonably quickly given
the current level of interest and multiple inspections.
Although not strictly a development the Company also completed the substantial
refurbishment of a logistics unit in Washington. The unit had previously been
occupied by a manufacturer servicing Nissan; however, we agreed terms with
Hermes Parcelnet on expiry of the last lease for a new 15-year lease subject
to a scope of works by the landlord that changed the unit to a fully
specialist delivery hub. The refurbishment included a substantial photo
voltaic scheme, and the asset now has an EPC A rating.
Sales:
Only one sale completed during the year; a logistics property of two units in
Livingston Scotland for £6.25m before costs sold towards the end of 2023.
Given the various potential corporate transactions, sales were not progressed
in 2023, however a number of sales have been undertaken after the reporting
period as a strategy of prepaying the RCF was implemented.
▸London, 15 Basinghall Street (Office) – sold for £9.85m completed in the
first quarter.
▸Warrington, Opus 9 (Industrial) – sold in the first quarter for £6.75m.
▸Hebburn, Unit 4 Monkton Business Park (Industrial) – Sale completed in
April 2024 at £5.3m to the tenant.
▸Bristol, Kings Business Park (Industrial) – sold for £7.9m in April
2024.
In addition, soft marketing commenced after the period end for the sale of Far
Ralia, the Company’s natural capital asset. Timing of the exit is being
influenced by changes to the grant funding submission period and strong
progress on planting in order to maximise value for the Company. It is
realised that at a time of higher interest rates a non-income producing asset
sits less comfortably in an income focused fund. Indications suggest the
capital value uplift on a sale will make this investment one of the
Company’s better investments.
Asset Management:
Although not many investment transactions were completed over the course of
2023, the experienced and dedicated asset management team completed a
significant number of deals to enhance or protect the income to the Company.
Rent collection has returned to the levels expected following the disruption
of COVID.
Rent Collection Quarter % Received
2022 1 100%
2 100%
3 99%
4 100%
2022 FY 100%
2023 1 100%
2 100%
3 100%
4 99%
2023 FY 100%
The vacancy rate at the year-end was 7.6% (prior year 9.8%) which is above our
target level of 5%.
Fourteen lettings were completed during the year securing total rent of £2.7m
per annum.
Seven lease renewals or regears were completed over the year securing £1.4m
per annum, along with seven rent reviews, resulting in an additional £0.5m
per annum being secured.
Portfolio Rent Reviews
Basis % of Current Rent Roll Weighted Average Floor (value if fixed) Weighted Average Cap / Range of Caps Weighted Average Unexpired Lease Term (years)
RPI Inflation linked % 15.9% 1.0% 3.9 (ex-uncapped income) 7.6
CPI Inflation linked % 8.1% 0.7% 3.8% 19.6
Fixed / Stepped 9.6% 2.6% n/a 10.0
Open Market Value 66.4% n/a n/a 2.6
Total 100% n/a n/a 6.3 (FUND WAULT)
Income Growth Potential
One of the attractions of the portfolio is the amount of reversion that exists
– i.e. potential to grow the rent. At year end that figure was £7m with the
Estimated Rental Value (ERV) of the portfolio 26% above the passing rent. This
reversion will be received from several parts of the portfolio as the table
below demonstrates.
Rent reviews are a mixture of open market (negotiated), fixed or indexed. The
graphic below shows the Company mix.
Passing Rent (OMV) £17.8m
RPI Linked Income £4.8m
CPI Linked Income £2.3m
Fixed/Stepped Income £2.7m
Reversion in Let Portfolio £3.6m
Development Properties £0.8m
Void Properties £2.6m
Estimated Rental Value £34.2m
Debt
As reported in the last Annual Report and Accounts, the Company’s previous
debt facilities with RBSI expired in April 2023. The Company had secured new
facilities with RBSI in the 4th quarter of 2022 that commenced concurrently to
the previous facilities expiring. These new facilities are:
▸A 3-year Term Loan of £85m which is fully drawn. The Company entered into
an interest rate cap for the full £85m at 3.96% which when coupled with the
margin of 150 bps (one of the lowest in the sector) results in an all-in cost
capped at 5.46%.
▸Revolving Credit Facility (RCF) of £80m. As at the year-end, the Company
had drawn £56.9m of the RCF which is also at a margin of 150 bps over
SONIA. Following subsequent sales and development costs, the drawn amount
was £44.4m as at 31 March 2024.
The two facilities from RBSI are due to expire in April 2026 and incur no
early repayment fees. As at 31 December 2023, the Loan to Value ratio (LTV)
was 30.8%.
Performance
There are a number of different measures of performance used by the Board,
from individual assets to shareholder return. These are detailed below:
Portfolio total return (annualised) MSCI UK Quarterly Property Index return (annualised) NAV total return (annualised)
1 Year (0.7%) (1.5%) (3.0%)
3 Year 4.0% 1.5% 2.8%
5 Year 3.0% 0.8% 1.6%
10 Year 7.1% 5.4% 7.2%
Portfolio Return:
As the Company invests in direct real estate one of the best measures of
investment decisions and quality of the portfolio is its performance compared
to the general UK real estate market. For that reason, we compare the
portfolio to the MSCI quarterly index – the largest regular index of the
market. The table above shows that the Company’s portfolio has outperformed
the MSCI index over 1,3, 5, and 10 years. For the purpose of this year-end
report the chart also shows the portfolio and net asset value (NAV) against
both indices for clarity.
NAV Return:
NAV total return encompasses the costs of the fund, including running the REIT
and debt costs. As the MSCI index does not include these, we instead use the
AIC Property Direct UK Sector weighted average as a comparator. In the short
term, the impact of higher debt costs has impacted the Company NAV Total
Return along with its high exposure to logistics which de-rated heavily at the
end of 2022. The chart below also shows a comparison to the Open-Ended
property sector as investors often have to decide whether to invest in
Investment Companies or Open-Ended vehicles.
NAV Total Returns to 31 December 2023
Source AIC, abrdn 1 year % 3 years % 5 years % 10 years %
abrdn Property Income Trust Limited (3.0) 8.8 8.0 101.2
AIC Property UK Commercial (weighted average) (0.8) 10.9 18.2 73.6
Investment Association Open Ended Commercial Property Funds sector 2.6 2.8 6.0 43.2
Share Price:
The final measure is one that the Investment Manager has limited influence on
but is of most interest to Shareholders – that is the Share Price Total
Return. The table below compares the API share price return to that of the
FTSE all share REIT index and AIC Property UK Commercial (weighted average)
segment. A major negative factor has been the persistently high discount at
which the shares have traded when compared to the Company’s NAV.
Share Price Total Returns to 31 December 2023
Source AIC, abrdn 1 year % 3 years % 5 years % 10 years %
abrdn Property Income Trust Limited (8.2) 6.6 (11.7) 35.2
FTSE All-Share Index 7.9 28.1 37.7 68.1
FTSE All-Share REIT Index 11.6 (1.1) 8.3 35.5
AIC Property Direct – UK Sector (weighted Average) (1.3) 6.8 5.1 22.0
Valuation
The portfolio is valued quarterly by Knight Frank LLP under the provisions of
the RICS Red Book. As at 31 December 2023 the portfolio, including Far Ralia,
was valued at £439.2m (£416.2m at 31 December 2022) and the Company held
cash of £6.7m (£15.9m at 31 December 2022). The portfolio consisted of 46
assets at year-end (45 assets at 31 December 2022).
Investment Strategy
The Company has always had a focus on income with its objective stated as
“To provide shareholders with an attractive income return, with the prospect
of income and capital growth, through investing in a diversified portfolio of
commercial real estate assets in the UK”.
With the growing importance of Environmental, Social and Governance (ESG)
matters on investors and occupiers alike a slight pivot in strategy over the
last few years has been to ensure that the income from the portfolio is
sustainable. We do that by ensuring the portfolio will continue to appeal to
tenants through the quality of accommodation offered at an affordable price.
The scale of new lettings and lease renewals suggests this has been achieved,
with further growth in income to be expected from the portfolio.
Environmental Social and Governance (ESG)
ESG is central to API’s investment philosophy and is fully incorporated into
our decision making and actions. We believe that ESG should form a central
part of decision making, and that in order to make the best decisions, we must
build our own expertise and knowledge through working with best-in-class
consultants to optimise the timing and impact of our investments in ESG
improvements. We do not aim to solve every problem overnight, rather we seek
to find the optimum point of intervention for each asset to maximise return
for shareholders and avoid waste (and with-it embedded carbon).
To reflect the importance of ESG, the Annual Report now includes a dedicated
section and we were also early adopters of the Taskforce for Climate-related
Financial Disclosures.
Outlook and Future Strategy
Although the economic outlook and the Company’s future remains uncertain the
portfolio consists of good quality assets that appeal to occupiers and
investors. The Investment Manager will continue to focus on growing income
through active asset management of the assets, and, subject to shareholder
approval (please see Note 2.1 of the Financial Statements) will commence a
Managed Wind-Down of the Company through the sale of assets. The sales
process is expected to take approximately 24 months within a range of 18-30
months from the date of implementation, although this is very dependent on a
reasonable market existing for all the Company’s properties. There is a
clear objective to maximise returns to shareholders in a reasonable
timescale.
PROPERTY INVETMENTS
Top Ten Properties
Property Value (range) Sector % of total portfolio
Halesowen, B&Q £22m - £24m Retail 5.4%
Rotherham, Ickles Way £20m - £22m Industrial 4.8%
Birmingham, 54 Hagley Road £18m - £20m Office 4.5%
Welwyn Garden City, Morrison’s £18m - £20m Retail 4.2%
Swadlincote, Tetron 141 £16m - £18m Industrial 3.6%
Shellingford, White Horse Business Park £14m - £16m Industrial 3.5%
London, Hollywood Green £12m - £14m Other 3.2%
Washington, Rainhill Road £12m - £14m Industrial 3.1%
Corby, 3 Earlstrees Road £12m - £14m Industrial 3.1%
St Helens, Stadium Way £12m - £14m Industrial 2.9%
Top Ten Tenants
Tenant Passing Rent % of total contracted rent
B&Q Plc £1,560,000 5.7%
Public Sector £1,365,203 5.0%
WM Morrisons Supermarkets Ltd £1,252,162 4.6%
The Symphony Group Plc £1,225,000 4.5%
Schlumberger Oilfield UK Plc £1,138,402 4.2%
Timbmet Limited £904,768 3.3%
Atos IT Services Limited £872,466 3.2%
CEVA Logistics Limited £840,000 3.1%
Thyssenkrupp Materials (UK) Ltd £643,565 2.4%
Hermes Parcelnet Ltd £591,500 2.2%
Portfolio Allocation by region
Region Weighting
South East 23.0%
West Midlands 18.7%
North West 15.4%
East Midlands 13.5%
North East 12.0%
Scotland 10.1%
South West 3.3%
City of London 2.2%
London West End 1.8%
ENVIRONMENTAL, SOCIAL and GOVERNANCE (ESG)
ESG
It is now commonplace for investment managers to say that ESG is embedded in
their processes. It is not always clear what that really means. As a Company
investing in real assets we can have a direct impact on ESG outputs – and
the reason we have fully integrated ESG into our investment process and
behaviour is that we believe it is fundamental to achieving the Company’s
investment objective. We do not consider ESG in isolation or as just a cost.
We see it as an opportunity for driving performance. It is for that reason it
forms an integral part of our decision-making processes. We seek to implement
ESG initiatives in a planned, sensible, and measured way so as to maximise the
return on investment.
ESG Policy
Please note that the text below relates to the approach and activities
undertaken in 2023. If the proposal to move to a managed wind-down is approved
by shareholders then the focus will change to an optimum disposal strategy
rather than longer term performance initiatives, and this will impact the
approach to ESG.
ESG Strategy
The Board has a separate Sustainability Committee that sets Key Performance
Indicators (KPIs) in order to measure the ESG performance of the real estate
portfolio and Investment Manager in delivering ESG improvements. The Committee
is relatively new, and demonstrates the increased importance of ESG in
managing risk and return for the Company.
The Investment Manager has an advanced and comprehensive framework of process,
oversight, and knowledge to incorporate and enhance ESG into the business and
to ensure practical implementation, which is evolving to keep pace with
current ESG trends and legislation.
Priorities
The Company, in addition to its focus on ESG transparency and reporting, has
identified two main areas of focus that have the most relevance for the
activities it undertakes – People and Planet.
People involves our tenants, the users of our properties and the local
community. It is a wide-ranging theme, covering supplier management, community
engagement, social values, tenant engagement and wellness.
Under Planet, the Company has a primary focus on (1) carbon and energy; (2)
climate resilience; and (3) biodiversity.
Extreme weather events are becoming more common place bringing the need for
climate action into focus. The Company has a clear strategy for managing
carbon emissions across the portfolio and has been implementing energy
efficiency improvements and renewable energy projects for several years.
In 2021, we undertook work to establish the operational carbon footprint
baseline of the portfolio and model our pathway to net-zero.
The Company’s commitments are as follows:
▸ 2030: achieve Net Zero Carbon across all portfolio landlord emissions
(Scope 1 & 2)
▸ 2050: achieve Net Zero Carbon across all portfolio emissions (Scope 1, 2 &
3).
The following provides an overview of definitions of the different emissions
scopes:
▸ Scope 1 and 2: Cover emissions that directly result from the landlord’s
activities where there is operational control, either through the purchase or
consumption of energy or refrigerant losses.
▸ Scope 3: Emissions are those that occur in our supply chains and
downstream leased assets (tenant spaces) over which we have a degree of
influence but limited control.
While there are no standard industry definitions of net-zero carbon for real
estate, the Company has been working to build-out its own definitions, which
are detailed in the full Annual Accounts which can be found via the following
link: https://www.abrdnpit.co.uk/en-gb/literature.
This involved benchmarking the performance of each asset, modelling our future
footprint including embodied and operational carbon and identifying the types
of measures necessary to fully decarbonise the portfolio by 2050. From that
baseline we can measure progress annually – although it won’t be a
straight line to net-zero. Since then, we have been actioning our net-zero
strategy to improve on the baseline performance.
Transparency and Reporting
EPRA Sustainability Best Practice Recommendations Guidelines.
We have adopted the 2017 EPRA Sustainability Best Practice Recommendations
Guidelines (sBPR) to inform the scope of indicators we report against. We have
reported against all EPRA sBPR indicators that are material to the Company. We
also report additional data not required by the EPRA sBPR where we believe it
to be relevant (e.g. like-for-like greenhouse gas emissions).
A full outline of the scope of reporting and materiality review in relation to
EPRA sBPR indicators as explained above, is included in the full Annual
Accounts which can be found via the following link:
https://www.abrdnpit.co.uk/en-gb/literature.
Our ESG Priorities
Planet - Climate Change
The Company considers the risks and opportunities of climate change on the
portfolio. This is one of the most material ESG components to investment
performance. The Taskforce for Climate-related Financial Disclosures (TCFD)
was established to provide a standardised way to disclose and assess
climate-related risks and opportunities and defines two types of climate
risks:
▸ Transition risks: those that relate to an asset, portfolio or company’s
ability to decarbonise. An entity can be exposed to risks as a result of
carbon pricing, regulation, technological change and shifts in demand related
to the transition.
▸ Physical risks: those that relate to an asset’s vulnerability to factors
such as increasing temperatures and extreme weather events as a result of
climate change. Exposure to physical risks may result in, for example, direct
damage to assets, rising insurance costs, health and safety or supply chain
disruption.
There is still significant uncertainty and methodological immaturity in
assessing climate risks and opportunities and there is not yet a widely
recognised net zero carbon standard. Nonetheless, we have progressed already
with work to model the implications of decarbonising the portfolio in line
with a 1.5°C scenario (using the ‘Carbon Risk Real Estate Monitor’
(CRREM) as a real-estate specific framework to measure against) and undertaken
analysis to understand potential future physical climate risks.
The full Annual Accounts (which can be found via the following link:
https://www.abrdnpit.co.uk/en-gb/literature) provides a brief overview of our
Company approach to all 11 TCFD recommendations. Whilst the company does not
fall in scope of the 'Companies (Strategic Report) ( Climate-related Financial
Disclosure) Regulations 2022', the company still voluntarily follows this
framework, as best practice. The disclosure outlines how the Company complies
with all 11 recommendations. We expect that our reporting against TCFD
recommendations will continue to evolve over time as industry methodologies
improve and our own work develops further. In addition to the qualitative
disclosure below, the next section provides further analysis into the work the
Company has been undertaking with regards to transition risks and its net-zero
carbon target.
Transition Risks: Targeting Net-Zero
Net-Zero Strategy
The Company has set a target to be net-zero for emissions associated with
landlord-procured energy by 2030 and has determined that it will work with
tenants to establish a reasonable and realistic target for total carbon
emissions over the medium term.
The net-zero target was informed from the findings of a carbon modelling
exercise undertaken in 2021 to understand its current carbon footprint, and
what would be required to be net-zero by 2050. The key finding was that
landlord-controlled energy (i.e. responsible for scope 1 and 2 carbon
emissions) accounts for roughly 11% of the Company’s carbon footprint and we
have limited control over 89% of the output determined by tenants.
Our Net-Zero Principles
Although the goal of net-zero may seem clear, definitions and standards and
the policy mix to support it remains immature. Accordingly, the Company has
established several key principles to ensure its strategy, is robust and
delivers value:
Practical:
▸ Asset-level action – focusing on energy efficiency and renewables is our
priority to ensure compliance with energy performance regulations. Our
analysis shows that meeting proposed future Energy Performance Certificate
standards is a sensible stepping stone towards net-zero. This improves the
quality of assets for occupiers and reduces the exposure to regulatory and
market risk. Our investment in nature-based carbon removal at Far Ralia is in
addition to asset-level decarbonisation.
▸ Timing – we aim to align improvements at our properties with existing
plant replacement cycles and planned refurbishment activities wherever
possible. This ensures we are not unnecessarily replacing functional plant
ahead of its useful life unless necessary, which in turn reduces cost and
embodied carbon.
Realistic:
▸ Target – long-term objectives must be stretching but deliverable and
complemented by near-term targets and actions.
▸ Policy support – to fully decarbonise before 2050 the real estate sector
requires a supportive policy mix to incentivise action and level the playing
field.
Measurable:
▸ Clear key performance indicators at the asset and portfolio level.
Collaborative:
▸ Occupiers – we cannot achieve net-zero for the portfolio in isolation.
We will work closely with occupiers, many of whom have their own
decarbonisation strategies covering their leased space.
▸ Suppliers – we will work collaboratively with our suppliers including
property managers and consultants in order to achieve net-zero.
Performance to Date
Baseline versus current performance:
In order to report progress against our net-zero carbon target, please see
table below which splits out the carbon performance for scope 1 and 2 carbon
emissions with regards to the 2030 target and Scope 3 carbon emissions for the
2050 target.
Our carbon performance for our 2019 baseline versus 2022 is shown below. We
used 2019 as a baseline as it was unaffected by changes in occupancy due to
COVID-19. The 2019 baseline was updated from that reported in the previous
annual report due to improved data coverage and the inclusion of F-gases.
Between 2019 and 2022, absolute carbon emissions for the portfolio have
decreased by 32%.
This can in part be explained by sale of assets. The most useful figure to
observe is the carbon intensity figure which normalises the carbon performance
by floor area and shows relative performance improvements between 2019 and
2022 removing the influence of any portfolio churn. The carbon intensity for
Scope 1 and 2 assets where we have data for the whole building has reduced by
34% between 2019 and 2022. For scope 3 emissions, the carbon intensity has
reduced by 12%.
The reason 2023 data is not shown here, is due to later data collection
periods for scope 3 which required data requests going out to all tenants
during Q1 2024 to collect data for the previous year to allow time for energy
invoicing to be completed.
Net Zero target KPI Metric Baseline 2022 % Change
2030 Scope 1 & 2 Absolute carbon (scope 1 & 2) tCO2e 2,102 1,426 -32%
% of portfolio (Scope 1 & 2) % 11% 10% -1%
Carbon intensity (Scope 1 & 2 whole building) tCO2e/m2 50.57 33.30 -34%
Carbon performance against current year CRREM target (Scope 1 & 2 whole building) % of portfolio by value that meets CRREM Current 72% 94% n/a
2050 Scope 1, 2 and 3 Absolute carbon (Scope 1, 2 & 3 whole building) tCO2e 19,375 13,935 -32%
Absolute carbon (Scope 3) tCO2e 17,273 12,509 -28%
% of portfolio (Scope 3) % 89% 90% +1%
Carbon intensity (scope 3 whole building) tCO2e/m2 42.32 37.21 -12%
For more information around our commitment and approach to ESG, please see our
full Annual Accounts https://www.abrdnpit.co.uk/en-gb/literature.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board ensures that proper consideration of risk is undertaken in all
aspects of the Company’s business on a regular basis. During the year, the
Board carried out an assessment of the risk profile of the Company, including
consideration of risk appetite, risk tolerance and risk strategy. The Board
regularly reviews the principal and emerging risks of the Company, seeking
assurance that these risks are appropriately rated and ensuring that
appropriate risk mitigation is in place.
The group and its objectives become unattractive to investors, leading to
widening of the discount.
This risk has been a major concern of the Board and has been highlighted in
conversations with shareholders. The discount has traded consistently at a
larger discount than most of the peer group. This was one of the factors
that led to a review of the Company’s future.
Net revenue falls such that the Company cannot sustain its level of dividend,
for example due to tenant failure, voids or increased costs.
This risk is mitigated through regular review of forecast dividend cover and
of tenant mix, risk and profile. Due diligence work on potential tenants is
undertaken before entering into new lease arrangements and tenants are kept
under review through regular contact and various reports both from the
managing agents and the Investment Manager’s own reporting process.
Contingency plans are put in place at units that have tenants that are
believed to be in financial trouble. The Company subscribes to the MSCI Iris
Report which updates the credit and risk ranking of the tenants and income
stream and compares it to the rest of the UK real estate market.
The increase in financing costs has meant the dividend has been uncovered
during the year despite the strongly reversionary nature of the portfolio and
forecasts of the dividend being covered in 2025 – it was felt that this was
a factor contributing to the high level of the discount.
Uncertainty or change in the macroeconomic environment results in property
becoming an undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and discussion with, the
Investment Manager and other advisers, and by having a diversified property
portfolio (diversified by sector and geography).
Macroeconomic conditions form part of the decision-making process for
purchases and sales of properties and for sector allocation decisions.
The impact of geopolitical uncertainty and the cost-of-living crisis have
resulted in inflationary pressures which have impacted both property values
and the ability of tenants to pay rent.
Real estate holdings of good quality and rental growth prospects can appear
more attractive at such times to offer a partial hedge against inflationary
pressures.
Environmental.
Environmental risk is considered as part of each purchase and monitored on an
ongoing basis by the Investment Manager. However, with extreme weather events
both in the UK and globally becoming a more regular occurrence due to climate
change, the impact of the environment on the property portfolio and on the
wider UK economy is seen as an increasing risk.
Please see the Environmental, Social and Governance Policy section, our
Taskforce for Climate-related Financial Disclosures and the Investment
Manager’s Review for further details on how the Company addresses
environmental risk, including climate change.
Other risks faced by the Group include the following:
* Tax efficiency – the structure of the Group or changes to legislation
could result in the Group no longer being a tax efficient investment vehicle
for shareholders.
* Regulatory – breach of regulatory rules could lead to the suspension of
the Group’s Stock Exchange Listing, financial penalties or a qualified audit
report.
* Financial – inadequate controls by the Investment Manager or third-party
service providers could lead to misappropriation of assets. Inappropriate
accounting policies or failure to comply with accounting standards could lead
to misreporting or breaches of regulations.
* Operational – failure of the Investment Manager’s accounting systems or
disruption to the Investment Manager’s business, or that of third-party
service providers, could lead to an inability to provide accurate reporting
and monitoring, leading to loss of shareholder confidence.
* Business continuity – risks to any of the Company’s service providers or
properties, following a catastrophic event e.g. terrorist attack,
cyber-attack, power disruptions or civil unrest, leading to disruption of
service, loss of data etc.
* Refinancing – risk that the Company is unable to renew its existing
facilities, or does so on significantly adverse terms, which does not support
the current business strategy.
* Cyber – the risk of large-scale network disruption through various forms
such as hacking, malware, phishing, DDOS, data breach or loss. In addition,
Artificial Intelligence and it's potential use in cyber attacks.
The Board seeks to mitigate and manage all risks through continual review,
policy setting and enforcement of contractual obligations. It also regularly
monitors the investment environment and the management of the Group’s
property portfolio, levels of gearing and the overall structure of the Group.
Details of the Group’s internal controls are described in more detail in the
Corporate Governance Report in the full Annual Accounts which can be found via
the following link: https://www.abrdnpit.co.uk/en-gb/literature.
Emerging Risks
Emerging risks have been identified by the Board through a process of
evaluating relatively new risks that have emerged and increased materially in
the year, and subsequently, or through market intelligence are expected to
grow significantly and impact the Company. Any such emerging risks are likely
to cause disruption to the business model. If ignored, they could impact the
Company’s financial performance and prospects. Alternatively, if recognised,
they could provide opportunities for transformation and improved performance.
▸Future of the Company
Following the Company’s Court Meeting and General Meeting held on the 27
March 2024, the Board announced that it intended to take steps to implement a
Managed Wind-Down subject to approval of API shareholders at an upcoming EGM
on 28 May 2024. Further information on the timeline and proposal can be found
in Note 2.1 of the Financial Statements.
If shareholders vote in favour of a managed wind-down, there are several risks
associated with the size, speed and method of capital distributions back to
shareholders, and the maintenance of REIT status for tax purposes. Several
options are being considered and will be detailed in an upcoming circular to
shareholders.
Finally, there is a risk that as the Managed Wind-Down progresses, some assets
prove difficult to sell and become stranded.
▸Economic and Geopolitical
2024 is a year in which more than half the global population will experience
local elections and there will be greater focus on the democratic process in
some 70 countries. The outcome of some elections, particularly the United
States, may have far reaching implications on the geo-political world order.
If former President, Donald Trump, wins the US election, there is the risk
that America may pursue a more isolationist and protectionist policy which may
result in less military support (e.g. Ukraine), less diplomatic intervention
in other conflicts such as the Middle East and more trade tariffs. Greater
escalation of events could result and financial markets are likely to be
volatile.
Conflict between countries is rising. Following Hamas’ attack on Israel and
Israel’s military response in Gaza, it is uncertain yet if other countries
will be drawn into the violence. The war waging between Ukraine and Russia
since February 2022 has reached a stalemate, but with no settlement in sight.
Rapid inflationary pressures caused by supply side shortages generated
initially by the Russian invasion of Ukraine have now subsided but inflation
may continue to remain above acceptable levels and so there is an expectation
that interest rates will stay “higher for longer” than originally
anticipated. The impact on consumers and businesses remains to be seen, even
if recessions are avoided, and increasing default rates on loans could put
strain on the banking system.
Tensions are also increasing in the relationship between the United States and
China which could lead to greater protectionism and a decline in global trade.
In particular, the future of Taiwan is disputed and as one of the largest
producers and exporters of microchips in the world could cause considerable
disruption if its independence was threatened. Many Western companies are
continuing to build supply chains closer to home and reduce their dependency
on Asia, particularly China.
The current economic and geopolitical environment is unpredictable, and
changing rapidly, and this may affect real estate valuations in the
Company’s portfolio.
▸Climate
Climate change is happening now and its rate of change and impact on the
environment will depend on the planet’s success in controlling global
emissions. The average surface temperature in the UK has risen by 1.2oC since
pre-industrial times, and further warming is predicted. More extreme weather
events are also expected in future which could cause serious damage to
infrastructure and property. The extent of climate change and the necessary
regulation to control it are uncertain and will continue to be monitored. A
"greenlash" against climate policies is beginning to emerge and may become
more evident if the Republicans win the US elections in 2024. This could
derail progress against global climate targets.
▸Changing Behavioural Patterns
The pandemic introduced or accelerated some structural changes to the ways
that we live, work and consume and reformed our expectations of our
environment and society. In particular, the trend towards flexible and home
working is affecting the use of offices, with sustainability, health,
wellbeing and the social impact of office use increasing in importance.
The continuing attraction of online shopping and decline in physical retailing
have created challenging conditions for traditional retailers and their
landlords. It is still uncertain how the role of offices and retail will
develop, and they both continue to be assessed in order to protect the
portfolio but also to identify new investment opportunities.
▸Technology & Artificial Intelligence
Technology is rapidly changing the habits of businesses and consumers which in
turn is impacting occupiers’ future requirements for property and leading to
greater disparity in the performance of different property sectors and also
within each sector itself. Advances in technology have enabled many of the
behavioural changes in the use of real estate: for example, the increased use
of video conferencing by businesses has facilitated a more permanent shift to
home working and could also redefine the need for office space in the future.
Robotics and automation are also altering the specifications for industrial
buildings and greater use of data and advanced analytics is driving the need
the data storage and data centres. Technology is also increasingly
contributing to improvements in the sustainability of properties. If landlords
fail to embrace technology, they may face the risk of “stranded” assets in
the future.
Artificial intelligence is being adopted rapidly by businesses and jobs may
change significantly as AI replaces the need for particular human activities.
This will impact business models and may reduce workforce numbers, but also
could generate new roles. This potentially transforming aspect of AI, in turn,
will affect business' requirements for space.
Cyber-attacks are increasing in occurrence and target businesses’ data, IT
systems and even their physical infrastructure as buildings have become more
reliant on smart technology for their daily operation. In addition, the rapid
evolution of AI is potentially introducing risks that have not yet been
identified or quantified.
Viability Statement
The Board has assessed the Group’s viability over three years and assessed
financial projections over that timeframe on the assumption that shareholders
do not vote in favour of the Managed Wind-Down as further explained in Note
2.1 of the Financial Statements.
The Board has also carried out a robust assessment of the principal and
emerging risks faced by the Group, as detailed above. The main risks which the
Board considers will affect the business model are: future performance,
solvency, liquidity, tenant failure leading to a fall in dividend cover and
macroeconomic uncertainty.
The Board takes any potential risks to the ongoing success of the Group, and
its ability to perform, very seriously and works hard to ensure that risks are
consistent with the Group’s risk appetite at all times. In assessing the
Group’s viability, the Board has carried out thorough reviews of the
following:
* Detailed NAV, cash resources and income forecasts, prepared by the
Company’s Investment Manager, for a three-year period under both normal and
stressed conditions;
* The Group’s ability to pay its operational expenses, bank interest, tax
and dividends over a three-year period;
* Future debt repayment dates and debt covenants, in particular those in
relation to LTV and interest cover;
* The ability of the Company to refinance its debt facilities in April 2026;
* Demand for the Company’s shares and levels of premium or discount at which
the shares trade to NAV;
* Views of shareholders; and
* The valuation and liquidity of the Group’s property portfolio, the
Investment Manager’s portfolio strategy for the future and the market
outlook.
The assessment for stressed conditions used a foreseeable severe but plausible
scenario which was modelled using the following assumptions:
* 25 per cent capital fall in the next 3 years
* Tenant defaults of 15 per cent for the next 3 years
* Sterling Overnight Index Average (SONIA) tracks 1.0 per cent above the
anticipated forward curve
Despite the uncertainty in the UK regarding the impact of international
conflict, the Board has a reasonable expectation, based on the information at
the time of writing, that the Group will be able to continue in operation and
meet its liabilities as they fall due over the next three years.
The Board have also assessed the Group’s ability to meet its liabilities as
they fall due under a Managed Wind-Down scenario. In that case, the Group
may no longer be considered to be viable as it will be liquidated once the net
proceeds of the wind-down have been returned to shareholders. However, the
Board is satisfied that the Group will be able to meet its liabilities as they
fall due over the wind-down period.
GOING CONCERN
The Group’s strategy and business model, together with the factors likely to
affect its future development, performance and position, including principal
risks and uncertainties, are set out in the Strategic Report.
The Directors have reviewed detailed cash flow, income and expense projections
in order to assess the Group’s ability to pay its operational expenses, bank
interest and dividends. The Directors have examined significant areas of
possible financial risk including cash and cash requirements and the debt
covenants, in particular those relating to LTV and interest cover.
As set out in more detail in the Chair’s Statement and in Note 2.1 of the
Financial Statements, following the results of the Company’s Court Meeting
and General Meeting held on the 27th March 2024, the Board announced that they
are taking steps to implement a Managed Wind-Down subject to the approval of
shareholders at an upcoming EGM on 28 May 2024. The outcome of this vote
represents a material uncertainty which may cast significant doubt on the
Group’s ability to continue as a going concern.
Notwithstanding this material uncertainty, the Board has concluded that it
remains appropriate to continue to prepare the financial statements on a going
concern basis. In reaching this conclusion, the Board has come to the view
that, as the proposed change in Investment Policy is contingent on shareholder
approval and the Company is considered solvent in all other regards, there is
no irrevocable path to liquidation and thus going concern remains the most
appropriate basis for preparation. Note 2.1 of the Financial Statements
includes further details on the Board’s assessment of going concern and the
proposed EGM.
STATEMENT OF DIRECTOR’S RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group
Consolidated Financial Statements for each year which give a true and fair
view, in accordance with the applicable Guernsey law and those International
Financial Reporting Standards (“IFRSs”) as adopted by the European Union.
In preparing those Consolidated Financial Statements, the Directors are
required to:
* Select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors and then apply them
consistently;
* Make judgement and estimates that are reasonable and prudent;
* Present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* Provide additional disclosures when compliance with the specific
requirements in IFRSs as adopted by the European Union is insufficient to
enable users to understand the impact of particular transactions, other events
and conditions on the Group’s financial position and financial performance;
* State that the Group has complied with IFRSs as adopted by the European
Union, subject to any material departures disclosed and explained in the Group
Consolidated Financial Statements; and
* Prepare the Group Consolidated Financial Statements on a going concern basis
unless it is inappropriate to presume that the Group will continue in
business.
The Directors confirm that they have complied with the above requirements in
preparing the Group Consolidated Financial Statements.
The Directors are responsible for keeping adequate accounting records, that
are sufficient to show and explain the Group’s transactions and disclose
with reasonable accuracy at any time, the financial position of the Group and
to enable them to ensure that the Financial Statements comply with The
Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the
assets of the Group and hence for taking reasonable steps for the prevention
and detection of fraud, error and non-compliance with law and regulations.
The maintenance and integrity of the Company’s website is the responsibility
of the Directors through its Investment Manager; the work carried out by the
auditors does not involve considerations of these matters and, accordingly,
the auditors accept no responsibility for any change that may have occurred to
the Consolidated Financial Statements since they were initially presented on
the website. Legislation in Guernsey governing the preparation and
dissemination of the consolidated financial statements may differ from
legislation in other jurisdictions.
Responsibility Statement of the Directors in respect of the Consolidated
Annual Report under the Disclosure and Transparency Rules
The Directors each confirm to the best of their knowledge that:
* The Consolidated Financial Statements, prepared in accordance with IFRSs as
adopted by the European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group; and
* The management report, which is incorporated into the Strategic Report,
Directors’ Report and Investment Manager’s Review, includes a fair review
of the development and performance of the business and the position of the
Group, together with a description of the principal risks and uncertainties
that they face.
Statement under the UK Corporate Governance Code
The Directors each confirm to the best of their knowledge and belief that the
Annual Report and Consolidated Financial Statements taken as a whole are fair,
balanced and understandable and provide the information necessary to assess
the Group’s position and performance, business model and strategy.
Approved by the Board on
29 April 2024
James Clifton-Brown
Chair
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2023
12 Months to 12 Months to
31 Dec 2023 31 Dec 2022
Notes £ £
Rental income 27,552,279 26,697,931
Service charge income 4,884,357 4,411,821
Service charge expenditure (6,354,598) (5,576,812)
Net Rental Income 26,082,038 25,532,940
Administrative and other expenses
Investment management fee 4 (2,632,225) (3,480,963)
Other direct property operating expenses 4 (2,408,461) (3,010,845)
Net Impairment gain on trade receivables 4 213,048 772,947
Fees associated with strategic review and aborted merger 4 (1,729,925) -
Other administration expenses 4 (1,136,742) (1,134,919)
Total administrative and other expenses (7,694,305) (6,853,780)
Operating profit before changes in fair value of investment properties 18,387,733 18,679,160
Valuation loss from investment properties 7 (17,989,531) (62,257,782)
Valuation loss from land 8 (783,683) (60,322)
Loss on disposal of investment properties 7 (279,090) (207,153)
Operating profit/(loss) (664,571) (43,846,097)
Finance income 5 92,178 27,543
Finance costs 5 (7,695,508) (3,672,685)
Loss on termination of interest rate swaps 15b - (3,562,248)
Loss for the year before taxation (8,267,901) (51,053,487)
Taxation
Tax charge 6 - -
Loss for the year, net of tax (8,267,901) (51,053,487)
Other comprehensive (loss) / income
Movement in fair value on swap 15a (902,534) 1,470,570
Movement in fair value on interest rate cap 15c (789,918) 43,292
Total other comprehensive (loss)/gain (1,692,452) 1,513,862
Total comprehensive loss for the year, net of tax (9,960,353) (49,539,625)
Loss per share 2023 (p) 2022 (p)
Basic and diluted loss per share 20 (2.17) (13.11)
All items in the above Consolidated Statement of Comprehensive Income derive
from continuing operations.
The notes below are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED BALANCE SHEET
As at 31 December 2023
31 Dec 23 31 Dec 22
Assets Notes £ £
Non-current assets
Investment properties 7 388,338,754 401,217,536
Lease incentives 7 9,306,403 8,357,036
Land 8 8,250,000 7,500,000
Interest rate cap 15c 559,671 2,211,007
Rental deposits held on behalf of tenants 895,003 751,782
407,349,831 420,037,361
Current Assets
Investment property held for sale 9 35,100,000 -
Trade and other receivables 11 6,101,152 7,457,083
Cash and cash equivalents 12 6,653,838 15,871,053
Interest rate swap 15a - 1,238,197
Interest rate cap 15c 849,110 339,462
48,704,100 24,905,795
Total assets 456,053,931 444,943,156
Liabilities
Current liabilities
Trade and other payables 13 14,018,455 10,880,310
14,018,455 10,880,310
Non-current liabilities
Bank borrowings 14 141,251,910 109,123,937
Obligations under finance leases 16 1,810,120 899,572
Rental deposits due to tenants 895,003 751,782
143,957,033 110,775,291
Total liabilities 157,975,488 121,655,601
Net assets 298,078,443 323,287,555
Equity
Capital and reserves attributable to Company’s equity holders
Share capital 18 228,383,857 228,383,857
Treasury share reserve 18 (18,400,876) (18,400,876)
Retained Earnings 19 - 4,382,024
Capital reserves 19 (9,660,578) 11,084,178
Other distributable reserves 19 97,756,040 97,838,372
Total equity 298,078,443 323,287,555
2023 (p) 2022 (p)
NAV per share 22 78.2 84.8
Approved and authorised for issue by the Board of Directors on 29 April 2024
and signed on their behalf by James Clifton-Brown
The accompanying notes below are an integral part of these Consolidated
Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2023
Notes Share Capital £ Treasury Shares £ Retained Earnings £ Capital Reserves £ Other Distributable Reserves £ Total Equity £
Opening balance 1 January 2023 228,383,857 (18,400,876) 4,382,024 11,084,178 97,838,372 323,287,555
Loss for the year - - (8,267,901) - - (8,267,901)
Other comprehensive loss - - - (1,692,452) - (1,692,452)
Total comprehensive loss for the year - - (8,267,901) (1,692,452) - (9,960,353)
Dividends paid 21 - - (15,248,759) - - (15,248,759)
Valuation loss from investment properties 7 - - 17,989,531 (17,989,531) - -
Valuation loss from land 8 - - 783,683 (783,683) - -
Reclassified from Other distributable reserves - - 82,332 - (82,332) -
Loss on disposal of investment properties 7 - - 279,090 (279,090) - -
Balance at 31 December 2023 228,383,857 (18,400,876) 4,382,024 11,084,178 97,838,372 323,287,555
For the year ended 31 December 2022
Notes Share Capital £ Treasury Shares £ Retained Earnings £ Capital Reserves £ Other Distributable Reserves £ Total Equity £
Opening balance 1 January 2022 228,383,857 (5,991,417) 8,521,081 72,095,573 97,838,372 300,847,466
Loss for the year - - (51,053,487) - - (51,053,487)
Other comprehensive income - - - 1,513,862 - 1,513,862
Total comprehensive income for the period - - (51,053,487) 1,513,862 - (49,539,625)
Ordinary shares paced into treasury net of issue costs - (12,409,459) - - - (12,409,459)
Dividends paid 21 - - (15,610,827) - - (15,610,827)
Valuation loss from investment properties 7 - - 62,257,782 (62,257,782) - -
Valuation loss from land 8 - - 60,322 (60,322) - -
Loss on disposal of investment properties 7 - - 207,153 (207,153) - -
Balance at 31 December 2022 228,383,857 (18,400,876) 4,382,024 11,084,178 97,838,372 323,287,555
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2023
12 months to 12 months to
31 Dec 2023 2022
Cash flows from operating activities Notes £ £
Loss for the year before taxation (8,267,901) (51,053,487)
Movement in lease incentives (984,446) (841,398)
Movement in trade and other receivables 1,212,710 3,719,424
Movement in trade and other payables 2,353,098 (3,237,151)
Loss on termination of interest rate swaps 15b - 3,562,248
Finance costs 5 7,695,508 3,672,685
Finance income 5 (92,178) (27,543)
Valuation loss from investment properties 7 17,989,531 62,257,782
Valuation loss from land 8 783,683 60,322
Loss on disposal of investment properties 7 279,090 207,153
Net cash inflow from operating activities 20,969,095 18,320,035
Cash flows from investing activities
Finance income 5 92,178 27,543
Purchase of investment properties 7 (23,986,401) (5,501,321)
Purchase of land 8 (1,533,683) (60,322)
Capital expenditure on investment properties 7 (21,678,721) (13,524,813)
Net proceeds from disposal of investment properties 7 6,120,910 41,142,847
Net cash (outflow)/inflow from investing activities (40,985,717) 22,083,934
Cash flows from financing activities
Shares bought back during the year 18 - (12,409,459)
Borrowing on RCF 14 63,000,000 17,000,000
Repayment of RCF 14 (6,125,621) (17,000,000)
Repayment of expired facility 14 (110,000,000) -
New term facility 14 85,000,000 -
Bank borrowing arrangement costs 14 - (804,297)
Interest paid on bank borrowing 5 (7,396,815) (2,959,023)
Receipts on Interest rate SWAP 1,254,217 (473,425)
Receipts on Interest rate Cap 15c 365,674 -
Swap breakage costs 15b - (3,562,248)
Cap arrangement fees 15c - (2,507,177)
Finance lease interest 5 (49,289) (24,468)
Dividends paid to the Company’s shareholders 21 (15,248,759) (15,610,827)
Net cash inflow/(outflow) from financing activities 10,799,407 (38,350,924)
Net (decrease)/increase in cash and cash equivalents in the year (9,217,215) 2,053,045
Cash and cash equivalents at beginning of year 12 15,871,053 13,818,008
Cash and cash equivalents at end of year 12 6,653,838 15,871,053
Notes TO the consolidated financial statements
1. General information
abrdn Property Income Trust Limited (“the Company”) and its subsidiaries
(together “the Group”) carries on the business of property investment
through a portfolio of freehold and leasehold investment properties located in
the United Kingdom. The Company is a limited liability company incorporated in
Guernsey, Channel Islands. The Company has its listing on the London Stock
Exchange.
The address of the registered office is
PO Box 255,
Trafalgar Court,
Les Banques,
St Peter Port,
Guernsey.
These audited Consolidated Financial Statements were approved for issue by the
Board of Directors on 29 April 2024.
1. Accounting policies
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared
in accordance with International Financial Reporting Standards (“IFRS”) as
adopted by the European Union and as issued by the International Accounting
Standards Board (“IASB”), and all applicable requirements of The Companies
(Guernsey) Law, 2008. The audited Consolidated Financial Statements of the
Group have been prepared under the historical cost convention as modified by
the measurement of investment property, land and derivative financial
instruments at fair value. The Consolidated Financial Statements are presented
in pounds sterling and all values are not rounded except when otherwise
indicated.
Assessment of Going Concern
During the second half of 2023 the Board undertook a strategic review. This
review was prompted by the Board’s concerns, as well as those of some
shareholders about the Group’s size, the lack of liquidity in its shares,
the persistent discount to NAV and an uncovered dividend. The outcome of this
review, following interest from other listed REITs, was that the Board
recommended to shareholders that they vote in favour of a proposed merger with
Custodian Property Income REIT plc (“Custodian”) for the reasons outlined
in various announcements to shareholders during the first quarter of 2024.
At an EGM on 27 March approximately 60% of shareholders voted in favour of the
proposed merger. However, the threshold for approval of the merger was 75% so
the merger did not proceed. The Board explained to shareholders that if the
proposed merger was rejected, it would take the necessary actions to put the
Group into a managed and orderly wind-down, selling assets and returning funds
to shareholders as such funds become available. The Board is now, therefore,
taking steps to initiate this process and a circular to shareholders is
expected to be issued on 14 May 2024 convening another EGM towards the end of
May (“wind-down EGM”) at which shareholders will be asked to vote in
favour of a resolution to change the Group’s investment policy. The
resolution (the “Wind-Down Resolution”), which if passed will trigger the
wind-down process, requires a simple majority in favour of 50%. The Board will
unanimously recommend that shareholders vote in favour of this resolution.
The Board has sought the advice of the Investment Manager about the likely
timing and outcome for a managed wind-down. The Investment Manager has
estimated a period of approximately 24 months within a range of 18-30 months.
The Board is satisfied that the Group will have no material difficulty in
meeting its liabilities as they fall due during the wind-down process. In
particular, the Board is satisfied that the requirements of the Group’s
lenders can be met.
The Company is listed on the London Stock Exchange and, with a 31 December
year end, is required to file its Annual Report and Financial Statements by 30
April. Therefore, this report is being issued before the outcome of the
shareholder vote at the “wind-down EGM” is known. If the resolution is
passed, the Group will need to prepare future financial statements on a basis
other than going concern (see below). However, there can be no certainty of
outcome and it is possible that over 50% of shareholders will vote against the
resolution. In that case, the Group will continue to operate as normal and
will also continue to prepare its financial statements on the going concern
basis.
At the EGM in March approximately 40% of shareholders voted against the
proposed merger with Custodian (comprising 16% of all shareholders). The Board
is aware that a proportion of these shareholders are actively seeking a
wind-down of the Company and are therefore likely to vote in favour of the
Wind-Down Resolution. In addition, the Board notes that many shareholders
(particularly tracker funds and some retail shareholders) are likely to vote
in accordance with the Board’s recommendations and will therefore also vote
in favour of a managed wind-down. On this basis the Board considers that it is
highly probable that the Wind-Down Resolution will be passed. However, there
can be no certainty because of the large proportion of shareholders on the
register whose voting intentions cannot be ascertained and the large
proportion of shareholders who did not vote at the EGM on 27 March. If the
vote is not successful, then the Group would continue in its current form and
would follow its current Investment Policy.
The Directors have considered the requirements in the IASB Conceptual
Framework para 3.9 and in International Accounting Standards 1 (“IAS1”)
para 25 in relation to going concern. Given the considerations above, there
is, therefore a material uncertainty related to events or conditions that may
cast significant doubt upon the Group’s ability to continue as a going
concern. The Directors note that if shareholders vote in favour of a managed
wind down the Group will have an intention to enter liquidation and will have
no realistic alternative but to do so even if it is likely that the
liquidation itself may not arise for over a year. In those circumstances the
Group will not be able to use the going concern basis even though it will be
able to meet its liabilities as they fall due over the wind-down period.
The Group is currently a going concern, able to meet its liabilities as they
fall due over the going concern horizon of 12 months from the date of this
report. It is also able to meet its liabilities as they fall due in the event
that it enters into a managed wind-down process. The Board therefore considers
that it is appropriate to prepare financial statement on the going concern
basis disclosing the material uncertainty in relation to going concern arising
from the shareholder vote at the wind-down EGM.
Changes in accounting policy and disclosure.
The following amendments to existing standards and interpretations were
effective for the year, but were deemed not applicable to the Group:
▸ Amendments to IFRS 17 Insurance Contracts, Amendments to IAS 12 Income
Taxes – Deferred Tax related to Assets and Liabilities arising from a Single
Transaction, and Amendments to IAS 12 Income Taxes – International tax
Reform.
The following amendments to existing standards and interpretations were
effective for the year and have been adopted by the Company:
▸ Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of
Accounting Policies.
The amendments require the disclosure of ‘material’, rather than
‘significant’, accounting policies. The amendments also provide guidance
on the application of materiality to disclosure of accounting policies,
assisting entities to provide useful, entity-specific accounting policy
information that users need to understand other information in the financial
statements.
▸ Amendments to IAS 8 – Definition of Accounting Estimates.
The amendments replace the definition of a change in accounting estimates with
a definition of accounting estimates. Under the new definition, accounting
estimates are “monetary amounts in financial statements that are subject to
measurement uncertainty”.
New and revised IFRS Standards in issue but not yet effective
At the date of authorisation of these financial statements, the Group has not
applied the following new and revised IFRS Accounting Standards that have been
issued but are not yet effective. The Group will consider these amendments
in due course to see if they will have any impact on the Group.
▸ Amendments to IAS 1 Presentation of Financial Statements —
Classification of Liabilities as Current or Non-current
▸ Amendments to IAS 1 Presentation of Financial Statements — Non-current
Liabilities with Covenants
The amendments change the requirements in IAS 1.
▸ Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial
Instruments: Disclosures — Supplier Finance Arrangements
The amendments add a disclosure objective stating that an entity is required
to disclose information about its supplier finance arrangements as part of its
exposure to concentration of liquidity risk.
▸ Amendments to IFRS 16 — Lease Liability in a Sale and Leaseback
The amendments add subsequent measurement requirements for sale and leaseback
transactions that satisfy the requirements in IFRS 15 to be accounted for as a
sale.
2.2 Significant accounting judgements, estimates and assumptions
The preparation of the Group’s Financial Statements requires management to
make judgements, estimates and assumptions that affect the reported amounts of
revenues, expenses, assets and liabilities, and the disclosure of contingent
liabilities, at the reporting date. However, uncertainties about these
assumptions and estimates particularly if a manged wind-down is voted for by
shareholders, could result in outcomes that could require a material
adjustment to the carrying amount of the asset or liability affected in the
future periods. The most significant estimates and judgements are set out
below. There were no critical accounting judgements.
Fair value of investment properties
Investment properties are stated at fair value as at the Balance Sheet date.
Gains or losses arising from changes in fair values are included in the
Consolidated Statement of Comprehensive Income in the year in which they
arise. The fair value of investment properties is determined by external real
estate valuation experts using recognised valuation techniques. The fair
values are determined having regard to any recent real estate transactions
where available, with similar characteristics and locations to those of the
Group’s assets.
In most cases however, the determination of the fair value of investment
properties requires the use of valuation models which use a number of
judgements and assumptions. The only model used was the income capitalisation
method. Under the income capitalisation method, a property’s fair value is
judged based on the normalised net operating income generated by the property,
which is divided by the capitalisation rate (discounted by the investor’s
rate of return). Under the income capitalisation method, over (above market
rent) and under-rent situations are separately capitalised (discounted).
The sensitivity analysis in note 7 details the decrease in the valuation of
investment properties if equivalent yield increases by 50 basis points or
rental rates (ERV) decreases by 5%.
Fair value of financial instruments
When the fair value of financial assets and financial liabilities recorded in
the Consolidated Balance Sheet cannot be derived from active markets, they are
determined using a variety of valuation techniques that include the use of
mathematical models. The input to these models are taken from observable
markets where possible, but where this is not feasible, a degree of judgement
is required in establishing fair value. The judgements include considerations
of liquidity and model inputs such as credit risk (both own and
counterparty’s), correlation and volatility.
Changes in assumptions about these factors could affect the reported fair
value of financial instruments. The models are calibrated regularly and tested
for validity using prices from any observable current market transactions in
the same instrument (without modification or repackaging) or based on any
available observable market data.
The valuation of interest rate swaps and caps used in the Balance Sheet is
provided by The Royal Bank of Scotland. These values are validated by
comparison to internally generated valuations prepared using the fair value
principles outlined above. The sensitivity analysis in note 3 details the
increase and decrease in the valuation of interest rate swaps and caps if
market rate interest rates had been 100 basis points higher and 100 basis
points lower.
2.3 Summary of material accounting policies
As described in note 2.1, the Group adopted Disclosure of Accounting Policies
(Amendments to IAS 1 and IFRS Practical Statement 2) from 1 January 2023.
The amendments require the disclosure of ‘material’, rather than
‘significant’, accounting policies. Accounting policy information is
material if, when considered together with other information included in an
entity’s financial statements, it can reasonably be expected to influence
decisions that the primary users of general-purpose financial statements make
on the basis of those financial statements.
Accounting policy information may be material because of the nature of the
related transactions, other events or conditions, even if the amounts are
immaterial. However, not all accounting policy information relating to
material transactions, other events or conditions is itself material. The
Directors have reviewed the accounting policies and are satisfied that the
information previously disclosed as part of their ‘significant’ accounting
policies fulfils the definitions of ‘material’ under the amended standards
– as such there has been no change to the summary of accounting policies
below in the current year.
A Basis of consolidation
The audited Consolidated Financial Statements comprise the financial
statements of abrdn Property Income Trust Limited, and its material wholly
owned subsidiary undertakings.
Control is achieved when the Group is exposed, or has rights, to variable
returns from its involvement with subsidiaries and has the ability to affect
those returns through its power over the subsidiary. Specifically, the Group
controls a subsidiary if, and only if, it has:
* Power over the subsidiary (i.e. existing rights that give it the current
ability to direct the relevant activities of the subsidiary)
* Exposure, or rights, to variable returns from its involvement with the
subsidiary
* The ability to use its power over the subsidiary to affect its returns
The Group assesses whether or not it controls a subsidiary if facts and
circumstances indicate that there are changes to one or more of the three
elements of control. Consolidation of a subsidiary begins when the Group
obtains control over the subsidiary and ceases when the Group loses control of
the subsidiary.
Assets, liabilities, income and expenses of a subsidiary acquired or disposed
of during the year are included in the consolidated statement of other
comprehensive income from the date the Group gains control until the date when
the Group ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting policies.
All intra-group balances, transactions and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
B Functional and presentation currency
Items included in the financial statements of each of the Group’s entities
are measured using the currency of the primary economic environment in which
the entity operates (“the functional currency”). The Consolidated
Financial Statements are presented in pound sterling, which is also the
Company’s functional currency.
C Revenue recognition
Revenue is recognised as follows;
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and value added tax
(“VAT”) recognised on a straight-line basis over the lease term including
lease agreements with stepped rent increases. The initial direct costs
incurred in negotiating and arranging an operating lease are recognised as an
expense over the lease term on the same basis as the lease income. The cost of
any lease incentives provided are recognised over the lease term, on a
straight-line basis as a reduction of rental income. The resulting asset is
reflected as a receivable in the Consolidated Balance Sheet.
Contingent rents, being those payments that are not fixed at the inception of
the lease, for example increases arising on rent reviews, are recorded as
income in periods when they are earned. Rent reviews which remain outstanding
at the year-end are recognised as income, based on estimates, when it is
reasonable to assume that they will be received.
iii) Other income
The Group is classified as the principal in its contract with the managing
agent. Service charges billed to tenants by the managing agent are therefore
recognised gross.
iv) Grant Income
Government grants that relate to the Group’s assets are accounted for as a
reduction in the cost of the asset to which they relate. They are only
recognised when there is both reasonable assurance that the Group will comply
with all material conditions attached to the grant and that the grant will be
received.
v) Property disposals
Where revenue is obtained by the sale of properties, it is recognised once the
sale transaction has been completed, regardless of when contracts have been
exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The investment management
and administration fees, finance and all other revenue expenses are charged
through the Consolidated Statement of Comprehensive Income as and when
incurred. The Group also incurs capital expenditure which can result in
movements in the capital value of the investment properties.
E Taxation
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively
enacted by the reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised in other
comprehensive income and in equity respectively, and not in the income
statement. Positions taken in tax returns with respect to situations in which
applicable tax regulations are subject to interpretation, if any, are reviewed
periodically and provisions are established where appropriate.
The Group recognises liabilities for current taxes based on estimates of
whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income and deferred tax provisions in the period
in which the determination is made.
Deferred income tax is provided using the liability method on all temporary
differences at the reporting date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognised only to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the expected manner
of realisation or settlement of the carrying amount of assets and liabilities.
In determining the expected manner of realisation of an asset the Directors
consider that the Group will recover the value of investment property through
sale. Deferred income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise completed property and property under
construction or re-development that is held to earn rentals or for capital
appreciation or both. Property held under a lease is classified as investment
property when the definition of an investment property is met.
Investment properties are measured initially at cost including transaction
costs. Transaction costs include transfer taxes, professional fees for legal
services and initial leasing commissions 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 properties are stated at fair
value. Fair value is based upon the market valuation of the properties as
provided by the external valuers as described in note 2.2. Gains or losses
arising from changes in the fair values are included in the Consolidated
Statement of Comprehensive Income in the year in which they arise.
For the purposes of these financial statements, in order to avoid double
counting, the assessed fair value is:
i) Reduced by the carrying amount of any
accrued income resulting from the spreading of lease incentives and/or minimum
lease payments.
ii) Increased by the carrying amount of any liability to the superior
leaseholder or freeholder (for properties held by the Group under operating
leases) that has been recognised in the Balance Sheet as a finance lease
obligation.
Acquisitions of investment properties are considered to have taken place on
exchange of contracts unless there are significant conditions attached. For
conditional exchanges acquisitions are recognised when these conditions are
satisfied. Investment properties are derecognised when they have been disposed
of and no future economic benefit is expected from their disposal. Any gains
or losses on the disposal of investment properties are recognised in the
Consolidated Statement of Comprehensive Income in the year of retirement or
disposal.
Gains or losses on the disposal of investment properties are determined as the
difference between net disposal proceeds and the carrying value of the asset
in the previous full period financial statements.
G Investment properties held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value (except for investment
property measured using fair value model).
Non-current assets and disposal groups are classified as held for sale if
their carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale
is highly probable and the asset (or disposal group) is available for
immediate sale in its present condition. Management must be committed to the
sale which should be expected to qualify for recognition as a completed sale
within one year from the date of classification.
H Land
The Group’s land is capable of woodland creation and peatland restoration
projects which would materially assist the Group’s transition to Net Zero.
Land is initially measured at cost including transaction costs. Transaction
costs include transfer taxes and professional fees for legal services.
Subsequent expenditure is capitalised only if it is probable that the future
economic benefits associated with the expenditure will flow to the Group. Land
is not depreciated but instead, subsequent to initial recognition, recognised
at fair value based upon periodic valuations provided by the external valuers.
Gains or losses arising from changes in the fair values are included in the
Consolidated Statement of Comprehensive Income in the year in which they
arise.
I Trade and other receivables
Trade receivables are recognised and carried at the lower of their original
invoiced value and recoverable amount. Where the time value of money is
material, receivables are carried at amortised cost. A provision for
impairment of trade receivables is established when there is objective
evidence that the Group will not be able to collect all amounts due according
to the original terms of the receivables. Significant financial difficulties
of the debtor, probability that the debtor will enter bankruptcy or financial
reorganisation, and default or delinquency in payments (more than 30 days
overdue) are considered indicators that the trade receivable is impaired. The
amount of the provision is the difference between the asset’s carrying
amount and the present value of estimated future cash flows, discounted at the
original effective interest rate. The carrying amount of the asset is reduced
through use of an allowance account, and the amount of the expected credit
loss is recognised in the Consolidated Statement of Comprehensive Income. When
a trade receivable is uncollectible, it is written off against the allowance
account for trade receivables. Subsequent recoveries of amounts previously
written off are credited in the Consolidated Statement of Comprehensive
Income.
The Group applies the IFRS 9 simplified approach to measuring expected credit
losses which uses a lifetime expected loss allowance for all trade receivables
and contract assets.
A provision for impairment of trade receivables is established where the
Property Manager has indicated concerns over the recoverability of arrears
based upon their individual assessment of all outstanding balances which
incorporates forward looking information. Given this detailed approach, a
collective assessment methodology applying a provision matrix to determine
expected credit losses is not used.
The amount of the provision is recognised in the Consolidated Balance Sheet
and any changes in provision recognised in the Statement of Comprehensive
Income.
J Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and
other short-term highly liquid investments readily convertible within three
months or less to known amounts of cash and subject to insignificant risk of
changes in value.
K Borrowings and interest expense
All loans and borrowings are initially recognised at the fair value of the
consideration received, less issue costs where applicable. After initial
recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. Amortised cost is calculated by taking into
account any discount or premium on settlement. Borrowing costs are recognised
within finance costs in the Consolidated Statement of Comprehensive Income as
incurred.
L Accounting for derivative financial instruments and hedging activities
Interest rate hedges are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured at their
fair value. The method of recognising the resulting gain or loss depends on
whether the derivative is designated as a hedging instrument, and if so, the
nature of the item being hedged. The Group documents at the inception of the
transaction the relationship between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various
hedging transactions. The Group also documents its assessment both at hedge
inception and on an ongoing basis of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items.
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in other
comprehensive income in the Consolidated Statement of Comprehensive Income.
The gains or losses relating to the ineffective portion are recognised in
operating profit in the Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when the hedged
transaction affects profit or loss, such as when the hedged financial income
or financial expenses are recognised.
When a derivative is held as an economic hedge for a period beyond 12 months
after the end of the reporting period, the derivative is classified as
non-current consistent with the classification of the underlying item. A
derivative instrument that is a designated and effective hedging instrument is
classified consistent with the classification of the underlying hedged item.
M Service charge
IFRS15 requires the Group to determine whether it is a principal or an agent
when goods or services are transferred to a customer. An entity is a principal
if the entity controls the promised good or service before the entity
transfers the goods or services to a customer. An entity is an agent if the
entity’s performance obligation is to arrange for the provision of goods and
services by another party.
Any leases entered into between the Group and a tenant require the Group to
provide ancillary services to the tenant such as maintenance works etc,
therefore these service charge obligations belong to the Group. However, to
meet this obligation the Group appoints a managing agent, Jones Lang Lasalle
Inc “JLL” and directs it to fulfil the obligation on its behalf. The
contract between the Group and the managing agent creates both a right to
services and the ability to direct those services. This is a clear indication
that the Group operates as a principal and the managing agent operates as an
agent. Therefore, it is necessary to recognise the gross service charge
revenue and expenditure billed to tenants as opposed to recognising the net
amount.
N Other financial liabilities
Trade and other payables are recognised and carried at invoiced value as they
are considered to have payment terms of 30 days or less and are not interest
bearing. The balance of trade and other payables are considered to meet the
definition of an accrual and have been expensed through the Income Statement
or Balance Sheet depending on classification. VAT payable at the Balance Sheet
date will be settled within 31 days of the Balance Sheet date with Her
Majesty’s Revenue and Customs (“HMRC”) and deferred rental income is
rent that has been billed to tenants but relates to the period after the
Balance Sheet date. Rent deposits recognised in note 13 as current are those
that are due within one year as a result of upcoming tenant
expiries.
3. Financial Risk Management
The Group’s principal financial liabilities are loans and borrowings. The
main purpose of the Group’s loans and borrowings is to finance the
acquisition and development of the Group’s property portfolio. The Group has
rent and other receivables, trade and other payables and cash and short-term
deposits that arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real
estate risk), credit risk, liquidity risk and capital risk. The Group is not
exposed to currency risk or price risk. The Group is engaged in a single
segment of business, being property investment in one geographical area, the
United Kingdom. Therefore the Group only engages in one form of currency being
pound sterling.
The Board of Directors reviews and agrees policies for managing each of these
risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial instruments will
fluctuate because of changes in market prices. The financial instruments held
by the Group that are affected by market risk are principally the interest
rate swap (which ended 27 April 2023) and the interest rate cap (which
commenced 27 April 2023).
i) Interest Rate risk
As described below the Group invests cash balances with RBS, Citibank and
Barclays. These balances expose the Group to cash flow interest rate risk as
the Group’s income and operating cash flows will be affected by movements in
the market rate of interest. There is considered to be no fair value interest
rate risk in regard to these balances.
The bank borrowings as described in note 14 also expose the Group to cash flow
interest rate risk. The Group’s policy has historically been to manage its
cash flow interest rate risk using interest rate derivatives (see note 15).
The Group has floating rate borrowings of £141,874,379; £85,000,000 of these
borrowings has been fixed via an interest rate cap.
The fair value of the interest rate swap is exposed to changes in the market
interest rate as their fair value is calculated as the present value of the
estimated future cash flows under the agreements. The accounting policy for
recognising the fair value movements in the interest rate swaps is described
in note 2.3 L.
The Group completed an extension of its debt facilities that were due to
expire in April 2023 with new floating rate borrowings of £85,000,000
commencing on the same day as the existing facility ended. As discussed
further in note 15, the Group initially sought to manage its cash flow
interest rate risk using an interest rate swap. Due to subsequent changes in
the interest rate environment, the Group took the decision to break the swap
and replace this with an interest rate cap limiting the floating rate exposure
to 3.959%.
Trade and other receivables and trade and other payables are interest free and
have settlement dates within one year and therefore are not considered to
present a fair value interest rate risk.
The tables below set out the carrying amount of the Company’s financial
instruments excluding the amortisation of borrowing costs as outlined in note
14.
As at 31 December 2023 Fixed rate Variable rate Interest rate
£ £ £
Cash and cash equivalents - 6,653,838 0.000%
Bank borrowings 85,000,000 56,874,379 5.459%
As at 31 December 2022 Fixed rate Variable rate Interest rate
£ £ £
Cash and cash equivalents - 15,871,053 0.000%
Bank borrowings 110,000,000 - 2.725%
At 31 December 2023, if market rate interest rates had been 100 basis points
higher, which is deemed appropriate given historical movements in interest
rates, with all other variables held constant, the profit for the year would
have been £66,538 higher (2022: £158,711 higher) as a result of the higher
interest income on cash and cash equivalents. Other Comprehensive Income and
the Capital Reserve would have been £1,120,407 higher (2022: £1,753,510
higher) as a result of an increase in the fair value of the derivative
designated as a cash flow hedge of floating rate borrowings.
At 31 December 2023, if market rate interest rates had been 100 basis points
lower with all other variables held constant, the profit for the year would
have been £66,538 lower (2022: £158,711 lower) as a result of the lower
interest income on cash and cash equivalents. Other Comprehensive Income and
the Capital Reserve would have been £781,333 lower (2022: £1,404,933 lower)
as a result of a decrease in the fair value of the derivative designated as a
cash flow hedge of floating rate borrowings.
ii) Real estate risk
The Group has identified the following risk associated with the real estate
portfolio. The risks following, in particular b and c and also credit risk
have remained high given the ongoing cost of living crisis and the resultant
effect on tenants’ ability to pay rent:
a) The cost of any development schemes may increase if there are delays in the
planning process given the inflationary environment. The Group uses advisers
who are experts in the specific planning requirements in the scheme’s
location in order to reduce the risks that may arise in the planning process.
b) major tenants may become insolvent causing a significant loss of rental
income and a reduction in the value of the associated property (see also
credit risk below). To reduce this risk, the Group reviews the financial
status of all prospective tenants and decides on the appropriate level of
security required via rental deposits or guarantees.
c) The exposure of the fair values of the portfolio to market and occupier
fundamentals. The Group aims to manage such risks by taking an active approach
to asset management (working with tenants to extend leases and minimise
voids), capturing profit (selling when the property has delivered a return to
the Group that the Group believes has been maximised and the proceeds can be
reinvested into more attractive opportunities) and identifying new investments
(generally at yields that are accretive to the revenue account and where the
Group believes there will be greater investment demand in the medium term).
Credit risk
Credit risk is the risk that a counterparty will be unable to meet a
commitment that it has entered into with the Group. In the event of default by
an occupational tenant, the Group will suffer a rental income shortfall and
incur additional related costs. The Investment Manager regularly reviews
reports produced by Dun and Bradstreet and other sources, including the MSCI
IRIS report, to be able to assess the credit worthiness of the Group’s
tenants and aims to ensure that there are no excessive concentrations of
credit risk and that the impact of default by a tenant is minimised. In
addition to this, the terms of the Group’s bank borrowings require that the
largest tenant accounts for less than 20% of the Group’s total rental
income, that the five largest tenants account for less than 50% of the
Group’s total rental income and that the ten largest tenants account for
less than 75% of the Group’s total rental income. The maximum credit risk
from the tenant arrears of the Group at the financial year end was £3,741,772
(2022: £4,713,145) as detailed in note 11. The Investment Manager also has
a detailed process to identify the expected credit loss from tenants who are
behind with rental payments.
This involves a review of every tenant who owes money with the Investment
Manager using their own knowledge and communications with the tenant to assess
whether a provision should be made. This resulted in the provision for bad
debts decreasing to £832,240 at the year-end (2022: £2,137,972) after
write-offs.
With respect to credit risk arising from other financial assets of the Group,
which comprise cash and cash equivalents, the Group’s exposure to credit
risk arises from default of the counterparty bank with a maximum exposure
equal to the carrying value of these instruments. As at 31 December 2023
£316,737 (2022: £6,481,061) was placed on deposit with The Royal Bank of
Scotland plc (“RBS”), £242,900 (2022: £786,166) was held with Citibank
and £6,094,201 (2022: £8,603,826) was held with Barclays.
The credit risk associated with the cash deposits placed with RBS is mitigated
by virtue of the Group having a right to off-set the balance deposited against
the amount borrowed from RBS should RBS be unable to return the deposits for
any reason. Citibank is rated A-2 Stable by Standard & Poor’s and P-2 Stable
by Moody’s. RBS is rated A-1 Stable by Standard & Poor’s and P-1 Stable by
Moody’s. Barclays Bank UK is rated A-1 Stable by Standard & Poor’s and P-1
Stable by Moody’s.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
investment properties in which the Group invests are not traded in an
organised public market and may be illiquid. As a result, the Group may not
be able to liquidate its investments in these properties quickly at an amount
close to their fair value in order to meet its liquidity requirements.
The following table summarises the maturity profile of the Group’s financial
liabilities based on contractual undiscounted payments.
The disclosed amounts for interest-bearing loans and interest rate swaps in
the below table are the estimated net undiscounted cash flows.
The Group’s liquidity position is regularly monitored by management and is
reviewed quarterly by the Board of Directors
Year ended 31 December 2023 On demand 12 months 1 to 5 years >5 years Total
£ £ £ £ £
Interest-bearing loans - 8,442,998 152,428,127 - 160,871,125
Trade and other payables 7,514,629 52,450 209,800 5,140,100 12,916,979
Rental deposits due to tenants - 299,124 713,058 181,945 1,194,127
7,514,629 8,794,572 153,350,985 5,322,045 174,982,231
Year ended 31 December 2022 On demand 12 months 1 to 5 years >5 years Total
£ £ £ £ £
Interest-bearing loans - 29,462,608 94,425,183 - 123,887,791
Trade and other payables 5,284,559 26,068 104,271 2,580,717 7,995,615
Rental deposits due to tenants - 257,899 508,736 243,046 1,009,681
5,284,559 29,746,575 95,038,190 2,823,763 132,893,087
Capital Risk
The Group’s objectives when managing capital are to safeguard the Group’s
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders,
issue new shares, buy back existing shares, increase or decrease borrowings or
sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio. This ratio is
calculated as total borrowings divided by gross assets and has a limit of 65%
set by the Articles of Association of the Company. Gross assets are calculated
as non-current and current assets, as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December 2023 and at 31 December 2022 were as
follows:
2023 2022
£ £
Total borrowings (excluding unamortised arrangement fees) 141,874,379 110,000,000
Gross assets 456,053,931 444,943,156
Gearing ratio (must not exceed 65%) 31.11% 24.72%
The Group also monitors the Loan-to-value ratio which is calculated as gross
borrowings less cash divided by portfolio valuation. As at 31 December 2023
this was 30.7% (2022: 22.6%).
Fair values
Set out below is a comparison by class of the carrying amounts and fair value
of the Group’s financial instruments that are carried in the financial
statements at amortised cost.
Carrying amount Fair Value
2023 2022 2023 2022
Financial Assets £ £ £ £
Cash and cash equivalents 6,653,838 15,871,053 6,653,838 15,871,053
Trade and other receivables 6,101,152 7,457,083 6,101,152 7,457,083
Financial liabilities
Bank borrowings 141,251,910 109,123,937 144,957,576 109,580,566
Trade and other payables 8,217,588 6,564,852 8,217,588 6,564,852
In addition to the above, the Group's financial instruments also include an
Interest rate swap and Interest rate cap. These have not been included in
the disclosure above as these are already held at fair value. The fair value
of trade receivables and payables are materially equivalent to their amortised
cost.
The fair value of the financial assets and liabilities are included at an
estimate of the price that would be received to sell a financial asset or paid
to transfer a financial liability in an orderly transaction between market
participants at the measurement date. The following methods and assumptions
were used to estimate the fair value:
* Cash and cash equivalents, trade and other receivables and trade and other
payables are the same as fair value due to the short-term maturities of these
instruments. Trade and other receivables/payables are measured in reference
to contractual amounts due to/from the Group. These contractual amounts are
directly observable.
* The fair value of the Right of use asset/Obligation under finance lease
represents the ground rent liability associated with Leasehold properties.
Their fair value is assessed with direct reference to the regular payments
made under the ground rent and interest rates associated with the Group’s
debt financing.
* The fair value of bank borrowings is estimated by discounting future cash
flows using rates currently available for debt on similar terms and remaining
maturities. The fair value approximates their carrying values gross of
unamortised transaction costs. This is considered as being valued at level 2
of the fair value hierarchy and has not changed level since 31 December 2022.
* The fair value of rental deposit liabilities is the same as the current
value as the monies owed are held in separate bank accounts.
* The fair values of the interest rate swap and cap contracts are estimated by
discounting expected future cash flows using current market interest rates and
yield curve over the remaining term of the instrument. This is considered as
being valued at level 2 of the fair value hierarchy and has not changed level
since 31 December 2022. The definition of the valuation techniques are
explained in the significant accounting judgements, estimates and assumptions
above.
The table below shows an analysis of the fair values of financial assets and
liabilities recognised in the Balance Sheet by the level of the fair value
hierarchy:
Level 1 – Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2 – Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3 – Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
Year ended 31 December 2023 Level 1 Level 2 Level 3 Total fair value
Financial assets
Trade and other receivables - 6,101,152 - 6,101,152
Cash and cash equivalents 6,653,838 - - 6,653,838
Interest rate cap - 1,408,781 - 1,408,781
Rental deposits held on behalf of tenants 895,003 - - 895,003
Right of use asset - 1,810,120 - 1,810,120
7,548,841 9,320,053 - 16,868,894
Financial liabilities
Trade and other payables - 8,217,588 - 8,217,588
Bank borrowings - 144,957,576 - 144,957,576
Obligation under finance leases - 1,810,120 - 1,810,120
Rental deposits held on behalf of tenants 895,003 - - 895,003
895,003 154,985,284 - 155,880,287
Year ended 31 December 2022 Level 1 Level 2 Level 3 Total fair value
Financial assets
Trade and other receivables - 7,457,083 - 7,457,083
Cash and cash equivalents 15,871,053 - - 15,871,053
Interest rate swap - 1,238,197 - 1,238,197
Interest rate cap - 2,550,469 - 2,550,469
Rental deposits held on behalf of tenants 751,782 - - 751,782
Right of use asset - 899,572 - 899,572
16,622,835 12,145,321 - 28,768,156
Financial liabilities
Trade and other payables - 6,564,852 - 6,564,852
Bank borrowings - 109,580,566 - 109,580,566
Obligation under finance leases - 899,572 - 899,572
Rental deposits held on behalf of tenants 751,782 - - 751,782
751,782 117,044,990 - 117,796,772
4. Administrative and Other Expenses
2023 2022
Notes £ £
Investment management fees 2,632,225 3,480,963
Other direct property expenses
Vacant Costs (excluding void service charge) * 1,217,722 600,561
Repairs and maintenance 418,360 1,740,937
Letting fees 405,684 431,534
Other costs 366,695 237,813
Total Other direct property expenses 2,408,461 3,010,845
Net Impairment gain on trade receivables ** (213,048) (772,947)
Fees associated with strategic review and aborted merger 1,729,925 -
Other administration expenses
Directors’ fees and subsistence 23 239,436 247,603
Valuer’s fees 75,524 94,256
Auditor’s fees 192,700 131,280
Marketing 222,893 226,782
Other administration costs 406,189 434,998
Total Other administration expenses 1,136,742 1,134,919
Total Administrative and other expenses 7,694,305 6,853,780
* Void Service charge costs for the year amounted to £1,470,241 (2022:
£1,164,991). These have been reclassified as Service charge expenditure as
noted below.
** In the prior year, impairment gains/(losses) on trade receivables (2022:
gain of £852,062) were disclosed separately to amounts written-off in the
period (2022: £79,115). The disclosure has been simplified in the current
year – see Note 11 for further information on amounts written-off in the
period.
2023 2022
£ £
Total service charge billed to tenants 4,731,793 4,492,780
Service charge due from/(to) tenants 152,564 (80,959)
Service charge income 4,884,357 4,411,821
Total service charge expenditure incurred 4,884,357 4,411,821
Service charge incurred in respect of void units 1,470,241 1,164,991
Service charge expenditure 6,354,598 5,576,812
Investment management fees
From 1 July 2019, under the terms of the IMA the Investment Manager was
entitled to investment management fees of 0.70% of total assets up to £500
million; and 0.60% of total assets in excess of £500 million. The Group
agreed a 10bps reduction in the fee effective from 1 January 2023; 0.60% of
total assets up to £500m, and 0.50% of total assets in excess of £500
million. The total fees charged for the year amounted to £2,632,225 (2022:
£3,480,963). The amount due and payable at the year-end amounted to
£1,312,401 excluding VAT (2022: £742,952 excluding VAT). In addition the
Company paid the Investment Manager a sum of £184,750 excluding VAT (2022:
£184,750 excluding VAT) to participate in the Managers marketing programme
and Investment Trust share plan. On 12 October 2023, the Board served notice
on the Investment Management Agreement. In the event that the Managed
Wind-Down is approved by Shareholders, it is proposed that a new agreement
(and fee structure) will be signed with the Investment Manager.
Administration, secretarial and registrar fees
On 19 December 2003 Northern Trust International Fund Administration Services
(Guernsey) Limited (“Northern Trust”) was appointed administrator,
secretary and registrar to the Group. Northern Trust is entitled to an annual
fee, payable quarterly in arrears, of £65,000. Northern Trust is also
entitled to reimbursement of reasonable out of pocket expenses. Total fees and
expenses charged for the year amounted to £70,325 (2022: £65,000). The
amount due and payable at the year-end amounted to £32,500 (2022: £32,500).
Valuers fee
Knight Frank LLP (“the Valuers”), external international real estate
consultants, was appointed as valuers in respect of the assets comprising the
property portfolio. The total valuation fees charged for the year amounted to
£75,524 (2022: £94,256). The total valuation fee comprises a base fee for
the ongoing quarterly valuation, and a one-off fee on acquisition of an asset.
The amount due and payable at the year-end amounted to £18,665 excluding VAT
(2022: £17,687 excluding VAT).
The annual fee is equal to 0.017 percent of the aggregate value of property
portfolio paid quarterly.
Auditor’s fee
At the year-end date Deloitte LLP continued as independent auditor of the
Group. The audit fees for the year amounted to £192,700 (2022: £131,280) and
relate to audit services provided for the 2023 financial year. Deloitte LLP
did not provide any non-audit services in the year (2022: nil).
Fees associated with strategic review and aborted merger
As described in more detail in note 2.1, the Board undertook a strategic
review during the second half of 2023 after concerns over the Company’s
size, liquidity, persistent discount to NAV and dividend cover. The outcome
of this review, following interest from other listed REITs, was that the Board
recommended to shareholders that they vote in favour of a proposed merger with
Custodian REIT. The costs associated with the initial Rule 2.7 announcement
(including advisor, due diligence and valuation fees) were £2,041,248 of
which £1,729,925 was accrued and unpaid at 31 December 2023 based on levels
of work in progress (WIP). These fees do not include any costs associated
with the subsequent approach from Urban Logistics or proposed managed and
orderly wind-down following the EGM on 27 March 2024 (see note 26).
5. Finance income and costs
2023 2022
£ £
Interest income on cash and cash equivalents 92,178 27,543
Finance income 92,178 27,543
Interest expense on bank borrowings 8,119,398 3,251,500
Non-utilisation charges on facilites 198,314 308,582
Receipt on interest rate swap (911,184) (116,700)
Receipt on interest rate caps (578,933) -
Amortisation of premium paid for interest rate cap 565,030 -
Amortisation of arrangement costs (see note 14) 253,594 204,835
Finance lease interest 49,289 24,468
Finance costs 7,695,508 3,672,685
Of the finance costs above, £1,959,463 of the interest expense on bank
borrowings were accruals at 31 December 2023 and included in Trade and other
payables.
6. Taxation
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 January 2015. As a UK REIT, the income profits of the
Group’s UK property rental business are exempt from corporation tax as are
any gains it makes from the disposal of its properties, provided they are not
held for trading or sold within three years of completion of development. The
Group is otherwise subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at
least 90% of the income profits of the Group’s UK property rental business.
There are a number of other conditions that are also required to be met by the
Company and the Group to maintain REIT tax status. These conditions were met
in the period and the Board intends to conduct the Group’s affairs such that
these conditions continue to be met for the foreseeable future.
Accordingly, deferred tax is not recognised on temporary differences relating
to the property rental business.
The Company and its Guernsey subsidiary have obtained exempt company status in
Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey.
A reconciliation between the tax charge and the product of accounting profit
multiplied by the applicable tax rate for the year ended 31 December 2023 and
2022 is as follows:
2023 2022
£ £
Loss before tax (8,267,901) (51,053,487)
Tax calculated at blended UK statutory corporation tax rate of 23.5% (2022: 19%) (1,942,957) (9,700,163)
UK REIT exemption on net income (2,534,334) (2,179,636)
Valuation loss in respect of Investment properties not subject to tax 4,477,291 11,879,799
Current income tax charge - -
* Calculated as a blended average of 23.5% being 3 months at the prevailing
19%, and 9 months at 25%.
7. Investment Properties
UK UK UK UK
Industrial Office Retail Other Total
2023 2023 2023 2023 2023
£ £ £ £ £
Market value at 1 January 227,525,000 88,450,000 53,550,000 39,150,000 408,675,000
Purchase of investment properties 4,367,140 - 19,619,261 - 23,986,401
Capital expenditure on investment properties 17,394,611 3,658,739 624,029 1,342 21,678,721
Opening market value of disposed investment properties (6,400,000) - - - (6,400,000)
Valuation loss from investment properties 6,062,225 (19,490,769) (1,360,741) (3,200,246) (17,989,531)
Movement in lease incentives 1,121,061 (42,970) (42,549) (51,096) 984,446
Market value at 31 December 250,070,037 72,575,000 72,390,000 35,900,000 430,935,037
Investment property recognised as held for sale (19,750,000) (15,350,000) - - (35,100,000)
Market value net of held for sale at 31 December 230,320,037 57,225,000 72,390,000 35,900,000 395,835,037
Right of use asset recognised on leasehold properties - 1,810,120 - - 1,810,120
Adjustment for lease incentives (5,957,199) (1,943,609) (846,233) (559,362) (9,306,403)
Carrying value at 31 December 224,362,838 57,091,511 71,543,767 35,340,638 388,338,754
The valuations were performed by Knight Frank LLP, acting in the capacity of a
valuation adviser to the AIFM, accredited external valuers with recognised and
relevant professional qualifications and recent experience of the location and
category of the investment properties being valued. The valuation model in
accordance with Royal Institute of Chartered Surveyors (‘RICS’)
requirements on disclosure for Regulated Purpose Valuations has been applied
(RICS Valuation - Global Standards, which incorporate the International
Valuation Standards). These valuation models are consistent with the
principles in IFRS 13. The market value provided by Knight Frank at the
year-end was £430,935,037 (2022: £408,675,000) however an adjustment has
been made for lease incentives of £9,248,902 (2022: £8,357,036) that are
already accounted for as an asset. In addition, as required under IFRS 16, a
right of use asset of £1,810,120 has been recognised in respect of the
present value of future ground rents. As required under IFRS 16 an amount of
£1,810,120 has also been recognised as an obligation under finance leases in
the balance sheet. Valuation gains and losses from investment properties are
recognised in the Consolidated Statement of Comprehensive Income for the
period and are attributable to changes in unrealised gains or losses relating
to investment properties held at the end of the reporting period.
UK UK UK UK
Industrial Office Retail Other Total
2022 2022 2022 2022 2022
£ £ £ £ £
Market value at 1 January 273,565,250 126,275,000 56,525,000 36,050,000 492,415,250
Purchase of investment properties 91,859 - - 5,409,462 5,501,321
Capital expenditure on investment properties 9,375,227 4,117,846 31,740 - 13,524,813
Opening market value of disposed investment properties (20,450,000) (20,900,000) - - (41,350,000)
Valuation loss from investment properties (35,924,164) (20,993,533) (3,087,334) (2,252,751) (62,257,782)
Movement in lease incentives 866,828 (49,313) 80,594 (56,711) 841,398
Market value at 31 December 227,525,000 88,450,000 53,550,000 39,150,000 408,675,000
Right of use asset recognised on leasehold properties - 899,572 - - 899,572
Adjustment for lease incentives (4,871,218) (1,986,578) (888,782) (610,458) (8,357,036)
Carrying value at 31 December 222,653,782 87,362,994 52,661,218 38,539,542 401,217,536
In the Cash Flow Statement, proceeds from disposal of investment properties
comprise:
2023 2022
£ £
Opening market value of disposed investment properties 6,400,000 41,350,000
Loss on disposal of investment properties (279,090) (207,153)
Net proceeds from disposal of investment properties 6,120,910 41,142,847
Valuation Methodology
The fair value of completed investment properties are determined using the
income capitalisation method.
The income capitalisation method is based on capitalising the net income
stream at an appropriate yield. In establishing the net income stream the
valuers have reflected the current rent (the gross rent) payable to lease
expiry, at which point the valuer has assumed that each unit will be re-let at
their opinion of ERV. The valuers have made allowances for voids where
appropriate, as well as deducting non recoverable costs where applicable. The
appropriate yield is selected on the basis of the location of the building,
its quality, tenant credit quality and lease terms amongst other factors.
No properties have changed valuation technique during the year. At the Balance
Sheet date the income capitalisation method is appropriate for valuing all
assets.
The Company appoints suitable valuers (such appointment is reviewed on a
periodic basis) to undertake a valuation of all the direct real estate
investments on a quarterly basis. The valuation is undertaken in accordance
with the then current RICS guidelines and requirements as mentioned earlier.
The Investment Manager meets with the valuers on a quarterly basis to ensure
the valuers are aware of all relevant information for the valuation and any
change in the investment over the quarter. The Investment Manager then reviews
and discusses the draft valuations with the valuers to ensure correct factual
assumptions are made.
The management group that determines the Company’s valuation policies and
procedures for property valuations is the Property Valuation Committee. The
Committee reviews the quarterly property valuation reports produced by the
valuers (or such other person as may from time to time provide such property
valuation services to the Company) before its submission to the Board,
focusing in particular on:
* significant adjustments from the previous property valuation report;
* reviewing the individual valuations of each property;
* compliance with applicable standards and guidelines including those issued
by RICS and the FCA Listing Rules;
* reviewing the findings and any recommendations or statements made by the
valuer;
* considering any further matters relating to the valuation of the properties.
The Chair of the Committee makes a brief report of the findings and
recommendations of the Committee to the Board after each Committee meeting.
The minutes of the Committee meetings are circulated to the Board. The Chair
submits an annual report to the Board summarising the Committee’s activities
during the year and the related significant results and findings.
The table below outlines the valuation techniques and inputs used to derive
Level 3 fair values for each class of investment properties. The table
includes:
* The fair value measurements at the end of the reporting period.
* The level of the fair value hierarchy (e.g. Level 3) within which the fair
value measurements are categorised in their entirety.
* A description of the valuation techniques applied.
* Fair value measurements, quantitative information about the significant
unobservable inputs used in the fair value measurement.
* The inputs used in the fair value measurement, including the ranges of rent
charged to different units within the same building.
As noted above, all investment properties listed in the table below are
categorised Level 3 and all are valued using the Income Capitalisation method.
Country & Class 2023 UK Industrial Level 3 UK Office Level 3 UK Retail Level 3 UK Other Level 3
Fair Value 2023 £ 250,070,037 72,575,000 72,390,000 35,900,000
Key Unobservable Input 2023 Initial Yield Initial Yield Initial Yield Initial Yield
Reversionary yield Reversionary yield Reversionary yield Reversionary yield
Equivalent Yield Equivalent Yield Equivalent Yield Equivalent Yield
Estimated rental value per sq ft Estimated rental value per sq ft Estimated rental value per sq ft Estimated rental value per sq ft
Range (weighted average) 2023 0.00% to 8.97% (4.80%) 4.56% to 10.51% (7.57%) 6.03% to 9.12% (6.91%) 5.40% to 9.30% (6.53%)
4.74% to 8.79% (6.55%) 7.34% to 12.20% (10.33%) 5.52% to 7.99% (6.22%) 5.81% to 9.40% (6.52%)
5.28% to 8.30% (6.46%) 7.04% to 9.98% (8.89%) 5.76% to 9.91% (7.02%) 5.58% to 9.21% (6.67%)
£4.75 to £10.25 (£7.04) £15.79 to £45.94 (£27.08) £0.00 to £30.61 (£11.35) £6.50 to £20.00 (£14.49)
Country & Class 2022 UK Industrial Level 3 UK Office Level 3 UK Retail Level 3 UK Other Level 3
Fair Value 2022 £ 227,525,000 88,450,000 53,550,000 39,150,000
Key Unobservable Input 2022 Initial Yield Initial Yield Initial Yield Initial Yield
Reversionary yield Reversionary yield Reversionary yield Reversionary yield
Equivalent Yield Equivalent Yield Equivalent Yield Equivalent Yield
Estimated rental value per sq ft Estimated rental value per sq ft Estimated rental value per sq ft Estimated rental value per sq ft
Range (weighted average) 2022 0.00% to 8.78% (5.20%) 5.10% to 7.90% (6.11%) 4.39% to 8.33% (6.75%) 5.01% to 9.13% (5.98%)
5.00% to 8.68% (6.35%) 6.25% to 10.45% (8.76%) 5.49% to 7.99% (6.16%) 4.79% to 9.40% (5.85%)
5.00% to 8.23% (6.26%) 6.15% to 9.25% (8.02%) 5.76% to 9.67% (6.79%) 5.01% to 9.07% (5.87%)
£4.50 to £9.00 (£6.38) £17.01 to £45.47 (£26.78) £8.74 to £30.61 (£15.37) £6.00 to £20.00 (£14.71)
Descriptions and definitions
The table above includes the following descriptions and definitions relating
to valuation techniques and key observable inputs made in determining the fair
values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions prevailing at
the date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return of the cash
flow from the property, assuming a rise or fall to ERV at the next review or
lease termination, but with no further rental change.
Initial yield
Initial yield is the annualised rents of a property expressed as a percentage
of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial yield will
rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot, average ERV per
square foot, initial yield and reversionary yield as at the Balance Sheet
date.
2023 2022
ERV p.a. £34,189,042 £31,048,945
Area sq.ft. 3,503,840 3,416,291
Average ERV per sq.ft. £9.76 £9.09
Initial yield 5.8% 5.7%
Reversionary yield 7.1% 7.1%
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of completed investment
property.
2023 2022
£ £
Increase in equivalent yield of 50 bps (31,373,168) (31,086,535)
Decrease in rental rates of 5% (ERV) (15,910,176) (15,879,151)
Below is a list of how the interrelationships in the sensitivity analysis
above can be explained.
In both cases outlined in the sensitivity table the estimated Fair Value would
increase (decrease) if:
* The ERV is higher (lower)
* Void periods were shorter (longer)
* The occupancy rate was higher (lower)
* Rent free periods were shorter (longer)
* The capitalisation rates were lower (higher)
8. Land
2023 2022
£ £
Cost
Balance at the beginning of the year 8,061,872 8,001,550
Additions 2,154,160 60,322
Government Grant Income receivable (620,477) -
Balance at the end of the year 9,595,555 8,061,872
Accumulated depreciation and amortisation
Balance at the beginning of the year (561,872) (501,550)
Valuation loss from land (783,683) (60,322)
Balance at the end of the year (1,345,555) (561,872)
Carrying amount as at 31 December 8,250,000 7,500,000
Valuation methodology
The Land is held at fair value and is categorised Level 3.
The Group appoints suitable valuers (such appointment is reviewed on a
periodic basis) to undertake a valuation of the land on a quarterly basis. The
valuation is undertaken in accordance with the current RICS guidelines by
Knight Frank LLP whose credentials are set out in note 7.
Additions represent costs associated with the reforestation and peatland
restoration at Far Ralia. Grants are receivable from the Scottish Government
for such costs. The conditions of the grant are deemed to be complied with on
initial completion of work on the associated Work Areas identified under the
Grant agreement. As at 31 December 2023, no grant income has yet been
received however £620,477 has been recognised in accordance with the
Group’s policy for grant recognition (see Note 2.3 C iv).
9. Investment Properties Held for Sale
As at 31 December 2023, the Group was actively seeking a buyer for several
assets including its industrial assets Opus 9 in Warrington, Unit 5 Monkton
Business Park in Hebburn and Kings Business Park in Bristol. In addition,
the Group was actively seeking a buyer of its office asset 15 Basinghall
Street in London, and 101 Princess Street in Manchester. As noted further in
note 26, the Group exchanged contracts and completed on several of these.
As at 31 December 2022, the Group was not actively seeking a buyer for any of
the Investment Properties.
10. Investments in Limited Partnership and Subsidiaries
The Company owns 100 per cent of the issued ordinary share capital of abrdn
Property Holdings Limited (formerly known as Standard Life Investments
Property Holdings Limited), a company with limited liability incorporated and
domiciled in Guernsey, Channel Islands, whose principal business is property
investment.
In 2015 the Group acquired 100% of the units in Standard Life Investments
SLIPIT Unit Trust, (formerly Aviva Investors UK Real Estate Recovery II Unit
Trust) a Jersey Property Unit Trust. The acquisition included the entire
issued share capital of a General Partner which held, through a Limited
Partnership, a portfolio of 22 UK real estate assets. The transaction
completed on 23 December 2015 and the Group has treated the acquisition as a
Business Combination in accordance with IFRS 3.
* abrdn Property Holdings Limited (formerly known as Standard Life Investments
Property Holdings Limited), a property investment company with limited
liability incorporated in Guernsey, Channel Islands.
* abrdn (APIT) Limited Partnership (formerly known as Standard Life
Investments (SLIPIT) Limited Partnership), a property investment limited
partnership established in England.
* abrdn APIT (General Partner) Limited, a company with limited liability
incorporated in England, whose principal business is property investment.
* abrdn (APIT Nominee) Limited, a company with limited liability incorporated
and domiciled in England, whose principal business is property investment.
11. Trade and other receivables
2023 2022
£ £
Trade receivables 4,574,012 6,851,117
Less: provision for impairment of trade receivables (832,240) (2,137,972)
Trade receivables (net) 3,741,772 4,713,145
Rental deposits held on behalf of tenants 299,124 257,899
Accrued Grant Income (see Note 8) 620,477 -
Other receivables 1,439,779 2,486,039
Total trade and other receivables 6,101,152 7,457,083
Reconciliation for changes in the provision for impairment of trade
receivables:
2023 2022
£ £
Opening balance (2,137,972) (2,990,034)
Credit for the year 213,048 772,947
Reversal for amounts written-off 1,092,684 79,115
Closing balance (832,240) (2,137,972)
The estimated fair values of receivables are the discounted amount of the
estimated future cash flows expected to be received and approximate their
carrying amounts.
The trade receivables above relate to rental income receivable from tenants of
the investment properties. When a new lease is agreed with a tenant the
Investment Manager performs various money laundering checks and makes a
financial assessment to determine the tenant’s ability to fulfil its
obligations under the lease agreement for the foreseeable future. The majority
of tenants are invoiced for rental income quarterly in advance and are issued
with invoices at least 21 days before the relevant quarter starts. Invoices
become due on the first day of the quarter and are considered past due if
payment is not received by this date. Other receivables are considered past
due when the given terms of credit expire.
Amounts are considered impaired when it becomes unlikely that the full value
of a receivable will be recovered. Movement in the balance considered to be
impaired has been included in other direct property costs in the Consolidated
Statement of Comprehensive Income. As at 31 December 2023, trade receivables
of £832,240 (2022: £2,137,972) were considered impaired and provided for.
The ageing of these receivables is as follows:
2023 2022
£ £
0 to 3 months (37,274) (8,203)
3 to 6 months (81,350) (251,682)
Over 6 months (713,616) (1,878,087)
(832,240) (2,137,972)
If the provision for impairment of trade receivables increased by £1 million
then the Company’s earnings and net asset value would decrease by £1
million. If it decreased by £1 million then the Company’s earnings and net
asset value would increase by £1 million.
As of 31 December 2023, trade receivables of £500,470 (2022: £3,099,355)
were less than 3 months past due but considered not impaired.
12. Cash and cash equivalents
2023 2022
£ £
Cash held at bank 6,337,101 9,389,992
Cash held on deposit with RBS 316,737 6,481,061
6,653,838 15,871,053
Cash held at banks earns interest at floating rates based on daily bank
deposit rates. Deposits are made for varying periods of between one day and
three months, depending on the immediate cash requirements of the Group, and
earn interest at the applicable short-term deposit rates.
13. Trade and other payables
2023 2022
£ £
Trade and other payables 7,023,461 4,655,599
VAT payable 656,894 628,960
Deferred rental income 6,038,976 5,337,852
Rental deposits due to tenants 299,124 257,899
14,018,455 10,880,310
Trade and other payables are recognised at amortised cost. Trade payables are
non-interest bearing and normally settled on 30-day terms.
14. Bank borrowings
2023 £ 2022 £
Loan facility (including Rolling Credit Facility) 165,000,000 165,000,000
Drawn down outstanding balance 141,874,379 110,000,000
On 12 October 2022 the Group entered into an agreement to extend its existing
£165 million debt facility with Royal Bank of Scotland International
(“RBSI”). The previous facility (which expired on 27 April 2023) consisted
of a £110 million term loan payable at 1.375% plus SONIA and two Revolving
Credit Facilities (“RCF”) of £35 million payable at 1.45% plus SONIA and
£20 million payable at 1.60% plus SONIA. The amended and restated agreement
is for a three-year term loan of £85 million and a single RCF of £80
million; both payable at 1.5% plus SONIA. As at 31 December 2023 £56.9m of
the RCF was drawn (2022: £nil).
2023 £ 2022 £
Opening carrying value of expired facility as at 1 January 109,928,234 109,723,399
Borrowings during the period on expired RCF 25,000,000 17,000,000
Repayment of expired RCF (25,000,000 (17,000,000)
Repayment of expired facility (110,000,000) -
Amortisation arrangement costs 71,766 204,835
Closing carrying value of expired facility - 109,928,234
Opening carrying value of new facility as at 1 January (804,297) -
Borrowings during the period on new RCF 63,000,000 -
Repayment of new RCF (6,125,621) -
New term loan facility 85,000,000 -
Arrangement costs of new facility - (804,297)
Amortisation arrangement costs 181,828 -
Closing carrying value 141,251,910 (804,297)
Opening carrying value of facilities combined as at 1 January 109,123,937 109,723,399
Closing carrying value of facilities combined 141,251,910 109,123,937
2023 2022
£ £
Amortisation of arrangement costs (expired facility) 71,766 204,835
Amortisation of arrangement costs (new facility) 181,828 -
See Note 5 253,594 204,835
Under the terms of the loan facilities there are certain events which would
entitle RBSI to terminate the loan facility and demand repayment of all sums
due. Included in these events of default is the financial undertaking relating
to the LTV percentage. The loan agreement notes that the LTV percentage is
calculated as the loan amount less the amount of any sterling cash deposited
within the security of RBSI divided by the gross secured property value, and
that this percentage should not exceed 60% for the period to and including 27
April 2021 and should not exceed 55% after 27 April 2021 to maturity. There
have been no changes to the covenant requirements as a result of the extension
to the facility noted above.
Analysis of movement in net debt Cash and cash equivalents £ Interest-bearing loans £ 2023 Net debt £ Cash and cash equivalents £ Interest-bearing loans £ 2022 Net debt £
Opening balance 15,871,053 (109,123,937) (93,252,884) 13,818,008 (109,723,399) (95,905,391)
Cash movement (9,217,215) (31,874,379) (41,091,594) 2,053,045 804,297 2,857,342
Amortisation of arrangement costs - (253,594) (253,594) - (204,835) (204,835)
Closing balance 6,653,838 (141,251,910) (134,598,072) 15,871,053 (109,123,937) (93,252,884)
All loan covenants were met during the year ended December 2023.
2023 2022
£ £
Loan amount 141,874,379 110,000,000
Cash (6,653,838) (15,871,053)
135,220,541 94,128,947
Investment property valuation 439,185,037 416,175,000
LTV percentage 30.8% 22.6%
Other loan covenants that the Group is obliged to meet include the following:
* that the net rental income is not less than 150% of the finance costs for
any three month period
* that the largest single asset accounts for less than 15% of the Gross
Secured Asset Value
* that the largest ten assets accounts for less than 75% of the Gross Secured
Asset Value
* that sector weightings are restricted to 55%, 45% and 75% for the Office,
Retail and Industrial sectors respectively..
* that the largest tenant accounts for less than 20% of the Company’s annual
net rental income
* that the five largest tenants account for less than 50% of the Company’s
annual net rental income
* that the ten largest tenants account for less than 75% of the Company’s
annual net rental income
During the year, the Group complied with its obligations and loan covenants
under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly owned subsidiaries, abrdn Property Holdings Limited
and abrdn (APIT) Limited Partnership. The switch to the Sterling Overnight
Index Average (SONIA) benchmark took effect from the first interest payment
date (20 January 2022) following cessation of LIBOR (1 January 2022).
15. Interest rate Swap and Cap
In order to mitigate any interest rate risk linked to their debt facilities,
the Group's policy has been to manage its cash flow using hedging
instruments. The following hedging instruments were effective during the
year:
15a Historic Interest Rate Swap
The Group had previously taken out an interest rate swap of a notional amount
of £110,000,000 with RBS as part of a refinancing exercise in April 2016.
The interest rate swap effective date was 28 April 2016 and had a maturity
date of 27 April 2023. Under the swap the Company agreed to receive a floating
interest rate linked to SONIA and pay a fixed interest rate of 1.35%.
2023 2022
£ £
Opening fair value of interest rate swaps at 1 January 1,238,197 (568,036)
Reclassification of interest accrual (335,663) (247,093)
Valuation (loss)/gain on interest rate swap (902,534) 1,470,570
Reclassified to Profit & Loss - 582,756
Closing fair value of interest rate swap at 31 December - 1,238,197
The spilt of the interest rate swap is listed below:
2023 2022
£ £
Current assets/(liabilities) - 1,238,197
Non-current assets/(liabilities) - -
Interest rate swap with a start date of 28 April 2016 maturing on 27 April 2023 - 1,238,197
15b Terminated Interest Rate Swap
As disclosed in note 14, on 12 October 2022 the Group announced that it had
completed an extension of its debt facilities which included an interest rate
swap of a notional amount of £85,000,000 (due to commence 27 April 2023).
At the time, there was heightened volatility and swap rates were high,
exacerbated by political uncertainty, and the all-in cost of the term loan
amounted to 6.97%. In light of the change in interest rate environment
subsequent to its completion, the Group decided to break the swap at a cost of
£3,562,248 on 12 December 2022.
15c Interest Rate Cap
Simultaneously to the breaking of the £85,000,000 swap, the Group agreed an
interest rate cap against a notional amount of £85,000,000 (due to commence
27 April 2023) with a cap level (SONIA) set at 3.959%. The cost of
purchasing this cap was £2,507,177 and expires in April 2026 at the same time
as the loan facility.
2023 2022
£ £
Opening fair value of interest rate cap at 1 January 2,550,469 -
Cost of interest rate cap - 2,507,177
Net Change in fair value (1,141,688) 43,292
Closing fair value of interest rate cap at 31 December 1,408,781 2,550,469
The change in fair value of the interest rate cap comprises fair value changes
and interest received, paid and accrued.
2023
Cost of hedging Cash flow hedge Total
£ £ £
Opening fair value 1,779,151 771,318 2,550,469
Valuation (loss)/gain (1,153,875) 377,860 (776,015)
Interest received - (365,673) (365,673)
Net Change in fair value (1,153,875) 12,187 (1,141,688)
Closing fair value of interest rate cap at 31 December 625,276 783,505 1,408,781
Less Closing Interest Accrual * - (213,260) (213,260)
Adjusted fair value of interest rate cap at 31 December 625,276 570,245 1,195,521
Opening Adjusted fair value of interest rate cap at 1 January 1,779,151 771,318 2,550,469
Valuation (loss)/gain recognised on Adjusted Valuation (1,153,875) (201,073) (1,354,948)
Net Change in fair value (as above) (1,153,875) 12,187 (1,141,688)
Less Closing Interest Accrual (as above) * - (213,260) (213,260)
Valuation (loss)/gain recognised on Adjusted Valuation (1,153,875) (201,073) (1,354,948)
2023
Interest Rate Cap Reserves Reconciliation Cost of hedging reserve Cash flow hedge reserve Total
£ £ £
Opening Reserve (728,026) 771,318 43,292
Valuation (loss)/gain recognised on Adjusted Valuation (1,153,875) (201,073) (1,354,948)
Amortisation of Premium (See Note 5) 565,030 - 565,030
Valuation loss as recognised in Other Comprehensive Income (588,945) (201,073) (789,918)
Closing Reserve (1,316,871) 570,245 (746,626)
* As the valuation of the interest rate cap includes a valuation attributable
to the unsettled interest (due to 21st January) a separate accrual has not
been recorded in the balance sheet. Instead, this represents a recycling of
the change in Other Comprehensive Income for the Cash flow hedge to Finance
Cost.
2022
Cost of hedging Cash flow hedge Total
£ £ £
Opening Value - - -
Cost of Interest rate cap 2,507,177 - 2,507,177
Valuation (loss)/gain (728,026) 771,318 43,292
Net Change in fair value (728,026) 771,318 43,292
Closing fair value of interest rate cap at 31 December 1,779,151 771,318 2,550,469
Less Closing Interest Accrual * - - -
Adjusted fair value of interest rate cap at 31 December 1,779,151 771,318 2,550,469
Opening Adjusted fair value of interest rate cap at 1 January - - -
Valuation (loss)/gain recognised on Adjusted Valuation (728,026) 771,318 43,292
2022
Interest Rate Cap Reserves Reconciliation Cost of hedging reserve Cash flow hedge reserve Total
£ £ £
Opening Reserve - - -
Valuation (loss)/gain recognised on Adjusted Valuation (728,026) 771,318 43,292
Amortisation of Premium (See Note 5) - - -
Valuation gain as recognised in Other Comprehensive Income (728,026) 771,318 43,292
Closing Reserve (728,026) 771,318 43,292
The Interest associated with the cap recognised as an offset against Finance
Cost is summarised below:
2023 2022
£ £
Interest received 365,673 -
Closing Interest Accrual 213,260 -
Receipt on interest rate caps (see Note 5) 578,933 -
The spilt of the interest rate cap is listed below:
2023 2022
£ £
Current assets/(liabilities) 849,110 339,462
Non-current assets/(liabilities) 559,671 2,211,007
Interest rate cap with a start date of 27 April 2023 maturing on 26 April 2026 1,408,781 2,550,459
16. Obligations under Finance Leases
Minimum lease payments Interest Present value of minimum lease payments
2023 2023 2023
£ £ £
Less than one year 52,450 (49,202) 3,248
Between two and five years 209,800 (195,892) 13,908
More than five years 5,140,100 (3,347,135) 1,792,965
T otal 5,402,350 (3,592,229) 1,810,121
Minimum lease payments Interest Present value of minimum lease payments
2022 2022 2022
£ £ £
Less than one year 26,068 (24,468) 1,600
Between two and five years 104,271 (97,426) 6,845
More than five years 2,580,717 (1,689,590) 891,127
Total 2,711,056 (1,811,484) 899,572
The above table shows the present value of future lease payments in relation
to the ground lease payable at Hagley Road, Birmingham as required under IFRS
16. A corresponding asset has been recognised and is part of Investment
properties as shown in note 7.
17. Lease analysis
The Group has granted leases on its property portfolio. This property
portfolio as at 31 December 2023 had an average lease expiry of 6 years and 4
months. Leases include clauses to enable periodic upward revision of the
rental charge according to prevailing market conditions. Some leases contain
options to break before the end of the lease term.
Future minimum rentals receivable under non-cancellable operating leases as at
31 December are as follows:
2023 2022
£ £
Within one year 27,137,392 24,457,032
Between one and two years 22,839,051 21,677,762
Between two and three years 19,036,836 16,236,484
Between three and four years 14,949,198 12,375,936
Between four and five years 12,718,074 8,695,218
More than 5 years 78,172,826 45,075,463
Total 174,853,377 128,517,895
The largest single tenant at the year-end accounts for 5.7% (2022: 6.0%) of
the current annual passing rent.
18. Share capital
Under the Company’s Articles of Incorporation, the Company may issue an
unlimited number of ordinary shares of 1 pence each, subject to issuance
limits set at the AGM each year. As at 31 December 2023 there were 381,218,977
ordinary shares of 1p each in issue (2022: 381,218,977). All ordinary shares
rank equally for dividends and distributions and carry one vote each. There
are no restrictions concerning the transfer of ordinary shares in the Company,
no special rights with regard to control attached to the ordinary shares, no
agreements between holders of ordinary shares regarding their transfer known
to the Company and no agreement which the Company is party to that affects its
control following a takeover bid.
Allotted, called up and fully paid: 2023 2022
£ £
Opening balance 228,383,857 228,383,857
Shares issued - -
Closing balance 228,383,857 228,383857
Treasury Shares
In 2022, the Company undertook a share buyback programme at various levels of
discount to the prevailing NAV. In the period to 31 December 2023 no shares
had been bought back (2022: 15,703,409) at a cost of £nil (2022:
£12,409,459) and are included in the Treasury share
reserve.
2023 2022
£ £
Opening balance 18,400,876 5,991,417
Bought back during the year - 12,409,459
Closing balance 18,400,876 18,400,876
The number of shares in issue as at 31 December 2023/2022 are as follows
2023 2022
Number of shares Number of shares
Opening balance 381,218,977 396,922,386
Bought back during the year and put into Treasury - (15,703,409)
Closing balance 381,218,977 381,218,977
19. Reserves
The detailed movement of the below reserves for the years to 31 December 2023
and 31 December 2022 can be found in the Consolidated Statement of Changes in
Equity above.
Retained earnings
This is a distributable reserve and represents the cumulative revenue earnings
of the Group less dividends paid to the Company’s
shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed investment
properties and unrealised valuation gains and losses on investment properties
and cash flow hedges since the Company’s launch.
Other distributable reserves
This reserve represents the share premium raised on launch of the Company
which was subsequently converted to a distributable reserve by special
resolution dated 4 December 2003.
20. Earnings per share
Basic earnings per share amounts are calculated by dividing profit for the
year net of tax attributable to ordinary equity holders by the weighted
average number of ordinary shares outstanding during the year. As there are no
dilutive instruments outstanding, basic and diluted earnings per share are
identical.
The earnings per share for the year is set out in the table below. In addition
one of the key metrics the Board considers is dividend cover.
This is calculated by dividing the net revenue earnings in the year (surplus
for the year net of tax excluding all capital items and the swaps breakage
costs) divided by the dividends payable in relation to the financial year. For
2023 this equated to a figure of 81% (2022: 97%). See the Alternative
Performance Measures in the full Annual Accounts which can be found via the
following link: https://www.abrdnpit.co.uk/en-gb/literature.
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
2023 2022
£ £
Loss for the year net of tax (8,267,901) (51,053,487)
2023 2022
Weighted average number of ordinary shares outstanding during the year 381,218,977 389,565,276
Loss per ordinary share (pence) (2.17) (13.11)
Profit for the year excluding capital items (£) 10,824,203 11,471,770
EPRA earnings per share (pence) 2.83 2.94
21. Dividends and Property Income Distributions Gross of Income Tax
12 months to Dec 23 12 months to Dec 22
Dividends PID pence Non-PID pence Total Pence PID £ Non-PID £ PID pence Non-PID pence Total Pence PID £ Non-PID £
Quarter to 31 December of prior year (paid in February) - 1.0000 1.0000 - 3,812,190 0.7910 0.2090 1.0000 3,139,656 829,568
Quarter to 31 March (paid in May) 1.0000 - 1.0000 3,812,190 - 1.0000 - 1.0000 3,969,224 -
Quarter to 30 June (paid in August) 1.0000 - 1.0000 3,812,190 - 1.0000 - 1.0000 3,860,190 -
Quarter to 30 September (paid in November) - 1.0000 1.0000 - 3,812,190 0.1806 0.8194 1.0000 688,481 3,123,708
Total dividends paid 2.0000 2.0000 4.0000 7,624,380 7,624,380 2.9716 1.0284 4.0000 11,657,551 3,953,276
Quarter to 31 December of current year (paid after year end) 0.3980 0.6020 1.0000 1,517,252 2,294,938 - 1.0000 1.0000 - 3,812,190
Prior year dividends (per above) - (1.0000) (1.0000) - (3,812,190) (0.7910) (0.2090) (1.0000) (3,139,656) (829,568)
Total dividends paid for the year 2.3980 1.6020 4.0000 9,141,632 6,107,128 2.1806 1.8194 4.0000 8,517,895 6,935,898
On 23 February 2024 a dividend in respect of the quarter to 31 December 2023
of 1.0 pence per share was paid split as 0.398p Property Income Distribution,
and 0.602p Non-Property Income Distribution.
22. Reconciliation of Audited Consolidated NAV to Unaudited Published NAV
The NAV attributable to ordinary shares is published quarterly and is based on
the most recent valuation of the investment
properties.
2023 2022
Number of ordinary shares at the reporting date 381,218,977 381,218,977
2023 2023
£ £
Total equity per audited consolidated financial statements 298,078,443 323,287,555
NAV per share (p) 78.2 84.8
Published NAV per share (p) 78.4 84.8
The variance between the unaudited published NAV and audited consolidated NAV
of 0.2p per share represents the recognition of fees associated with the
strategic review and proposed merger, the identification of a backdated rent
review post publication but agreed prior to year-end, and the recognition of
accrued grant income not yet received.
23. Related Party Disclosures
Directors’ remuneration
The Directors of the Company are deemed as key management personnel and
received fees for their services. Total fees for the year were £239,436
(2022: £247,603) none of which remained payable at the year-end (2022: nil).
abrdn Fund Managers Limited, as the Manager of the Group from 10 December
2018, (formerly Aberdeen Standard Fund Managers Limited), received fees for
their services as investment managers. Further details are provided in note 4.
2023 2022
£ £
Huw Evans - 17,124
Mike Balfour 41,500 41,500
Mike Bane 37,000 34,059
James Clifton-Brown 50,000 50,000
Jill May 37,000 37,000
Sarah Slater 37,000 37,000
Employers’ national insurance contributions 23,735 22,885
226,235 239,568
Directors’ expenses 13,201 8,035
239,436 247,603
24. Segmental Information
The Board has considered the requirements of IFRS 8 ‘operating segments’.
The Board is of the view that the Group is engaged in a single segment of
business, being property investment and in one geographical area, the United
Kingdom.
25. Commitments and Contingent Liabilities
The Group had contracted capital commitments as at 31 December 2023 of £2.4
million (31 December 2022: £17.3m). The commitment is the remaining Capital
spend on the industrial developments in St Helens and Knowsley, in addition to
large scale project at Washington.
As discussed further in note 4 and note 26 below, following the shareholder
vote on the 27 March 2024 the Board is taking steps to put the Company into a
managed and orderly wind-down to be voted upon by shareholders at an upcoming
wind-down EGM. If shareholders vote for a change in Investment Policy,
corporate advisors will be entitled to receive £2,129,993. As discussed
more fully in note 2.1, the outcome of this vote is not wholly within the
Group’s control and there is no certainty of the outcome due to the large
proportion of shareholders on the register whose voting intentions cannot be
ascertained and the large proportion of shareholders who did not vote at the
EGM on 27 March
26. Events after the balance sheet date
Merger with Custodian
On 19 January 2024, the boards of abrdn Property Income Trust Limited (API)
and Custodian Property Income REIT plc (Custodian) announced that they had
reached agreement on the terms and conditions of a recommended all-share
merger pursuant to which CREI would acquire the entire issued and to be issued
share capital of API. It was intended that the Merger will be implemented by
means of a Court sanctioned scheme of arrangement under Part VIII of the
Companies Law. Shareholder votes were scheduled for the 27th (CREI) and 28th
(API) February 2024.
On 20 February 2024, Urban Logistics REIT plc (Urban) announced that they were
considering a possible offer for API and were ultimately given a deadline of
5pm on 20 March 2024 to clarify their intentions. As a result, API’s
Shareholder Meetings were adjourned to the 27 March 2024.
On 27 March 2024 approximately 60% of shareholders who cast a vote voted in
favour of the proposed merger. However, the threshold for approval of the
merger was 75% so the merger did not proceed. The Board explained to
shareholders that if the proposed merger was rejected, it would take the
necessary actions to put the Company into a managed and orderly wind-down,
selling assets and returning funds to shareholders as such funds become
available. The Board is now, therefore, taking steps to initiate this process
and a circular to shareholders will be issued convening another meeting during
May at which shareholders will be asked to vote in favour of a resolution to
change the Company’s investment policy as further explained in note 2.1.
As discussed further in note 4, fees associated with the initial Rule 2.7
announcement (including advisor, due diligence and valuation fees) were
£2,014,248 of which £1,729,925 was accrued as at 31 December 2023 based on
levels of WIP. Fees associated with the approach from Urban (including due
diligence) were £298,300, while fees associated with proposed wind-down are
£87,500.
Dividends
On 23 February 2024 a dividend in respect of the quarter to 31 December 2023
of 1.0 pence per share was paid split as 0.398p Property Income Distribution,
and 0.602p Non-Property Income Distribution.
Sales
On 7 March 2024, the Company completed on the sale of its industrial asset
Opus 9, Warrington for a headline price of £6.75m. Further to this, the
Company completed on the sale of its office asset 15 Basinghall Street in
London for a headline price of £9.8m on 22 March 2024, and its Industrial
assets Unit 5 Monkton Business Park in Hebburn (8 April 2024) and Kings
Business Park in Bristol (15 April 2024) for headline prices of £5.3m and
£7.9m respectively.
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 December 2023. The statutory accounts for the
year ended 31 December 2023 received an audit report which was unqualified.
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
Jason Baggaley – Real Estate Fund Manager, abrdn
Tel: 07801039463 or jason.baggaley@abrdn.com
Mark Blyth – Real Estate Deputy Fund Manager, abrdn
Tel: 07703695490 or mark.blyth@abrdn.com
Craig Gregor - Fund Controller, abrdn
Tel: 07789676852 or craig.gregor@abrdn.com
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